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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [X] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Microelectronic Packaging, Inc.
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(Name of Registrant as Specified In Its Charter)
Microelectronic Packaging, Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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PRELIMINARY COPY
CONFIDENTIAL - FOR USE
OF THE COMMISSION ONLY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
MICROELECTRONIC PACKAGING, INC.
May 29, 1996
TO THE SHAREHOLDERS OF MICROELECTRONIC PACKAGING, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Microelectronic Packaging, Inc. (the "Company"), a California corporation, will
be held on May 29, 1996, at 9:00 a.m., local time, at 9350 Trade Place, San
Diego, California 92126, for the following purposes:
1. To approve the convertibility of a debenture (the "Debenture") issued
by MPM (S) Pte., Ltd. ("MPM"), a wholly-owned subsidiary of the Company, to a
group of related investors (collectively, "Transpac"), into shares of the
Company's Common Stock, with the effect that, upon conversion of the Debenture,
Transpac could own in excess of 20% of the number of shares of the Company's
Common Stock outstanding prior to and after the conversion of the Debenture.
2. To approve an amendment to the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") to increase the authorized
shares of Common Stock from 10,000,000 shares to 15,000,000 shares, which
amendment is necessary in part to effect an increase in the number of shares of
Common Stock that may be necessary to provide for the convertibility of the
Debenture submitted for approval pursuant to Proposal One.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on April 10, 1996 are
entitled to notice of and to vote at the meeting. A list of shareholders
entitled to vote at the Special Meeting will be available for inspection at the
executive offices of the Company for a period of ten days before the Special
Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to sign and
return the enclosed Proxy as promptly as possible in the envelope enclosed for
that purpose.
Please note that this Notice of Special Meeting of Shareholders and related
proxy statement call for a different meeting than the Annual Meeting to be held
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on May 29, 1996. Different proposals are to be voted upon for this meeting, so
even if you have already voted for the Annual Meeting proposals, please sign and
return the enclosed proxy card for the Special Meeting.
Any shareholder attending the meeting may vote in person even if such
shareholder has returned a Proxy.
Sincerely,
Timothy da Silva
President and Chief Executive Officer
May 10, 1996
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE READ THE ATTACHED PROXY
STATEMENT CAREFULLY, AND COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE.
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PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
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Page
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General............................................................ 1
Revocability of Proxies....................................... 1
Solicitation.................................................. 1
Deadline for Receipt of Shareholder Proposals................. 1
Record Date and Voting........................................ 1
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING.................... 2
PROPOSAL ONE -- APPROVAL OF THE CONVERTIBILITY OF
DEBENTURE ISSUED TO TRANSPAC................................. 2
PROPOSAL TWO -- INCREASE IN AUTHORIZED CAPITAL STOCK.......... 5
DESCRIPTION OF CAPITAL STOCK.................................. 7
OWNERSHIP OF SECURITIES....................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 11
Results of Operations.................................... 11
Years Ended 1993, 1994 and 1995.......................... 11
Liquidity and Capital Resources.......................... 15
Future Operating Results................................. 16
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 27
FORM 10-K..................................................... 28
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MICROELECTRONIC PACKAGING, INC.
9350 Trade Place
San Diego, California 92126
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1996
GENERAL
The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors of Microelectronic Packaging, Inc., a California corporation (the
"Company"), for use at the Special Meeting of Shareholders to be held on May 29,
1996 (the "Special Meeting"). The Special Meeting will be held at 9:00 a.m.,
local time, at the Company's corporate headquarters at 9350 Trade Place, San
Diego, California, 92126.
These proxy solicitation materials were mailed on or about May 10,
1996 to all shareholders entitled to vote at the Special Meeting.
REVOCABILITY OF PROXIES
Any person giving a Proxy has the power to revoke it at any time
before its exercise. It may be revoked by filing with the Chief Executive
Officer of the Company at the Company's principal executive offices, 9350 Trade
Place, San Diego, California, 92126, a notice of revocation or another signed
Proxy with a later date. You may also revoke your Proxy by attending the
Special Meeting and voting in person.
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional soliciting materials furnished to shareholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees or agents
of the Company. No compensation will be paid to these individuals for any such
services. Except as described above, the Company does not presently intend to
solicit proxies other than by mail.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be
presented by such shareholders at the Company's 1997 Annual Meeting must be
received by the Company no later than December 21, 1996 in order that they may
be included in the proxy statement and form of proxy relating to that meeting.
RECORD DATE AND VOTING
Shareholders of record on April 10, 1996 are entitled to notice of and
to vote at the Special Meeting. At the record date, 5,508,813 shares of the
Company's Common Stock, no par value, were issued and outstanding. Abstentions
and broker non-votes are counted as present for the purpose of determining the
presence of a quorum for the transaction of business. Each shareholder is
entitled to one vote for each share
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of Common Stock held by such shareholder. All votes will be tabulated by the
inspector of election appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
PROPOSAL ONE -- APPROVAL OF THE CONVERTIBILITY OF
DEBENTURE ISSUED TO TRANSPAC
GENERAL
On March 27, 1996, pursuant to a subscription agreement, the Company
consummated the sale and issuance of 842,013 shares of Common Stock
(collectively, the "Transpac Shares") to Transpac Capital Pte Ltd and a group of
related investors (collectively, "Transpac") at the purchase price of $2.37526
per share, the average of the closing prices of the Company's Common Stock as
reported on the Nasdaq National Market during the ninety trading days
immediately preceding February 2, 1996 (the "Transpac Financing"). In addition,
MPM (S) Pte., Ltd. ("MPM"), a wholly-owned subsidiary of the Company, issued a
debenture ("Debenture") to Transpac in the principal amount of $9,000,000. From
and after April 23, 1997 and at Transpac's option, the Debenture can be
convertible into shares of MPM's Common Stock provided MPM is then a publicly
traded company or, subject to approval by the Company's shareholders, into
shares of the Company's Common Stock (the "Conversion Shares") or the Debenture
can be repaid in cash. In addition, Transpac was granted board observer rights
and the right in the future to appoint a representative of Transpac to the
Company's Board of Directors. The terms and conditions of the Transpac
Financing are more specifically set forth in the subscription agreement (the
"Subscription Agreement") by and among the Company and Transpac attached hereto
as Exhibit A. All shareholders are encouraged to review this agreement very
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carefully and any summary contained herein is qualified by such agreement. The
Company intends to use the proceeds from the Transpac transaction to finance
MPM's product development efforts utilizing licensed technology from IBM, as
more fully discussed under "--Advantages and Disadvantages of Proposal One."
The purpose of the Special Meeting is in part to obtain shareholder approval for
the convertibility of the Debenture into the Company's Common Stock. Except as
set forth in Exhibit A, Transpac will not receive any payment or other corporate
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distribution from the Company if this Proposal One is not approved.
As of March 31, 1996, the Company had issued and outstanding 5,508,813
shares of Common Stock. The Transpac Shares represented approximately 15.3% of
the Common Stock issued and outstanding after the consummation of the Transpac
Financing. The Transpac Shares and the Conversion Shares could potentially in
the aggregate equal up to 49% of the number of shares of Common Stock then
outstanding prior to and after the conversion of the Debenture. Shareholder
approval of Proposal One is necessary in order for the Company to comply with
the requirements of the Nasdaq National Market, on which the Company's Common
Stock is traded. Specifically, Section 6(i)(1)(d)(ii) of the Bylaws of the NASD
(the "NASD Bylaws") provides that shareholder approval is required for the
issuance of securities in connection with a transaction other than a public
offering involving the sale or issuance by a company listed on the Nasdaq
National Market of common stock or securities convertible into common stock
equal to 20% or more of such company's common stock or 20% or more of the voting
power outstanding before the issuance for less than the greater of book or
market value of the company's common stock. Furthermore, Section 6(i)(1)(b) of
the NASD Bylaws provides that each Nasdaq National Market issuer shall obtain
shareholder approval of a plan or to the issuance of securities when the
issuance will result in a change of control of the issuer. Neither the
California General Corporation Law nor the Company's Amended and Restated
Articles of Incorporation currently requires shareholder approval for the
issuance of the Transpac Shares or the Conversion Shares. However, because the
Debenture is potentially convertible at a price per share price lower than the
current closing price or book value of the Company's Common Stock into an
aggregate number of shares of Common Stock that, when combined with the Transpac
Shares, would exceed 20% of the number of shares of Common Stock outstanding
before and after the conversion of the Debenture, shareholder approval of the
convertibility of the Debenture (and related share issuance), which may cause
the 20% limit to be exceeded, is required to maintain the Common Stock's
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listing on the Nasdaq National Market. In addition, because the Transpac Shares
and the Conversion Shares could potentially in the aggregate equal up to 49% of
the number of shares of Common Stock then outstanding prior to and after the
conversion of the Debenture, which could possibly be deemed to be a "change of
control" under the NASD Bylaws and, therefore, require shareholder approval
thereunder.
THE DEBENTURE
The Debenture has a term of five years and bears interest at the rate
of 8.5% per annum. Accrued and unpaid interest is due and payable in cash in
annual installments at the end of each year of the term of the Debenture.
Unless earlier converted by Transpac, the principal outstanding under the
Debenture is due and payable in full at the end of the five-year term of the
Debenture. From and after April 23, 1997, the Debenture is convertible at
Transpac's option into shares of Common Stock of MPM provided MPM is a then
publicly traded company. Subject to shareholder approval of this Proposal One,
the Debenture will also be convertible at Transpac's option into Conversion
Shares of MPI. If this Proposal One is approved, the number of Conversion
Shares issuable to Transpac upon conversion of the Debenture will be determined
based on a formula that is based upon (i) the Company's and MPM's profitability
at the time of conversion; or (ii) the price per share obtained by the Company
after the closing of the Transpac Financing in a financing with proceeds of at
least $3.0 million, or a series of related financings during an eighteen-month
period that generates proceeds of up to $6.5 million. The conversion formula
and the terms and conditions of the issuance of the Debenture are more
specifically set forth on Schedule 5 to the convertible loan agreement by and
among the Company, MPM and Transpac (the "Loan Agreement") attached hereto as
Exhibit B. All shareholders are encouraged to review this agreement very
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carefully and any summary contained herein is qualified by such agreement. By
the terms of this conversion formula, the greater the future profitability of
each of the Company and MPM, the greater the number of shares of MPI Common
Stock that could be issued to Transpac as Conversion Shares. By its terms, the
Debenture can only be converted into the number of Conversion Shares that, when
combined with the Transpac Shares, equals up to 49% of the Company's then issued
and outstanding Common Stock after the conversion of the Debenture. Assuming
the Company's currently outstanding capitalization remains unchanged and taking
into account that the Transpac Shares represent approximately 15.3% of such
current capitalization, the Company could be obligated to issue up to an
aggregate of 4,187,813 shares of Common Stock to Transpac in the form of
Conversion Shares. In addition, to the extent that the Company's capitalization
increases in the future due to additional issuances of Common Stock, the Company
could be obligated to issue an even greater number of shares to Transpac upon
conversion of the Debenture. Since 5,508,813 shares of Common Stock were issued
and outstanding as of March 31, 1996 and 568,325 shares of Common Stock were
reserved for issuance upon the exercise of currently outstanding options and
warrants, the 10,000,000 shares of Common Stock currently authorized for
issuance by the Company's Articles of Incorporation may be insufficient to
permit the maximum conversion of the Debenture. Therefore the Company is
requesting in Proposal Two that the Articles of Incorporation be amended to
increase the number of shares of Common Stock authorized for issuance from
10,000,000 to 15,000,000. Because the increase in authorized stock is necessary
to permit maximum conversion of the Debenture, Proposals One and Two are
interrelated such that Proposal One cannot be effected unless Proposal Two is
also approved. In such regard, negative votes, broker non-votes and abstentions
as to Proposal Two will have the practical effect of votes against Proposal One.
However, the approval of Proposal One is not necessary for Proposal Two to be
effected, and thus negative votes, broker non-votes or abstentions as to
Proposal One will not have the effect of votes against Proposal Two. In this
regard, Proposal Two, if approved, will be implemented even if Proposal One is
rejected. See, however, "--Advantages and Disadvantages of Proposal One." The
Company intends to file a listing application with the Nasdaq National Market if
and when the Company receives notice of conversion from Transpac.
