<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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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 Identification No.)
incorporation or organization)
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 CORPORATE ISSUERS:
At SEPTEMBER 30, 1996, there were outstanding 5,684,497 shares of the
------------------ ---------
Registrant's Common Stock, no par value per share.
<PAGE>
<TABLE>
<CAPTION>
Index Page No.
- -------- --------
<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................. 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................... 27
Item 2. Changes in Securities............................... 27
Item 3. Defaults Upon Senior Securities..................... 27
Item 4. Submission of Matters to a Vote of Security Holders. 27
Item 5. Other Information................................... 27
Item 6. Exhibits and Reports on Form 8-K.................... 28
SIGNATURES....................................................... 29
EXHIBIT INDEX.................................................... 30
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 2,559,000 $ 2,923,000
Accounts receivable, net 4,491,000 6,815,000
Inventories 8,021,000 7,158,000
Other current assets 6,132,000 3,659,000
------------ ------------
Total current assets 21,203,000 20,555,000
Property, plant and equipment, net 24,162,000 16,943,000
Deferred facility start-up costs 6,185,000 1,920,000
Other non-current assets 3,156,000 3,009,000
------------ ------------
$ 54,706,000 $ 42,427,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings, due on demand $ 9,073,000 $ 9,245,000
Accounts payable 6,564,000 7,767,000
Accrued liabilities 4,575,000 4,538,000
Deferred revenue 753,000 572,000
Current portion of long-term debt (Note 8) 20,123,000 3,316,000
------------ ------------
Total current liabilities 41,088,000 25,438,000
Long-term debt 3,755,000 9,573,000
Subsequent events, commitments and contingencies
(Notes 6, 7 and 8)
Total shareholders' equity 9,863,000 7,416,000
------------ ------------
$ 54,706,000 $ 42,427,000
============ ============
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales:
Product sales $ 11,247,000 $ 15,779,000 $ 44,005,000 $ 41,659,000
Other sales 711,000 - 1,527,000 -
------------- ------------- --------------- -------------
11,958,000 15,779,000 45,532,000 41,659,000
Cost of goods sold:
Product sales 9,765,000 12,097,000 36,462,000 34,283,000
Other sales 597,000 - 1,326,000 -
------------- ------------- --------------- -------------
10,362,000 12,097,000 37,788,000 34,283,000
------------- ------------- --------------- -------------
Gross profit 1,596,000 3,682,000 7,744,000 7,376,000
Selling, general and administrative 1,378,000 1,636,000 4,352,000 5,013,000
Engineering and product development 725,000 644,000 2,010,000 1,695,000
Provision for revaluation of subsidiary
and other related assets - - - 1,000,000
------------- ------------- --------------- -------------
Income (loss) from operations (507,000) 1,402,000 1,382,000 (332,000)
Other income (expense):
Foreign exchange gain (loss) 80,000 (576,000) 380,000 (1,171,000)
Interest (expense), net (643,000) (399,000) (1,728,000) (855,000)
Other income, net 348,000 30,000 466,000 422,000
------------- ------------- --------------- -------------
Income (loss) before
provision for income taxes (722,000) 457,000 500,000 (1,936,000)
Provision for income taxes - - 47,000 -
------------- ------------- --------------- -------------
Net income (loss) $ (722,000) $ 457,000 $ 453,000 $ (1,936,000)
============= ============= =============== =============
Net income (loss) per common share $ (0.13) $ 0.10 $ 0.08 $ (0.42)
============= ============= =============== =============
Weighted average shares used
in per share calculation 5,622,000 4,770,000 5,493,000 4,660,000
============= ============= =============== =============
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 453,000 $ (1,936,000)
Adjustments to reconcile net income (loss) to net cash (used) by
operating activities:
Depreciation and amortization 2,035,000 1,806,000
Provision for revaluation of subsidiary and other related assets - 1,000,000
Unrealized loss on borrowings denominated in foreign currency - 327,000
Gain on sale of fixed asssets (284,000) -
Realized (gain) on forward foreign currency contracts (318,000) (165,000)
Changes in assets and liabilities:
Accounts receivable 2,644,000 (265,000)
Inventories (867,000) (365,000)
Other current assets (2,473,000) (1,183,000)
Deferred facility start-up costs and other non-current assets (4,365,000) (231,000)
Accounts payable, accrued liabilities and deferred revenue (1,028,000) 1,397,000
------------ ------------
Net cash provided (used) by operating activities (4,203,000) 385,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (9,290,000) (5,831,000)
Increase in net assets held for sale, net of related borrowings of
$2,888,000 - (2,069,000)
Advances under notes receivable - (30,000)
Realized gain from forward foreign currency contracts 318,000 165,000
------------ ------------
Net cash (used) by investing activities (8,972,000) (7,765,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facilities 39,037,000 27,102,000
Repayments under line of credit facilities (39,209,000) (26,138,000)
Borrowings under long-term debt 12,058,000 7,575,000
Principal payments on long-term debt (1,069,000) (712,000)
Issuance of common stock 1,994,000 -
------------ ------------
Net cash provided by financing activities 12,811,000 7,827,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (364,000) 447,000
CASH AT BEGINNING OF PERIOD 2,923,000 1,346,000
------------ ------------
CASH AT END OF PERIOD $ 2,559,000 $ 1,793,000
============ ============
</TABLE>
5
<PAGE>
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 963,409 1,911,000 1,911,000
Stock options exercised 60,995 83,000 83,000
Net income 453,000 453,000
--------- ------------ ------------- -----------
Balance at September 30, 1996 5,684,497 $ 36,320,000 $ (26,457,000) $ 9,863,000
========= ============ ============= ===========
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Quarterly Financial Statements
The accompanying condensed consolidated financial statements and related
notes at and for the three and nine month periods ended September 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
nine month periods ended September 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
Financial 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>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
Raw materials $3,858,000 $3,304,000
Work in progress 1,601,000 1,641,000
Finished goods 2,562,000 2,213,000
------------- -------------
$8,021,000 $7,158,000
============= =============
</TABLE>
3. EFFECTS OF INCOME TAXES
For the nine month period ended September 30, 1996, the Company recorded
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 nine 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 California franchise tax liability for 1996.
