<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-23562
-------
MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
California 94-3142624
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9350 Trade Place, San Diego, California 92126
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 530-1660
------------------
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
At May 13, 1997, there were outstanding 10,793,280 shares of Registrant's Common
------------ ----------
Stock, no par value per share.
===============================================================================
<PAGE>
<TABLE>
Index Page No.
- ----- -------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets................................... 3
Condensed Consolidated Statements of Operations......................... 4
Condensed Consolidated Statements of Cash Flows......................... 5
Condensed Consolidated Statement of Changes in Shareholders' Deficit.... 6
Notes to Condensed Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 28
Item 2. Changes in Securities................................................... 28
Item 3. Defaults Upon Senior Securities......................................... 28
Item 4. Submission of Matters to a Vote of Security Holders..................... 28
Item 5. Other Information....................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................ 28
SIGNATURES.............................................................................. 30
EXHIBIT INDEX........................................................................... 31
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,949,000 $ 2,954,000
Accounts receivable, net 4,732,000 5,849,000
Inventories 13,560,000 10,072,000
Other current assets 879,000 1,836,000
- ------------------------------------------------------------------------------------------
Total current assets 22,120,000 20,711,000
Property, plant and equipment, net 3,264,000 3,479,000
Other non-current assets 874,000 704,000
- ------------------------------------------------------------------------------------------
$ 26,258,000 $ 24,894,000
==========================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit borrowings, due on demand $ 2,891,000 $ 5,201,000
Debt in default, due on demand 7,931,000 8,084,000
Current portion of long-term debt 875,000 2,527,000
Accounts payable 17,255,000 12,522,000
Accrued liabilities 2,168,000 2,626,000
Deferred revenue 451,000 503,000
Current liabilities of discontinued operations, net 20,429,000 19,263,000
- ------------------------------------------------------------------------------------------
Total current liabilities 52,000,000 50,726,000
Long-term debt, less current portion 4,390,000 4,782,000
Commitments and Contingencies
Shareholders' Deficit
Common stock, no par value 39,839,000 38,138,000
Accumulated deficit (69,971,000) (68,752,000)
- ------------------------------------------------------------------------------------------
Total shareholders' deficit (30,132,000) (30,614,000)
- ------------------------------------------------------------------------------------------
$ 26,258,000 $ 24,894,000
==========================================================================================
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net sales:
Product sales $ 13,894,000 $ 17,217,000
Other sales - 234,000
- -----------------------------------------------------------------------------------
13,894,000 17,451,000
Cost of goods sold:
Product sales 13,177,000 14,239,000
Other sales - 215,000
- -----------------------------------------------------------------------------------
13,177,000 14,454,000
- -----------------------------------------------------------------------------------
Gross profit 717,000 2,997,000
Selling, general and administrative 1,718,000 1,437,000
Engineering and product development 339,000 613,000
- -----------------------------------------------------------------------------------
Income (loss) from operations (1,340,000) 947,000
Other income (expense):
Foreign exchange gain 303,000 142,000
Interest (expense), net (390,000) (388,000)
Other income, net 208,000 53,000
- -----------------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes (1,219,000) 754,000
Provision for income taxes - 100,000
- -----------------------------------------------------------------------------------
Income (loss) from continuing operations (1,219,000) 654,000
Loss from discontinued operations - (89,000)
- -----------------------------------------------------------------------------------
Net income (loss) $ (1,219,000) $ 565,000
===================================================================================
Weighted average shares used
in per share calculation 9,040,000 4,903,000
===================================================================================
Net income (loss) per common share:
Income (loss) from continuing operations $ (0.13) $ 0.13
Loss from discontinued operations - (0.01)
- -----------------------------------------------------------------------------------
Net income (loss) per common share $ (0.13) $ 0.12
===================================================================================
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,219,000) $ 565,000
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 230,000 671,000
Unrealized gain on borrowings
denominated in foreign currency (64,000) (9,000)
Gain on sale of fixed assets (3,000) -
Realized loss on forward foreign currency contracts - 557,000
Changes in assets and liabilities:
Accounts receivable 1,117,000 (2,435,000)
Inventories (3,488,000) 65,000
Other current assets 758,000 (705,000)
Deferred facility start-up costs and other non-current assets 30,000 (1,088,000)
Accounts payable, accrued liabilities and deferred revenue 5,389,000 827,000
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities of:
Continuing operations 2,750,000 (1,552,000)
Discontinued operations 128,000
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,878,000 (1,552,000)
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of fixed assets (37,000) (1,491,000)
Proceeds from sale of fixed assets 25,000 -
Realized (loss) from forward foreign currency contracts - (557,000)
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (12,000) (2,048,000)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term notes payable
Continuing operations (2,310,000) 743,000
Discontinued operations (101,000) -
Borrowings under long-term debt and promissory notes
Continuing operations 34,000 10,000,000
Principal payments on long-term debt and promissory notes
Continuing operations (467,000) (179,000)
Discontinued operations (27,000) -
Issuance of common stock - 1,920,000
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,871,000) 12,484,000
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (5,000) 8,884,000
Cash at beginning of period 2,954,000 2,923,000
- ------------------------------------------------------------------------------------------------------
Cash at end of period $ 2,949,000 $11,807,000
======================================================================================================
</TABLE>
5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------------- Accumulated
Shares Amount Deficit Total
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 6,991,493 $38,138,000 $ (68,752,000) $(30,614,000)
Issuance of common stock 3,801,787 1,701,000 1,701,000
Net loss (1,219,000) (1,219,000)
---------- ----------- ------------- ------------
Balance at March 31, 1997 10,793,280 $39,839,000 $ (69,971,000) $(30,132,000)
========== =========== ============= ============
</TABLE>
6
<PAGE>
MICROELECTRONIC PACKAGING, INC.