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ADVANTAGES AND DISADVANTAGES OF PROPOSAL ONE
The Company's Board of Directors believes that approval of this
Proposal One is in the best interests of the Company and its shareholders. In
reaching this conclusion, the Board of Directors noted that there are
significant advantages and disadvantages to this Proposal One.
The Company requires significant capital to develop its products, in
particular the technology licensed from IBM for product development at MPM. The
Transpac Financing is an important step in continuing to finance MPM's product
development. If MPM cannot meet its performance milestones with IBM on a timely
basis, the license agreement with IBM could terminate. Without the financing
from Transpac, one of the Company's current providers of working capital, such
product development could not continue. The structure of the investment was
negotiated at arms length, after a review of the lack of alternatives, by
representatives of the Company and MPM. The financing was structured as a sale
of a convertible debenture to achieve two objectives: first, to give Transpac a
preference over the shareholders of the Company in the case of a bankruptcy and
second, to give Transpac the possibility of sharing on an equity basis if the
Company prospers, rather than being limited solely to principal and interest
payments on the debt. The possibility of a conversion to equity under the right
circumstances results in potentially greater return to Transpac on its
investment. These rights were necessary to obtain Transpac's investment.
Failure to comply with the terms of the investment could materially adversely
affect the Company's ability to continue as an ongoing concern. Failure to
obtain such approvals could constitute a breach of the agreements covering such
investment and entitle Transpac to request damages from the Company and MPM.
Failure to comply with the terms of the Transpac investment, including receipt
of shareholder approvals, would materially adversely affect the Company's
business, financial condition and results of operations.
As shareholders of the Company may be aware, the Company is highly
leveraged, with approximately $44,000,000 in liabilities, including the
Debenture, various bank debt, trade payables, accrued expenses and other long
term obligations, but only approximately $7,400,000 in total shareholders'
equity. In addition to the above, the Transpac Financing increased the
Company's total debt and diluted the Company's earnings per share ("EPS")
because of the 842,013 shares of Common Stock issued to date, and may further
dilute EPS because of the convertibility feature. By enabling Transpac to
convert the Debenture into shares of the Company's Common Stock, the Company
would be potentially able to lower its debt to equity ratio, which would better
enable the Company to attract future debt and equity financing. In addition, by
enabling Transpac to increase its equity ownership of the Company and the value
of its initial investment in the Company through the convertibility of the
Debenture, the Company will be able to incentivize Transpac to work closely with
and support the Company in Transpac's capacity as a significant shareholder
and/or a director of the Company. The Company believes that a close on-going
relationship with Transpac could be beneficial to the Company's future results
of operations.
The disadvantages noted by the Board of Directors include the fact
that the issuance of the Conversion Shares will have the effect of significantly
reducing the percentage ownership of the Company's current shareholders. In the
absence of a proportionate increase in the Company's earnings and book value, an
increase in the aggregate number of the Company's issued and outstanding shares
of Common Stock caused by the issuance of the Conversion Shares would
significantly dilute the earnings per share and book value per share of all
outstanding shares of the Company's and MPM's capital stock. If such factors
were reflected in the price per share of Common Stock, the potential realizable
value of a shareholder's investment could be materially adversely affected. In
addition, the Conversion Shares may be freely tradeable at some point in time
after conversion of the Debenture. Sales of such freely tradeable Conversion
Shares in the open market from time to time would potentially have a negative
effect upon the trading price of the Company's Common Stock. The agreements
covering the financing contain numerous restrictions on the ability of the
Company and MPM to operate in certain ways. The existence of the Debenture and
its convertibility feature into shares of Common Stock of MPI would
significantly dilute any earnings per share amounts and significantly dilute the
ownership interests of MPI's shareholders. The existence of the Debenture and
its convertibility feature into shares of common stock of MPM
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could have the same effect on MPI, as the current sole shareholder, as the
potential creation of a minority interest in the earnings of MPM, if any, would
reduce the Company's proportionate share of earnings for MPM with a
corresponding reduction in the Company's results of operations. Such dilution
would be further exacerbated if IBM were to also exercise its option to purchase
up to 51% of the capital stock of MPM.
After a review of the foregoing points, the Board of Directors of the
Company and MPM determined that approval of this Proposal One is in the best
interests of the Company's shareholders. This Proposal One was approved by all
of the directors of the Company present at a meeting of the Board of Directors
on February 29, 1996 at which meeting a quorum was present. The affirmative
vote of (i) a majority of the shares of the Company's Common Stock represented
and voting at the Special Meeting and (ii) a majority of the required quorum is
required for the approval of this Proposal One. Thus, abstentions and broker
non-votes can have the effect of preventing approval of a proposal where the
number of affirmative votes, though a majority of the votes cast, does not
constitute a majority of the required quorum. Because the increase in
authorized stock in Proposal Two is necessary to permit conversion of the
Debenture, Proposals One and Two are interrelated such that Proposal One cannot
be effected unless Proposal Two is also approved. In such regard, negative
votes, broker non-votes and abstentions as to Proposal Two will have the
practical effect of votes against Proposal One. The Board of Directors
recommends that the shareholders vote FOR the approval of the convertibility of
the Debenture.
Prior to the Transpac Financing, Transpac was unaffiliated with the
Company. No director or officer of the Company, or any of their associates, has
any direct or indirect interest in the transactions which are the subject of
this Proposal One. The purchase price of the Transpac Shares and the terms of
the Debenture were determined by negotiation between the Company and Transpac
and an assessment of the terms necessary to attract the investment capital
sought by the Company.
PROPOSAL TWO -- INCREASE IN AUTHORIZED CAPITAL STOCK
The Board of Directors is requesting shareholder approval of an
amendment of the Company's Articles of Incorporation to increase the number of
shares of Common Stock authorized for issuance from 10,000,000 to 15,000,000.
On March 31, 1996, 5,508,813 shares of the Company's Common Stock were issued
and outstanding. On March 31, 1996, there were 568,325 shares of the Company's
Common Stock reserved for issuance upon exercise of currently outstanding
options or warrants. The remaining 3,922,862 shares of authorized but unissued
Common Stock are not reserved for any specific use and are available for future
issuance, other than for the convertibility of the Debenture that is the subject
of Proposal One. Since the increase in authorized stock is necessary to permit
maximum conversion of the Debenture, Proposals One and Two are interrelated such
that Proposal One cannot be fully effected unless Proposal Two is also approved.
However, the approval of Proposal One is not necessary for Proposal Two to be
effected.
The Board of Directors considers it advisable to have the additional
shares available for possible future issuance upon conversion of the Debenture.
As the maximum number of Conversion Shares, when combined with the Transpac
Shares, could in the aggregate equal up to 49% of the Company's issued and
outstanding Common Stock after conversion of the Debenture, the Company will not
have a sufficient number of authorized but unissued shares of Common Stock for
issuance upon conversion of the Debenture. In addition, the Board of Directors
considers it advisable to have the additional shares of Common Stock available
for future financings, acquisitions, stock dividends or stock splits, for
issuance under the Company's employee benefit plans and for other general
corporate purposes. Although the Company does not have any other current plan
to issue its stock in exchange for financing (other than shares that may be
issued in the future as Conversion Shares), the Company from time to time has
and will continue to seek outside financing to fund its operations. The Company
anticipates that it may in the future enter into an agreement to obtain
financing in exchange for the issuance of shares of Common Stock that would be
authorized by the approval of this Proposal Two. The
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availability of such shares for issuance in the future will give the Company
greater flexibility and permit such shares to be issued without the expense and
delay of a special shareholders' meeting.
If this amendment is adopted, Article III of the Company's Articles of
Incorporation will be amended to read in its entirely as follows:
"(a) Class of Stock. The Corporation is authorized to issue one class of
--------------
stock to be designated "Common Stock," no par value per share. The total
number of Common Stock that the Corporation is authorized to issue is
Fifteen Million (15,000,000) shares."
If this amendment is adopted, the additional shares of Common Stock may be
issued by direction of the Board of Directors in the form of Conversion Shares,
or at such times, in such amounts and upon such terms as the Board of Directors
may determine, without further approval of the shareholders unless, in any
instance, such approval is expressly required by regulatory agencies or
otherwise. As discussed in part under Proposal One, the Nasdaq National Market,
on which the issued shares of Common Stock are currently included for quotation,
requires shareholder approval as a prerequisite to continued inclusion of the
shares in several situations, including acquisition transactions, where the
issuance of additional shares could result in an increase of 20% or more in the
number of shares of capital stock of the Company outstanding. The Common Stock
carries no preemptive rights to purchase additional shares.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's shareholders depending upon the
exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company so as to dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal.
In addition, an issuance of additional shares by the Company could have an
effect on the potential realizable value of a shareholder's investment. In the
absence of a proportionate increase in the Company's earnings and book value, an
increase in the aggregate number of outstanding shares of the Company caused by
the issuance of the additional shares would dilute the earnings per share and
book value per share of all outstanding shares of the Company's stock. If such
factors were reflected in the price per share of Common Stock, the potential
realizable value of a shareholder's investment could be adversely affected.
The proposed amendment to the Company's Articles of Incorporation was
approved by all of the directors of the Company present at a meeting of the
Board of Directors on February 29, 1996 at which meeting a quorum was present.
The affirmative vote of a majority of the outstanding shares of Common
Stock is required for approval of the amendment to the Company's Amended and
Restated Articles of Incorporation although broker non-votes and abstentions
have the effect of votes against this Proposal Two. Because the increase in
authorized stock in Proposal Two is necessary to permit conversion of the
Debenture, Proposals One and Two are interrelated such that Proposal One cannot
be effected unless Proposal Two is also approved. In such regard, negative
votes, broker non-votes and abstentions as to Proposal Two will also have the
practical effect of votes against Proposal One. The Board of Directors
recommends that the shareholders vote FOR the increase in the Company's
authorized shares of Common Stock from 10,000,000 to 15,000,000.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The holders of the Company's Common Stock are entitled to one vote per
share on all matters to be voted upon by the shareholders, except that all such
holders are entitled to cumulate their votes in the election of directors. Each
shareholder voting for the election of directors may cumulate such shareholder's
votes and give one candidate the number of votes equal to the number of
directors to be elected multiplied by the number of votes to which the
shareholder's shares are entitled, or distribute such shareholder's votes on the
same principle among as many candidates as the shareholder may select, provided
that votes cannot be cast for more than the number of director positions subject
to such election. However, no shareholder shall be entitled to cumulate votes
unless the names of candidates for which votes are being cumulated have been
placed in nomination prior to the voting and the shareholder, or any other
shareholder, has given notice prior to the commencement of the voting of such
shareholder's intention to cumulate the shareholder's votes. These cumulative
voting provisions will terminate if and when the Company meets certain listing
and trading standards, including a requirement for 800 record holders of the
Company's securities as of the record date of the Company's most recent annual
meeting of shareholders. This provision may have the effect of delaying,
deferring or preventing a change in control of the Company. The holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
REGISTRATION RIGHTS
Under the terms of a registration rights agreement, waiver agreement
and conversion agreement, subject to certain exceptions, if the Company proposes
to register any of its shares of Common Stock (other than the 160,000 shares
underlying a warrant issued by the Company to the underwriter (the
"Underwriter") of its initial public offering (the "Underwriter's Warrant"))
under the Securities Act of 1933, as amended (the "Securities Act"), either for
its own account or the account of any shareholder, in any public offering,
investors holding approximately 3,043,000 shares in the aggregate (the
"Registrable Securities") are entitled to notice of such registration and are
entitled on three separate occasions to include for registration therein their
Registrable Securities. In addition, the holder or holders of an aggregate of
at least 35% of the then outstanding Registrable Securities shall have the right
to require the Company to file a registration statement under the Securities Act
in order to register the Registrable Securities then held by such holder or
holders, provided that (i) the fair market or book value of the Registrable
Securities requested to be so registered is not less than $300,000, and (ii) the
Company is only obligated to file registration statements on no more than four
separate occasions in the aggregate and no more than two of which shall require
the use of registration statements on Form S-1. The right to include any of the
above-described Registrable Securities in any registration is subject to certain
limitations and conditions, including the underwriters' right to limit on a pro
rata basis the number of shares being registered by all holders. The Company is
required to indemnify holders of Registrable Securities and the underwriters, if
any, for such holders under certain circumstances. In general, the Company is
required to bear the expenses of all requested demand and piggyback
registrations, except for the selling shareholders' pro rata portion of the
underwriting discounts and commissions.