Recent financing transactions may have caused a limitation on the utilization
of its net operating losses under Internal Revenue Code Section 382. The
Company believes that the current period impact of such possible net
operating loss limitation would not have a material adverse effect on the
Company's financial condition or cash flows. 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 from the assumed
exercise of stock options (using the treasury stock method). When dilutive,
the computation of 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), and the impact of the differences
between average and ending market prices on the calculation of treasury stock
for the assumed conversion of stock
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
options. Fully diluted net income (loss) per share has not been presented as
it is not materially different from primary net income (loss) per share.
Further dilutive transactions may occur pursuant to the transaction noted in
Note 6 below.
At the Company's Special Meeting of Shareholders 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
$2.0 million 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 calender year during 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 is
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.
As discussed in Note 8 below, the Company's MPS Subsidiary is in default on
one of its debt obligations. As a result of cross default provisions, MPM's
Debenture to Transpac is also in default. Under the terms of the Debenture,
Transpac is permitted to increase the interest rate charged from 8.5% to
9.0%. As of November 18, 1996, the Company has not been notified by Transpac
of their intent to charge the increased interest rate, nor has any demand for
accelerated payment been made.
6. OTHER FINANCING TRANSACTIONS AND SUBSEQUENT EVENTS
In October 1996, the Company issued $2.8 million in 8% convertible debentures
to a group of offshore investors (collectively "Purchasers"). Accrued and
unpaid interest on the debentures is due and payable in cash in quarterly
installments on the first day of each fiscal quarter of the Company during
the one-year term of the debentures. The outstanding principal under the
debentures will be due and payable in full at the end of the one-year term;
however, subject to certain limitations set forth below, from and after 45
days from October 23, 1996, the outstanding principal under the debentures
may be converted at each Purchaser's option into shares of the Company's
Common Stock. The number of shares of the Company's Common Stock issuable to
the Purchasers upon such conversion will be the amount of principal
outstanding divided by the lesser of 80% of the average of the closing bid
price of the Company's Common Stock as reported by Nasdaq National Market for
the three consecutive trading days immediately preceding the date of
conversion or 110% of the closing bid price of the Company's Common Stock as
reported by Nasdaq National Market on October 23, 1996. MPI also issued a
warrant (the "Warrant") to one of the Purchasers to purchase 75,421 shares of
the Company's Common Stock. The exercise price of the Warrant is the lesser
of the average price at which the debentures are converted into the Company's
Common Stock, or 110% of the closing bid price of the Company's Common Stock
as reported by Nasdaq National Market on October 23, 1996. The Warrant is
exercisable commencing 45 days after October 23, 1996, and remains
exercisable until October 23, 1997. The Debentures may not be converted into
shares of Common Stock if such conversion would result in the issuance by the
Company of more than 19.9% of the Company's outstanding Common Stock as of
October 23, 1996, including shares issued or issuable upon exercise of the
Warrant (whether such Warrant has been exercised or not). The Company is
required to redeem all outstanding principal amounts under the debentures
that cannot be converted (because such conversion would result in the
issuance or potential issuance of shares of Common Stock exceeding the 19.9%
limit) at 120% of such outstanding principal amount. In addition, the Company
paid one of the Purchasers $322,000 as a placement fee. Under current
Securities and Exchange Commission ("SEC") regulations, such shares of the
Company's Common Stock may be offered and sold in
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
the United States trading markets, at the earliest, 40 days after the
issuance of the debentures and the Warrant. For further information on this
recent financing transaction, interested parties are encouraged to review the
Company's Current Report on Form 8-K filed with the SEC on October 28, 1996.
During the first quarter of 1996, the Company's MPS subsidiary borrowed $1.0
million under a credit facility bearing interest at 7%. During the first nine
months of 1996, the Company's MPM subsidiary borrowed $2.3 million under a
leasing arrangement bearing interest at rates ranging from 4% to 6%. 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%), which was drawn upon by MPS on October 7,
1996.