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 month periods ended March 31, 1997 and 1996 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 month period
ended March 31, 1997 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, 1996 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
<TABLE>
<CAPTION>
Inventories consist of the following:
MARCH 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials.......................... $ 9,619,000 $ 5,797,000
Work-in-progress....................... 3,865,000 2,977,000
Finished goods......................... 1,246,000 2,622,000
Obsolescence reserve................... (1,170,000) (1,324,000)
----------- -----------
$13,560,000 $10,072,000
=========== ===========
</TABLE>
3. EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the quarter
ended March 31, 1997, since the Company's domestic and Singapore operations
generated operating losses for both financial reporting and income tax
purposes.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and
credit carryforwards in subsequent periods will be subject to annual
limitations.
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). Fully diluted
net income (loss) per share has not been presented as it is not materially
different from primary net income (loss) per share. When dilutive, fully
diluted net income (loss) per share will include the effects of the
conversion of the Transpac debenture into shares of MPI Common Stock.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and litigation arising in and
outside of the ordinary course of business. In addition, given the current
state of the Company and its subsidiaries, numerous creditors and parties to
contracts have threatened or initiated litigation to recoup their loans and
investments. If these claims are not favorably resolved, they will have a
material adverse effect on the Company's financial condition, results of
operations and ability to continue as a going concern.
6. CUSTOMER SUPPLIED INVENTORY
The Company's CTM Electronics, Inc. subsidiary purchases certain chips used
in the assembly of its multichip modules from one of the Company's
significant customers. This customer has notified the Company of its intent
to stop selling chips to the Company effective January 1, 1998, and instead
will provide the chips on consignment. The pro forma presentation below gives
effect to this proposed change on selected line items from the Company's
Condensed Consolidated Financial Statements as of, and for the three months
ended, March 31, 1997, as if this change had been put into effect on January
1, 1997.
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
March 31, 1997 Adjustments March 31, 1997
=======================================================================================
<S> <C> <C> <C>
Total current assets $22,120,000 $(7,735,000) (1) $14,385,000
=======================================================================================
Total current liabilities $52,000,000 $(7,735,000) (1) $44,265,000
=======================================================================================
</TABLE>
(1) Effect on total current assets is the result of reduced carrying values
of inventories and accounts receivable, and the effect on total current
liabilities results from the reduced resulting balances of accounts
payable.
<TABLE>
<CAPTION>
Historical Pro Forma
Three Months Ended Pro Forma Three Months Ended
March 31, 1997 Adjustments March 31, 1997
=========================================================================================
<S> <C> <C> <C>
Net sales $13,894,000 $(7,134,000)(1)(2) $ 6,760,000
Cost of goods sold 13,177,000 (7,280,000)(1) 5,879,000
Gross profit 717,000 146,000 863,000
Net income (loss) $(1,219,000) 146,000 $(1,073,000)
=======================================================================================
Net income (loss) per
common share $ (0.13) $ 0.01 $ (0.12)
=======================================================================================
</TABLE>
(1) Effect on net sales and cost of goods sold is the result of a reduction
in the sales amount and reduced cost of materials used in the assembly
process of these multichip modules.
(2) Effect on net sales resulting from a reduction of sales discounts which
would occur as a result of lower selling prices. The Company has offered
a 2% discount for prompt payment of invoices, which the customer has
consistently utilized.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
7. LOSS OF BUSINESS
The Company's MPC subsidiary was informed in April 1997 that Carborundum
Corporation ("Carborundum"), its sole customer, was immediately cancelling
the manufacturing and related agreements with MPC as a result of
Carborundum's sale of its assets to a third party.
On April 5, 1997, a fire at the Company's MPC facility caused damage to the
building and certain equipment. The Company is insured against the fire, and
believes that it will incur minimal losses from the fire. The Company
intends to close the MPC operation and has terminated all of its MPC
employees. MPC represented approximately 6% of consolidated net sales of the
Company in the year ended December 31, 1996, and comprised less than 1% of
the Company's consolidated total assets. The Company expects that there will
be minimal impact from the disposition of the assets of MPC. Most costs of
closure of the MPC operations will be borne by the former customer or the
Company's business interruption insurance.
8. SUPPLEMENTAL INFORMATION TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Holders of the remaining $1,900,000 of convertible debentures issued in
October 1996, elected to convert their debentures into 3,801,787 shares of
Common Stock during the quarter ended March 31, 1997.
9. NEW ACCOUNTING STANDARD
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement
provides a different method of calculating earnings per share than is
currently used in accordance with APB 13, Earnings per Share. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement is
effective for fiscal years and interim periods ending after December 15,
1997; early adoption is not permitted. The Company has not determined the
effect, if any, of adoption on its EPS computation(s).
10. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company (including subsidiaries except MPM) will continue as a going
concern. A number of factors, including the Company's history of significant
losses, the debt service costs associated with the Company's high level of
existing indebtedness, the need to restructure debt which is currently in
default, various claims and lawsuits, the economic dependency upon a limited
number of customers, MPM in receivership, and the possibility of MPS being
placed into receivership raise substantial doubts about the Company's
ability to continue as a going concern. The Company currently has $7.9
million of indebtedness in default and thereby due upon demand, as well as
$2.9 million of line of credit borrowings that are also due upon demand. The
Company does not possess sufficient cash resources to repay these
obligations, and the Company would be unable to repay these loans in the
event that such demand was made by the Company's creditors.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
As a result of the events described above, the new executive management team
is restructuring the Company's remaining operations with the goal of
producing profits and positive cash flow. Management has been successful in
restructuring two of the Company's customer loans; principal will be repaid
over three to four years with the commencement of principal payments
deferred until 1998. The Company believes that it may be able to restructure
the majority of its remaining customer loans on similar terms.