In connection with its public offering, the Company granted
registration rights to the Underwriter with respect to the 160,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrant. If the
Company shall cause a registration statement, or offering statement under
Regulation A, to be filed with the Commission, the Underwriter shall have the
right commencing one year after the date of this Prospectus and continuing for a
four-year period thereafter to include in such registration statement and
offering statement the
7
<PAGE>
Underwriter's Warrant and/or the securities issuable upon its exercise at no
expense to the Underwriter. Additionally, the Company has agreed that, upon
written request by a holder of 50% or more of the Underwriter's Warrant which is
made during the exercise period of the Underwriter's Warrant, the Company will,
on two separate occasions, register the Underwriter's Warrant and/or any of the
securities issuable upon the exercise thereof. The initial such registration
will be at the Company's expense and the second at the expense of the holder of
the Underwriter's Warrant.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Company's Common Stock is
American Stock Transfer & Trust Company, New York, New York.
OWNERSHIP OF SECURITIES
The following table sets forth information known to the Company
regarding the ownership of the Company's Common Stock as of March 31, 1996 for
(i) each Director and nominee who owns Common Stock, (ii) all persons or
entities who were known by the Company to be beneficial owners of five percent
(5%) or more of the Company's Common Stock, (iii) the Chief Executive Officer
and the other executive officers whose salary and bonus for 1995 were in excess
of $100,000 and (iv) all executive officers and Directors of the Company as a
group.
<TABLE>
<CAPTION>
Number of Shares Percent of Total Shares
Name and Address of Beneficial Owner (9) Beneficially Owned(1) Outstanding Beneficially Owned
- ---------------------------------------------------- --------------------- -------------------------------
<S> <C> <C>
Entities that may be deemed to be
affiliated with Transpac Capital Pte Ltd
6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809 (2)................................ 842,013 15.30%
Wilmer R. Bottoms (3)............................... 832,610 15.09%
Entities that may be deemed to be affiliated with
Patricof & Co. Ventures, Inc.
2100 Geng Road, Suite 220
Palo Alto, CA 94303 (3)............................. 828,110 15.00%
Cabot Ceramics, Inc.
c/o Cabot Corporation
75 State Street
Boston, MA 02119-1806 (4)........................... 656,992 11.90%
Portal Investments, Inc.
c/o Levon Kasarjian, Jr.
8180 North Hayden Road
Suite D-100
Scottsdale, AZ 85258 (5)............................ 398,546 7.20%
Entities that may be deemed to be affiliated with
TBM Associates
101 Federal Street, 4th Floor
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Boston, MA 02110 (6)................................ 369,267 6.70%
Timothy da Silva (7)................................ 211,919 3.70%
Jee Fook Pak (8).................................... 11,194 *
Waldemar Heeb (8)................................... 13,326 *
Charles F. Wheatley (8)............................. 7,108 *
Ernest J. Joly (8).................................. 5,330 *
Frank Howland (8)................................... 2,250 *
Cecil E. Smith, Jr. (8)............................. 4,500 *
William R. Thompson................................. 1,000 *
All directors and executive officers
as a group (10 persons) (9)......................... 1,098,323 19.00%
- -----------
</TABLE>
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Percentage beneficially owned
is based on a total of 5,508,813 shares of Common Stock issued and
outstanding as of March 31, 1996. Shares of Common Stock subject to options
or warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of March 31, 1996 are deemed outstanding for
computing the percentage of the person holding such options or warrants but
are not outstanding for computing the percentage of any other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
beneficially owned.
(2) The Transpac entities include Transpac Capital Pte Ltd (the "Manager"),
a Singapore private limited company; Transpac Industrial Holdings Limited
("TIH"), a Singapore private limited company; Regional Investment Company
Limited ("Regional"), a Singapore public limited company; Transpac Equity Fund
("TEF"), a British Virgin Islands trust; Transpac Venture Partnership II
("TVP"), a collective investment scheme; Transpac Manager's Fund ("TMP"), a
British Virgin Islands international business company; and NatSteel Equity III
Pte Ltd ("NatSteel"), a Singapore private limited company. The Manager does not
have any direct ownership interest in the Company's Common Stock. The Manager
has, in its capacity as investment adviser to each of TIH, Regional, TEF and
TVP, the power to control the voting and disposition of the 765,466 shares of
Common Stock held in the aggregate by TIH, Regional, TEF and TVP and, therefore,
may be deemed to be a beneficial owner of such shares. Such shares constitute
approximately 13.90 percent of the outstanding Common Stock. TIH has direct
beneficial ownership of 334,069 shares (approximately 6.1%) of the Common Stock.
TIH shares the power to control the voting and disposition of such 334,069
shares of Common Stock with the Manager. TIH disclaims beneficial ownership of
any shares of Common Stock held by any other Transpac entity. Regional has
direct beneficial ownership of 92,066 shares (approximately 1.79%) of the Common
Stock. Regional shares the power to control the voting and disposition of such
92,066 shares of Common Stock with the Manager. Regional disclaims beneficial
ownership of any shares of Common Stock held by any other Transpac entity. TEF
has direct beneficial ownership of 197,285 shares (approximately 1.79%) of the
Common Stock. TEF shares the power to control the voting and disposition of such
197,285 shares of Common Stock with the Manager. TEF disclaims beneficial
ownership of any shares of Common
9
<PAGE>
Stock held by any other Transpac entity. TVP has direct beneficial
ownership of 139,415 shares (approximately 2.5%) of the Common Stock. TVP
shares the power to control the voting and disposition of such 139,415
shares of Common Stock with the Manager. TVP disclaims beneficial ownership
of any shares of Common Stock held by any other Transpac entity. TMF has
direct beneficial ownership of 2,631 shares (approximately 0.05%) of the
Common Stock. NatSteel has direct beneficial ownership of 75,547 shares
(approximately 1.4%) of the Common Stock. NatSteel and the Manager have no
formal relationship, advisory or otherwise, in respect of the shares of
Common Stock held by NatSteel. However, NatSteel anticipates that it may
rely upon the advice of Transpac in connection with the voting and
disposition of the shares of Common Stock held by it. NatSteel disclaims
beneficial ownership of the shares of Common Stock held by any other
Transpac entity. The information in this footnote was obtained from a
Schedule 13D filed with the Securities and Exchange Commission on or about
April 3, 1996.
(3) Includes 201,308, 412,557, 104,593 and 106,795 shares owned by APA
Excelsior Fund, APA Excelsior II, Coutts & Co. (Jersey) Ltd., Custodian for
APA Excelsior Venture Capital Holding (Jersey) Ltd., and APA Venture
Capital Fund, respectively, and 1,428, 1,143, 286 and zero shares,
respectively, in the form of immediately exercisable warrants owned by such
entities. Dr. Bottoms, the Chairman of the Board of the Company, is a
general partner of APA Excelsior Fund and APA Partners, which is a general
partner of APA Excelsior II, and a Senior Vice President of Patricof & Co.
Ventures, Inc., which is an investment manager to APA Excelsior Venture
Capital Holding (Jersey) Ltd. and APA Venture Capital Fund, and as such may
be deemed to share voting and investment power with respect to such shares,
along with Alan Patricof, Patricia Cloherty, George Jenkins, Janet Effland
and Robert Chefitz. Dr. Bottoms and such other named individuals disclaim
beneficial ownership of such shares except to the extent of their
respective pecuniary interest therein.
(4) Includes 654,326 shares owned by Cabot Ceramics, Inc. and 2,666 shares
issuable upon exercise of a warrant. Cabot Ceramics, Inc. is a corporation
wholly-owned by Cabot Corporation. The executive management of Cabot
Corporation has voting and investment power over such shares and may be
deemed to beneficially own such shares.
(5) Includes 397,213 shares owned by Portal Investments, Inc. and 1,333
shares issuable upon exercise of warrants. Portal Investments, Inc. is an
Arizona corporation, eighty-eight percent of whose common stock is beneficially
owned by Bell Atlantic Systems Leasing International, Inc., a New York
corporation, a wholly-owned subsidiary of Bell Atlantic Capital Corporation, a
Delaware corporation, which is a wholly-owned subsidiary of Bell Atlantic
Investments, Inc., a Delaware corporation, which is a wholly-owned subsidiary
of Bell Atlantic Corporation, a Delaware corporation.
(6) Includes 368,094 shares owned by N.V. Bever Holding, and 1,173 shares
issuable upon exercise of warrants owned by N.V. Bever Holding. Joost
Tjaden, the chairman of the board and a principal shareholder of TBM
Associates, Inc., is a managing director of Bever Management B.V., a Dutch
Company, which is the managing director of N.V. Bever Holding. Mr. Tjaden
and John W. Blackburn are the two shareholders of Bever Management B.V.
TBM Associates, Inc. disclaims beneficial ownership of the shares owned by
N.V. Bever Holding.
(7) Includes 1,000 shares registered in the name of Barbara da Silva, Mr. da
Silva's spouse. All other shares beneficially owned by Mr. da Silva are in
the form of stock options exercisable within sixty (60) days of March 31,
1996.
(8) All shares in the form of stock options exercisable within 60 days of
March 31, 1996.
(9) See Notes 3, 7 and 8 above.
10
<PAGE>
To the Company's knowledge, based solely upon representations from such
shareholders, each beneficial owner of more than ten percent of the Company's
capital stock and all officers and directors filed all reports and reported all
transactions on a timely basis with the Securities and Exchange Commission (the
"Commission"), the NASD and the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in any such forward-looking statements as a result of
certain factors, including those set forth in Future Operating Results,
beginning on page 16.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data of the Company expressed as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 85.5 89.1 80.0
------- -------- ------
Gross profit...................................................... 14.5 10.9 20.0
Selling, general and administrative............................... 10.0 11.9 13.6
Engineering and product development............................... 4.3 4.1 3.7
Provision for revaluation of subsidiary and
other related assets............................................ -- -- 1.7
------- -------- ------
Income (loss) from operations..................................... 0.2 (5.1) 1.0
Other income (expense):
Foreign exchange loss........................................... (1.3) (2.4) (2.2)
Interest expense................................................ (1.4) (1.0) (2.2)
Royalty revenue................................................. 0.3 0.4 --
Other income.................................................... 1.8 1.2 1.0
------- -------- ------
Loss before income taxes and the cumulative effect of change in
accounting principle............................................. (0.4) (6.9) (2.4)
======= ======== ======
Net loss.......................................................... (0.4) (6.9) (2.4)
======= ======== ======
</TABLE>
For a detailed description of the Company's Consolidated Balance Sheets as
of December 31, 1995 and 1994 and the Consolidated Statements of Operations,
Statements of Cash Flows and Statements of Shareholders' Equity for each of the
three fiscal years in the period ended December 31, 1995, together with the
reports of the Independent Certified Public Accountants, please see Exhibit C to
---------
this Proxy Statement.
YEARS ENDED 1993, 1994 AND 1995
11
<PAGE>
Net sales. The Company's net sales increased by 21.9% from $34.7 million
in 1993 to $42.3 million in 1994 and by 37.1% to $58.0 million in 1995. The
increase in net sales during 1994 is primarily attributable to a $6.4 million
increase in revenues from the sale of multichip modules ("MCM") products at the
Company's CTM Electronics, Inc. subsidiary ("CTM"). The increase in net sales
during 1995 is primarily attributable to increases in revenues from sales of
pressed ceramics products at the Company's Microelectronic Packaging (S) Pte.,
Ltd. ("MPS") and Microelectronic Packaging America ("MPA") subsidiaries of
approximately $12.4 million (which includes the effect of $1.2 million derived
from transfer of technology in 1994 referred to below), and a $4.6 million
increase in revenues from the sale of MCM products at the Company's CTM
subsidiary. The increase in sales of pressed ceramic products reflects both an
increase in units sold and a general price increase implemented by MPS in the
second quarter of 1995. The increase in revenue from the sale of MCMs was due to
both an increase in units sold and a change in the product components sold to
CTM's primary customer. Beginning in March 1994, CTM began purchasing a
component of the end product from its primary customer and in turn increasing
the sales price for the increase in cost. Prior to March 1994, the customer had
provided the component for use in the products it was purchasing from CTM. The
effect of this change was to increase both sales and cost of sales by $1.4
million during 1995.