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
has not been 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 Company's limited
investigation to date, the Company does not currently 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 currently 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 settlement required the
Company to contribute $525,000, with the remainder paid by the Company's
insurance carrier. Final approval was received in May 1996 by the U.S.
District Court for the Southern District of California. The Company provided
for the full cost of the settlement of such litigation during 1995.
9
<PAGE>
The Company is involved in various claims arising in the ordinary course of
business; none of these claims, in the current 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.
8. EVENTS OF DEFAULT
As of September 30, 1996, the Company's MPS subsidiary was not in compliance
with certain financial covenants of its "Line of credit borrowings" with DBS.
In addition, most of the debt obligations of the Company and its subsidiaries
have provisions which cause, or may cause, those debt instruments to be in
default if the Company or its subsidiaries are in default on any other loans
("cross default" provisions). The Company and its MPS subsidiary are
attempting to renegotiate the covenants of the Line of credit, however, as of
November 18, 1996, the Company and its MPS subsidiary have been unable to
obtain a waiver of compliance. As a result, the balance of the debt
obligations which are in default, including those with cross default
provisions, have been included in "Current portion of long-term debt" on the
Condensed Consolidated Balance Sheets as of September 30, 1996.
Many of these debt obligations permit the lenders to increase their interest
rates up to 3% over their existing rates, or even higher rates may be
charged, as may be determined by certain lenders.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
- ---------
Net sales were $12.0 million for the third quarter and $45.5 million for the
first nine months of 1996, representing a decrease of $3.8 million or 24.2% for
the quarter and an increase of $3.9 million or 9.3% for the first nine months of
1996 when compared to the similar periods in 1995. The decrease in product sales
during the third quarter is primarily attributable to a $3.8 million decrease in
revenues from sales of pressed ceramics products at the Company's
Microelectronic Packaging (S) Pte. Ltd. ("MPS") subsidiary. Beginning in July,
1996, the Company began to experience the impact of an industry-wide decline in
the demand for pressed ceramics products. Also in 1996, due to a component
shortage, sales of multichip modules ("MCM's") production to a significant
customer of CTM Electronics, Inc. ("CTM") were significantly lower than
anticipated during the current quarter. These primary factors have lead to the
decrease in net sales from the third quarter of 1995 to the third quarter of
1996.
The increase in product sales during the first nine months of 1996 over 1995 is
primarily attributable to an increase in revenues from the sales of MCM products
at CTM ($5.1 million) which was offset in part by reductions in sales of pressed
ceramics products at MPA and MPS ($2.3 million and $1.7 million, respectively).
The increase in sales of MCM's is primarily due to an increase in the number of
units sold during the first and second quarters of 1996.
Net sales for the third quarter and for the first nine months of 1996 includes
$711,000 and $1,527,000, 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 $10.4 million for the third quarter of 1996, which
represents a decrease of $1.7 million or 14.4% from the third quarter of 1995.
In comparison, the reduction in product sales for the corresponding period was
approximately 24%, as noted above. The result is a 10% decrease in the gross
margin on product sales for such quarter. The reduction in sales has been
sufficiently large such that the Company has been unable to adequately absorb
the significant fixed overhead costs at its facilities.
Cost of goods sold were $37.8 million for the first nine months of 1996, which
represents an increase of $3.5 million or 10.2% from the corresponding period of
1995. In comparison, sales increased by approximately 9% for the nine months
ended September 30, 1996 from the same period in 1995. The result is a 0.7%
decrease in the gross margin on product sales for the first nine months of 1996
over 1995.
Cost of goods sold for the third quarter and for the first nine months of 1996
includes $597,000 and $1,326,000, respectively, of expenses incurred in
connection with the equipment and technology transfer agreement with a
government factory in Yixing, China. Such expenses have been included in "Other
Sales" under "Cost of Goods Sold" in the Condensed Consolidated Statement of
Operations.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
Selling, general and administrative expenses were $1.4 million for the third
quarter and $4.4 million for the first nine months of 1996, representing
decreases of $258,000 or 15.8% and $661,000 or 13.2%, respectively, from the
comparable periods of 1995. These decreases are primarily due from non-recurring
settlement expenses incurred in 1995. The Company currently anticipates that
selling, general and administrative expenses may increase in absolute dollars
during the fourth quarter of 1996.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ENGINEERING AND PRODUCT DEVELOPMENT
- -----------------------------------
Engineering and product development expenses were $725,000 for the third quarter
and $2,010,000 for the first nine months of 1996, representing increases of
$81,000 or 12.6% and $315,000 or 18.6%, 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 $80,000 for the third quarter and
$380,000 for the first nine months of 1996, as compared to net foreign exchange
losses of $576,000 and $1,171,000, respectively, for the comparable periods of
1995. The appreciation of the value of the US dollar relative to the Japanese
yen during the first nine months 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
DBS, the Company has entered into forward foreign currency contracts to hedge
foreign currency transactions such as purchases of raw materials denominated in
Japanese yen. 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. The terms of 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$30.0 million
(US$21.3 million at September 30, 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. An additional factor which
restricts the Company's hedging activities is the available borrowing capacity
of the foreign exchange line of credit. 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
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 $643,000 for the third quarter and $1,728,000 for the first
nine months of 1996, representing increases of $244,000 or 61.2% and $873,000 or
102.1%, respectively, over the comparable periods of 1995. Such increases are
primarily due to additional borrowings by the Company under its borrowing
arrangements with DBS and the Debentures issued as part of the Transpac
Financing (see "Liquidity and Capital Resources"). The Company anticipates that
interest expense will increase in the fourth quarter as a result of the
additional equipment financing incurred in the third quarter and from the
issuance of the $2.8 million in 8% convertible debentures in October 1996 (see
Note 6 of Notes to Condensed Consolidated Financial Statements).