11. Forward Looking Statements
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
effects of debt restructuring and restructuring of MPS.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Conditions and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
NET SALES
Net sales were $13,894,000 for the first three months of 1997 ("1997"), which
represents a decrease of $3,557,000 or 20.4% when compared to the first three
months of 1996 ("1996"). The decrease in net sales during 1997 was primarily
attributable to a $4,545,000 reduction in revenues from sales of pressed
ceramics products at the Company's Microelectronic Packaging (S) Pte. Ltd.
("MPS") subsidiary, offset in part by a $1,458,000 increase in revenues from
the sales of MCM products at the Company's CTM Electronics, Inc. ("CTM")
subsidiary. The decrease in sales of pressed ceramic products reflects a 45%
reduction in the number of units sold and a 5% reduction in average selling
prices between 1996 and 1997. The reduction in units sold results from the loss
of a significant customer (SGS-Thompson) and an industry-wide decline in the
demand for pressed ceramics products. The increase in sales of MCM's results
from a 48% increase in average selling prices due to a change in product mix,
offset in part by a 21% reduction in units sold.
Net sales for 1996 includes $234,000 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. There were no such revenues recorded in 1997.
COST OF GOODS SOLD
Cost of goods sold for 1997 was $13,177,000, which represents a decrease of
$1,277,000 or 8.8% from 1996. This decrease is comprised of a decrease in costs
at MPS of $2,567,000 or 31% and an increase in costs at CTM of $2,048,000 or
43%. The decrease in cost of goods sold for pressed ceramics results from the
45% decline in the number of units shipped by MPS, offset in part by an increase
in costs of approximately 14%. The increase in cost of goods sold for MCM's in
1997 results primarily from a 99% increase in the average per unit cost of the
major components used, reduced by a 21% decrease in the number of units shipped
at ctm. The increase in the average material cost per unit results from a change
in product mix and correlates directly with the increase in average unit selling
prices discussed above (which accounts for a 78% increase in costs).
Cost of goods sold for 1996 includes $215,000 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. There were
no such expenses incurred in 1997.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GROSS PROFIT
The gross profit for 1997 was $717,000 or 5.2% of net sales, as compared to
$2,997,000 or 17.2% for 1996. The decrease in gross profit results from the
reduction in units shipped at MPS, which has reduced overhead absorption, offset
in part by an increase in gross margin in absolute dollars at CTM through sale
of higher-priced products. The cost of the raw materials used in the assembly
of the new multichip modules have increased approximately dollar-for-dollar with
net sales, causing gross margin, as a percentage of sales, to decline (see Note
6 to the Condensed Consolidated Financial Statements).
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $1,718,000 for 1997 as
compared with $1,437,000 for 1996. This increase of $281,000 or 19.6% is
primarily due to the increase in legal, personnel, and other costs related to
the Company's ongoing operations and restructuring. The Company currently
anticipates that selling, general and administrative expenses will increase
during the remainder of fiscal 1997 from fiscal 1996 levels due in part to the
continuation of the restructuring.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were $339,000 for 1997,
representing a decrease of $274,000 or 44.7%, from 1996. This decrease is
primarily due to a decrease in personnel costs and expenditures on materials
used in product development at MPS. This decrease corresponds with the reduced
sales levels at MPS. The Company currently anticipates that engineering and
product development costs will increase during the remainder of 1997.
FOREIGN EXCHANGE GAIN
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 $303,000 for 1997, and $142,000
for 1996 which are the result of the appreciation of the value of the US dollar
relative to the Singapore dollar. The appreciation of the value of the US dollar
relative to the Japanese yen during 1997 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. The appreciation of the Japanese yen relative to the
US dollar during 1996 had the effect of increasing the cost of certain raw
materials as well as increasing the carrying value of certain of the Company's
obligations.
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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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$20.8 million at March 31, 1997) 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 will continue to be severely
limited in their effectiveness.
INTEREST EXPENSE
Interest expense was $390,000 for 1997, representing a decrease of $2,000 or
0.5% from 1996.
OTHER INCOME (EXPENSE)
Other income was $208,000 for 1997, as compared to $53,000 for 1996, which is
principally comprised of a $190,000 gain on the sale of the assets which were
collateral for a loan made by the Company, which had been fully-reserved in
1995.
EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the quarter
ended March 31, 1997, since the Company's domestic and Singapore operations
generated operating losses for both financial reporting and income tax purposes.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's independent certified public accountants have included an
explanatory paragraph in their audit report with respect to the Company's
December 31, 1994, 1995 and 1996 consolidated financial statements related to a
substantial doubt with respect to the Company's ability to continue as a going
concern. There can be no assurance that the Company will operate profitably in
the future and that the Company will not continue to sustain losses. Absent
outside debt or equity financing, and excluding significant expenditures
required for the Company's major projects and assuming the Company is successful
in restructuring its debt, the Company currently anticipates that cash on hand
and anticipated cash flow from operations may be adequate to fund its operations
in the ordinary course throughout the remainder of 1997. Any significant
increase in planned capital expenditures or other costs or any decrease in, or
elimination of, anticipated sources of revenue or the inability of the Company
to restructure its debt could cause the Company to restrict its business and
product development efforts. There can be no assurance that the Company will be
successful in
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
restructuring its debt on acceptable terms, or at all. If adequate revenues are
not available, the Company will be unable to execute its business development
efforts and has been 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.