Net sales in 1994 also includes $1.2 million derived from the transfer of
certain production equipment and related production supplies to a third party
pursuant to an equipment resale arrangement. The revenues arising from this
arrangement are included in other sales. There were no such revenues during
1995.
Cost of goods sold. The Company's cost of goods sold increased from $29.7
million in 1993 to $37.7 million in 1994 to $46.4 million in 1995. The increases
were primarily the result of increased sales during these periods. The cost
associated with the inclusion by CTM in its finished MCM products of components
that, in previous years, were purchased by CTM's customers from third party
suppliers and provided to CTM, accounted for $2.3 million of the $8.0 million
increase in 1994 and $1.4 million of the $8.7 million increase in 1995. Cost of
goods sold has also been materially adversely affected by exchange rate
fluctuations during such periods. The appreciation of the Japanese yen and the
Singapore dollar relative to the United States dollar during such periods has
increased the Company's cost of goods sold and decreased its margins on products
sold. Such fluctuations in exchange rates have resulted in increases in the
Company's cost of goods sold of $198,000, $1,545,000 and $875,000 in 1993, 1994
and 1995, respectively. Cost of goods sold as a percentage of net sales
increased from 85.5% in 1993 to 89.1% in 1994 primarily due to the material
adverse impact of exchange rate fluctuations on the gross margins generated by
the Company's Singapore operations and inadequate overhead absorption at MPA due
to low product sales. Cost of goods sold as a percentage of net sales decreased
to 80.0% in 1995. During 1995, gross margin from sales in percentage terms
increased as the impact of improved pricing at MPS and improved overhead
absorption at MPS, CTM and MPA due to improved shipping volumes offset increases
in the costs of certain of the Company's raw materials and the impact of
exchange rate fluctuations on gross margins generated by the Company's Singapore
operations.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.5 million in 1993 to $5.0 million in 1994 to $7.9
million in 1995. The increase of approximately $1.6 million or 44.5% in 1994 is
primarily attributable to the inclusion of expenses related to the operations
acquired as part of the Company's acquisition of CTM of $380,000, administrative
costs related to an equipment transfer agreement with an entity in China of
$111,000, the expenses associated with establishing reserves relating to certain
uncollectible receivables of $157,000, an increase in legal and accounting costs
of $220,000, an increase of approximately $600,000 in personnel costs and
approximately $284,000 of other costs associated with the Company's operating as
a public company together with other increases of $282,000 relating to an
increase in activity, offset by a decrease of approximately $434,000 in expenses
due to a down-sizing of business operations in a business sector. The increase
of approximately $2.8 million or 56.6% in 1995 is attributable to several
factors, including the establishment of a reserve for uncollectible receivables
of $980,000, legal settlement costs of $525,000, an increase in legal costs of
approximately $400,000, an increase in sales commissions at CTM of approximately
$140,000 as a result of the increase in sales of MCM products, additional
personnel
12
<PAGE>
costs of approximately $380,000 and a further $375,000 related to the
overall increase in activity in 1995. Selling, general and administrative
expenses may increase in absolute dollars during 1996.
Engineering and Product Development. Engineering and product development
costs increased from $1.5 million in 1993 to $1.7 million in 1994 to $2.2
million in 1995. The increase of approximately $240,000 or 16.1% in 1994
primarily reflects the inclusion of expenses related to the new operations
acquired in the CTM acquisition. The increase of approximately $418,000 or 24.1%
in 1995 primarily reflects an increase in personnel costs and expenditures on
materials used in product development. The Company currently anticipates that
engineering and product development costs will increase in absolute dollars in
the future as it continues to develop products such as cerquads for commercial
applications, low-temperature co-fired multilayer ceramics for use in the
production of MCMs, white ceramic packages for the telecommunications industry
and products incorporating thick film technology, and programs associated with
technology licenses.
Provision for Revaluation of Subsidiary and Other Related Assets. In July
1995, the Company's Board of Directors directed management to undertake the sale
of the Company's MPM subsidiary and certain other related assets. In connection
with this decision, the Company recorded a writedown of $1,000,000 during the
second quarter of 1995 for the revaluation of this subsidiary to its net
realizable value and the establishment of a reserve for certain exit costs to be
incurred during the anticipated phase-out period. In January 1996, the
Company's Board of Directors elected to continue the Company's development
program associated with the IBM technology. In March 1996, the Company
consummated the Transpac Financing and thereby obtained additional funds to
continue equipping the MPM production facility. The reserve for exit costs
established during the second quarter of 1995 was completely utilized by the end
of the year. The Company did not recognize any additional exit costs beyond
those recorded in the second quarter of 1995.
Foreign Exchange Loss. During 1993, 1994 and 1995, the Company's results
of operations were materially adversely affected by the declining value
of the United States dollar compared to the Japanese yen and the Singapore
dollar. During this time period, the Japanese yen exchange rate declined from
134 Japanese yen to 1 U.S. dollar to as low as 83.1 Japanese yen to 1 U.S.
dollar and the Singapore dollar exchange rate declined from 1.60 Singapore
dollars to 1 U.S dollar to as low as 1.39 Singapore dollars to 1 U.S. dollar.
The fluctuations in the relative value of these currencies from their relative
values at the beginning of each respective fiscal year resulted in the Company's
experiencing additional costs of $645,000, $2,552,000 and $2,129,000 in 1993,
1994 and 1995, respectively. For financial reporting purposes, a portion of
these additional costs is included in cost of goods sold, while the remainder is
recorded in the caption foreign exchange loss. Such fluctuations in exchange
rates have resulted in reductions of the Company's gross profit on product sales
of $198,000, $1,545,000 and $875,000 in 1993, 1994 and 1995, respectively.
During such periods, the Company also reported foreign exchange transaction
losses of $447,000, $1,007,000 and $1,254,000, respectively.
Fluctuations in foreign exchange rates have a significant impact on the
Company's results of operations. Certain of the Company's raw material purchases
and other costs of production and administration are denominated in Japanese yen
and Singapore dollars, while all of the Company's sales are denominated in U.S.
dollars. Consequently, a change in exchange rates between the U.S. dollar and
the Japanese yen or the Singapore dollar can affect the Company's cost of goods
sold or its selling, general and administrative expenses, resulting in gains or
losses that are included in the Company's results of operations. Exchange rate
fluctuations also impact the carrying value of certain of the Company's
obligations, resulting in foreign currency transaction gains or losses that are
likewise included in the Company's results of operations. Fluctuations in
exchange rates also subject the Company to gains or losses on its outstanding
forward foreign currency contracts. For financial reporting purposes, the gain
or loss arising from exchange rate fluctuations between the transaction date for
a transaction denominated in a foreign currency and that transaction's
settlement date, or reporting date for transactions which have not settled, is
characterized as a foreign exchange gain or loss, as is the gain or loss
suffered on outstanding forward foreign currency contracts.
In an effort to minimize the impact of foreign exchange rate movements on
the Company's operating results, and subject to financing from and the consent
of the Development Bank of Singapore ("DBS"), the Company enters into forward
foreign currency contracts to hedge foreign currency transactions such as
purchases
13
<PAGE>
of raw materials denominated in Japanese yen. The terms of the forward
contracts generally involve the exchange of U.S. dollars for either Japanese yen
or Singapore dollars at a future date, with maturities generally ranging from
one to nine months from the execution date of the forward contract. At contract
maturity, the Company makes net settlements of U.S. dollars for foreign
currencies at forward rates that were agreed to at the execution date of the
forward contracts. The Company utilizes its S$30,000,000 (U.S.$21,216,000 at
December 31, 1995) foreign exchange line of credit with DBS to finance the
purchase of forward foreign currency contracts with maturities of up to 12
months. Advances under this line of credit are guaranteed by MPI and are secured
by all of the assets of MPS, including a second mortgage on MPS's leasehold land
and buildings. The Company's ability to utilize this line is subject to
significant limitations imposed by DBS. Another factor which restricts the
Company's hedging activities is the available borrowing capacity of the foreign
exchange line of credit. In addition, the Company generally enters into forward
contracts only when it anticipates future weakening of the U.S. dollar relative
to the Singapore dollar or Japanese yen. As a result of these and other factors,
the Company's hedging measures have been and may continue to be severely limited
in their effectiveness.
The Company's operating results have been and will continue to be
materially adversely affected by any weakening in the U.S. dollar relative to
either the Japanese yen or the Singapore dollar. During the first half of 1995,
both the Japanese yen and the Singapore dollar appreciated in value against the
U.S. dollar. The appreciation of these currencies had the effect of increasing
the Company's cost of goods sold and selling, general and administrative
expenses and decreasing the margins of the Company's products. During the second
half of 1995, although the value of the U.S. dollar rebounded against both the
Japanese yen and the Singapore dollar, the Company incurred additional foreign
exchange losses owing to its obligations under its outstanding forward foreign
currency contracts, which required the Company to purchase Japanese yen and
Singapore dollars at contract rates that were below prevailing market rates at
the date of settlement. Any future weakening of the U.S. dollar relative to
either the Singapore dollar or the Japanese yen will have a material adverse
effect upon the Company's business, financial condition and results of
operations. To mitigate the effects of the weaker U.S. dollar, the Company
increased the sales prices of certain of its products during the second quarter
of 1995. The Company will attempt to further offset the material adverse effect
of the weaker U.S. dollar by qualifying non-Japanese sources of key materials,
and completing the relocation of its pressed ceramic products manufacturing
operations to Indonesia from Singapore. There can be no assurance that such
measures can or will be taken or financed to a sufficient degree such that they
will offset the impact of the weaker U.S. dollar on the Company's operating
results.
Interest Expense. Interest expense decreased from $490,000 in 1993 to
$443,000 in 1994 and increased to $1,298,000 in 1995. The decrease in 1994 of
$47,000 is primarily due to the reduction in interest expense resulting from the
retirement of various interest bearing obligations during the second quarter of
1994, which decrease more than offset the interest on the additional borrowings
under the Company's various credit facilities with DBS and the interest on
additional indebtedness incurred and assumed in the CTM acquisition. The
increase of $855,000 in 1995 is primarily due to additional borrowings by the
Company under its borrowing arrangements with DBS Bank (see Liquidity and
Capital Resources), an increase in the Singapore prime rate during the second
half of 1994 and the additional borrowings associated with the program to
acquire equipment from SSC (see Note 4 of Notes to Consolidated Financial
Statements attached hereto as Exhibit C). The Company currently anticipates that
---------
interest expense will continue to increase in absolute dollars during 1996 due
to the increase in Company borrowings.
Royalty Revenue. Royalty revenues from the Company's licensee were
$114,000 and $153,000 in 1993 and 1994, respectively. The Company's royalty
arrangement with its licensee terminated at the conclusion of the second quarter
of 1994; accordingly, the Company has had no royalty revenue during 1995. The
increase in royalty revenue in 1994 was due to an increase in licensee product
sales during the first quarter of 1994.
Other income. Other income was $634,000, $496,000 and $614,000 in 1993,
1994 and 1995, respectively. Other income in 1994 reflects primarily the
inclusion of $100,000 of interest income and approximately $136,000 of non-
recurring technology and training fees billed to a third party. The majority of
other income arising in 1995 reflects the receipt during the first quarter of a
$375,000 payment from an insurance policy (net of legal expenses) covering
product losses incurred in 1988 due to the contamination of products during the
14
<PAGE>
manufacturing process. The Company believes this will be the final payment
relating to any insurance recovery relating to this loss.
