<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
--------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-23562
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MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
California 94-3142624
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9350 Trade Place, San Diego, California 92126
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 530-1660
--------------------------
- -----------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
At June 30, 1996, there were outstanding 5,558,813 shares of the
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Registrant's Common Stock, no par value per share.
<PAGE>
<TABLE>
<CAPTION>
Index Page No.
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<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets.................... 3
Condensed Consolidated Statements of Operations......... 4
Condensed Consolidated Statements of Cash Flows.......... 5
Condensed Consolidated Statement of Changes in
Shareholders' Equity..................................... 6
Notes to Condensed Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................ 25
Item 2. Changes in Securities.................................... 25
Item 3. Defaults Upon Senior Securities.......................... 25
Item 4. Submission of Matters to a Vote of Securityholders....... 25
Item 5. Other Information........................................ 26
Item 6. Exhibits and Reports on Form 8-K......................... 26
</TABLE>
SIGNATURES............................................................ 28
EXHIBIT INDEX......................................................... 29
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,205,000 $ 2,923,000
Accounts receivable, net 8,783,000 6,815,000
Inventories 7,266,000 7,158,000
Other current assets 4,836,000 3,659,000
------------ ------------
Total current assets 27,090,000 20,555,000
Property, plant and equipment, net 21,711,000 16,943,000
Deferred facility start-up costs 4,764,000 1,920,000
Other non-current assets 3,422,000 3,009,000
------------ ------------
$56,987,000 $42,427,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings, due on demand $10,206,000 $ 9,245,000
Accounts payable 8,877,000 7,767,000
Accrued liabilities 3,557,000 4,538,000
Deferred revenue 599,000 572,000
Current portion of long-term debt 5,456,000 3,316,000
------------ ------------
Total current liabilities 28,695,000 25,438,000
Long-term debt 17,715,000 9,573,000
Commitments and contingencies (Note 7)
Total shareholders' equity 10,577,000 7,416,000
------------ ------------
$56,987,000 $42,427,000
============ ============
</TABLE>
3
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MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales:
Product sales $15,541,000 $13,185,000 $32,758,000 $25,881,000
Other sales 582,000 - 817,000
----------- ------------ ----------- ------------
16,123,000 13,185,000 33,575,000 25,881,000
Cost of goods sold:
Product sales 12,458,000 11,038,000 26,697,000 22,186,000
Other sales 514,000 - 729,000
----------- ------------ ----------- ------------
12,972,000 11,038,000 27,426,000 22,186,000
----------- ------------ ----------- ------------
Gross profit 3,151,000 2,147,000 6,149,000 3,695,000
Selling, general and administrative 1,530,000 1,906,000 2,974,000 3,378,000
Engineering and product development 672,000 570,000 1,286,000 1,051,000
Provision for revaluation of subsidiary
and other related assets - 1,000,000 - 1,000,000
----------- ------------ ----------- ------------
Income (loss) from operations 949,000 (1,329,000) 1,889,000 (1,734,000)
Other income/(expense):
Foreign exchange gain/(loss) 170,000 (226,000) 300,000 (595,000)
Interest (expense), net (626,000) (279,000) (1,084,000) (456,000)
Other income, net 64,000 1,000 117,000 392,000
----------- ------------ ----------- ------------
Income (loss) before
provision for income taxes 557,000 (1,833,000) 1,222,000 (2,393,000)
Provision (benefit) for income taxes (53,000) - 47,000 -
----------- ------------ ----------- ------------
Net income (loss) $ 610,000 $(1,833,000) $ 1,175,000 $(2,393,000)
=========== ============ =========== ============
Net income (loss) per common share $ 0.11 $ (0.39) $ 0.22 $ (0.51)
=========== ============ =========== ============
Weighted average shares used
in per share calculation 5,746,000 4,660,000 5,327,000 4,660,000
=========== ============ =========== ============
</TABLE>
4
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MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,175,000 $(2,393,000)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation and amortization 1,347,000 1,258,000
Provision for revaluation of subsidiary and other related assets - 1,000,000
Unrealized loss on borrowings denominated in foreign currency - 212,000
Realized (gain) on forward foreign currency contracts (215,000) (563,000)
Changes in assets and liabilities:
Accounts receivable (1,968,000) (517,000)
Inventories (108,000) (17,000)
Other current assets (1,177,000) (3,720,000)
Defered facility start-up costs and other non-current assets (3,326,000) (52,000)
Accounts payable, accrued liabilities and deferred revenue 156,000 3,690,000
------------- -------------
Net cash (used) by operating activities (4,116,000) (1,102,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (6,046,000) (2,831,000)
Increase in net assets held for sale, net of related borrowings of $2,427,000 - (760,000)
Advances under notes receivable - (30,000)
Realized gain from forward foreign currency contracts 215,000 563,000
------------- -------------
Net cash (used) by investing activities (5,831,000) (3,058,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facilities 46,669,000 16,878,000
Repayments uncer line of credit facilities (45,708,000) (16,633,000)
Borrowings under long-term debt 10,616,000 5,075,000
Principal payments on long-term debt (334,000) (495,000)
Issuance of common stock 1,986,000 -
------------- -------------
Net cash provided by financing activities 13,229,000 4,825,000
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NET INCREASE IN CASH 3,282,000 665,000
CASH AT BEGINNING OF PERIOD 2,923,000 1,346,000
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CASH AT END OF PERIOD $ 6,205,000 $ 2,011,000
============= =============
</TABLE>
5
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MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------- Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 4,660,093 $34,326,000 $(26,910,000) $ 7,416,000
Issuance of common stock 842,058 1,911,000 1,911,000
Stock options exercised 56,662 75,000 75,000
Net income 1,175,000 1,175,000
------------ ------------ ------------ ------------
Balance at June 30, 1996 5,558,813 $36,312,000 $(25,735,000) $10,577,000
============ ============ ============ ============
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related
notes for the three and six month periods ended June 30, 1996 and 1995 are
unaudited but include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of financial position and results of operations of the Company for
the interim periods. The results of operations for the three and six month
periods ended June 30, 1996 are not necessarily indicative of the operating
results to be expected for the full fiscal year. The information included in
this report should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto and the other
information, including risk factors, set forth for the year ended December
31, 1995 in the Company's Annual Report on Form 10-K. Readers of this
Quarterly Report on Form 10-Q are strongly encouraged to review the Company's
Annual Report on Form 10-K. Copies are available from the Chief Executive
Officer of the Company at 9350 Trade Place, San Diego, California 92126.
2. INVENTORIES
Inventories, net of obsolescence reserves, consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- ---------------
<S> <C> <C>
Raw materials $3,681,000 $3,304,000
Work in progress 1,619,000 1,641,000
Finished goods 1,966,000 2,213,000
-------------- ---------------
$7,266,000 $7,158,000
============== ===============
</TABLE>
3. EFFECTS OF INCOME TAXES
For the six month period ended June 30, 1996, the Company has recorded an
income tax expense of $47,000, which is comprised of $5,000 for federal
alternative minimum taxes and $42,000 for state franchise taxes. For purposes
of computing federal income tax liability, the Company believes that it has
sufficient net operating losses, which can be carried forward, to eliminate
the federal income tax liability that would otherwise be due on the income
generated in the first six months of 1996. Federal alternative minimum tax is
not entirely eliminated by the Company's net operating losses from previous
years. Due to the varying rules governing state franchise taxes for
California, the Company does not have sufficient net operating losses from
previous years to eliminate its franchise tax liability for 1996.
As of the filing of the Company's Form 10-Q for the first quarter of 1996,
the Company believed that recent stock transactions may have caused the
Company to have to defer a portion of the benefit of its net operating losses
under Internal Revenue Code Section 382. Based on a study of the Company's
stock transactions and impact on the Company's net operating losses, the
Company believes no such limitation exists. The taxable income generated by
the Company's foreign operations during this time period was offset through
the utilization of capital allowance carryforwards. No income tax expense was
recorded in the comparable period of 1995 as the Company's foreign and
domestic operations generated net operating losses for both financial
reporting and income tax purposes.
4. NET INCOME (LOSS) PER SHARE
The computation of primary net income (loss) per share is based upon the
weighted average number of outstanding common shares during the period, plus,
when their effect is dilutive, common stock equivalents
7
<PAGE>
from the exercise of stock options (using the treasury stock method). Where
dilutive, the computation fully diluted net income (loss) per share would
include the effects of the issuance of a minority interest in the Company's
MPM subsidiary (the "MPM Option") upon the conversion of the Transpac
Debenture issued by MPM in March 1996 (see Note 5). Fully diluted net income
(loss) per share has not been presented as the effect of this conversion
would be antidilutive.
At the Company's Special Meeting of Shareholders which was held on May 29,
1996, the shareholders approved the convertibility of the Transpac Debenture
(see Note 5) into shares of MPI Common Stock (the "MPI Option"). As a result,
any computation of fully diluted net income (loss) per share will include the
effects of the more dilutive conversion of either the MPI Option or the MPM
Option.
5. TRANSPAC FINANCING
In March 1996, the Company and MPM consummated a financing (the "Transpac
Financing") with Transpac Capital Pte. Ltd. and certain other affiliated
investors (collectively, "Transpac") in which the Company issued 842,013
shares of its Common Stock to Transpac for the aggregate purchase price of
$2,000,000 and MPM issued a debenture (the "Debenture") to Transpac in the
principal amount of $9.0 million. The Debenture, repayment of which has been
guaranteed by MPI, 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 annual
installments at the end of each year of the term of the Debenture. The
principal outstanding under the Debenture will be due and payable in full at
the end of the five-year term; however, from and after April 23, 1997, and
through the term of the Debenture, the Debenture will be convertible at
Transpac's option into the number of shares of MPM capital stock that is
equivalent to up to 45% of MPM's outstanding capitalization at the time of
conversion, or into the number of shares of MPI capital stock that, when
combined with the shares discussed above, will not exceed 49% of the
Company's outstanding capitalization at the time of any such conversion.