During the first three months of 1997, the Company financed its operations
primarily through cash flows from its operating units. The Company's principal
sources of liquidity as of March 31, 1997 consisted of $2.9 million of cash and
a very limited available borrowing capacity with DBS.
The Company is currently in default on substantially all of its debt obligations
and numerous trade and other creditors are requesting repayment of their amounts
due.
MPS has a S$9.5 million (US$6.6 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. 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 March 31, 1997, MPS had
outstanding borrowings under this arrangement of US$2.8 million. In addition,
MPS had loans from, or guaranteed by, customers totaling US$10.3 million.
The MPS borrowing agreements include 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 MPM agreement also contains certain
restrictive provisions. As of March 31, 1997, MPS and MPM were not in compliance
with the covenants set forth in its agreement with DBS. The Company anticipates
that the industry-wide depressed market for pressed-ceramics will continue for
the remainder of 1997. As a result, 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. DBS is
participating in the financial restructuring efforts of MPS.
The Company was recently informed that DBS may appoint a receiver for MPS.
Should DBS appoint a receiver for MPS, the receiver may elect to accept an offer
to purchase assets of MPS. Alternatively, the receiver may elect to liquidate
the assets of MPS, which would cause the cessation of MPS's operations and
sales. The Company may negotiate with DBS and the receiver-to-be in an attempt
to sell selected assets of MPS, which would allow the Company to remain in the
pressed ceramics business. Since MPS's sales are material to the Company's
results of operations, any cessation would materially adversely affect the
Company's financial condition and results of operations.
As of March 31, 1997, MPS failed to make timely principal payments under its
loan obligations to TI, SGS-Thomson and a note to Citibank N.A. guaranteed by
Motorola. Remedies available to the note holders include acceleration of the
principal balance of the notes, attachment and/or foreclosure of assets of MPS,
CTM, MPA, and MPI pledged as security, and perfection of guarantees issued by
MPI. The Company is in regular communication with all lenders regarding the
restructure. No lender to date has either declared a default or has exercised
any such remedies under these notes. MPS entered into an Amended Loan and
Security Agreement with TI on April 2, 1997 pursuant to which TI agreed to (i)
waive its right to pursue a default remedy under the original loan agreement,
(ii) a lower interest rate of 3.5% per annum on the outstanding balance and
(iii) a revised (and extended) payment schedule for the outstanding balance owed
by MPS. The Company is currently attempting to renegotiate the terms and
conditions of its notes with SGS-Thomson and Citibank to waive any current
defaults and to restructure the notes to provide more favorable terms to the
Company. There can be no assurance that the Company will be successful in these
negotiations or that SGS-Thomson and Citibank will not avail themselves of the
remedies available to them.
MPC has a S$500,000 (US$346,000 at March 31, 1997) 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 March 31, 1997, MPC had
outstanding borrowings under this arrangement of $82,000. MPC was notified by
DBS on April 16, 1997 that this banking facility was canceled. The balance was
fully repaid subsequent to March 31, 1997.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MPM had a $3.5 million borrowing facility with DBS, which is guaranteed by both
MPI and MPS. This facility consisted 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 March 31, 1997, MPM had outstanding borrowings under this
arrangement of approximately $3.2 million. DBS has appointed a receiver to
dispose of the assets of MPM which comprise part of DBS's security. The Company
anticipates that the disposition of the MPM assets will partially repay the
outstanding borrowings. The Company is currently attempting to negotiate
repayment terms with DBS for the anticipated shortfall.
At March 31, 1997, the Company also had borrowings of $9.0 million under the
Transpac Debenture, $11.5 million under notes payable to various customers
bearing interest at rates ranging from 3.5% to 18.0%, $1.1 million under
mortgage notes bearing interest at a rate of 7.5%, $0.1 million under term loans
bearing interest at rates ranging from 11.9% to 12.2%, and $2.4 million under
capital lease obligations, consisting of various machinery and equipment
financing agreements, bearing interest at 4% to 8%. Borrowings under the above
arrangements are secured by substantially all of the assets of the Company. The
Company also incurred certain non-interest bearing obligations in connection
with an acquisition in 1993 that have been discounted to their net present value
of $0.3 million at March 31, 1997.
The Company informed DBS in March 1997 that MPM would be unable to repay its
borrowings with DBS as part of the liquidation of MPM. On April 10, 1997, DBS
sent to MPS a written demand for payment of the entire $3,298,000 currently due
under the MPM loan. In addition to demanding payment, DBS imposed the default
interest rate (additional 3% interest rate) on the outstanding debt. Since MPM
has insufficient resources to repay DBS, with the agreement of the Company, DBS
has appointed a receiver to dispose of the assets of MPM which comprise part of
DBS's security. MPM has additionally ceased lease payments due in February 1997
to lessors for certain equipment in the MPM facility and the lessors have
declared the leases to be in default. MPM owes approximately $2.0 million on
these equipment leases. The Company believes that the disposal of MPM's assets
will not be sufficient to repay the debt obligations due to DBS. The Company
believes the disposal of assets will be insufficient to fully repay the lease
obligations of MPM and its indebtedness to Transpac. These obligations have been
fully guaranteed by MPI. The Company is currently attempting to negotiate
repayment terms with these creditors for the anticipated shortfall.