Effects of income taxes. The Company's operating results were not impacted
by income taxes during 1993, as taxable income during this period was offset by
the utilization of a net operating loss carryforward. During 1994, the Company's
foreign and domestic operations generated operating losses for both financial
reporting and income tax purposes. During 1995, taxable income at the Company's
domestic and foreign operations was offset by the utilization of net operating
loss and other carryforwards. As of December 31, 1995, the Company had net
operating loss carryforwards of $11.3 million for United States income tax
purposes. In addition, at December 31, 1995, the Company had $435,000 in federal
and state research and development credits and $31,000 in investment tax credits
available for United States income tax purposes. The Company believes that it
has incurred an ownership change pursuant to Section 382 of the Internal Revenue
Code and, as a result, the Company believes that its ability to utilize its
current net operating loss and credit carryforwards in subsequent periods will
be subject to annual limitations. As of December 31, 1995, the Company had
capital allowance carryforwards of $2.4 million for Singapore income tax
purposes.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109 effective January 1, 1993. SFAS 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year(s) in which the
differences are expected to reverse. Upon implementation of SFAS 109, on January
1, 1993, the Company recorded a cumulative benefit of a one-time change in
accounting principle of $346,000, which represents the future tax benefits
expected to be realized upon utilization of the Company's foreign tax loss
carryforwards. These loss carryforwards were utilized during 1993.
LIQUIDITY AND CAPITAL RESOURCES
During 1993, 1994 and 1995, the Company financed its operations through a
combination of cash flow from operations, bank and other borrowings, equipment
lease financings and certain other debt and equity financings. During 1995,
operations provided net cash of $300,000. Investing activities, primarily
consisting of acquisitions of fixed assets, used $11.8 million and financing
activities provided net cash of $13.1 million during the same period. At
December 31, 1995, the Company had a working capital deficiency of $4,883,000
and an accumulated deficit of $26,910,000. In March 1996, the Company
consummated an equity financing of $2,000,000 with Transpac and MPM raised an
additional $9,000,000 through the issuance of the Debenture to Transpac.
The Company's principal sources of liquidity at December 31, 1995 consisted
of $2,923,000 of cash, and certain limited available borrowing capacity with
DBS. MPS has a S$9,500,000 (US$6,719,000) borrowing arrangement with DBS,
guaranteed by MPI, consisting of a working capital line of credit facility and
an overdraft facility. Borrowings under this arrangement are due on demand and
are secured by substantially all of the assets of MPS. Borrowings under the
working capital line and the overdraft facility bear interest at the Singapore
prime rate plus 1/2% and plus 3/4%, respectively. At December 31, 1995, MPS
had outstanding borrowings under this arrangement of $6,045,000. MPC has a
S$500,000 (US$354,000) borrowing arrangement with DBS, guaranteed by both MPI
and MPS, consisting of a working capital line of credit facility and an
overdraft facility. Borrowings under this arrangement are due on demand and are
secured by all of the assets of MPC. Borrowings under the working capital line
of credit facility and the overdraft facility bear interest at the Singapore
prime rate plus 1/2% and plus 3/4%, respectively. At December 31, 1995, MPC
had outstanding borrowings under this arrangement of $3,000. In February 1995,
MPM activated a $3,500,000 borrowing facility with DBS. The facility, which is
guaranteed by both MPI and MPS, consists of a $3.2 million short-term advance
facility and a $300,000 import/export bills facility. Advances under this
credit facility will bear interest at the bank's prime lending rate plus 2.5%
and cannot remain outstanding for more than 30 days. The facility does permit
rolling over of existing outstanding balances. This credit facility will mature
in May 1996 unless converted into a term loan at the election of DBS upon the
Company's satisfaction of certain criteria. This facility automatically
terminates in the event of the termination of the Company's technology transfer
agreement with IBM. At December 31, 1995,
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MPM had outstanding borrowings under this arrangement of $3,197,000. Borrowings
under this arrangement are secured by substantially all of the assets of MPM.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earnings levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt, the most restrictive of these covenants
being those associated with maintaining certain quarterly profitability levels.
The MPM and MPC agreements also contain restrictive provisions. As of December
31, 1995, each of MPM, MPS and MPC were in violation of certain covenants set
forth in their respective agreements with DBS, such violations including a
breach of profitability covenant by MPC, a breach of debt-to-equity ratio
covenant by MPM and a breach of the prohibition on intercompany advances. Such
violations were waived by DBS as of such date. As of March 31, 1996, the Company
was in default under one of its debt covenants. Such default was waived by the
lender after March 31, 1996.
At December 31, 1995, the Company also had borrowings of $10,000,000 under
notes payable to, or guaranteed by, various customers bearing interest at rates
ranging from 7.0% to 14.0% (see Note 8 of Notes to Financial Statements),
$1,424,000 under mortgage notes bearing interest at rates of 7.5% and 7.75%,
$207,000 under term loans bearing interest at 12.2%, and $864,000 under capital
lease obligations, consisting of various machinery and equipment financing
agreements, bearing interest at various rates. Borrowings under the above
arrangements are secured by various assets of the Company. The Company also
incurred certain noninterest bearing obligations in connection with the CTM
acquisition that have been discounted to their net present value of $394,000 at
December 31, 1995.
Since the execution of the IBM technology agreements, expenditures
associated with the establishment by MPM of a production facility in Singapore
to manufacture products incorporating the technology licensed from IBM under the
IBM Agreement have totalled approximately $9,200,000. During the same period,
the Company also paid an additional $2,000,000 of up-front nonrefundable
royalties to IBM. These expenditures, which have been partially funded through
bank and lease financing, have had a material adverse effect on the Company's
cash flow and capital resources. In addition to the $2.0 million payment, the
Company has significant continuing royalty obligations under the IBM Agreement.
Under the IBM Agreement, the Company is also required to attain certain
production milestones at specified dates. If the Company fails to achieve these
specified milestones in a timely manner, the IBM Agreement is terminable by IBM.
In addition, commencing in August 1996, the IBM Agreement is terminable by
either party without cause upon six months prior written notice. Although the
Company currently believes that with adequate financing it can achieve the
production milestones set forth in the IBM Agreement, there can be no assurance
that the Company will be able to achieve such milestones on a timely basis, or
at all. Furthermore, there can be no assurance that IBM will not terminate the
IBM Agreement after August 1996. If the Company does not timely achieve the
production milestones under the IBM Agreement, the Company could lose its rights
to the technology licensed to the Company by IBM under such agreement. If IBM
terminates the IBM Agreement after August 1996, the Company would lose its right
to such technology. The loss of such rights would have a material adverse impact
on the Company's future revenues and on the Company's future.
The Company is in the process of seeking additional financing, but other
than credit facilities discussed above, had no legally binding commitments or
arrangements for such financing as of March 31, 1996 other than $1.0 million
loaned to the Company by a bank lender in February 1996 and a term sheet entered
into with a bank lender in March 1996 for an additional $1.0 million and there
can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all, when required by the Company.
FUTURE OPERATING RESULTS
Future Capital Needs; Need for Additional Financing. The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the
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market, requirements to retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's research and development efforts, the Company's operating
results and the status of competitive products. Absent outside debt or equity
financing, and excluding significant expenditures required for the Company's
major projects and obligations associated with MPM, the Company currently
anticipates that cash on hand, including funds from the Transpac financing,
anticipated cash flow from operations and funds available from MPS' bank line of
credit and borrowings from customers may be adequate to fund its operations
excluding MPM in the ordinary course through 1996. See "Repayment of Bank
Obligations by MPM; Need for Additional Financing by MPM." There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations. In addition, the Company will require
additional financing after such date to fund its operations in the ordinary
course and retire its significant debt obligations. Furthermore, the Company
will require significant additional financing in order to carry out its current
corporate development programs including the provision of certain raw materials
and production supplies to a third party supplier in Indonesia and the
consolidation of MPS's Singapore operations. There can be no assurance that the
Company will be able to obtain such additional financing on terms acceptable to
the Company, or at all.
Pursuant to a subcontract manufacturing agreement between the Company and
Innoventure, a third party supplier, Innoventure established a manufacturing
facility in Indonesia that partially processes pressed ceramic products on
behalf of the Company. Partial processing of pressed ceramic products commenced
in the second quarter of 1995. Pressed ceramic products that are partially
processed in the Indonesian facility are completed in the Company's Singapore
facility. The Company currently anticipates that the Indonesian facility may be
able to fully process and produce pressed ceramic products by the end of 1997.
Equipping such facility to fully process and produce pressed ceramic products is
subject to a number of conditions, including, but not limited to, additional
transfers of pressed ceramic manufacturing equipment from Singapore, and there
can be no assurance that such facility will be so equipped. Pursuant to the
terms of this agreement, the Company agreed to provide Innoventure with raw
materials and other production supplies necessary for the commencement of
production in this facility. This obligation to provide raw materials and
production supplies has subsequently been modified by both parties such that the
Company is now purchasing these items from its suppliers on behalf of
Innoventure. Innoventure currently owes the Company approximately $1,434,000
related to the supply of such raw materials and related production supplies, and
the Company anticipates that it will continue to purchase such items on
Innoventure's behalf for the foreseeable future. The foregoing amount is
structured to be repaid to the Company by Innoventure with the form and timing
of such payments being agreed to by both parties. There can be no assurance that
amounts of raw materials and production supplies being provided to Innoventure
will not increase in the future, however, or that such amounts will continue to
be repaid by Innoventure in a timely fashion, or at all. Under this agreement,
the Company also agreed to lease certain production equipment to Innoventure. To
date, the parties have not finalized the terms of this leasing arrangement. In
the interim, the Company moved certain of its production equipment from its
Singapore facilities and certain of the equipment purchased from Samsung Corning
to the Innoventure facility. There can be no assurance that the Company will not
be required to replace such equipment in MPS's Singapore facilities or incur
additional costs as a result of replacing such equipment.
Although limited processing of pressed ceramic products commenced in
Indonesia during the second quarter of 1995, the full transition of the
Company's pressed ceramic production operations from Singapore to Indonesia has
not yet been completed and such operations are still primarily located at its
Singapore facility. Upon the completion of the transfer of its pressed ceramic
production operations to the facility in Indonesia, the Company may consolidate
the MPS Singapore operations, which currently occupy two facilities, into one
facility. Such consolidation, if undertaken by the Company, would cost a minimum
of $1.0 to $3.0 million and such consolidation may be completed no earlier than
the end of 1997. The Company does not currently have the resources to
consolidate MPS's Singapore facilities. In the event that the Company requires
additional funds to finance the consolidation of MPS's facilities, the Company
will seek additional financing through subsequent sales of its debt or equity
securities or through bank or lessor financing alternatives, if available. There
can be no assurance that the Company will not incur additional costs with
respect to the establishment of the manufacturing facility in Indonesia or the
consolidation, if any, of MPS's Singapore operations.