6. OTHER FINANCING TRANSACTIONS
During the first quarter of 1996, the Company's MPS subsidiary borrowed $1.0
million under a credit facility bearing interest at 7%. MPS also entered into
a term sheet with the Development Bank of Singapore ("DBS") for a $1.0
million credit facility bearing interest at 7.5% (the Singapore interbank
offered rate plus 1.5%).
7. COMMITMENTS AND CONTINGENCIES
The Company previously shipped quantities of hazardous waste to a Whittier,
California, hazardous waste treatment facility for recycling. The owner of
that facility allegedly failed to recycle or dispose of the various wastes
shipped to the site and has now filed for bankruptcy. The Company is one of
more than four thousand generators, including numerous Fortune 500
corporations, identified by the State of California as having responsibility
for cleanup at the site, and it is not ranked as one of the generators that
has shipped a significant amount of hazardous waste. On May 15, 1995, the
United States Environmental Protection Agency ("EPA") issued written notice
that it considers the Company to be a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"). The EPA has determined that there may be an imminent and
substantial endangerment to the public health, welfare, and environment
because of a release and/or threat of a release of hazardous substances from
the site located in Whittier, California. The notice requires the Company to
take immediate actions to contain and prevent any further release of
hazardous substances at the site. In response to the EPA notice, the Company
and approximately 100 of the other named generators provided the necessary
funding to effect the removal and destruction of the hazardous wastes stored
at this site. In addition, the Company and such generators have provided the
necessary funding to test the soil and ground-water at this site, which
testing is currently ongoing. Although the cost incurred by the Company to
date of removing and destroying the hazardous waste stored at this facility
was not significant, this effort does not address the cleanup of any
potential soil and/or ground-water contamination present at this site. There
can be no assurance, therefore, that the costs and expenses associated with
this action will not increase in the future to a level that would have a
material adverse effect upon the Company's business, financial condition,
results of operations or cash flows. Based upon the
8
<PAGE>
Company's investigation to date, the Company does not believe that this
matter, if resolved adversely to the Company, would have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
The Company has also previously shipped small quantities of hazardous waste
for recycling to a San Diego hazardous waste treatment facility operated by a
third party operator ("Operator"). The owner of the property and the State of
California have filed suits against the Operator and two of its officers and
the owner of the property has obtained a mandatory injunction to compel the
removal of hazardous waste on site. If the Operator does not comply, it is
possible that the property owner or a government agency could also sue or
bring enforcement proceedings against approximately 100 hazardous waste
generators, including the Company, that shipped such wastes to the facility
to pay for the removal and to participate in site cleanup if any
contamination is discovered. Based upon the Company's limited investigation
to date, the Company does not believe that this matter, if resolved adversely
to the Company, would have a material adverse effect upon the Company's
business, financial condition, results of operations or cash flows.
In November 1995, the Company reached an agreement to settle a consolidated
class action lawsuit in exchange for $950,000. The proposed settlement
required the Company to contribute $525,000, with the remainder paid by the
Company's insurance carrier. The proposed settlement is subject to final
approval by the U.S. District Court for the Southern District of California.
The Company provided for the anticipated costs of settlement of such
litigation during 1995.
The Company is involved in various claims arising in the ordinary course of
business; none of these claims, in the opinion of management, is expected to
have a material adverse impact on the financial condition, cash flows or
overall trends in the results of operations of the Company. The ultimate
resolution of certain of these claims, however, could have a potentially
material adverse effect on the Company's results of operations in the
individual period in which the claim is resolved.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
- ---------
Net sales were $16.1 million for the second quarter and $33.6 million for the
first six months of 1996, representing increases of $2.9 million or 22.3% and
$7.7 million or 29.7%, respectively, over the comparable periods of 1995. The
increase in product sales during 1996 over the comparable periods of 1995 is
primarily attributable to increases in revenues from sales of pressed ceramics
products at the Company's Microelectronic Packaging (s) Pte. Ltd. ("MPS")
subsidiary ($700,000 and $2.1 million, respectively), and an increase in
revenues from the sales of MCM products at the Company's CTM Electronics, Inc.
("CTM") subsidiary ($1.6 million and $4.8 million, respectively). The increase
in sales of pressed ceramic products reflects both an increase in units sold
and, to a lesser extent, a general price increase implemented by MPS in the
second quarter of 1995. The increase in revenue from the sale of MCM's was due
primarily to an increase in the number of units sold. Net sales for the second
quarter and for the first six months of 1996 also reflects the inclusion of
$582,000 and $817,000, respectively, of revenues derived under an equipment and
technology transfer agreement with a government factory in Yixing, China. Such
revenues have been included in other sales in the Condensed Consolidated
Statement of Operations.
COST OF GOODS SOLD
- ------------------
Cost of goods sold were $13.0 million for the second quarter and $27.5 million
for the first six months of 1996, representing increases of $1.9 million or
17.5% and $5.2 million or 23.6%, respectively, over the comparable periods of
1995. These increases were primarily attributable to increased sales during
these periods. Cost of goods sold as a percentage of net sales was 80.8% in the
second quarter and 81.8% in the first six months of 1996, compared with 83.7%
and 85.7%, respectively, for the corresponding periods of 1995. During 1996,
gross margin from sales in percentage terms has increased over the comparable
periods of 1995 as the impact of improved pricing at MPS and improved overhead
absorption at MPS and CTM (due to increased shipping volumes) have offset
increases in the costs of certain of the Company's raw materials and increases
in certain fixed costs at MPS.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
Selling, general and administrative expenses were $1,530,000 for the second
quarter and $2,974,000 for the first six months of 1996, representing
decreases of $376,000 or 19.7% and $404,000 or 12.0%, respectively, from the
comparable periods of 1995. This decrease is the result of the non-recurring
settlement expenses incurred in 1995. The Company currently anticipates that
selling, general and administrative expenses may increase in absolute dollars
during 1996.
ENGINEERING AND PRODUCT DEVELOPMENT
- -----------------------------------
Engineering and product development expenses were $672,000 for the second
quarter and $1,286,000 for the first six months of 1996, representing increases
of $102,000 or 17.9% and $235,000 or 22.4%, respectively, over the comparable
periods of 1995. These increases are primarily due to 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 low-temperature cofired multilayer ceramics for use in the production of
MCM's and products incorporating thick film technology.
FOREIGN EXCHANGE GAIN (LOSS)
- ----------------------------
As discussed in more detail below, the Company's operating results are subject
to the impact of fluctuations in the relative values of certain currencies. The
Company reported net foreign exchange gains of $170,000 for the second quarter
and $300,000 for the first six months of 1996, as compared to net foreign
exchange losses of $226,000 and $595,000, respectively, for the comparable
periods of 1995. The appreciation of the value of the US dollar relative
10
<PAGE>
to the Japanese yen during the first half of 1996 had the effect of decreasing
the cost of certain raw materials as well as reducing the carrying value of
certain of the Company's obligations and was primarily responsible for the gains
recognized during this period. The loss recognized during 1995 was primarily
attributable to the declining value of the US dollar compared to both the yen
and the Singapore dollar during that period.
Fluctuations in foreign exchange rates have had 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 US dollars. Consequently, a change in exchange rates between the
US 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 of raw materials denominated in Japanese yen. The terms of the
forward contracts involve the exchange of US dollars for either Japanese yen or
Singapore dollars at a future date, with maturities generally ranging from one
to several months from the execution date of the forward contract. At contract
maturity, the Company makes net settlements of US 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 (US$21,260,000 at March 31,
1996) 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 US dollar relative to
either 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 affected by
any fluctuations in the value of the US dollar relative to either the Japanese
yen or the Singapore dollar. Any future weakening of the US 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 attempt to mitigate the effects of any such weakening in the
value of the US dollar, the Company will attempt to qualify non-Japanese sources
of key materials, and accelerate 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 a weaker US dollar on the Company's
operating results.
INTEREST EXPENSE
- ----------------
Interest expense was $626,000 for the second quarter and $1,084,000 for the
first six months of 1996, respresenting increases of $347,000 or 124.4% and
$628,000 or 137.7%, respectively, over the comparable periods of 1995. Such
increases were primarily due to additional borrowings by the Company under its
borrowing arrangements with DBS Bank and the Debenture issued as part of the
Transpac Financing (see Liquidity and Capital Resources). The Company currently
anticipates that interest expense will continue at the second quarter level for
the rest of 1996.
11
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OTHER INCOME (EXPENSE)
- ----------------------
Other income was $64,000 for the second quarter and $117,000 for the first six
months of 1996, as compared to $1,000 and $392,000, respectively, for the
comparable periods of 1995. The majority of other income arising in 1995
reflects the receipt during the second quarter of a $375,000 payment from an
insurance policy covering product losses incurred in 1988 due to the
contamination of products during the manufacturing process.
EFFECTS OF INCOME TAXES
- -----------------------
For the six month period ended June 30, 1996, the Company has recorded an income
tax expense of $47,000, which is comprised of $5,000 for federal alternative
minimum taxes and $42,000 for state franchise taxes. For purposes of computing
federal income tax liability, the Company believes that it has sufficient net
operating losses, which can be carried forward, to eliminate federal income tax
liability that would otherwise be due on the income generated in the first six
months of 1996. Federal alternative minimum tax is not entirely eliminated by
the Company's net operating losses from previous years. Due to the varying
rules governing state franchise taxes for California, the Company does not have
sufficient net operating losses from previous years to eliminate its franchise
tax liability for 1996.