In addition, the Company anticipates that the liquidation of MPM will not
provide sufficient resources to repay the trade creditors of MPM. Indebtedness
to IBM for equipment rental totaling $704,000 is a direct obligation of MPI, and
accordingly would not be discharged by the liquidation of MPM. Additionally,
certain vendors of MPM provided goods or services to MPM under purchase orders
issued by MPS. Under Singapore law, these obligations, totaling $2.3 million may
also be deemed obligations of MPS and may not be discharged by the liquidation
of MPM. The Company has reflected these anticipated obligations in its
consolidated balance sheets as of December 31, 1996 and March 31, 1997.
The financial resources of MPS are insufficient for it to repay the
MPM trade creditors. DBS has informed the Company that it may appoint a receiver
over MPS to protect its primary secured creditor position from actions brought
against MPS by the MPM trade creditors. The trade creditors of MPS or MPM may
seek to liquidate MPS.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
There can be no assurance that if DBS appoints a receiver for MPS or the trade
creditors of MPS or MPM successfully petition for the liquidation of MPS, that
the receiver will not liquidate all or a portion of MPS's assets to repay
obligations owed to DBS. If such action were taken by the receiver, MPS would be
unable to manufacture its pressed ceramic products and would produce no revenue.
The Company is in communication with DBS to restructure the debts of MPS. Since
MPS's sales are material to the Company's results of operations, any cessation
would materially adversely affect the Company's financial condition and results
of operations.
MPI failed to make timely principal payments under a note with NSEB which was
due in January, 1997. In March 1997, the Company entered into an Amended Loan
and Security Agreement and a Second Secured Promissory Note with NSEB pursuant
to which NSEB agreed to waive any breach of the covenants, terms and conditions
of the original Loan and Security Agreement and the original Secured Promissory
Note (both dated May 30, 1995) and agreed to a revised payment schedule. The
interest rate on the outstanding balance, however, was raised from 14% per annum
to 18% per annum.
FUTURE OPERATING RESULTS
Continuation of MPS Operations. The Company was recently informed by DBS, the
principal secured creditor of MPS, that it may appoint a receiver for MPS. The
appointment of a receiver is allowed by the terms of the loan agreements between
MPS and DBS, since MPS is in default of certain covenants under loans granted by
DBS to MPS. Should DBS appoint a receiver for MPS, the receiver may elect to
accept an offer to purchase assets of MPS. Alternatively, the receiver may elect
to liquidate the assets of MPS, which would cause the cessation of MPS's
operations and sales. The Company may negotiate with DBS and the receiver-to-be
in an attempt to sell selected assets of MPS, which would allow the Company to
remain in the pressed ceramic business. This proposed plan would allow the
continued operation of the existing business during an interim period until such
asset purchase can be organized and completed. The Company has not yet reached
an agreement with DBS. Should the Company be successful in these negotiations,
the Company could continue to operate its pressed ceramic business without
interruption to its customers. Since MPS's sales are material to the Company's
results of operations, any cessation would materially adversely affect the
Company's financial condition and results of operations.
Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's December 31, 1994, 1995 and 1996 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. There can be no assurance that the Company will
operate profitably in the future and that the Company will not continue to
sustain losses. Absent outside debt or equity financing, and excluding
significant expenditures required for the Company's major projects and assuming
the Company is successful in restructuring its debt, the Company currently
anticipates that cash on hand and anticipated cash flow from operations may be
adequate to fund its operations in the ordinary course throughout the remainder
of 1997. Any significant increase in planned capital expenditures or other costs
or any decrease in, or elimination of, anticipated sources of revenue or the
inability of the Company to restructure its debt could cause the Company to
restrict its business and product development efforts. There can be no assurance
that the Company will be successful in restructuring its debt on acceptable
terms, or at all. If adequate revenues 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 restructure its debt and become profitable. The factors leading to and
the existence of the explanatory paragraph will continue to have a material
adverse effect on the Company's ability to obtain additional financing.
Risk of Bankruptcy. The Company may need to be reorganized under Chapter 11 of
Title 11 of the United States Code or placed under Judicial Management, as that
term is defined under Singapore law or liquidated under Chapter 7 of Title 11 of
the United States Code or similar laws of Singapore. There can be no assurance
that if the Company decides to reorganize under the applicable laws of the
United States and/or Singapore that such reorganizational efforts would be
successful or that shareholders would receive any distribution on account of
their ownership of shares of the Company's stock. Similarly, there can be no
assurances that if the Company decides to liquidate under the applicable laws of
the United States and/or Singapore that such liquidation would result in the
shareholders receiving any distribution on account of their ownership of shares
of the Company's stock. If the Company were to be reorganized or liquidated
under the applicable laws of either the United States or Singapore, the
bankruptcy laws of
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
both countries would require (with limited exceptions) that the creditors of the
Company be paid before any distribution is made to the shareholders.
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
restructure and retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's design and development efforts, the Company's operating results
and the status of competitive products. If the Company is successful in
restructuring its debt obligations, absent debt or equity financing and
excluding significant expenditures required for the Company's major projects,
the Company anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations through the remainder of 1997.
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
may require substantial additional financing to fund its operations in the
ordinary course, particularly if the Company is unable to restructure its debt
obligations. Furthermore, the Company may require additional financing to fund
the acquisition of selected assets needed in its production facilities and to
complete certain programs, such as the provision of production supplies to a
third party supplier in Indonesia and the consolidation of MPS's Singapore
operations. There can be no assurance that the Company will be able to obtain
such additional financing on terms acceptable to the Company, or at all.