As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements,
the Company and its subsidiaries are in default on most of their debt
obligations. Many of these debt obligations permit the lenders to increase their
interest rates up to 3% over their existing rates, or even higher rates may be
charged, as may be determined by certain lenders. As of November 18, 1996, the
Company and its subsidiaries have not been notified by any of their lenders of
their intent to charge the increased interest rates, however, the Company and
its subsidiaries could be required to pay the increased interest rates from the
date of default until the default is cured.
OTHER INCOME (EXPENSE)
- ----------------------
Other income was $348,000 for the third quarter and $466,000 for the first nine
months of 1996, as compared to $30,000 and $422,000, respectively, for the
comparable periods of 1995. Included in the third quarter of 1996 is the gain on
the sale of substantially all of the assets of the Company's MPA subsidiary of
$284,000. The results of operations and the total assets of MPA are not material
when compared to the consolidated results of operations and total assets of MPI.
The majority of other income arising in 1995 reflects the receipt during the
third 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 nine month period ended September 30, 1996, the Company recorded 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
nine 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 California
franchise tax liability for 1996.
Recent financing transactions may have caused a limitation on the utilization of
its net operating losses under Internal Revenue Code Section 382. The Company
believes that the current period impact of such possible net operating loss
limitation would not have a material adverse effect on the Company's financial
condition or cash flows. 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 first nine months 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 of Notes to Condensed
Consolidated Financial Statements, the Company consummated an equity financing
of $2.0 million with Transpac and the Company's MPM subsidiary raised an
additional $9.0 million through the issuance of the Debentures to Transpac in
March 1996. The Company's principal sources of liquidity as of September 30,
1996 consisted of $2.6 million of cash and a very limited available borrowing
capacity with DBS. The $9.0 million raised by MPM has been fully-utilized. As of
November 18, 1996, there is approximately $1.3 million of available working
capital remaining from the $2.8 million of 8% convertible debentures sold in
October 1996.
MPS, the Company's principal operating subsidiary, has a S$9.5 million (US$6.7
million) 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.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Borrowings under the working capital line and the overdraft facility bear
interest at the Singapore prime rate plus 1/2% and 3/4%, respectively. At
September 30, 1996, MPS had outstanding borrowings under this arrangement of
US$5.7 million. In addition, MPS had loans from, or guaranteed by, customers
totaling $9.5 million.
MPC has a S$500,000 (US$355,000 at September 30, 1996) 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 3/4% respectively. At September 30, 1996, MPC
had outstanding borrowings under this arrangement of $138,000.
MPM has a $3.5 million 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 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 Company's technology transfer
agreement with IBM. At September 30, 1996, MPM had outstanding borrowings under
this arrangement of $3.2 million.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earnings levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt. The MPC and MPM agreements also contain
certain restrictive provisions. As of September 30, 1996, MPS was not in
compliance with certain financial covenants of its borrowing agreement with DBS.
As a result of the cross default provisions (see Note 8 of Notes to Condensed
Consolidated Financial Statements), the borrowing agreements between DBS and MPC
and MPM may be considered to be in default. These borrowing agreements permit
DBS to charge an increased rate of interest (the "default interest rate"), which
is equal to the interest rate stated above plus 3%, or such other rate as may be
determined by DBS, while the borrowing agreements are in default. The Company is
attempting to renegotiate the covenants of the borrowing agreement between MPS
and DBS. As of November 18, 1996, the Company has been unable to obtain a waiver
of compliance from DBS, however, DBS has not requested that the balances be
paid, has not indicated its intent to charge the default interest rate on any of
these loans, and has continued to permit MPS, MPC and MPM to utilize the credit
facilities within the previously established limits. Since the original terms of
these borrowing agreements call for the balances to be due on demand, the
Company continues to report the balances due as current liabilities on the
Condensed Consolidated Balance Sheet as of September 30, 1996. The Company
anticipates that the industry-wide depressed market for pressed-ceramics will
continue into the fourth quarter and may extend into 1997. Should this softening
market continue, the Company will continue to have difficulty in meeting its
covenants with DBS. The Company is in regular communication with DBS, providing
DBS with data on the Company and the industry. No assurances can be made that
the Company will receive a waiver of compliance with these covenants. Failure to
receive these waivers would materially adversely affect the Company's results of
operations, financial position and prospects for raising additional capital.