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The DBS line of credit available to MPS, which is guaranteed by MPI,
contains numerous restrictive covenants on the ability of such subsidiary to
provide funds to MPI or to other subsidiaries and on the use of proceeds. The
credit facilities at MPC and MPM and the Transpac agreements also contain
similar restrictions. The Company's high level of outstanding indebtedness and
the numerous restrictive covenants set forth in the agreements covering this
indebtedness prohibit the Company from obtaining additional bank lines of credit
and from raising funds through the issuance of debt or other securities without
the prior consent of DBS and Transpac. The Company is in the process of seeking
additional financing, but as of March 31, 1996, had no legally binding
commitments or arrangements for such financing other than a $1.0 million term
loan from a bank lender, a term sheet for an additional $1.0 million and the
Transpac financing which was consummated in late March 1996. The $9.0 million
raised by MPM is not available for use in other portions of the Company's
business. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all, when required by the
Company. If additional funds are raised by issuing equity or convertible
securities, further dilution to the existing shareholders will result. If
adequate funds are not available, the Company will be required to delay, scale
back or eliminate programs such as the consolidation of MPS's Singapore facility
or development of the IBM technology, which could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. In addition the Company will be required to take similar action with
respect to other research and development or manufacturing, construction
or transitioning programs or alliances or obtain funds through arrangement with
third parties that may require the Company to relinquish rights to certain of
its technologies or potential products or other assets that the Company would
not otherwise relinquish. The delay, scaling back or elimination of any such
programs or alliances or the relinquishment of any such rights could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Future Operating Results. The Company's operating results have fluctuated
significantly in the past and may continue to fluctuate significantly in the
future depending upon a variety of factors, including foreign currency losses,
losses associated with the Company's MPM subsidiary, downward pressure in gross
margins at the Company's subsidiaries, continued losses at the Company's
subsidiaries due to low shipping volume, market acceptance of new and enhanced
versions of the Company's products, delays, cancellations or reschedulings of
orders, delays in product development, defects in products, the mix of products
sold, integration of acquired businesses, political and economic instability,
natural disasters, outbreaks of hostilities, gains or losses due to foreign
currency fluctuations, variations in manufacturing yields, changes in
manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
pressed ceramic and personal computer industries. In addition, operating results
may fluctuate significantly based upon several other factors, including the
Company's ability to attract new customers, seasonal fluctuations in business
activity worldwide, changes in pricing by the Company, its competitors,
subcontractors, customers or suppliers, the conversion, if any, of existing
Singapore facilities, and fluctuations in manufacturing yields at the Singapore
and Indonesian facilities. Although the Company recently consummated the
Transpac financing, there can be no assurance that revenue levels during the
start-up phase of operations will be adequate to cover MPM's fixed overhead
costs, which may result in significant operating losses arising at this
subsidiary and thereby materially adversely affect the Company's business,
prospects, financial condition and results of operation. The absence of
significant backlog for an extended period of time will also limit the Company's
ability to plan production and inventory levels, which could lead to substantial
fluctuations in operating results. Accordingly, the failure to receive
anticipated orders or delays in shipments due, for example, to unanticipated
shipment reschedulings or defects or to cancellations by customers, or to
unexpected manufacturing problems may cause net sales in a particular quarter to
fall significantly below the Company's expectations, which would materially
adversely affect the Company's operating results for such quarter. The impact of
these and other factors on the Company's net sales and operating results in any
future period cannot be forecasted with certainty. In addition, the significant
fixed overhead costs at the Company's facilities, the need for continued
expenditures for research and development, capital equipment and other
commitments of the Company, among other factors, will make it difficult for the
Company to reduce its expenses in a particular period if the Company's sales
goals for such period are not met. A large portion of the Company's operating
expenses are fixed and are difficult
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to reduce or modify should revenues not meet the Company's expectations, thus
magnifying the material adverse impact of any such revenue shortfall.
Accordingly, there can be no assurance that the Company will not continue to
sustain losses in the future or that such losses will not have a material
adverse effect on the Company's business, financial condition and results of
operation.
Repayment of Bank Obligations by MPM; Need for Additional Financing by MPM.
As of December 31, 1995, MPM had outstanding borrowings of approximately
$3,200,000 under its borrowing arrangement with DBS. The facility, which is
guaranteed by both MPI and MPS, expires in May 1996 unless converted into a term
loan at the discretion of DBS. Borrowings under this short term credit facility
cannot remain outstanding for more than 30 days although the facility does
permit rolling over of existing outstanding balances. In March, 1996, MPM issued
the Debenture to Transpac, which Debenture is due and payable in March 2001
unless earlier converted. The existence of the debenture and its convertibility
feature into shares of common stock of MPI would significantly dilute any
earnings per share amounts and significantly dilute the ownership interests of
MPI's investors. The existence of the debenture and its convertibility feature
into shares of Common Stock of MPM could have the same effect on MPI, as the
current sole shareholder, as the potential creation of a minority interest in
the earnings of MPM, if any, would reduce the Company's proportional earnings
from this subsidiary with a corresponding reduction in the Company's overall
results of operations. The Company currently anticipates that the proceeds
generated by the Transpac financing will enable MPM to commence the limited
production of partially processed revenue producing units by the end of 1996;
provided, however, that if DBS does not convert MPM's $3.2 million short term
credit facility into a term loan upon the expiration of such facility in May
1996, MPM may require additional financing to commence such limited production
by the end of 1996 because a portion of the proceeds from the Transpac financing
will be utilized to retire the DBS facility. With adequate additional financing,
the Company currently anticipates that volume production of fully processed
revenue producing units may commence by the end of 1997. The Company currently
anticipates that expenditures associated with equipping the MPM facility so that
it may commence limited production of partially processed revenue producing
units by the end of 1996 will total several million dollars, and, thereafter,
tens of millions of dollars in order for the facility to commence full
production of fully processed revenue producing units by the end of 1997. The
Company will require significant additional financing above and beyond the
proceeds from the Transpac financing to adequately fund its obligations under
the IBM Agreement and the manufacture of products based on such technology.
Neither MPI nor any of its subsidiaries is currently able to generate such funds
from their respective operations. Therefore, if additional funds are required,
the Company would be required to undertake another offering of its debt and/or
equity securities. There can be no assurances that the Company would be able to
obtain such additional funds on terms acceptable to the Company, or at all, if
required. A failure to obtain such additional funds as required would have a
material adverse effect on MPM's operations and, therefore, on the business,
financial condition and results of operations of the Company. Furthermore, if
the Company is unable to obtain additional funds as needed and MPM defaults on
its obligations under the facility with DBS or the Debenture with Transpac, MPM
would be unable to achieve the production milestones under the IBM Agreement,
giving IBM the right to terminate such agreement. In the event of such
termination by IBM, the Company would lose the rights to the technology licensed
to it by IBM under the IBM Agreement. The failure by the Company to obtain the
necessary additional funds to maintain MPM's operations, a default by MPM under
the DBS or Transpac facility or MPM's loss of its technology rights under the
IBM Agreement would materially and adversely affect the Company's business,
prospects, financial condition and results of operations.
Adverse Impact of MPM Default on MPS and MPI; Repayment of Bank Obligations
by MPS; Adverse Impact of MPS Default on MPM. At December 31, 1995, MPS had
outstanding borrowings of approximately $7.5 million with DBS. In addition,
during 1995, MPS borrowed an aggregate of approximately $8.5 million from a
consortium of customers (the "Consortium") to fund its purchase of certain
CERDIP manufacturing and alumina powder equipment from Samsung Corning. MPM's
bank obligations also consist of borrowings of $3.2 million from DBS. If MPM
defaults on its obligations under the DBS facility, DBS could, as one of its
numerous remedies, declare the debt owed to it by MPS to be immediately due and
payable. Such an action would also result in defaults under certain of MPS's
loan agreements pursuant to which it borrowed funds from the Consortium, among
other lenders. Such accelerations would materially adversely affect the
Company's ability to continue as an ongoing concern. In addition, in November
1995 Motorola, Inc.
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("Motorola") guaranteed MPS' repayment of $2.0 million in borrowings from a
certain bank lender. Under the terms of the agreement relating to Motorola's
guarantee, MPI granted Motorola a security interest in all of the issued and
outstanding capital stock of MPS and two other subsidiaries of the Company. In
the event that MPS defaults under its obligations to this bank lender and while
such event of default continues, Motorola will have the right to vote and give
consents with respect to all of the issued and outstanding capital of MPS and
such subsidiaries (the "Subsidiary Voting Rights"). As a result, during the
continuation of any such event of default, MPI would be unable to control at the
shareholder level the direction of the subsidiaries that generate substantially
all of the Company's revenues and hold substantially all of the Company's
assets. Any such loss of control would have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Furthermore, the acquisition by Motorola of the Subsidiary Voting Rights would
constitute an event of default under the IBM Agreement and the Manufacturing and
Technology Agreements with Carborundum, thereby giving IBM and Carborundum the
right to terminate the IBM Agreement and the Manufacturing and Technology
Agreements. Upon such a termination by IBM or Carborundum, the Company would
lose the rights to the technology that it has licensed from each of such
entities, as applicable. The Company's loss of either of these rights would
preclude the Company from manufacturing and selling products based on such
technologies and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. The acquisition of the
Subsidiary Voting Rights by Motorola would also constitute a default under the
IBM Option Agreement, thereby triggering IBM's right to purchase up to 51% of
the then outstanding capital stock of MPM. IBM's exercise of this right would
cause MPI to lose voting control over MPM, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The agreements covering the Transpac financing, including the Debenture and
MPI's guarantee of such MPM indebtedness, contain numerous restrictions and
events of default that could be triggered by the aforementioned actions and
would, if they became effective, materially adversely affect the Company's
business, prospects, results of operations and condition.
High Leverage. The Company is highly leveraged and has substantial debt
service requirements. After giving effect to the Transpac financing, the Company
and its subsidiaries currently have $31.1 million in debt obligations. At
December 31, 1995, the Company had a total shareholders' equity of approximately
$7.4 million. The Company's ability to meet its debt service requirements will
be dependent upon the Company's future performance, which will be subject to
financial, business and other factors affecting the operation of the Company,
many of which are beyond its control. The Company must continue to raise capital
in order to increase the production capacity of its MPM and another subsidiary's
facilities. These additional capital requirements will be substantial and may be
financed largely by the issuance of additional debt. There can be no assurance
that the Company will be able to meet the capital requirements described above
or, if the Company is able to meet such requirements, that the terms available
will be favorable to the Company.
Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's 1995 consolidated financial statements related to a
substantial doubt with respect to the Company's ability to continue as a going
concern, although the financial statements do not presently include any
adjustments that might result from the uncertainty of the Company's ability to
continue as a going concern. There can be no assurance that the Company will
operate profitably in the future and that losses will not continue to occur.
Absent outside debt or equity financing, and excluding significant expenditures
required for the Company's major projects and obligations associated with MPM,
the Company currently anticipates that cash on hand, anticipated cash flow from
operations and funds available from the MPS bank line of credit and borrowings
from customers and Transpac may be adequate to fund its operations, excluding
MPM, in the ordinary course throughout 1996. The Company is currently seeking
additional financing through sales of debt or equity securities and through bank
or lessor financing alternatives, if available, to finance its future capital
projects. These efforts will be hampered by the Company's high level of existing
indebtedness, secured or otherwise. Any significant increase in planned capital
expenditures or other costs or any decrease in or elimination of anticipated
sources of financing could cause the Company to restrict its business and
product development efforts. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company. If adequate funds are not available, the Company will
be unable to execute its business development efforts and will be required to
delay, scale back or eliminate programs such as the
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transition of the Singapore operations to Indonesia and may be unable to
continue as a going concern. There can be no assurance that the Company's future
consolidated financial statements will not include another going concern
explanatory paragraph if the Company is unable to raise sufficient funds to fund
its operations. The factors leading to and the existence of the explanatory
paragraph will have a material adverse effect on the Company's ability to obtain
additional financing. See " -- Future Capital Needs; Need for Additional
Financing," "Liquidity and Capital Resources" and "Consolidated Financial
Statements."
Foreign Currency Fluctuations. Although the Company's sales are denominated
in United States dollars, the majority of the Company's operating expenditures
are made in other currencies, namely Japanese yen and Singapore dollars. As a
result, the Company's operating results have been and will continue to be
materially adversely affected by any weakening of the United States dollar
relative to these currencies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Any appreciation of such
currencies relative to the United States dollar would result in exchange losses
for the Company and could have the effect of increasing the Company's costs of
goods and general and administrative expenses and decreasing its margins or in
making the prices of the Company's or its customers' products less competitive.
Accordingly, such effects have had and will continue to have a material adverse
effect upon the business, financial condition and results of operations of the
Company. Although the Company seeks to mitigate its currency exposure through
hedging measures, these measures have been and may in the future be
significantly limited in their effectiveness. In the future, the Company's
operating results will also be materially adversely affected by any weakening of
the United States dollar relative to Indonesia's currency. See "New
Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore."
New Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore. In 1993,
the Company entered into a subcontract manufacturing agreement with Innoventure
pursuant to which Innoventure designed and constructed a new manufacturing
facility in Indonesia. The Company currently anticipates moving its pressed
ceramic production operations presently located in MPS's facilities in Singapore
to Indonesia. In connection with such move, the Company may consolidate MPS's
Singapore operations, which currently occupy two facilities, into one facility.