As of the filing of the Company's Form 10-Q for the first quarter of 1996, the
Company believed that recent stock transactions may have caused the Company to
have to defer a portion of the benefit of its net operating losses under
Internal Revenue Code Section 382. Based on a study of the Company's stock
transactions and impact on the Company's net operating losses, the Company
believes that no such limitation exists. The taxable income generated by the
Company's foreign operations during this time period was offset through the
utilization of capital allowance carryforwards. No income tax expense was
recorded in the comparable period of 1995 as the Company's foreign and domestic
operations generated net operating losses for both financial reporting and
income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the second quarter of 1996, the Company financed its operations through a
combination of cash flows from its operating units and certain other borrowings
and equity financings. As discussed in Note 5 to the Condensed Consolidated
Financial Statements, the Company consummated an equity financing of $2,000,000
with Transpac and the Company's MPM subsidiary raised an additional $9,000,000
through the issuance of the Debenture to Transpac in March 1996. The Company's
principal sources of liquidity as of June 30, 1996, consisted of $6,205,000 of
cash, and certain limited available borrowing capacity with DBS. The $9.0
million raised by MPM is not available for use in other portions of the
Company's business.
MPS, the Company's principal operating subsidiary, has a S$9,500,000
(US$6,733,000) 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 June 30, 1996, MPS had outstanding borrowings under this
arrangement of $6,521,000.
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 and an overdraft
facility. Borrowings under this arrangement are also due on demand and are
secured by all of the assets of MPC. Borrowings under the working capital line
of credit facility and the overdraft facility bear interest at the Singapore
prime rate plus 1/2% and plus 3/4% respectively. At June 30, 1996, MPC had
outstanding borrowings under this arrangement of $177,000.
MPM has a $3,500,000 borrowing facility with DBS which is guaranteed by both MPI
and MPS. This facility consists of a $3.2 million short-term advance facility
and a $300,000 import/export bills facility. Advances under this credit
facility are secured by substantially all of the assets of MPM and bear interest
at the bank's prime lending rate plus 2.5% and cannot remain outstanding for
more than 30 days. The facility does permit rolling over of existing
outstanding balances. This credit facility matured in May 1996, but has not yet
been converted into a term loan, which is at the election of DBS. This facility
automatically terminates in the event of the termination of the
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Company's technology transfer agreement with IBM. At June 30, 1996, MPM had
outstanding borrowings under this arrangement of $3,197,000.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earning levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt. The MPM agreement also contains certain
restrictive provisions. As of June 30, 1996, MPS was in compliance with all
covenants set forth in its agreement with DBS. The Company anticipates that the
pressed-ceramics industry may soften in the third quarter of 1996. Should this
softening market result in a reduced demand for the Company's pressed ceramic
products, the Company may have difficulty in meeting some of its covenants with
DBS. The Company is in regular communication with DBS Bank, providing them with
data on the Company and the industry. No assurances can be made that the
Company will receive a waiver of compliance with these convenants, should a
waiver of compliance be required. Failure to receive these waivers would
materially adversely affect the Company's results of operations, financial
position and prospects.
At June 30, 1996, the Company also had borrowings of $9,000,000 under the
Debenture discussed above, $11.0 million under notes payable to various
customers bearing interest at rates ranging from 7.0% to 14.0%, $1,335,000 under
mortgage notes bearing interest at a rate of 7.5%, $155,000 under term loans
bearing interest at 12.2% and $1,344,000 under capital lease obligations,
consisting of various machinery and equipment financing agreements, bearing
interest at 4% to 6%. Borrowings under the above arrangements are secured by
substantially all of the assets of the Company. The Company also incurred
certain non-interest bearing obligations in connection with an acquisition in
1993 that have been discounted to their net present value of $337,000 at June
30, 1996.
Since the execution of the Company's technology licensing agreement with the
International Business Machines Corporation (the "IBM Agreement"), expenditures
associated with the establishment by MPM of a production facility in Singapore
to manufacture products incorporating such licensed technology have totaled
approximately $10,100,000. During the same period, the Company also paid an
additional $2,000,000 of up-front non-refundable 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 obligations under the IBM Agreement. Under the IBM Agreement, the
Company is also required to attain certain production milestones at specified
dates, which the Company has not achieved. Failure to achieve these specified
milestones permits IBM to terminate the IBM Agreement. In addition, commencing
in August 1996, the IBM Agreement is terminable by either party without cause
upon six months prior written notice. The Company is currently in the process of
renegotiating with IBM certain restrictive covenants of the original 1994
Agreement. There can be no assurance that such covenants will be changed.
Although the Company currently believes that with adequate financing it can
achieve revised production milestones, 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 renegotiate the
Covenants of the IBM Agreement and achieve the revised production milestones
under a revised 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 June 30, 1996, other than the term sheet
entered into with a bank lender in March 1996 for a $1.0 million term facility
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 market, requirements to
retire its substantial debt, requirements to construct, transition and maintain
existing or new
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manufacturing facilities, commitments to third parties to develop, manufacture,
license and sell products, 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, excluding the remaining funds from the Transpac Financing, anticipated
cash flow from operations and funds available from the MPS bank line of credit
will be adequate to fund its operations, excluding MPM, in the ordinary course
through the twelve months subsequent to June 30, 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 middle of
1998. 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 $2,185,000
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. After 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 1998. 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.
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
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facilities at MPC and MPM, customer loan agreements and the Transpac agreements
also contain similar restrictions. The Company's high level of outstanding
indebtedness and the numerous restrictive coven-ants 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, certain customers 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 term sheet for a $1.0 million term loan from a bank lender. The
$9.0 million raised by MPM is not available for use in other portions of the
Company's business, except for the development of the IBM technology. 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 will 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 certain of 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, political and economic instability, natural disasters,
outbreaks of hostilities, variations in manufacturing yields, changes in
manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
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. Furthermore, there can be no assurance that revenue
levels, if any, during the start-up phase of operations at MPM 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 operations.
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 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 operations.
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REPAYMENT OF BANK OBLIGATIONS BY MPM; NEED FOR ADDITIONAL FINANCING BY MPM. As
of June 30, 1996, MPM had outstanding borrowings of approximately $3,197,000
under its borrowing arrangement with DBS. The facility, which is guaranteed by
both MPI and MPS, is a short term credit facility which cannot remain
outstanding for more than 30 days although the facility does permit rolling over
of existing outstanding balances. In March 1996, MPM issued a $9,000,000
convertible 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 will significantly
dilute any earnings per share amounts and could significantly dilute the
ownership interests of MPI's investors. The existence of the debenture and its
convertibility 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. MPM will require additional financing to commence
limited production of partially-processed revenue-producing units by the fourth
quarter of 1996. 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 its 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
operation 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 facility or MPM's
loss of its technology rights under the IBM Agreement would materially and
adversely and affect the Company's business, prospects, financial condition and
loss 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 June 30, 1996, MPS had
outstanding borrowings of approximately $8.0 million with DBS and an aggregate
of approximately $9.5 million from a consortium of customers (the "Consortium").
MPM's bank obligations also consist of borrowings of $3.2 million from DBS and
$2.5 million from Orix Leasing. 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. ("Motorola") guaranteed
MPS's repayment of $2.0 million in borrowings from a certain bank lender. Under
the terms of the agreement relating to Motorola's guarantee, MPI granted
Motorola a security interest in all of the issued and outstanding capital stock
of MPS, CTM and MPA. 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, CTM and MPA (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, 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
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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 convertible 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 become
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. As of June 30, 1996, the Company and its subsidiaries had
approximately $33.4 million in debt obligations while shareholders' equity
totaled approximately $10.6 million. The Company's ability to meet its debt
service 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 MPS
facilities. These additional capital requirements will be substantial. 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 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 accountants have included
an explanatory paragraph in their audit report with respect to the Company's
1995 audited consolidated financial statements related to a substantial doubt
with respect to the Company's ability to continue as a going concern. There can
be no assurance that the Company will operate profitably in the future and that
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, excluding the funds from the Transpac Financing, will be
adequate to fund its operations, excluding MPM, in the ordinary course through
the twelve months subsequent to June 30, 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 may be hampered by the Company's high level of existing
indebtedness, secured and 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 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 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
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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 1998. 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 Indonesian 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: reduced control over delivery schedules, quality
assurance, manufacturing yields and costs. 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. 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, respectively, 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 MCMs, would 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
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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 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, as is currently being experienced by the Company and the
industry. The Company believes that the markets for new generations of
semiconductors will also be subject to similar fluctuations. 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 affect the
Company's business, financial conditions and results of operations. There can
be no assurance that the Company's net sales and results of operations will not
be materially adversely affected if downturns or slowdowns in the semiconductor,
personal computer industry or other industries utilizing the Company's products
occur in the future.
HIGHLY COMPETITIVE INDUSTRY; SIGNIFICANT PRICE COMPETITION. The electronic
packaging and inter-connection technology industries are intensely competitive.
The Company experiences intense competition worldwide from a number of
manufacturers, many 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
19
<PAGE>
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
with customers whose end-use 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
matters 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.
Enforcement of existing and future laws and private contracts is uncertain, and
the implementation and interpretation thereof may be inconsistent. As the
Company increases the amount of its assets, particularly in the form of
manufacturing equipment, that are located 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
20
<PAGE>
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 two suppliers of the integrated circuits that are sold with the
Company's MCM 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. The Company's reliance on sole or a
limited group of suppliers 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.
PRODUCT QUALITY AND RELIABILITY; NEED TO INCREASE PRODUCTION. The Company's
customers establish demanding and time-consuming specifications for quality and
reliability that must be met by the Company's products. From initial customer
contact to actual qualification for production, which may take as long as 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 been experiencing 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 US 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 US 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.
21
<PAGE>
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 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 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 that 10% of the ownership of MPI or gain
access to any confidential information of either MPC or MPI relating to
Carborundum's microelectronics business. In either event, MPI 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 after 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.
22
<PAGE>
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
conducts 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 the Company to significant
liabilities, including joint and several liability under certain statues. 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 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 amorti-zation 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 MARKETPLACE. 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 immediately 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 development 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 disaster, 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 share of small capitalization stocks in
23
<PAGE>
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.