At September 30, 1996, the Company also had borrowings of $9.0 million under the
Transpac Debenture discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, $10.8 million under notes payable to various customers
bearing interest at rates ranging from 7.0% to 14.0%, $1.3 million under
mortgage notes bearing interest at a rate of 7.5%, $0.1 million under term loans
bearing interest at 11.8%, and $2.4 million 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.
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 $0.3 million at September 30, 1996. In October 1996, the Company issued $2.8
million in 8% convertible debentures (see Note 6 - Other Financing
Transactions). The Transpac Debenture, mortgage notes, and two of the customer
loans contain cross default provisions, which, based on the default discussed in
Note 8 of Notes to Condensed Consolidated Financial Statements, cause these
obligations to be in default. In the event of default, interest on the Transpac
Debenture may increase from 8.5% to 9% per annum and interest on the mortgage
notes increases by 3% over the stated rates. As of November 18, 1996, no demand
for acceleration of the principal has been made on any of these loans. As a
result, the Company and its subsidiaries have reported the balances of the debt
obligations with cross default provisions as "Current portion of long-term debt"
on the Condensed Consolidated Balance Sheets as of September 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 $20.3 million. During the same period, the Company also paid an
additional $2.0 million of up-front non-refundable royalties to IBM. These
expenditures, which have been partially funded through bank, equity, debt 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 became terminable by either party
without cause upon nine months prior written notice. The Company is currently in
the process of renegotiating with IBM certain restrictive covenants of the
original IBM 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 obtain the necessary financing or achieve such
milestones on a timely basis, or at all. Furthermore, there can be no assurance
that IBM will not terminate the IBM Agreement for failure to meet the production
milestones. 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 IBM Agreement. If IBM terminates the IBM Agreement,
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 funding of $10 to $20
million which would permit MPM to attain the production milestones discussed
above. Also, the Company is renegotiating borrowing terms with certain of its
customers which, if successful, would extend principal payment terms beyond
their current term. No legally binding commitments or arrangements for such
financing exists as of September 30, 1996, and there can be no assurance that
any additional financing will be available to the Company on acceptable terms,
or at all, or that the Company will be successful in renegotiating with
customers to extend payment terms. The default discussed above and in Note 8 of
Notes to Condensed Consolidated Financial Statements will make it more difficult
for the Company to obtain additional financing and to renegotiate the customer
loans.
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 manufacturing facilities, commitments to third parties to
develop, manufacture, license and sell products, the Company's operating results
and the status of competitive products. Approximately $10 to $20 million of
outside debt or equity financing will be required for the Company's major
projects and obligations associated with MPM.
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Also, if the Company is not successful in its efforts to extend principal
payment arrangements with certain of its customers, further financing will be
required. Other than these two requirements, the Company anticipates that cash
on hand and anticipated cash flow from operations will be adequate to fund its
operations, in the ordinary course through the twelve months subsequent to
September 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'
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.
In addition, the default discussed above and in Note 8 of Notes to Condensed
Consolidated Financial Statements will make it more difficult for the Company to
obtain additional financing.
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 $2.9 million
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' 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
facilities at MPC and MPM, customer loan agreements and the Transpac agreements
also contain similar
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
restrictions. The Company's high level of outstanding indebtedness and the
numerous restrictive covenants set forth in the agreements covering its
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, respectively. The
Company is in the process of seeking additional financing, but as of September
30, 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, which
funded in October 1996, and the issuance of $2.8 million in 8% convertible
debentures, which funded in October 1996, each of such financings are discussed
in Note 6 of Notes to Condensed Consolidated Financial Statements. 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 significant
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' 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 arrangements 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, shortage of components, 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,
and customers' ability to achieve sales of their own products, 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 significant 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, as the Company
experienced in its third quarter 1996 operating results. Accordingly, there can
be no assurance that the Company will not 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
17
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
operations. The Company anticipates that net sales and net income, if any, to be
reported in the fourth quarter of 1996 will be below the reported amounts for
the fourth quarter of 1995.
REPAYMENT OF BANK OBLIGATIONS BY MPM; NEED FOR ADDITIONAL FINANCING BY MPM. As
of September 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 $9.0
million 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 will 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 has received in October 1996 additional
funding which will permit MPM to commence limited production of partially-
processed revenue-producing units in the fourth quarter of 1996. The existence
and conversion of the debentures and the existence and exercise of the warrant
(issued in October 1996) into shares of the Company's Common Stock will
significantly dilute any earnings per share amounts and significantly dilute the
ownership interests of MPI's shareholders. However, an additional $10 to $20
million of funding will be required by MPM to cover the required expenditures
and start up operating expenses associated with equipping the facility so that
it may commence full production of fully-processed revenue-producing units by
the middle of 1997. The default discussed above and in Note 8 of Notes to
Condensed Consolidated Financial Statements will make it more difficult for the
Company to obtain additional financing. Neither MPI nor any of its subsidiaries
is currently able to generate such funds from its respective operations.
Therefore, when additional funds are needed, the Company would be required to
undertake another offering of 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. Failure to obtain such additional
funds would have a material adverse effect on MPM's operations and, therefore,
on the business' financial condition and results of operations of the Company.