Pursuant to a 1993 subcontract manufacturing agreement between MPI and
Innoventure, Innoventure established a manufacturing facility in Indonesia that
partially processes pressed ceramic products on behalf of MPI. 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 in 1997. Equipping such facility to fully
process and produce pressed ceramic products is subject to a number of
conditions, including, but not limited to, additional transfers of pressed
ceramic manufacturing equipment from Singapore, and there can be no assurance
that such facility will be so equipped. Pursuant to the terms of the Innoventure
Agreement (succeeded by the PTI Agreement), MPI 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 was subsequently modified by both parties in 1995 such that
MPS, successor to MPI, is now purchasing these items from its suppliers on
behalf of PTI, successor to Innoventure. PTI currently owes MPS approximately
$1.3 million related to the supply of such raw materials and related production
supplies, and MPS anticipates that it will continue to purchase such items on
PTI's behalf for the foreseeable future. The foregoing amount is to be repaid
to MPS on terms to be agreed upon by both parties. There can be no assurance,
however, that PTI will be able to manufacture pressed ceramic products on a
timely basis, in sufficient quantities or at all. PTI's inability to
manufacture products would have a material adverse effect on its ability to
repay its debt obligations to MPS. In addition, there can be no assurance that
PTI's need for raw materials and production supplies will not increase in the
future or that MPS will be able to meet such increased demand. Under the PTI
Agreement, MPS also agreed to lease certain production equipment to PTI. To
date, the parties have not finalized the terms of this leasing arrangement. In
the interim, MPS moved certain of its production equipment from its Singapore
facilities and certain of the equipment purchased from Samsung Corning to the
PTI facility. There can be no assurance that MPS will not be required to
replace such equipment in MPS's Singapore facilities or incur additional costs
as a result of replacing such equipment. There can be no assurance that DBS will
approve the transfer of any additional production equipment from MPS to PTI,
which approval is required under the terms of the collateral agreements relating
to certain loans with MPS. Additionally, there can be no assurance that MPS's
customers will qualify the remainder of the PTI facility. Production of the
remaining portion of the process cannot commence at the PTI facility without
production qualification by customers. Finally, should MPS choose to retain the
remaining portion of the production process and not transfer that process to
PTI, under the terms of the PTI Agreement, PTI may choose to cease production of
the portion
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
of the production process now performed by them in Indonesia, necessitating the
return of those processes to MPS in Singapore.
Although limited processing of pressed ceramic products commenced in Indonesia
during the second quarter of 1995, the full transition of MPS'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. If MPS
were to transfer 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 require significant expenditures. The Company
does not currently have the resources to consolidate MPS's Singapore facilities.
In the event that the Company requires additional funds to finance the
consolidation of MPS's facilities, the Company will seek additional financing
through subsequent sales of its debt or equity securities or through bank or
lessor financing alternatives, if available. There can be no assurance that the
Company will not incur additional costs with respect to the establishment of the
manufacturing facility in Indonesia or the consolidation, if any, of MPS's
Singapore operations.
The DBS line of credit available to MPS, which is guaranteed by MPI, contains
numerous restrictive covenants on the ability of such subsidiary to provide
funds to MPI or to other subsidiaries and on the use of proceeds. The credit
facilities at MPC and MPM and the Transpac agreements also contain similar
restrictions. The Company is in breach of each of such agreements and is in
default under each of such agreements. The MPC S$500,000 (US$346,000 as of March
31, 1997) borrowing arrangement with DBS has been fully repaid subsequent to
March 31, 1997. The MPM $3.5 million borrowing facility with DBS has been
declared under default, DBS has appointed a receiver to liquidate MPM's assets,
which liquidation is anticipated to be completed by the end of June 1997, and
DBS has further called upon MPS to repay the MPM borrowing under MPS's
guarantee. The Company has been negotiating with Transpac regarding the possible
conversion of its indebtness into equity of the Company. If the Company cannot
reach an agreement with its creditors to repay its obligations, the Company will
not be able to continue as a going concern. The Company's high level of
outstanding indebtedness and the numerous restrictive covenants set forth in the
agreements covering this indebtedness and its default position 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, Transpac and other creditors. The Company is currently in default on their
guarantee and loan obligations to DBS as a result of the Company's decision to
cease its multilayer operations, liquidate MPM's assets and restructure MPS. The
liquidation of MPM and the restructuring of MPS will have also resulted in the
Company's default under a number of other agreements, and certain creditors have
informed the Company they intend to accelerate outstanding payments due to them
under various credit agreements because of such defaults. There can be no
assurance that other creditors of the Company will not also choose to accelerate
the Company's debt obligations and the Company will not be able to repay such
accelerated obligations as they become due and immediately payable. If either a
sufficient number of creditors or any of the substantial creditors choose to
accelerate payments or to place MPI or one or more of its subsidiaries under
judicial reorganization, the Company may be forced to seek protection under
Chapter 11 of Title 11 of the United States Code or, where applicable, similar
bankruptcy laws of Singapore. If the Company were to seek additional financing,
it is not likely that additional financing will be available to the Company on
acceptable terms, or at all. If additional funds are raised by issuing equity or
convertible securities, further dilution to the existing shareholders will
result. Since adequate funds are not currently available, the Company has been
required to delay, scale back or eliminate programs such as the consolidation of
MPS's Singapore facility, which could continue to have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. In addition, the Company has been forced to delay, downsize or
eliminate other design and development, manufacturing, construction or
transitioning programs or alliances or obtain funds through arrangements with