24
<PAGE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<C> <S>
Item 1. Legal Proceedings
In February 1995, the Company was sued in the United States District
Court for the Southern District of California in two separate class
actions alleging various federal securities laws violations by the
Company and certain of its officers and directors. In October 1995,
these two lawsuits were subsequently combined into one consolidated
class action. In November 1995, the Company reached an agreement in
principle to settle the consolidated class action lawsuit in exchange
for a cash payment of $950,000. The proposed settlement required
the Company to contribute $525,000, with the remainder to be paid by
the Company's insurance carrier. The proposed settlement was given
final approval in May 1996.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securityholders
The Annual Meeting of Shareholders of the Company was held on May 29,
1996. The following items were voted upon by the shareholders with
all items being approved.
</TABLE>
<TABLE>
<CAPTION>
Votes
Against or Votes Broker
Votes For Withheld Abstained Non-Votes
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(1) Election of the following persons, who were the only
nominees, as Directors to hold office until the next
Annual Meeting or until their successors are elected
and qualified:
Wilmer R. Bottoms 3,566,126 19,164
Timothy da Silva 3,566,126 19,164
Cecil E. Smith, Jr. 3,566,126 19,164
Frank L. Howland 3,566,126 19,164
William R. Thompson 3,566,126 19,164
(2) Amendment of the Company's 1993 Stock Option/Stock
Issuance Plan to (i) increase the maximum number of
shares of Common Stock authorized for issuance over
the term of the 1993 Plan from 390,632 to 690,632
shares and (ii) establish a limit on the number of
shares of Common Stock for which any one participant
may be issued options, separately exercisable stock
appreciation rights and direct stock issuances over
the term of the 1993 Plan 2,345,753 62,264 7,101 1,170,172
(3) Ratification of BDO Seidman, LLP as the Company's
independent accountants for the fiscal year ending
December 31, 1996 3,569,490 9,750 1,250
</TABLE>
25
<PAGE>
On May 29, 1996, a Special Meeting of Shareholders of the Company was
held. The following items were voted upon by the shareholders with
all items being approved.
<TABLE>
<CAPTION>
Votes
Against or Votes Broker
Votes For Withheld Abstained Non-Votes
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(1) Approval of 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 3,692,982
(2) Approval of an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the
authorized number of shares of Common Stock from
10,000,000 shares to 15,000,000 shares, which amendment
was 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 3,692,982
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
Item 5. Other Information
On July 30, 1996, Wilmer R. Bottoms, Chairman of the Board of
Directors of the Company, resigned his position on the Board.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
. Exhibit 3.6 - Amended and Restated Articles of Incorporation
of the Company.
. Exhibit 10.76 - Subscription Agreement by and among the Company,
Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd.,
Regional Investment Company, Ltd. and Natsteel Equity III Pte
Ltd./(1)/
. Exhibit 10.77 - Convertible Loan Agreement by and among the
Company, MPM, Transpac Capital Pte Ltd., Transpac Industrial
Holdings Ltd., Regional Investment Company Ltd. and Natsteel
Equity III Pte Ltd./(1)/
. Exhibit 10.78 - Guarantee issued by the Company /(1)/
. Exhibit 10.79 - 1993 Stock Option/Stock Issuance Plan.
. Exhibit 11.1 - Computation of Net Income (Loss) per Common Share
. Exhibit 27.1 - Financial Data Schedule
/(1)/ These documents are incorporated by reference to the
Exhibits filed with the Company's Current Report on
Form 8-K, dated March 27, 1996, and filed with the
Securities and Exchange Commission on April 5, 1996.
</TABLE>
26
<PAGE>
(b) The following report on Form 8-K was filed during the quarter
ended June 30, 1996:
. Report on Form 8-K dated March 27, 1996 was filed with the
Securities and Exchange Commission on April 5, 1996, regarding
the issuance of 842,013 shares of the Company's Common Stock
to Transpac Capital Pte. Ltd. and certain other foreign
investors (collectively, "Transpac"), for a purchase price of
$2,000,000 and the issuance of a $9,000,000 convertible debenture
by one of the Company's subsidiaries to Transpac.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MICROELECTRONIC PACKAGING, INC.
(Registrant)
By: /s/ TIMOTHY DA SILVA
-----------------------------------------
Timothy da Silva
President and Chief Executive Officer and
Acting Chief Financial Officer
Date: August 14, 1996
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<C> <S>
3.6 Amended and Restated Articles of Incorporation of the Company.
10.76 Subscription Agreement by and among the Company, Transpac
Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional
Investment Company, Ltd. and Natsteel Equity III Pte Ltd./(1)/
10.77 Covertible Loan Agreement by and among the Company, MPM, Transpac
Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional
Investment Company Ltd. and Natsteel Equity III Pte Ltd./(1)/
10.78 Guarantee issued by the Company/(1)/
10.79 1993 Stock Option/Stock Issuance Plan
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
/(1)/ These documents are incorporated by reference to the Exhibits
filed with the Company's current report on Form 8-K, dated
March 27, 1996, and filed with the Securities and Exchange
Commission on April 5, 1996.
</TABLE>
29
<PAGE>
EXHIBIT 3.6
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MICROELECTRONIC PACKAGING, INC.,
a California Corporation
The undersigned Timothy da Silva and Warren T. Lazarow hereby certify
that:
ONE: They are the duly elected and acting President and Assistant
Secretary, respectively, of said corporation.
TWO: The Amended and Restated Articles of Incorporation of said
corporation shall be amended and restated to read in full as follows:
ARTICLE I
---------
The name of the corporation (herein called the "Corporation") is
MICROELECTRONIC PACKAGING, INC.
ARTICLE II
----------
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
-----------
(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 shares that the Corporation is authorized to issue is fifteen million
(15,000,000) shares. Fifteen million (15,000,000) shares shall be Common Stock.
(b) Rights and Restrictions of Common Stock. The Common Stock
---------------------------------------
authorized by this Amended and Restated Articles of Incorporation shall have the
rights and restrictions as follows:
1. Dividend Rights. The holders of the Common Stock shall be
---------------
entitled to receive, when and as declared by the Board of Directors, out of any
assets of the Corporation legally available therefor, such dividends as may be
declared from time to time by the Board of Directors.
<PAGE>
2. Liquidation Rights. In the event of any voluntary or involuntary
------------------
liquidation, dissolution or winding up of the Corporation, the holders of shares
of the Common Stock shall be entitled to receive all of the assets of the
Corporation available for distribution to its shareholders, ratably in
proportion to the number of shares of the Common Stock held by them.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holders of shares of Common Stock shall be
-------------
entitled to vote on all matters at all meetings of the shareholders of the
Corporation and shall be entitled to one vote for each share of Common Stock
entitled to vote at such meeting.
ARTICLE IV
----------
Except as otherwise provided in this Amended and Restated Articles of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE V
---------
The number of directors of the Corporation shall be fixed from
time to time by a bylaw or amendment thereof duly adopted by the Board of
Directors or by the shareholders of the Corporation.
ARTICLE VI
----------
Elections of directors need not be by ballot unless a shareholder
demands election by ballot at a meeting of shareholders and before the voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
-----------
Meetings of shareholders may be held within or without the State of
California, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
California at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE VIII
------------
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by the California General
Corporation Law. Any repeal or modification of this Article VIII by the
shareholders of the Corporation shall
2.
<PAGE>
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE IX
----------
The Corporation is authorized to indemnify the directors and officers
of the Corporation to the fullest extent permissible under California law.
ARTICLE X
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Articles of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon shareholders herein are granted subject to this reservation.
* * *
THREE: The foregoing amendment and restatement has been approved by
the Board of Directors of said Corporation.
FOUR: The foregoing amendment and restatement was approved by the
holders of the requisite number of shares of said Corporation in accordance with
Sections 902 and 903 of the California General Corporation Law; the total number
of outstanding shares of the only class entitled to vote with respect to the
foregoing amendment was 5,508,813 shares of Common Stock. The number of shares
voting in favor of the foregoing amendment equaled or exceeded the vote
required, such required vote being a majority of the outstanding shares of
Common Stock.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
May 29, 1996.
______________________________
Timothy da Silva, President
______________________________
Warren T. Lazarow,
Assistant Secretary
3.
<PAGE>
The undersigned certify under penalty of perjury that they have read
the foregoing Amended and Restated Articles of Incorporation and know the
contents thereof, and the statements therein are true.
Executed at San Diego, California, on May 29, 1996.
_____________________________
Timothy da Silva
_____________________________
Warren T. Lazarow
4.
<PAGE>
EXHIBIT 10.79
MICROELECTRONIC PACKAGING, INC.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(Amended through February 29, 1996)
ARTICLE ONE
GENERAL
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I. PURPOSE OF THE PLAN
A. This 1993 Stock Option/Stock Issuance Plan (the "Plan") is
intended to promote the interests of Microelectronic Packaging, Inc., a
California corporation (the "Corporation"), by providing eligible individuals
with the opportunity to acquire a proprietary interest, or otherwise increase
their proprietary interest, in the Corporation as an incentive for them to
remain in the service of the Corporation (or its parent or subsidiary
corporations).
B. The Discretionary Option Grant and Stock Issuance Programs under
this Plan became effective on the date on which the shares of the Corporation's
Common Stock were first registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Such date is hereby
designated as the Plan Effective Date. The Automatic Option Grant Program under
this Plan became effective immediately upon the execution and final pricing of
the Underwriting Agreement for the initial public offering of the Corporation's
Common Stock. The execution date of such Underwriting Agreement is hereby
designated as the Automatic Grant Program Effective Date.