Furthermore, the Company has been unable to achieve the production milestones
under the IBM Agreement, which gives 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 September 30, 1996, MPS had
outstanding borrowings of approximately $7.0 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
$2.1 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' 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
18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Agreements. Upon such a termination by IBM or Carborundum, the Company would
lose the rights to the technology that it has licensed from each of such
entities, as applicable. The Company's loss of either of these rights would
preclude the Company from manufacturing and selling products based on such
technologies and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. The acquisition of the
Subsidiary Voting Rights by Motorola would also constitute a default under the
IBM Option Agreement, thereby triggering IBM's right to purchase up to 51% of
the then outstanding shares of 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 September 30, 1996, the Company and its subsidiaries had
approximately $33.0 million in debt obligations while shareholders' equity
totaled approximately $9.9 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, 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. Outside
debt or equity financing will be required for the Company's major projects and
obligations associated with MPM. Also, if the Company is not successful in its
efforts to extend principal payment arrangements with certain of its customers,
further financing will be required immediately. Other than these two
requirements, the Company currently anticipates that cash on hand and
anticipated cash flow from operations will be adequate to fund its operations in
the ordinary course through the twelve months subsequent to September 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 are being
hampered by the Company's high level of existing indebtedness, secured and
otherwise, as well as the default discussed above and in Note 8 of Notes to
Condensed Consolidated Financial Statements. 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 has had 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 would have the effect of increasing the Company's costs of
goods and general and administrative expenses and decreasing its margins or in
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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making the prices of the Company's or its customers' products less competitive.
Accordingly, such effects have had and will continue to have a material adverse
effect upon the business, financial condition and results of operations of the
Company. Although the Company seeks to mitigate its currency exposure through
hedging measures, these measures have been and may in the future be
significantly limited in their effectiveness. In the future, the Company's
operating results will also be materially adversely affected by any weakening of
the United States dollar relative to Indonesia's currency. See "New
Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore."
NEW MANUFACTURING FACILITIES IN INDONESIA; TRANSITION OF EXISTING SINGAPORE
OPERATIONS; NEW MANUFACTURING FACILITIES IN INDONESIA AND SINGAPORE. In 1993,
the Company entered into a subcontract manufacturing agreement with Innoventure
pursuant to which Innoventure designed and constructed a new manufacturing
facility in Indonesia. The Company currently anticipates moving its pressed
ceramic production operations presently located in MPS's facilities in Singapore
to Indonesia. In connection with such move, the Company may consolidate MPS's
Singapore operations, which currently occupy two facilities, into one facility.
Such consolidation, if undertaken by the Company, will cost a minimum of $1.0 to
$3.0 million and such consolidation would be completed no earlier than the end
of 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 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 startup. 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
and, in certain cases, have decreased or deferred or delayed 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 MCM's,
has and may continue to materially adversely affect the Company's business,
financial condition and results of operations. In recent months, the
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Company has
experienced significant decreases in orders from one of its major customers due
to the unavailability of a critical component for such customer's end-user
product. The supply agreements with certain of these customers do not obligate
them to purchase products from the Company. The Company's ability to increase
its sales in the future will also depend in part upon its ability to obtain
orders from new customers. There can be no assurance that the Company's sales
will increase in the future or that the Company will be able to retain existing
customers or to attract new ones. The growth of the Company's customers'
business is critical to the growth of the Company. If customers of the Company
are not successful, the Company will not be successful. 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 consolidated 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 products is relatively mature and demand 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 condition 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 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 be 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.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION; UNCERTAINTY OF
MARKET ACCEPTANCE AND EMERGING MARKETS. The markets for the Company's products
are subject to technological change and new product introductions and
enhancements. Customers in the Company's markets require products embodying
increasingly advanced electronics packaging and interconnection technology.
Accordingly, the Company must anticipate changes in technology and define,
develop and manufacture or acquire new products that meet its customers' needs
on a timely basis. The Company anticipates that technological changes, such as
FLASH memory, advances in plastic materials technology and other semiconductor
devices that may be more cost effectively assembled into plastic packages and
that do not require the protection characteristics of the Company's ceramic
packages, could cause the Company's net sales to decline in the future. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market, support or acquire new products successfully, that any such
new products will gain market acceptance, or that the Company will be able to
respond effectively to technological changes. If the Company is unable for
technological or other reasons to develop products in a timely manner in
response to changes in technology, the Company's business, financial condition
and results of operations will be materially adversely affected. There can be no
assurance that the Company will not encounter technical or other difficulties
that could in the future delay the introduction of new products or product
enhancements. In addition, new product introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's products, which could materially adversely affect the Company's
business, financial condition and results of operations. Even if the Company
develops and introduces new products, such products must gain market acceptance
and significant sales in order for the Company to achieve its growth objectives.