Such consolidation, if undertaken by the Company, will cost a minimum of $1.0 to
$3.0 million and such consolidation would be completed no earlier than the end
of 1997. To date, the transition of the Company's pressed ceramic production
operations from Singapore to Indonesia has not yet been completed and the bulk
of such operations are still located at its Singapore facility. The operation of
the Indonesia facility by Innoventure is designed to increase the Company's
manufacturing capacity and to lower costs of production. Partial processing of
pressed ceramic products, which are completed in the Company's Singapore
facility, commenced in the second quarter of 1995. The Company currently
anticipates that it will be increasingly dependent on the Indonesian facility to
conduct the initial processing of its pressed ceramic products in future
periods. The Company's increasing reliance on Innoventure as a subcontractor
involves certain risks, including reduced control over delivery schedules,
quality assurance, manufacturing yields and cost. Although the Company has not
experienced material disruptions in supply from Innoventure to date, there can
be no assurance that manufacturing problems will not occur in the future. Any
such material disruption could have a material adverse effect on the Company's
business, financial condition and results of operations. The complete equipping
and operation of the facility in Indonesia could take several years to
accomplish. Innoventure is not under any unconditional obligation to fully equip
such facility and there are a number of other conditions that must be satisfied
before such Indonesian facilities can be fully equipped. There can be no
assurance, therefore, that such Indonesian facility will be fully completed.
Innoventure is also not subject to any written contractual obligation to
continue operating such facility. Thus, there can be no assurance that the
agreement with Innoventure is enforceable or that any judgment secured by the
Company, whether in Singapore or elsewhere, upon a breach of such agreement will
be upheld by Singapore courts. Innoventure is entitled to the first $4.5 million
in profits generated by the Indonesian facility within five years of project
start-up. In addition, pursuant to the Innoventure Agreement, the Company agreed
to provide Innoventure with raw materials and production supplies necessary for
the commencement of production in the Indonesian facility. This obligation to
provide raw materials and production supplies has subsequently been modified by
both parties such that the Company is now purchasing these items from its
suppliers on behalf of Innoventure.
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Innoventure currently owes the Company approximately $1,434,000 related to the
supply of such raw materials and related production supplies, and the Company
anticipates that it will continue to purchase such items on Innoventure's behalf
for the foreseeable future. The foregoing amount will be repaid to the Company
by Innoventure with the form and timing of such payments being agreed to by both
parties. There can be no assurance that amounts of raw materials and production
supplies being provided to Innoventure will not increase in the future, however,
or that such amounts will be repaid by Innoventure in a timely fashion, or at
all. There can also be no assurance that the Company will have adequate funds to
provide such materials and production supplies to Innoventure. See "-- Future
Capital Needs; Need for Additional Financing."
If the Company's revenues do not increase commensurate with the anticipated
increase in capacity in Indonesia, the Company's results of operations could be
materially adversely affected. As is typical in the semiconductor industry, new
manufacturing facilities initially experience low production yields. Any
inability on the Company's or Innoventure's part to obtain adequate production
yields or to maintain such yields in the future could delay shipments of
products. No assurance can be given that the facility in Indonesia will not
experience production yield problems or delays in completing product testing
required by a customer to qualify the Company as a vendor, either of which,
given that such facilities will be manufacturing pressed ceramic products and
advanced multilayer packages could materially adversely affect the Company's
business, financial condition and results of operations.
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. Recently, certain of the
Company's key customers have notified the Company that they intend to decrease
their product purchase orders with the Company. The loss of or any reduction in
orders by any of these customers, including reductions due to market, economic
or competitive conditions in the semiconductor, personal computer or electronic
industries or in other industries that manufacture products utilizing
semiconductors or multichip modules, could materially adversely affect the
Company's business, financial condition and results of operations. The supply
agreements with certain of these customers do not obligate them to purchase
products from the Company. The Company's ability to increase its sales in the
future will also depend in part upon its ability to obtain orders from new
customers. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to retain existing customers or to
attract new ones. There can also be no assurance that any of the Company's
subsidiaries will be able to diversify or enhance its customer base. Failure to
develop new customer relationships could materially adversely affect each such
subsidiary's results of operations and could materially adversely affect the
Company's business, financial condition and results of operations.
Mature Market; Dependence on Semiconductor and Personal Computer
Industries. To date, a significant portion of the Company's revenues have been
derived from sales of pressed ceramic products to customers in the semiconductor
industry. The market for the pressed ceramic product is relatively mature and
demand for pressed ceramic products may decline in the future. Accordingly, the
Company believes that sales of its pressed ceramic products may decrease in the
future and, as a result, the Company's business, financial condition and results
of operations may be materially adversely affected.
The financial performance of the Company is dependent in large part upon
the current and anticipated market demand for semiconductors and products such
as personal computers that incorporate semiconductors. The semiconductor
industry is highly cyclical and historically has experienced recurring periods
of oversupply, resulting in significantly reduced demand for the Company's
pressed ceramic products. The Company believes that the markets for new
generations of semiconductors will also be subject to similar fluctuations. The
semiconductor industry is currently experiencing rapid growth. There can be no
assurance that such growth will continue. A reduced rate of growth in the demand
for semiconductor component parts due, for example, to competitive factors,
technological change or otherwise, may materially adversely affect the markets
for the Company's products. From time to time, the personal computer industry,
like the semiconductor industry, has experienced significant downturns, often in
connection with, or in anticipation of, declines in general economic conditions.
Accordingly, any factor adversely affecting the semiconductor or the personal
computer industry or particular segments within the semiconductor or personal
computer industry may materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the
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<PAGE>
Company's net sales and results of operations will not be materially
adversely affected if downturns or slowdowns in the semiconductor, personal
computer industry or other industries utilizing the Company's products occur in
the future.
Highly Competitive Industry; Significant Price Competition. The electronic
packaging and interconnection technology industries are intensely competitive.
The Company experiences intense competition worldwide from a number of
manufacturers, including Kyocera Corporation, Sumitomo Metal Mining Co., Ltd.,
Motorola, Inc., TI, Fujitsu, Ltd., Hitachi, Ltd. and Toshiba Corporation, all of
which have substantially greater financial resources and production, marketing
and other capabilities than the Company with which to develop, manufacture,
market and sell their products. The market for sales of the Company's pressed
ceramic products is highly concentrated with a few competitors, all of which
provide intense competition and have substantially greater financial resources
and production, marketing and other capabilities than the Company with which to
develop, manufacture, market and sell pressed ceramic products. The Company
faces competition from certain of its customers that have the internal
capability to produce products competitive with the Company's products and may
face competition from new market entrants in the future. In addition,
corporations with which the Company has agreements are conducting independent
research and development efforts in areas which are or may be competitive with
the Company. The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide improved performance characteristics. New product
introductions by the Company's competitors could cause a significant decline in
sales or loss of market acceptance of the Company's existing products which
could materially adversely affect the Company's business, financial condition
and results of operations. Moreover, the Company has historically experienced
significant price competition in the sale of its pressed ceramic products, which
has materially adversely affected the prices and gross margins of such products
and the Company's business, financial condition and results of operations. The
Company is also experiencing significant price competition, which may materially
adversely affect the Company's business, financial condition and results of
operations. The Company believes that to remain competitive in the future it
will need to continue to develop new products and to invest significant
financial resources in new product development. There can be no assurance that
such new products will be developed or that sales of such new products will be
achieved. There can be no assurance that the Company will be able to compete
successfully in the future.
Technological Change; Importance of Timely Product Introduction;
Uncertainty of Market Acceptance and Emerging Markets. The markets for the
Company's products are subject to technological change and new product
introductions and enhancements. Customers in the Company's markets require
products embodying increasingly advanced electronics packaging and
interconnection technology. Accordingly, the Company must anticipate changes in
technology and define, develop and manufacture or acquire new products that meet
its customers' needs on a timely basis. The Company anticipates that
technological changes, such as FLASH memory, advances in plastic materials
technology and other semiconductor devices that may be more cost effectively
assembled into plastic packages and that do not require the protection
characteristics of the Company's ceramic packages, could cause the Company's net
sales to decline in the future. There can be no assurance that the Company will
be able to identify, develop, manufacture, market, support or acquire new
products successfully, that any such new products will gain market acceptance,
or that the Company will be able to respond effectively to technological
changes. If the Company is unable for technological or other reasons to develop
products in a timely manner in response to changes in technology, the Company's
business, financial condition and results of operations will be materially
adversely affected. There can be no assurance that the Company will not
encounter technical or other difficulties that could in the future delay the
introduction of new products or product enhancements. In addition, new product
introductions by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's products, which could materially
adversely affect the Company's business, financial condition and results of
operations. Even if the Company develops and introduces new products, such
products must gain market acceptance and significant sales in order for the
Company to achieve its growth objectives. Furthermore, it is essential that the
Company develop business relationships with and supply products to customers
whose end-user products achieve and sustain market penetration. There can be no
assurance that the Company's products will achieve widespread market acceptance
or that the Company will successfully develop such customer relationships.
Failure by the Company to develop products that gain widespread market
acceptance and significant sales or to develop relationships
23
<PAGE>
with customers whose end-user products achieve and sustain market penetration
will materially adversely affect the Company's business, financial condition and
results of operations. The Company's financial performance will depend in
significant part on the continued development of new and emerging markets such
as the market for MCMs. The Company is unable to predict with any certainty any
growth rate and potential size of emerging markets. Accordingly, there can be no
assurance that emerging markets targeted by the Company, such as the market for
MCMs, will develop or that the Company's products will achieve market acceptance
in such markets. The failure of emerging markets targeted by the Company to
develop or the failure by the Company's products to achieve acceptance in such
markets could materially adversely affect the Company's business, financial
condition and results of operations.
International Operations. Most of the Company's net sales to date have
been made to foreign subsidiaries of European and United States corporations.
The Company anticipates that sales to such types of customers will continue to
account for most of its net sales in the foreseeable future. As a result, most
of the Company's sales will continue to be subject to certain risks, including
changes in regulatory requirements, tariffs and other barriers, political and
economic instability, difficulties in staffing and managing foreign subsidiary
and branch operations, difficulties in managing contract manufacturers and
customers that are provided with contract manufacturing, potentially adverse tax
consequences, extended payment terms, and difficulty in accounts receivable
collection. The Company is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States or any other
country upon the importation or exportation of the Company's products in the
future. Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws or other trade policies, could materially adversely affect the Company's
ability to manufacture or sell in foreign markets. There can be no assurance
that any of these factors or the adoption of restrictive policies will not have
a material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, as the Company continues to transfer an
increasing amount of production equipment to the facility in Indonesia, the
Company will be increasingly subject to the risks associated with conducting
business in Indonesia, including economic conditions in Indonesia, the burdens
of complying with Indonesian laws, particularly with respect to private
enterprise and commercial activities, and, possibly, political instability. As
the Company increases the amount of its assets in Indonesia, there can be no
assurance that changes in economic and political conditions in Indonesia will
not have a material adverse effect on the Company's business, financial
condition and results of operations. Enforcement of existing and future laws and
private contracts is uncertain, and the implementation and interpretation
thereof may be inconsistent. See "-- New Manufacturing Facilities in Indonesia;
Transition of Existing Singapore Operations; New Manufacturing Facilities in
Indonesia and Singapore."
Sole or Limited Sources of Supply. Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. In the production of its CERDIP products the Company
has one supplier for its alumina powder, two suppliers for its ultraviolet
lenses and one supplier of certain sealing glasses. The Company also has one
supplier of the integrated circuits that are sold with the Company's packaging
products. In addition, there are a limited number of qualified suppliers of
laminate substrates which are of critical importance to the production of the
Company's MCM-L products. In the manufacturing process, the Company also
utilizes consigned materials supplied by certain of its customers. The Company's
reliance on sole or a limited group of suppliers and certain customers for
consigned materials involves several risks, including a potential inability to
obtain an adequate supply of required materials and reduced control over the
price, timely delivery, and quality of raw materials. There can be no assurance
that problems with respect to yield and quality of such materials and timeliness
of deliveries will not continue to occur. Disruption or termination of these
sources could delay shipments of the Company's products and could have a
material adverse effect on the Company's business, financial condition and
operating results. Such delays could also damage relationships with current and
prospective customers, including customers that supply consigned materials.