C. This Plan serves as the successor to the Corporation's 1988 Stock
Option Plan (the "Predecessor Plan"), and no further option grants or share
issuances shall be made under the Predecessor Plan from and after the Plan
Effective Date. All outstanding stock options and unvested share issuances under
the Predecessor Plan on such Plan Effective Date are hereby incorporated into
this Plan and shall accordingly be treated as outstanding stock options and
unvested share issuances under this Plan. However, each outstanding option grant
so incorporated shall continue to be governed solely by the express terms and
conditions of the instrument evidencing such grant, and no provision of this
Plan shall be deemed to affect or otherwise modify the rights or obligations of
the holders of such incorporated options with respect to their acquisition of
shares of the Corporation's Common Stock thereunder. All unvested shares of
Common Stock outstanding under the Predecessor Plan on the Plan Effective Date
shall continue to be governed solely by the express terms and conditions of the
instruments evidencing such issuances, and no provision of this Plan shall be
deemed to affect or modify the rights or obligations of the holders of such
unvested shares.
<PAGE>
II. DEFINITIONS
A. For purposes of the Plan, the following definitions shall be in
effect:
Board: the Corporation's Board of Directors.
Change in Control: a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's shareholders which the Board does not recommend such
shareholders to accept; or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time such election or nomination was approved
by the Board.
Code: the Internal Revenue Code of 1986, as amended.
Committee: the committee of two (2) or more non-employee Board
members appointed by the Board to administer the Plan.
Common Stock: shares of the Corporation's common stock.
Corporate Transaction: any of the following shareholder-approved
transactions to which the Corporation is a party:
(i) a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which
is to change the state in which the Corporation is incorporated,
2.
<PAGE>
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) any reverse merger in which the Corporation is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities are transferred to a person or persons different from those who
held such securities immediately prior to such merger.
Employee: an individual who performs services while in the employ of
the Corporation or one or more parent or subsidiary corporations, subject to the
control and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
Fair Market Value: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:
- If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded on the Nasdaq National
Market, the Fair Market Value shall be the closing selling price per share
on the date in question, as such price is reported by the National
Association of Securities Dealers through the Nasdaq National Market or any
successor system. If there is no reported closing selling price for the
Common Stock on the date in question, then the closing selling price on the
last preceding date for which such quotation exists shall be determinative
of Fair Market Value.
- If the Common Stock is at the time listed or admitted to trading on
any national stock exchange, then the Fair Market Value shall be the
closing selling price per share on the date in question on the exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Common Stock
on such exchange on the date in question, then the Fair Market Value shall
be the closing selling price on the exchange on the last preceding date for
which such quotation exists.
Optionee: a person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
Participant: a person who is issued Common Stock under the Stock
Issuance Program.
3.
<PAGE>
Permanent Disability or Permanently Disabled: the inability of the
Optionee or the Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
Plan Administrator: the Committee in its capacity as the
administrator of the Plan.
Service: the performance of services on a periodic basis for the
Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option or stock issuance agreement.
B. The following provisions shall be applicable in determining the
parent and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an unbroken chain
of corporations ending with the Corporation shall be considered to be a
parent of the Corporation, provided each such corporation in the unbroken
chain (other than the Corporation) owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be considered to
be a subsidiary of the Corporation, provided each such corporation (other
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
III. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into three separate
--------------
components: the Discretionary Option Grant Program specified in Article Two, the
Automatic Option Grant Program specified in Article Three and the Stock Issuance
Program specified in Article Four. Under the Discretionary Option Grant
Program, eligible individuals may, at the discretion of the Plan Administrator,
be granted options to purchase shares of Common Stock in accordance with the
provisions of Article Two. Under the Automatic Option Grant Program, each
individual serving as an eligible non-employee Board member on the Automatic
Grant Program Effective Date and each individual who first joins the Board as an
eligible non-employee director after the Automatic Grant Program Effective Date
will at periodic intervals receive option grants to purchase shares
4.
<PAGE>
of Common Stock in accordance with the provisions of Article Three, with the
first such grants to be made on the Automatic Grant Program Effective Date.
Under the Stock Issuance Program, eligible individuals may be issued shares of
Common Stock directly, either through the immediate purchase of such shares at a
price not less than eighty-five percent (85%) of the fair market value of the
shares at the time of issuance or as a bonus for past services rendered the
Corporation.
B. General Provisions. Unless the context clearly indicates
------------------
otherwise, the provisions of Articles One and Five shall apply to the
Discretionary Option Grant Program, the Automatic Option Grant Program and the
Stock Issuance Program and shall accordingly govern the interests of all
individuals under the Plan.
IV. ADMINISTRATION OF THE PLAN
A. Both the Discretionary Option Grant Program and the Stock
Issuance Program shall be administered by the Committee. No non-employee Board
member shall be eligible to serve on the Committee if such individual has,
within the relevant period designated below, received an option grant or direct
stock issuance under this Plan or any other stock plan of the Corporation (or
any parent or subsidiary corporation), other than pursuant to the Automatic
Option Grant Program:
(i) for each of the initial members of the Committee, the period
commencing with the Plan Effective Date and ending with the date of his or
her appointment to the Committee, or
(ii) for any successor or substitute member, the twelve (12)-
month period immediately preceding the date of his or her appointment to
the Committee or (if shorter) the period commencing with the Plan Effective
Date and ending with the date of his or her appointment to the Committee.
Members of the Committee shall serve for such period of time as the
Board may determine and shall be subject to removal by the Board at any time.
B. The Committee as Plan Administrator shall have full power and
authority (subject to the express provisions of the Plan) to establish rules and
regulations for the proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding option
grants or stock issuances thereunder as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties
who have an interest in the Discretionary Option Grant or Stock Issuance Program
or any outstanding option or share issuance thereunder.
C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and the
5.
<PAGE>
Plan Administrator shall exercise no discretionary functions with respect to
option grants made pursuant to that program.
V. OPTION GRANTS AND STOCK ISSUANCES
A. The persons eligible to participate in the Discretionary Option
Grant Program under Article Two and the Stock Issuance Program under Article
Four shall be limited to the following:
(i) officers and other key employees of the Corporation (or its
parent or subsidiary corporations) who render services which contribute to
the management, growth and financial success of the Corporation (or its
parent or subsidiary corporations); and
(ii) those consultants or other independent contractors who
provide valuable services to the Corporation (or its parent or subsidiary
corporations).
B. The non-employee members of the Board shall not be eligible to
---
participate in the Discretionary Option Grant and Stock Issuance Programs or in
any other stock option, stock purchase, stock bonus or other stock plan of the
Corporation (or its parent or subsidiary corporations). Non-employee members of
the Board shall, however, be eligible to receive automatic option grants
pursuant to the provisions of Article Three.
C. The Plan Administrator shall have full authority to determine, (i)
with respect to the option grants made under the Discretionary Option Grant
Program, which eligible individuals are to receive option grants, the number of
shares to be covered by each such grant, the status of the granted option as
either an incentive stock option ("Incentive Option") that satisfies the
requirements of Section 422 of the Code or a non-statutory option not intended
to meet such requirements, the time or times at which each granted option is to
become exercisable and the maximum term for which the option may remain
outstanding and (ii), with respect to stock issuances under the Stock Issuance
Program, the number of shares to be issued to each Participant, the vesting
schedule (if any) to be applicable to the issued shares, and the consideration
to be paid by the individual for such shares.
VI. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either the Corporation's authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock, including
shares repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall not
exceed 690,632 shares, subject to adjustment from time to time in accordance
with the provisions of this Section VI. Such authorized share reserve is
comprised of (i) the number of shares which remained for
6.
<PAGE>
issuance, as of the Plan Effective Date, under the Predecessor Plan as last
approved by the Corporation's shareholders prior to such Plan Effective Date,
including the shares subject to the outstanding options incorporated into this
Plan and any other shares which would have been available for future option
grant under the Predecessor Plan as last approved by the shareholders, (ii) an
additional increase of 251,447 shares authorized by the Board under this Plan
and approved by the Corporation's shareholders prior to the Plan Effective Date
and (iii) additional increases of 110,000 shares and 190,000 shares authorized
by the Board on June 5, 1995 and February 29, 1996, respectively, subject to the
approval of the Corporation's shareholders at the 1996 Annual Meeting. To the
extent one or more outstanding options under the Predecessor Plan incorporated
into this Plan are subsequently exercised, the number of shares issued with
respect to each such option shall reduce, on a share-for-share basis, the number
of shares available for issuance under this Plan.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1996 calendar year.
C. Should one or more outstanding options under this Plan (including
outstanding options under the Predecessor Plan incorporated into this Plan)
expire or terminate for any reason prior to exercise in full (including any
option cancelled in accordance with the cancellation-regrant provisions of
Section IV of Article Two of the Plan), then the shares subject to the portion
of each option not so exercised shall be available for subsequent option grants
under the Plan. All share issuances under the Plan (including unvested share
issuances under the Predecessor Plan which have been incorporated into this
Plan), whether or not the shares are subsequently repurchased by the Corporation
pursuant to its repurchase rights under the Plan, shall reduce on a share-for-
share basis the number of shares of Common Stock available for subsequent option
grants under the Plan. In addition, should the exercise price of an outstanding
option under the Plan (including any option incorporated from the Predecessor
Plan) be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Corporation in satisfaction
of the withholding taxes incurred in connection with the exercise of an
outstanding option under the Plan or the vesting of a direct share issuance made
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the share issuance, and not by the net
number of shares of Common Stock actually issued to the holder of such option or
share issuance.
D. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances per calendar year,
7.
<PAGE>
(iii) the number and/or class of securities for which automatic option grants
are to be subsequently made per eligible non-employee Board member under the
Automatic Option Grant Program, (iv) the number and/or class of securities and
price per share in effect under each option outstanding under either the
Discretionary Option Grant or Automatic Option Grant Program and (v) the number
and/or class of securities and price per share in effect under each outstanding
option incorporated into this Plan from the Predecessor Plan. Such adjustments
to the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
8.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant
Program shall be authorized by action of the Plan Administrator and may, at the
Plan Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted non-statutory options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
--------
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. Option Price.