Furthermore, it is essential that the Company develop business relationships
with and supply products to customers whose end-user products achieve and
sustain market penetration. There can be no assurance that the Company's
products will achieve widespread market acceptance or that the Company will
successfully develop such customer relationships. Failure by the Company to
develop products that gain widespread market acceptance and significant sales or
to develop relationships 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 MCM's. 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 MCM's, 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
22
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
changes in economic and political conditions in Indonesia will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Enforcement of existing and future laws and private
contracts is uncertain, and the implementation and interpretation thereof may be
inconsistent. See "-- New Manufacturing Facilities in Indonesia; Transition of
Existing Singapore Operations; New Manufacturing Facilities in Indonesia and
Singapore."
SOLE OR LIMITED SOURCES OF SUPPLY. Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. In the production of its CERDIP products the Company
has one supplier for its alumina powder, two suppliers for its ultraviolet
lenses and one supplier of certain sealing glasses. The Company also has 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. In recent months, the Company has experienced significant decreases
in orders from one of its major customers due to the unavailability of a
critical component for such customer's end-user product.
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
23
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Company's financial performance will depend in part on its ability to continue
to improve its systems, procedures and controls.
INTELLECTUAL PROPERTY MATTERS. Although the Company attempts to protect its
intellectual property rights through patents, trade secrets and other measures,
it believes that its financial performance will depend more upon the innovation,
technological expertise, manufacturing efficiency and marketing and sales
abilities of its employees. There can be no assurance that others will not
independently develop similar proprietary information and techniques or gain
access to the Company's intellectual property rights or disclose such technology
or that the Company can adequately 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
operations. The Company and Carborundum are
24
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
discussing the possibility of a two-year extension of the Agreement. However,
there can be no assurance that such an extension will be obtained.
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. The uncertainty of this situation may
weaken the performance of MPC.
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. See Note 7 of Notes to
Condensed Consolidated Financial Statements.
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 the issue of dilutive equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
DEPENDENCE ON KEY PERSONNEL. The Company's performance depends in significant
part upon the continued services of its President and Chief Executive Officer,
Timothy da Silva, the Senior Vice President of MPS, Jee Fook Pak, as well as
other key personnel, many of whom would be difficult to replace. Mr. Pak is not
bound by an employment agreement with the Company. The Company's financial
performance also depends in part upon its ability to attract and retain
qualified management, technical, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his current position or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.
NASDAQ NATIONAL MARKET LISTING REQUIREMENTS. The Company will be subject to
continuing requirements to be listed on the NASDAQ National Market. There can be
no assurance that the Company can continue to meet such requirements. The price
and liquidity of the Common Stock may be materially adversely affected if the
Company is unable to meet such requirements in the future.
SALE OF SHARES INTO THE 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 3.0 million additional shares of Common Stock became
immediately available for sale in the public market, subject, in part, to the
volume restrictions of Rule 144. In addition, in October 1996, the Company
issued debentures convertible into shares of the Company's Common Stock and
warrants exercisable into shares of Common Stock pursuant to a pre-determined
formula in accordance with Regulation S promulgated under the Securities Act of
1933, as amended. Pursuant to such regulations, such shares of Common Stock
could be sold as early as December 1996. Sales of a number of such shares could
materially adversely affect the Company's stock price.
25
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 disasters, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in the Company's
relationships with its customers and suppliers, or a shortfall or changes in
revenue, gross margins or earnings or other financial results from analysts'
expectations could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In recent years the stock market in general, and the
market for share of small capitalization stocks in particular, including the
Company, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities.
As of September 30, 1996, the Company's MPS subsidiary was not in
compliance with certain financial covenants of its "Line of credit
borrowings" with DBS. In addition, most of the debt obligations of the
Company and its subsidiaries have provisions which cause, or may cause,
those debt instruments to be in default if the Company or its
subsidiaries are in default on any other loans ("cross default"
provisions). The Company and its MPS subsidiary are attempting to
renegotiate the covenants of the Line of credit, however, as of
November 18, 1996, the Company and its MPS subsidiary have been unable
to obtain a waiver of compliance. As a result, the balance of the debt
obligations which are in default, including those with cross default
provisions, have been included in "Current portion of long-term debt"
on the Condensed Consolidated Balance Sheets as of September 30, 1996.
Many of these debt obligations permit the lenders to increase their
interest rates up to 3% over their existing rates, or even higher rates
may be charged, as may be determined by certain lenders.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 16, 1996, Cecil E. Smith resigned his position as a Director
of the Company.
On October 24-25, 1996, the Company entered into subscription
agreements ("Subscription Agreements") with a group of offshore
investors (collectively, the "Purchasers"). Pursuant to the terms of
the Subscription Agreements, the Company issued a series of convertible
debentures to the Purchasers at an aggregate purchase price of U.S.