Product Quality and Reliability; Need to Increase Production. The
Company's customers establish demanding and time-consuming specifications for
quality and reliability that must be met by the Company's
24
<PAGE>
products. From initial customer contact to actual qualification for production,
which may take as long as one year, the Company may expend significant
resources. Although recently the Company has generally met its customers'
quality and reliability product specifications, the Company has in the past
experienced difficulties in meeting some of these standards. Although the
Company has addressed past concerns and has resolved a number of quality and
reliability problems, there can be no assurance that such problems will not
recur in the future. If such problems did recur, the Company could experience
delays in shipments, increased costs, delays in or cancellation of orders and
product returns, any of which would have a material adverse effect on the
Company's business, financial condition or results of operations. In addition,
the contract manufacturing of pressed ceramic products in Indonesia and
commencement of operations in such new facility and conversion of its existing
facilities in Singapore for new products will increase the probability of many
such risks. The manufacture of the Company's products is complex and subject to
a wide variety of factors, including the level of contaminants in the
manufacturing environment and the materials used and the performance of
personnel and equipment. The Company has in the past experienced lower than
anticipated production yields and written off defective inventory as a result of
such factors. The Company must also successfully increase production to support
anticipated sales volumes. There can be no assurance that the Company will be
able to do so or that it will not experience problems in increasing production
in the future. The Company's failure to adequately increase production or to
maintain high quality production standards would have a material adverse effect
on the Company's business, financial condition and results of operations.
Expansion of Operations. In order to be competitive, the Company must
implement a variety of systems, procedures and controls and greatly improve its
communications between its U.S. and Singapore operations. The Company expects
its operating expenses to continue to increase significantly. If orders received
by the Company do not result in sales or if the Company is unable to sustain net
sales at anticipated levels, the Company's operating results will be materially
adversely affected until operating expenses can be reduced. The Company's
expansion will also continue to cause a significant strain on the Company's
management, financial and other resources. If the Company is to grow, it must
expand its accounting and other internal management systems and greatly improve
its communications between its U.S. and Singapore operations, and there can be
no assurance that the Company will be successful in effecting such expansion.
Any failure to expand these areas in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's results of operations. Moreover, there can be no assurance that net
sales will increase or remain at or above recent levels or that the Company's
systems, procedures and controls will be adequate to support the Company's
operations. The Company's financial performance will depend in part on its
ability to continue to improve its systems, procedures and controls.
Intellectual Property Matters. Although the Company attempts to protect
its intellectual property rights through patents, trade secrets and other
measures, it believes that its financial performance will depend more upon the
innovation, technological expertise, manufacturing efficiency and marketing and
sales abilities of its employees. There can be no assurance that others will not
independently develop similar proprietary information and techniques or gain
access to the Company's intellectual property rights or disclose such technology
or that the Company can meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products, duplicate the Company's products
or design around the patents owned by the Company, or that third parties will
not assert intellectual property infringement claims against the Company. In
addition there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights.
Litigation is becoming necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not conducted any patent searches or obtained an
opinion of counsel with respect to its proprietary rights. Although no claims or
litigation related to any
25
<PAGE>
intellectual property matter are currently pending against the Company, there
can be no assurance that infringement or invalidity claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future or that such assertions, if proven to be true, will not
materially adversely affect the Company's business, financial condition and
results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, the Company
could decide to litigate such claims, which could be extremely expensive and
time-consuming and could materially adversely affect the Company's business,
financial condition and results of operations.
Potential Divestiture of MPC (S) Pte. Ltd. Aluminum Nitride Subsidiary;
Obligation to Purchase Products. In connection with the agreements with the
Carborundum Company ("Carborundum") for the manufacture of microelectronic
packages fabricated with aluminum nitride compounds, the Company granted to
Carborundum an irrevocable option, exercisable at any time through December 31,
1996, to acquire for an agreed-upon price set forth in the agreements up to 75%
of the ownership of MPC, a subsidiary of the Company organized to manufacture
and sell such products only to Carborundum. In addition, Carborundum has a right
to acquire for an agreed-upon price set forth in the agreements up to 100% of
the ownership of MPC in the event that competitors of Carborundum's
microelectronics business acquire more than 10% of the ownership of the Company
or gain access to any confidential information of either MPC or the Company
relating to Carborundum's microelectronics business. In either event, the
Company would lose control of the management and direction of MPC and, in the
event of a total divestiture, the right to participate in the profits, if any,
of MPC. The exercise of either such option could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
although Carborundum is obligated to purchase certain specified quantities of
such packages from MPC, Carborundum may purchase such products from any other
party without regard to such purchase requirements if Carborundum determines in
good faith that such third party is more attractive to Carborundum than MPC on
an economic, quality or risk basis. The Manufacturing Agreement and Technology
Agreement expire on December 31, 1996 if not renewed by the parties.
Furthermore, commencing January 1, 1997, Carborundum may unilaterally terminate
the Manufacturing Agreement without cause, which termination would also
terminate the Technology Agreement. There can be no assurance that Carborundum
will not terminate the Manufacturing Agreement after January 1, 1997. The
Company would lose its rights to the technology currently licensed to it by
Carborundum and the right to manufacture products based on such technology as a
result of the expiration of the Manufacturing Agreement or if Carborundum
terminates the Manufacturing Agreement. Accordingly, any such expiration or
termination would have a material adverse effect on the Company's business,
financial condition and results of operation. The Company was recently notified
that the new owner of Carborundum has announced its intention to sell such
corporation. The Company is unable to determine what impact, if any, such
announcement or sale will have on the Company' s agreements with
Carborundum.
Environmental Regulations. The Company is subject to a variety of local,
state, federal and foreign governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
Company believes that it is currently in compliance in all material respects
with such regulations and that it has obtained all necessary environmental
permits to conduct its business. Nevertheless, the failure to comply with
current or future regulations could result in the imposition of substantial
fines on the Company, suspension of production, alteration of its manufacturing
processes or cessation of operations. Compliance with such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Any failure by the Company to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous or toxic substances, could subject to the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, financial condition or results of operations.
Growth Strategy Through Acquisitions. As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition
26
<PAGE>
of comparable or complementary businesses or technologies. The implementation of
this strategy will depend on many factors, including the availability of
acquisitions at attractive prices and the ability of the Company to make
acquisitions, the integration of acquired businesses into existing operations,
the expansion of the Company's customer base and the availability of required
capital. Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
Dependence on Key Personnel. The Company's performance depends in
significant part upon the continued services of its President and Chief
Executive Officer, Timothy da Silva, the Senior Vice President of MPS, Jee Fook
Pak, as well as other key personnel, many of whom would be difficult to replace.
Mr. Pak is not bound by an employment agreement with the Company. The Company's
financial performance also depends in part upon its ability to attract and
retain qualified management, technical, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his current position or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.
Nasdaq National Market Listing Requirements. The Company will be subject
to continuing requirements to be listed on the Nasdaq National Market. There can
be no assurance that the Company can continue to meet such requirements. The
price and liquidity of the Common Stock may be materially adversely affected if
the Company is unable to meet such requirements in the future.
Sale of Shares Into The Market Place. On April 29, 1996, upon termination
of the two-year lock-up agreement entered into in connection with the Company's
initial public offering, more than an additional 3,000,000 shares of Common
Stock became available for sale in the public market, subject, in part, to the
volume restrictions of Rule 144. Sales of a significant number of such shares
could materially adversely affect the Company's stock price.
Volatility of Stock Price. The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's financial results, general conditions or developments in the
semiconductor and personal computer industry and the general economy, sales of
the Company's Common Stock into the marketplace, an outbreak of hostilities,
natural disasters, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in the Company's
relationships with its customers and suppliers, or a shortfall or changes in
revenue, gross margins or earnings or other financial results from analysts'
expectations could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In recent years the stock market in general, and the
market for shares of small capitalization stocks in particular, including the
Company, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective November 21, 1995, the Board of Directors appointed the firm of
BDO Seidman, LLP ("BDO"), independent accountants, to audit the consolidated
financial statements of the Company for the fiscal year ending December 31,
1996.
27
<PAGE>
Prior to November 21, 1995, the Company's independent accountants were
Price Waterhouse LLP ("Price Waterhouse"). Price Waterhouse had audited the
Company's financial statements annually since 1984. Effective November 21,
1995, the Company dismissed Price Waterhouse as the Company's independent
accountants. The decision to dismiss Price Waterhouse was approved by the
Company's Board of Directors and Audit Committee on November 20, 1995. The
Company retained BDO as the Company's independent certified accountants
effective November 21, 1995. The decision to retain BDO was approved by the
Company's Board of Directors and Audit Committee on November 20, 1995. Prior to
November 21, 1995, the Company did not consult with BDO regarding any matters
relating to accounting principles or practices, financial statement disclosure,
the type of opinion that might be rendered on the Company's financial
statements, or on any matter that was either the subject of a disagreement or a
reportable event with Price Waterhouse.
Prior to its dismissal, Price Waterhouse delivered to the Company Reports
of Independent Accountants dated March 1, 1994 and April 11, 1995, on the
Company's financial statements for the past two fiscal years ended December 31,
1993 and December 31, 1994, respectively. Neither of these reports contained an
adverse opinion or a disclaimer of opinion and neither of such reports was
qualified or modified as to uncertainty, audit scope, or accounting principles
except that each of such reports contained an explanatory paragraph regarding
the Company's ability to continue as a going concern.
In connection with the audits for the fiscal years ended December 31, 1993
and December 31, 1994 and through November 20, 1995 (the date of dismissal),
there were no disagreements with Price Waterhouse over any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Price
Waterhouse, would have caused Price Waterhouse to make reference thereto in
their reports on the financial statements for such years.
In connection with its audit of the Company's financial statements for the
fiscal year ended December 31, 1994, Price Waterhouse reported to the Audit
Committee of the Company's Board of Directors that the Company's accounting
treatment for foreign currency transactions represented a material weakness in
the Company's internal controls.
A representative of BDO is not expected to be present at the Special
Meeting.
FORM 10-K
The Company files an Annual Report on Form 10-K with the SEC. Shareholders
may obtain a copy of this report, without charge, by writing to the Chief
Executive Officer of the Company, at the Company's executive offices at 9350
Trade Place, San Diego, California 92126.
THE BOARD OF DIRECTORS OF MICROELECTRONIC
PACKAGING, INC.
Dated: May 10, 1996
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<PAGE>
MICROELECTRONIC PACKAGING, INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS, MAY 29, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MICROELECTRONIC
PACKAGING, INC.
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of the Special Meeting of Shareholders to be held May 29, 1996 and the
Proxy Statement and appoints Timothy da Silva and Wilmer R. Bottoms and each
of them, the Proxy of the undersigned, with full power of substitution, to
vote all shares of Common Stock of Microelectronic Packaging, Inc. (the
"Company") which the undersigned is entitled to vote, either on his or her own
behalf or on behalf of any entity or entities, at the Special Meeting of
Shareholders of the Company to be held at 9350 Trade Place, San Diego,
California 92126 on May 29, 1996 at 9:00 a.m. (the "Special Meeting"), and at
any adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat. The shares
represented by this Proxy shall be voted in the manner set forth on the
reverse side.
(PLEASE SIGN ON REVERSE SIDE)
<PAGE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR AGAINST ABSTAIN
1. To approve the convertibility of a debenture issued by MPM (S) Pte., Ltd.,
a wholly-owned subsidiary of the Company, to a group of related investors,
into shares of the Company's Common Stock.
FOR AGAINST ABSTAIN
2. To approve an amendment to the Company's Amended and Restated Articles of
Incorporation to increase in the authorized shares of Common Stock from
10,000,000 shares to 15,000,000 shares, which amendment is necessary in part
to effect an increase in the number of shares of Common Stock that may be
necessary to provide for the convertibility of the Debenture submitted for
approval pursuant to Proposal One.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, WHEN
PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ABOVE. THIS PROXY WILL BE VOTED
FOR THE PROPOSALS IF NO SPECIFICATION IS MADE. THIS PROXY WILL ALSO BE VOTED
AT THE DISCRETION OF THE PROXY HOLDER ON SUCH MATTERS OTHER THAN THE TWO SPE-
CIFIC PROPOSALS AS MAY COME BEFORE THE MEETING.
Please print the name(s) appearing on each share certificate(s) over which you
have voting authority: ________________________________________________________
(PRINT NAME(S) ON CERTIFICATE(S)
SIGNATURE(S) _______________ DATE ____________________________________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When sign-ing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