------------
1. The option price per share shall be fixed by the
Plan Administrator in accordance with the following provisions:
(i) The option price per share of Common
Stock subject to an Incentive Option shall in no event be less than one
hundred percent (100%) of the Fair Market Value of such Common Stock on the
grant date.
(ii) The option price per share of Common
Stock subject to a non-statutory stock option shall in no event be less
than eighty-five percent (85%) of the Fair Market Value of such Common
Stock on the grant date.
2. The option price shall become immediately due
upon exercise of the option and, subject to the provisions of Section I of
Article Five and the instrument evidencing the grant, shall be payable in one of
the following alternative forms specified below:
(i) full payment in cash or check drawn to
the Corporation's order;
(ii) full payment in shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date (as such term is defined below);
9.
<PAGE>
(iii) full payment in a combination of shares
of Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date and cash or check drawn to the
Corporation's order; or
(iv) full payment through a broker-dealer
sale and remittance procedure pursuant to which the Optionee shall provide
irrevocable written instructions to (I) a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate option price payable for the
purchased shares plus all applicable Federal and state income and
employment taxes required to be withheld by the Corporation in connection
with such purchase and (II) the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete
the sale transaction.
For purposes of this subparagraph 2, the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure is used in
connection with the exercise of the option, payment of the option price for the
purchased shares must accompany such notice.
B. Term and Exercise of Options. Each option granted under this
----------------------------
Discretionary Option Grant Program shall be exercisable at such time or times
and during such period as is determined by the Plan Administrator and set forth
in the instrument evidencing the grant. No such option, however, shall have a
maximum term in excess of ten (10) years from the grant date. During the
lifetime of the Optionee, the option shall be exercisable only by the Optionee
and shall not be assignable or transferable by the Optionee other than by will
or by the laws of descent and distribution following the Optionee's death.
C. Termination of Service.
----------------------
1. The following provisions shall govern the exercise period
applicable to any outstanding options held by the Optionee at the time of
cessation of Service or death.
(i) Should an Optionee cease Service for any reason (other than
death) while holding one or more outstanding options under this Article
Two, then none of those options shall remain exercisable for more than a
ninety (90)-day period (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the grant)
measured from the date of such cessation of Service.
10.
<PAGE>
(ii) Any option held by the Optionee under this Article Two
and exercisable in whole or in part on the date of his or her death may be
subsequently exercised by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the laws of descent
and distribution. Such exercise, however, must occur prior to the earlier
-------
of (A) six (6) months measured from the date of the Optionee's death or (B)
the specified expiration date of the option term. Upon the occurrence of
the earlier event, the option shall terminate.
(iii) Under no circumstances shall any such option be
exercisable after the specified expiration date of the option term.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
shares (if any) in which the Optionee is vested at the time of his or her
cessation of Service. Upon the expiration of the limited post-Service
exercise period or (if earlier) upon the specified expiration date of the
option term, each such option shall terminate and cease to be outstanding
with respect to any vested shares for which the option has not otherwise
been exercised. However, each outstanding option shall immediately
terminate and cease to be outstanding, at the time of the Optionee's
cessation of Service, with respect to any shares for which the option is
not otherwise at that time exercisable or in which the Optionee is not
otherwise vested.
(v) Should (A) the Optionee's Service be terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (B) the Optionee make any
unauthorized use or disclosure of confidential information or trade secrets
of the Corporation or its parent or subsidiary corporations, then in any
such event all outstanding options held by the Optionee under this Article
Two shall terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to permit one or more options held by the Optionee under this
Article Two to be exercised, during the limited post-Service exercise period
applicable under subparagraph 1 above, not only with respect to the number of
vested shares of Common Stock for which each such option is exercisable at the
time of the Optionee's cessation of Service but also with respect to one or more
subsequent installments in which Optionee would have otherwise vested had such
cessation of Service not occurred.
11.
<PAGE>
D. Shareholder Rights.
------------------
An Optionee shall have no shareholder rights with respect to any
shares covered by the option until such individual shall have exercised the
option and paid the option price for the purchased shares.
E. Repurchase Rights.
-----------------
The shares of Common Stock acquired upon the exercise of any
Article Two option grant may be subject to repurchase by the Corporation in
accordance with the following provisions:
(i) The Plan Administrator shall have the discretion to authorize
the issuance of unvested shares of Common Stock under this Article Two.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase any or all of those unvested
shares at the option price paid per share. The terms and conditions upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the
purchased shares) shall be established by the Plan Administrator and set
forth in the instrument evidencing such repurchase right.
(ii) All of the Corporation's outstanding repurchase rights under
this Article Two shall automatically terminate, and all shares subject to
such terminated rights shall immediately vest in full, upon the occurrence
of a Corporate Transaction, except to the extent: (A) any such repurchase
right is expressly assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction or (B) such
termination is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
(iii) The Plan Administrator shall have the discretionary
authority, exercisable either before or after the Optionee's cessation of
Service, to cancel the Corporation's outstanding repurchase rights with
respect to one or more shares purchased or purchasable by the Optionee
under this Article Two and thereby accelerate the vesting of such shares in
whole or in part at any time.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as "non-statutory" options when issued under the Plan shall not be
---
subject to such terms and conditions.
12.
<PAGE>
A. Dollar Limitation. The aggregate Fair Market Value (determined as
-----------------
of the respective date or dates of grant) of the Common Stock for which one or
more options granted to any Employee after December 31, 1986 under this Plan (or
any other option plan of the Corporation or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as incentive stock options under the Federal tax laws shall be
applied on the basis of the order in which such options are granted. Should the
number of shares of Common Stock for which any Incentive Option first becomes
exercisable in any calendar year exceed the applicable One Hundred Thousand
Dollar ($100,000) limitation, then that option may nevertheless be exercised in
that calendar year for the excess number of shares as a non-statutory option
under the Federal tax laws.
B. 10% Shareholder. If any individual to whom an Incentive Option is
---------------
granted is the owner of stock (as determined under Section 424(d) of the Code)
possessing ten percent (10%) or more of the total combined voting power of all
classes of stock of the Corporation or any one of its parent or subsidiary
corporations, then the option price per share shall not be less than one hundred
ten percent (110%) of the Fair Market Value per share of Common Stock on the
grant date, and the option term shall not exceed five (5) years, measured from
the grant date.
Except as modified by the preceding provisions of this Section II, the
provisions of Articles One, Two and Five of the Plan shall apply to all
Incentive Options granted hereunder.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any Corporate Transaction, each option which is at
the time outstanding under this Article Two shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares. However, an outstanding
option under this Article Two shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof or to be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation or parent thereof, (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the option spread
existing at the time of the Corporate Transaction and provides for subsequent
payout in accordance with the same vesting schedule applicable to such option,
or (iii) the acceleration of such option is subject to other limitations imposed
by the Plan Administrator at the time of the option grant. The determination of
option
13.
<PAGE>
comparability under clause (i) above shall be made by the Plan Administrator,
and its determination shall be final, binding and conclusive.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options under this Article Two shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation or its parent company.
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issued to the option holder, in consummation of such Corporate Transaction, had
such person exercised the option immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the option price
payable per share, provided the aggregate option price payable for such
--------
securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.
D. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide (upon such terms as it may deem appropriate) for the
automatic acceleration of one or more outstanding options granted under the Plan
that are assumed or replaced in a Corporate Transaction and do not otherwise
accelerate at that time, in the event the Optionee's Service should subsequently
terminate within a designated period following the effective date of such
Corporate Transaction.
E. The grant of options under this Article Two shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
F. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under this Article Two (and the termination of one or
more of the Corporation's outstanding repurchase rights under this Article Two)
upon the occurrence of a Change in Control. The Plan Administrator shall also
have full power and authority to condition any such option acceleration (and the
termination of any outstanding repurchase rights) upon the subsequent
termination of the Optionee's Service within a specified period following the
Change in Control.
G. Any options accelerated in connection with the Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
option term.
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H. The exercisability as incentive stock options under the Federal
tax laws of any options accelerated under this Section III in connection with a
Corporate Transaction or Change in Control shall remain subject to the dollar
limitation of Section II of this Article Two. To the extent such dollar
limitation is exceeded, the accelerated option shall be exercisable as a non-
statutory option under the Federal tax laws.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, the
cancellation of any or all outstanding options under this Article Two (including
outstanding options under the Predecessor Plan incorporated into this Plan) and
to grant in substitution new options under the Plan covering the same or
different numbers of shares of Common Stock but with an option price per share
not less than (i) one hundred percent (100%) of the Fair Market Value on the new
grant date in the case of a grant of an Incentive Option, (ii) one hundred ten
percent (110%) of such Fair Market Value in the case of a grant of an Incentive
Option to a 10% Shareholder or (iii) eighty-five percent (85%) of such Fair
Market Value in the case of all other grants.
V. INITIAL GRANTS
For purposes of option grants made at the time of the Common Stock is
first registered under Section 12(g) of the 1934 Act or at any time thereafter
prior to the time the Common Stock is first traded on a national securities
exchange or the Nasdaq National Market, the Fair Market Value of the Common
Stock at such time shall be deemed to be equal to the price per share at which
the Common Stock is sold in the initial public offering pursuant to the
Underwriting Agreement.
15.
<PAGE>
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. ELIGIBILITY
A. Eligible Optionees. The individuals eligible to receive
------------------
automatic option grants pursuant to the provisions of this Article Three program
shall be limited to those individuals who are serving as non-employee Board
members on the Automatic Grant Program Effective Date or who are first elected
or appointed as non-employee Board members on or after such Effective Date,
whether through appointment by the Board or election by the Corporation's
shareholders. In no event, however, shall a non-employee Board member be
eligible to participate in the Automatic Option Grant Program if such individual
has at any time been in the prior employ of the Corporation (or any parent or
subsidiary corporation). Each non-employee Board member eligible to participate
in the Automatic Option Grant Program pursuant to the foregoing criteria shall
be designated an Eligible Director for purposes of the Plan.