third parties pursuant to which the Company has been forced to relinquish rights
to certain of its technologies or to other assets that the Company would not
otherwise relinquish. The delay, scaling back or elimination of any such
programs or the relinquishment of any such rights could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Possible Future Adverse 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, corporate and debt restructurings, creditor
relationships, conversions of significant amounts of debt into a significant
amount of equity, downward pressure in gross margins,
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
continued losses due to low shipping volume, delayed market acceptance, if any,
of new and enhanced versions of the Company's products, delays, cancellations or
reschedulings of orders, delays in product development, defects in products,
integration of acquired businesses, political and economic instability, natural
disasters, outbreaks of hostilities, variations in manufacturing yields, changes
in manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
pressed ceramic and personal computer industries. In addition, operating results
will fluctuate significantly based upon several other factors, including the
Company's ability to attract new customers, 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. 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
design and development, capital equipment and other commitments of the Company,
among other factors, will make it difficult for the Company to reduce its
expenses in a particular period if the Company's sales goals for such period are
not met. A large portion of the Company's operating expenses are fixed and are
difficult to reduce or modify should revenues not meet the Company's
expectations, thus magnifying the material adverse impact of any such revenue
shortfall. Accordingly, there can be no assurance that the Company will not
continue to sustain losses in the future or that such losses will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Repayment of Debt Obligations by MPM. As of December 31, 1996 and March 31,
1997, MPM had outstanding borrowings of approximately $3,298,000 under its
borrowing arrangement with DBS. MPM informed DBS in March 1997 that it would be
unable to repay its outstanding debts. DBS subsequently accelerated the entire
amount of the borrowings currently due and appointed a receiver for MPM to
liquidate MPM's assets, which were pledged to DBS as security. DBS's receiver
has since requested the Company's assistance in the liquidation of MPM's assets.
The Company currently anticipates that the proceeds from the liquidation of
MPM's assets will not be sufficient to repay the debt obligations due to DBS.
However, the Company believes the disposal of assets will be insufficient to
fully repay the lease obligations of MPM and its indebtedness to Transpac. Since
these borrowings have been fully guaranteed by MPI, the Company is currently
attempting to negotiate repayment terms with these creditors for the anticipated
shortfall. The failure by the Company to obtain favorable repayment terms will
materially adversely affect the Company's prospects and financial condition.
As of December 31, 1996 and March 31, 1997, MPM had equipment lease obligations
totaling $2.0 million, principally with one lessor. MPM failed to make lease
payments due in February 1997, and the lessors have declared the leases to be in
default. MPM anticipates that the lessors will liquidate the leased equipment.
However, the Company believes that the proceeds therefrom will be insufficient
to fully repay the lease obligations. Since the lease obligations have been
guaranteed by MPI, the Company is currently attempting to negotiate terms with
the lessors for the anticipated remaining indebtedness. The failure by the
Company to obtain favorable repayment terms would materially adversely affect
the Company's financial condition and ability to continue as an ongoing concern.
MPM is also currently in possession of certain inventory that MPM had ordered
from IBM. IBM has not yet been paid for such inventory. The outstanding debt
from the inventory is less than $150,000.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MPM is obligated, pursuant to its real property lease in Singapore with Jurong
Town Corporation ("JTC"), to return the facilities which it has been leasing to
their original state before returning the facilities to JTC. Returning the
facilities to their original state would require the expenditure of
approximately $800,000. There can be no assurance that JTC will not enforce this
lease provision. If MPM were forced to return the facilities to their original
state or pay the overdue lease payments, such actions could materially adversely
affect any plans to restructure MPM's debt obligations. MPM is currently
delinquent on lease payments due under the real property lease. DBS has
guaranteed the payment of MPM's lease obligation to JTC through June 1997.
In addition, the Company is attempting to convert the Transpac debentures into
equity of the Company. The conversion, if successful, would significantly dilute
any earnings per share amounts and significantly dilute the ownership interests
of MPI's current shareholders. If the Company is unsuccessful in converting the
debentures into equity, the Company would not be able to repay the amounts
outstanding under the debentures as required by its guarantee. This failure
would materially adversely affect the Company's financial condition and ability
to continue as a going concern, and could, as is the case with other debt
defaults and failures to repay, require that the Company seek bankruptcy
protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code
or similar bankruptcy laws of Singapore for MPI and its U.S. subsidiaries.
Adverse Impact of MPM Liquidation on MPS. Approximately $2.3 million of
invoices from MPM's trade creditors were incurred under purchase orders issued
by MPS. Under Singapore law, MPS may be liable for these invoices. MPS may be
currently unable to fully repay these MPM invoices. DBS, as the primary secured
creditor of MPS, has informed the Company that it may elect to appoint a
receiver over MPS. MPM's and/or MPS's trade creditors may also seek to have MPS
liquidated under the laws of Singapore. There can be no assurance that the
receiver, if appointed by DBS or MPM's and/or MPS's trade creditors, would not
liquidate all of MPS's assets currently pledged as security to DBS. Should DBS
appoint a receiver or should MPM's and/or MPS's trade creditors successfully
petition for the appointment of a receiver, and should that receiver liquidate
MPS's assets, MPS would be unable to continue its operations. Additionally, if
the liquidation of MPS assets were to generate proceeds less than the
outstanding obligations due, MPI may be forced to repay certain outstanding
debts because of its role as guarantor of such debts. If MPI were unable to
repay these debts, the Company may be forced to seek bankruptcy protection under
Chapter 11 or Chapter 7 of Title 11 of the United States Code or similar
bankruptcy laws of Singapore for MPI and its subsidiaries.