$2.8 million, which Debentures have terms of one year and bear interest
at the rate of 8.0% per annum. This offering was not registered under
the Securities Act of 1933, as amended, and was issued pursuant to the
exemption provided by Regulation S promulgated thereunder. Accrued and
unpaid interest on the Debentures is due and payable in cash in
quarterly installments on the first day of each fiscal quarter of the
Company during the one-year term of the Debentures. The outstanding
principal under the Debentures will be due and payable in full at the
end of the one-year term; however, subject to certain limitations set
forth below, from and after 45 days from October 23, 1996, the
outstanding principal under the Debentures may be converted at each
Purchaser's option into shares of the Company's Common Stock. The
number of shares of the Company's Common Stock issuable to the
Purchasers upon such conversion will be the amount of principal
outstanding divided by the lesser of 80% of the average of the closing
bid price of the Company's Common Stock as reported by Nasdaq National
Market for the three consecutive trading days immediately preceding the
27
<PAGE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 5. Other Information (continued)
date of conversion or 110% of the closing bid price of the Company's
Common Stock as reported by Nasdaq National Market on October 23, 1996.
MPI also issued a warrant (the "Warrant") to one of the Purchasers to
purchase 75,421 shares of the Company's Common Stock. The exercise
price of the Warrant is the lesser of the average price at which the
Debentures are converted into the Company's Common Stock, or 110% of
the closing bid price of the Company's Common Stock as reported by
Nasdaq National Market on October 23, 1996. The Warrant is exercisable
commencing 45 days after October 23, 1996, and remains exercisable
until October 23, 1997. The Debentures may not be converted into shares
of Common Stock if such conversion would result in the issuance by the
Company of more than 19.9% of the Company's outstanding Common Stock as
of October 23, 1996, including shares issued or issuable upon exercise
of the Warrant (whether such Warrant has been exercised or not). The
Company is required to redeem all outstanding principal amounts under
the Debentures that cannot be converted (because such conversion would
exceed the 19.9% limit) at 120% of such outstanding principal amount.
In addition, the Company paid one of the Purchasers $322,000 as a
placement fee. Under current Securities and Exchange Commission
regulations, such shares of the Company's Common Stock may be offered
and sold in the United States trading markets at the earliest forty
(40) days after the issuance of the Debentures and the Warrant.
The existence and conversion of the Debentures and the existence and
exercise of the Warrant into shares of the Company's Common Stock will
significantly dilute any earnings per share amounts and significantly
dilute the ownership interests of MPI's shareholders.
On November 7, 1996, the Board of Directors retained the services of
The Watley Group, LLC, a management consulting and financial advisory
firm, to advise the Company on various strategic, management, and
financial matters affecting the Company.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
The Exhibits filed as part of this report are listed below.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -------------------------------------------------
<C> <S>
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Registrant)
<S> <C>
Date: November 19, 1996 By: /s/ TIMOTHY DA SILVA
----------------- ----------------------------
Timothy da Silva
President & Chief Executive
Officer
Date: November 19, 1996 By: /s/ DENIS J. TRAFECANTY
----------------- ----------------------------
Denis J. Trafecanty
Chief Financial Officer
</TABLE>
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- --------- -------------------------------------------------
<C> <S>
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
30
<PAGE>
EXHIBIT 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE:
- ------------------------------------
Net income (loss) $ (722,000) $ 457,000 $ 453,000 $ (1,936,000)
------------ ------------- ------------- -------------
Weighted average shares outstanding:
Shares outstanding from beginning
of period 5,558,792 4,660,093 4,660,117 4,660,093
Sale of 842,058 shares on March 25, 1996 - - 580,836 -
Other shares issued during the period 63,606 - 46,097 -
Common equivalents - options to
Directors, Officers and Employees,
net of treasury shares - 109,910 206,343 -
------------ ------------- ------------- -------------
Weighted average Common and
Common equivalent shares outstanding 5,622,398 4,770,003 5,493,393 4,660,093
============ ============= ============= =============
Primary Net income (loss) per Common Share $ (0.13) $ 0.10 $ 0.08 $ (0.42)
============ ============= ============= =============
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
- ------------------------------------------
Net income (loss) $ (722,000) $ 457,000 $ 453,000 $ (1,936,000)
------------ ------------- ------------- -------------
Weighted average shares outstanding:
Shares outstanding from beginning
of period 5,558,792 4,660,093 4,660,117 4,660,093
Sale of 842,058 shares on March 25, 1996 - - 580,836 -
Other shares issued during the period 63,606 - 46,097 -
Common equivalents - options to
Directors, Officers and Employees,
net of treasury shares - 109,910 208,400 -
------------ ------------- ------------- -------------
Weighted average Common and
Common equivalent shares outstanding 5,622,398 4,770,003 5,495,450 4,660,093
============ ============= ============= =============
Fully diluted net income (loss) per
Common Share $ (0.13) $ 0.10 $ 0.08 $ (0.42)
============ ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF SEPTEMBER 30, 1996 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND
SHAREHOLDERS EQUITY FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,559
<SECURITIES> 0
<RECEIVABLES> 4,491
<ALLOWANCES> 0
<INVENTORY> 8,021
<CURRENT-ASSETS> 21,203
<PP&E> 24,162
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,706
<CURRENT-LIABILITIES> 41,088
<BONDS> 3,755
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 54,706
<SALES> 45,532
<TOTAL-REVENUES> 45,532
<CGS> 37,788
<TOTAL-COSTS> 37,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,728
<INCOME-PRETAX> 500
<INCOME-TAX> 47
<INCOME-CONTINUING> 453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0
</TABLE>