B. Limitation. Except for the option grants to be made pursuant to
----------
the provisions of this Automatic Option Grant Program, Eligible Directors shall
not be eligible to receive any additional option grants or stock issuances under
- ---
this Plan or any other stock plan of the Corporation (or its parent or
subsidiaries).
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article
-----------
Three on the dates specified below:
1. Initial Grant. Each Eligible Director who is a non-employee Board
member on the Automatic Grant Program Effective Date and each Eligible Director
who is first elected or appointed as a non-employee Board member after such date
shall automatically be granted, on the Automatic Grant Program Effective Date or
on the date of such initial election or appointment (as the case may be), a Non-
Statutory Option to purchase 9,000 shares of Common Stock upon the terms and
conditions of this Article Three.
2. Annual Grant. On the date of each Annual Shareholders Meeting,
beginning with the 1995 Annual Meeting, each individual who is to continue to
serve as an Eligible Director shall automatically be granted, whether or not
such individual is standing for re-election as a Board member at that Annual
Meeting, a Non-Statutory Option to purchase an additional 900 shares of Common
Stock upon the terms and conditions of this Article Three, provided he or she
has served as a non-employee Board
16.
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member for at least six (6) months prior to the date of such Annual Meeting.
There shall be no limit on the number of such 900-share option grants any one
Eligible Director may receive over his or her period of Board service.
B. Exercise Price. The exercise price per share of Common Stock
--------------
subject to each automatic option grant made under this Article Three shall be
determined in accordance with the following provisions:
- For the automatic option grants made on the Automatic Grant
Program Effective Date, the exercise price per share of Common Stock shall
be equal to the price per share at which the Common Stock is sold in the
initial public offering of the Common Stock pursuant to the Underwriting
Agreement.
- For all other automatic option grants, the exercise price per
share of Common Stock shall be equal to one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the automatic grant date.
C. Payment.
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The exercise price shall be payable in one of the alternative
forms specified below:
(i) full payment in cash or check drawn to the Corporation's
order;
(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date (as such term is defined below);
(iii) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date and cash or check drawn to the
Corporation's order; or
(iv) full payment through a sale and remittance procedure
pursuant to which the Optionee shall provide irrevocable written
instructions to (I) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares and
(II) the
17.
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Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale transaction.
For purposes of this subparagraph C, the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure specified
above is used for the exercise of the option for vested shares, payment of the
exercise price for the purchased shares must accompany the exercise notice.
D. Option Term. Each automatic grant under this Article Three shall
-----------
have a maximum term of ten (10) years measured from the automatic grant date.
E. Exercisability. Each automatic grant shall become exercisable in
--------------
a series of four (4) equal and successive annual installments over the
Optionee's period of continued service as a Board member, with the first such
installment to become exercisable one (1) year after the automatic grant date.
The exercisability of each automatic grant outstanding under this Article Three
shall be accelerated as provided in Section II.G and Section III of this Article
Three.
F. Non-Transferability. During the lifetime of the Optionee, each
-------------------
automatic option grant shall be exercisable only by the Optionee and shall not
be assignable or transferable by the Optionee other than by will or by the laws
of descent and distribution following Optionee's death.
G. Effect of Termination of Board Membership.
-----------------------------------------
1. Should the Optionee cease to serve as a Board member for any
reason (other than death or Permanent Disability) while holding one or more
automatic option grants under this Article Three, then such individual shall
have a ninety (90)-day period following the date of such cessation of Board
membership in which to exercise each such option for any or all of the shares of
Common Stock for which that option is exercisable at the time of such cessation
of Board service. Each such option shall immediately terminate and cease to be
outstanding, at the time of such cessation of Board service, with respect to any
shares for which the option is not otherwise at that time exercisable.
2. Should the Optionee die within ninety (90) days after
cessation of Board service, then any automatic option grant held by the Optionee
at the time of death may subsequently be exercised, for any or all of the shares
of Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Board membership (less any option shares subsequently
purchased by the Optionee prior to death), by the personal representative of the
Optionee's estate or by the person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the laws of descent and
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<PAGE>
distribution. Any such exercise must occur within six (6) months after the date
of the Optionee's death.
3. Should the Optionee die or become Permanently Disabled while
serving as a Board member, then any automatic option grant held by such Optionee
under this Article Three shall accelerate in full, and the Optionee (or the
representative of the Optionee's estate or the person or persons to whom the
option is transferred upon the Optionee's death) shall have a six (6)-month
period following the date of the Optionee's cessation of Board membership in
which to exercise such option for any or all of the shares of Common Stock
subject to the option at the time of such cessation of Board membership.
4. In no event shall any automatic grant under this Article Three
remain exercisable after the expiration date of the ten (10)-year option term.
Upon the expiration of the applicable post-service exercise period under
subparagraph 1, 2 or 3 above or (if earlier) upon the expiration of the ten
(10)-year option term, the automatic grant shall terminate and cease to be
outstanding for any unexercised shares for which the option was otherwise
exercisable at the time of the Optionee's cessation of Board membership.
H. Shareholder Rights. The holder of an automatic option grant under
------------------
this Article Three shall have none of the rights of a shareholder with respect
to any RESTRICTIONS shares subject to such option until such individual shall
have exercised the option and paid the exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions of each
---------------
automatic option grant shall be as set forth in the form Director Automatic
Grant Agreement attached as Exhibit A.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each automatic option
grant at the time outstanding under this Article Three shall automatically
accelerate so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares. Immediately after the consummation of the Corporate
Transaction, all automatic option grants under this Article Three shall
terminate and cease to be outstanding.
B. In connection with any Change in Control, each automatic option
grant at the time outstanding under this Article Three shall automatically
accelerate so that each such option shall, immediately prior to the specified
effective date for the Change in Control, become fully exercisable with respect
to the total number of shares of Common Stock at the time subject to such option
and may be exercised for all or any portion of those shares as fully-vested
shares. Any option accelerated in connection with the Change in
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<PAGE>
Control shall remain fully exercisable until the expiration or sooner
termination of the option term.
C. The automatic option grants outstanding under this Article Three
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS
The provisions of this Automatic Option Grant Program, together with
the automatic option grants outstanding under this Article Three, may not be
amended at intervals more frequently than once every six (6) months, other than
to the extent necessary to comply with applicable Federal income tax laws and
regulations.
20.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares may be issued under the Stock Issuance Program through
direct and immediate purchases without any intervening stock option grants. The
issued shares shall be evidenced by a Stock Issuance Agreement ("Issuance
Agreement") that complies with the terms and conditions of this Article Four.
A. Consideration
-------------
1. Shares of Common Stock shall be issued under the Stock Issuance
Program for one or more of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or check drawn to the Corporation's order;
(ii) a promissory note payable to the Corporation's
order in one or more installments, which may be subject to cancellation in
whole or in part upon terms and conditions established by the Plan
Administrator; or
(iii) past services rendered to the Corporation or any
parent or subsidiary corporation.
2. Shares of Common Stock may, in the absolute discretion of the Plan
Administrator, be issued for consideration with a value less than one hundred
percent (100%) of the Fair Market Value of such shares at the time of issuance,
but in no event less than eighty-five percent (85%) of such Fair Market Value.
B. Vesting Provisions
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service. The elements of the vesting schedule
applicable to any unvested shares of Common Stock issued under the Stock
Issuance Program, namely:
21.
<PAGE>
(i) the Service period to be completed by the Participant or
the performance objectives to be achieved by the Corporation,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Issuance
Agreement executed by the Corporation and the Participant at the time such
unvested shares are issued.
2. The Participant shall have full shareholder rights with respect to
any shares of Common Stock issued to him or her under the Plan, whether or not
his or her interest in those shares is vested. Accordingly, the Participant
shall have the right to vote such shares and to receive any regular cash
dividends paid on such shares. Any new, additional or different shares of stock
or other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to his or her
unvested shares by reason of any stock dividend, stock split, reclassification
of Common Stock or other similar change in the Corporation's capital structure
or by reason of any Corporate Transaction shall be issued, subject to (i) the
same vesting requirements applicable to his or her unvested shares and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.
3. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock under the Plan, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money promissory note), the Corporation shall repay to
the Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
4. The Plan Administrator may in its discretion elect to waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the non-
completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant's interest in the shares of
Common Stock as to which the waiver applies.
22.
<PAGE>
Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service.
II. CORPORATE TRANSACTIONS/CHANGE IN CONTROL
A. Upon the occurrence of any Corporate Transaction, all unvested
shares of Common Stock at the time outstanding under the Stock Issuance Program
shall immediately vest in full, except to the extent the Plan Administrator
imposes limitations in the Issuance Agreement which preclude such accelerated
vesting in whole or in part.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the shares are issued under the Stock Issuance
Program or at any time while the issued shares remain unvested, to provide for
the immediate and automatic vesting of one or more of those shares at the time
of a Change in Control. The Plan Administrator shall also have full power and
authority to condition any such accelerated vesting upon the subsequent
termination of the Participant's Service within a specified period following the
Change in Control.
III. TRANSFER RESTRICTIONS/SHARE ESCROW
A. Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing such unvested shares. To the extent an
escrow arrangement is utilized, the unvested shares and any securities or other
assets issued with respect to such shares (other than regular cash dividends)
shall be delivered in escrow to the Corporation to be held until the
Participant's interest in such shares (or other securities or assets) vests.
Alternatively, if the unvested shares are issued directly to the Participant,
the restrictive legend on the certificates for such shares shall read
substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND ARE
ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER AND (II) CANCELLATION OR
REPURCHASE IN THE EVENT THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN
INTEREST) CEASES TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER
RESTRICTIONS AND THE TERMS AND CONDITIONS OF SUCH CANCELLATION OR
REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST)
DATED ________________, 199__, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION."
23.
<PAGE>
B. The Participant shall have no right to transfer any unvested
shares of Common Stock issued to him or her under the Stock Issuance Program.
For purposes of this restriction, the term "transfer" shall include (without
limitation) any sale, pledge, assignment, encumbrance, gift, or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled, and
neither the Participant nor the proposed transferee shall have any rights with
respect to those shares. However, the Participant shall have the right to make
a gift of unvested shares acquired under the Stock Issuance Program to his or
her spouse or issue, including adopted children, or to a trust established for
such spouse or issue, provided the donee of such shares delivers to the
Corporation a written agreement to be bound by all the provisions of the Stock
Issuance Program and the Issuance Agreement applicable to the gifted shares.
24.
<PAGE>
ARTICLE FIVE
MISCELLANEOUS
-------------
I. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may, in its discretion, assist any Optionee
or Participant (including an Optionee or Participant who is an officer of the
Corporation) in the exercise of one or more options granted to such Optionee
under the Discretionary Option Grant Program or the purchase of one or more
shares issued to such Participant under the Stock Issuance Program, including
the satisfaction of any Federal and state income and employment tax obligations
arising therefrom, by (i) authorizing the extension of a loan from the
Corporation to such Optionee or Participant or (ii) permitting the Optionee or
Participant to pay the option price or purchase price for the purchased Common
Stock in installments over a period of years. The terms of any loan or
installment method of payment (including the interest rate and terms of
repayment) shall be upon such terms as the Plan Administrator specifies in the
applicable option or issuance agreement or otherwise deems appropriate under the
circumstances. Loans or installment payments may be authorized with or without
security or collateral. However, any loan made to a consultant or other non-
employee advisor must be secured by property other than the purchased shares of
Common Stock. In all events, the maximum credit available to the Optionee or
Participant may not exceed the option or purchase price of the acquired shares
plus any Federal and state income and employment tax liability incurred by the
Optionee or Participant in connection with the acquisition of such shares.
B. The Plan Administrator may, in its absolute discretion, determine
that one or more loans extended under this financial assistance program shall be
subject to forgiveness by the Corporation in whole or in part upon such terms
and conditions as the Plan Administrator may deem appropriate.
II. AMENDMENT OF THE PLAN AND AWARDS
A. The Board has complete and exclusive power and authority to amend
or modify the Plan (or any component thereof) in any or all respects whatsoever.
However, (i) no such amendment or modification shall adversely affect rights and
obligations with respect to options at the time outstanding under the Plan, nor
adversely affect the rights of any Participant with respect to Common Stock
issued under the Stock Issuance Program prior to such action, unless the
Optionee or Participant consents to such amendment, and (ii) any amendment made
to the Automatic Option Grant Program (or any options outstanding thereunder)
shall be in compliance with the limitation of Section IV of Article Three. In
addition, the Board may not, without the approval of the Corporation's
shareholders, amend the Plan to (i) materially increase the maximum number of
shares
25.
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issuable under the Plan, the number of shares for which options may be granted
under the Automatic Option Grant Program, or the maximum number of shares for
which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances per calendar year, except for
permissible adjustments under Section VI.C. of Article One, (ii) materially
modify the eligibility requirements for Plan participation or (iii) materially
increase the benefits accruing to Plan participants.
B. (i) Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and (ii) shares of Common Stock may
be issued under the Stock Issuance Program, which are in both instances in
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under the Discretionary Option Grant
Program or the Stock Issuance Program are held in escrow until shareholder
approval is obtained for a sufficient increase in the number of shares available
for issuance under the Plan. If such shareholder approval is not obtained
within twelve (12) months after the date the first such excess option grants or
excess share issuances are made, then (I) any unexercised excess options shall
terminate and cease to be exercisable and (II) the Corporation shall promptly
refund the purchase price paid for any excess shares actually issued under the
Plan and held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow.
III. TAX WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of stock options for such shares or the vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income tax and employment tax withholding requirements.
The Plan Administrator may, in its discretion and in accordance with
the provisions of this Section III of Article Five and such supplemental rules
as the Plan Administrator may from time to time adopt (including the applicable
safe-harbor provisions of Rule 16b-3 of the Securities and Exchange Commission),
provide any or all holders of non-statutory options (other than the automatic
grants made pursuant to Article Three of the Plan) or unvested shares under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Federal, state and local income and employment tax liabilities incurred
by such holders in connection with the exercise of their options or the vesting
of their shares (the "Taxes"). Such right may be provided to any such holder in
either or both of the following formats:
(i) Stock Withholding: The holder of the non-statutory
-----------------
option or unvested shares may be provided with the election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such non-statutory option or the vesting of such
shares, a portion of those shares with an aggregate Fair Market Value
equal
26.
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to the percentage of the applicable Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
(ii) Stock Delivery: The Plan Administrator may, in its
--------------
discretion, provide the holder of the non-statutory option or the unvested
shares with the election to deliver to the Corporation, at the time the
non-statutory option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in
connection with the option exercise or share vesting triggering the Taxes)
with an aggregate Fair Market Value equal to the percentage of the Taxes
incurred in connection with such option exercise or share vesting (not to
exceed one hundred percent (100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF PLAN
A. Provided this Plan is approved by the Corporation's shareholders
on or before the Plan Effective Date, this Plan shall, as successor to the
Predecessor Plan, become effective as of such Effective Date, and no further
option grants or stock issuances shall be made under the Predecessor Plan from
and after the Plan Effective Date.
B. Each stock option grant outstanding under the Predecessor Plan
immediately prior to the Plan Effective Date shall be incorporated into this
Plan and treated as an outstanding option under this Plan, but each such option
shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant, and nothing in this Plan shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to their acquisition of shares of Common Stock thereunder.
Each unvested share of Common Stock outstanding under the Predecessor Plan on
the Plan Effective Date shall continue to be governed solely by the terms and
conditions of the instrument evidencing such share issuance, and nothing in this
Plan shall be deemed to affect or otherwise modify the rights or obligations of
the holder of such unvested shares.
C. The option/vesting acceleration provisions of Section III of
Article Two and Section II of Article Four relating to Corporate Transactions
and Changes in Control may, in the Plan Administrator's discretion, be extended
to one or more stock options or unvested share issuances which are outstanding
under the Predecessor Plan on the Plan Effective Date but which do not otherwise
provide for such acceleration.
D. The Plan was amended by the Board on June 5, 1995 to increase the
number of shares of Common Stock authorized for issuance under the Plan by an
additional 110,000 shares, and the Plan was further amended by the Board on
February 29, 1996 to (i) increase the number of shares of Common Stock
authorized for issuance under the Plan by an additional 190,000 shares and (ii)
establish a 500,000-share limit on the aggregate number of shares of Common
Stock for which any one participant may be issued stock options and direct stock
issuances over the remaining term of the Plan. Each of the amendments is
27.
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subject to shareholder approval at the 1996 Annual Shareholders Meeting, and no
option granted on the basis of the share increases authorized by those
amendments shall become exercisable in whole or in part unless and until such
shareholder approval is obtained. If such shareholder approval is not obtained
at the 1996 Annual Meeting, then all options granted on the basis of those share
increases shall immediately terminate without ever becoming exercisable for the
non-approved shares, and no further option grants shall be made on the basis of
those increases. However, the Plan shall continue in effect until the reserve
of Common Stock under the Plan as last approved by the Corporation's
shareholders shall have been issued.
E. The Plan shall terminate upon the earlier of (i) December 8, 2003
-------
or (ii) the date on which all shares available for issuance under the Plan shall
have been issued pursuant to the exercise of the options granted under the Plan
or the issuance of shares (whether vested or unvested) under the Stock Issuance
Program. If the date of termination is determined under clause (i) above, then
all option grants and unvested share issuances outstanding on such date shall
thereafter continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants or issuances.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to option grants or share issuances under the Plan shall be used for
general corporate purposes
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under
the Plan, the issuance of any shares under the Stock Issuance Program, and the
issuance of Common Stock upon the exercise or surrender of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any securities exchange on which stock of the same class is then listed.
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VII. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the Plan, nor
any action taken by the Plan Administrator hereunder, nor any provision of the
Plan shall be construed so as to grant any individual the right to remain in the
employ or service of the Corporation (or any parent or subsidiary corporation)
for any period of specific duration, and the Corporation (or any parent or
subsidiary corporation retaining the services of such individual) may terminate
such individual's employment or service at any time and for any reason, with or
without cause.
VIII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionee or
Participant.
B. The provisions of the Plan relating to the exercise of options and
the vesting of shares shall be governed by the laws of the State of California,
as such laws are applied to contracts entered into and performed in such State.
C. The provisions of the Plan shall inure to the benefit of, and be
binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Participants and Optionees, the
legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.
29.
<PAGE>
Exhibit 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 610,000 $(1,833,000) $ 1,175,000 $(2,393,000)
------------ ------------ ------------ ------------
Weighted average shares outstanding:
Common stock and common stock equivalents 5,746,000 4,660,000 5,327,000 4,660,000
------------ ------------ ------------ -----------
Net income (loss) per common share $ 0.11 $ (0.39) $ 0.22 $ (0.51)
============ ============ ============ ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AS OF 6/30/96 AND STATEMENTS OF OPERATIONS CASH FLOW AND SHAREHOLDERS
EQUITY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,205
<SECURITIES> 0
<RECEIVABLES> 8,783
<ALLOWANCES> 0
<INVENTORY> 7,266
<CURRENT-ASSETS> 27,090
<PP&E> 21,711
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,987
<CURRENT-LIABILITIES> 25,077
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 56,987
<SALES> 33,575
<TOTAL-REVENUES> 33,575
<CGS> 27,426
<TOTAL-COSTS> 31,686
<OTHER-EXPENSES> 117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,084
<INCOME-PRETAX> 1,222
<INCOME-TAX> 47
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