Repayment of Bank Obligations by MPS. At March 31, 1997, MPS had outstanding
borrowings of approximately $2.8 million with DBS and had borrowed an aggregate
of approximately $10.5 million from a consortium of customers (the "Consortium")
to fund its purchase of certain CERDIP manufacturing and alumina powder
equipment from Samsung Corning. MPM's defaults on its obligations under its DBS
facility agreement has resulted in a demand by DBS that MPS pay MPM's
outstanding debts . DBS's action may result in defaults under MPS's loan
agreements pursuant to which it borrowed funds from the Consortium, among other
lenders. Such accelerations will materially adversely affect the Company's
ability to continue as an ongoing concern and may force the Company to seek
bankruptcy protection under Chapter 7 or Chapter 11 of Title 11 of the United
States Code or similar bankruptcy laws of Singapore. As a part of the
Consortium, Motorola guaranteed MPS' repayment of $2.0 million in borrowings
from a certain bank lender. Under the terms of the agreement relating to
Motorola's guarantee, MPI granted Motorola a security interest in all of the
issued and outstanding capital stock of MPS, CTM and MPA. In the event that MPS
defaults under its obligations to this bank lender and while such event of
default continues, Motorola may have the right to vote and give consents with
respect to all of the issued and outstanding capital of MPS, CTM and MPA (the
"Subsidiary Voting Rights"). As a result, during the continuation of any such
event of default, MPI may be unable to control at the shareholder level the
direction of the subsidiaries that generate substantially all of the Company's
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
revenues and hold substantially all of the Company's assets. Any such loss of
control would have a material adverse effect on the Company's business,
prospects, financial condition, results of operations and status as an ongoing
concern and could force the Company to seek protection under Chapter 7 or
Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of
Singapore. 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 have been triggered by the
aforementioned actions and would, if they became effective and operative,
materially adversely affect the Company's business, prospects, results of
operations, condition and status as an ongoing concern and could force the
Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the
United States Code or similar bankruptcy laws of Singapore.
High Leverage. The Company is highly leveraged and has substantial debt service
requirements. The Company has $30.2 million in debt obligations as of March 31,
1997. On March 31, 1997, the Company had a total shareholders' deficit of
approximately $30.1 million. The Company's ability to meet its debt service
requirements will be dependent upon the Company's future performance, which will
be subject to financial, business and other factors affecting the operation of
the Company, many of which are beyond its control and on the willingness of the
Company's creditors to participate in restructuring the Company's debt. There
can be no assurance that the Company will be able to meet the capital
requirements described above or, if the Company is able to meet such
requirements, that the terms available will be favorable to the Company.
Highly Competitive Industry; Significant Price Competition. The electronic
interconnection technology industry is intensely competitive. The Company
experiences intense competition worldwide from a number of manufacturers,
including Maxtek Components Corporation, Raytheon Electronic Systems, Hewlett-
Packard Company, Advanced Packaging Technology of America, Kyocera Corporation,
Sumitomo Metal Industries, Ltd. and MicroModule Systems, all of which have
substantially greater financial resources and production, marketing and other
capabilities than the Company with which to develop, manufacture, market and
sell their products. The market for sales of the Company's pressed ceramic
products is highly concentrated with a few competitors, all of which provide
intense competition and have substantially greater financial resources and
production, marketing and other capabilities than the Company with which to
develop, manufacture, market and sell pressed ceramic products. The Company
faces competition from certain of its customers that have the internal
capability to produce products competitive with the Company's products and may
face competition from new market entrants in the future. In addition,
corporations with which the Company has agreements are conducting independent
research and development efforts in areas which are or may be competitive with
the Company. The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide improved performance characteristics. New product
introductions by the Company's competitors could cause a significant decline in
sales or loss of market acceptance of the Company's existing products which
could materially adversely affect the Company's business, financial condition
and results of operations. Moreover, the Company has historically experienced
significant price competition in the sale of its pressed ceramic products, which
has materially adversely affected the prices and gross margins of such products
and the Company's business, financial condition and results of operations. The
Company is also experiencing significant price competition, which may materially
adversely affect the Company's business, financial condition and results of
operations. The Company believes that to remain competitive in the future it
will need to continue to develop new products and to invest significant
financial resources in new product development. There can be no assurance that
such new products will be developed or that sales of such new products will be
achieved. There can be no assurance that the Company will be able to compete
successfully in the future.
Foreign Currency Fluctuations. Although the Company's sales are denominated in
United States dollars, a substantial portion 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 may
continue to be materially adversely affected by changes in the United States
dollar relative to
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
these currencies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Any appreciation of such currencies
relative to the United States dollar would result in exchange losses for the
Company and could have the effect of increasing the Company's costs of goods and
general and administrative expenses and decreasing its margins or in making the
prices of the Company's 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 may also be
materially adversely affected by changes in the United States dollar relative to
Indonesia's currency.
New Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore. In 1993,
MPI entered into a subcontract manufacturing agreement with Innoventure pursuant
to which Innoventure designed and constructed a new manufacturing facility in
Indonesia. This agreement was succeeded by an agreement between MPS and PTI
dated September 5, 1995. The Company currently anticipates that it may move 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
require significant expenditures and such consolidation would be completed no
earlier than the end of 1997. To date, the transition of the Company's pressed
ceramic production operations from Singapore to Indonesia has not yet been
completed and the majority of such operations are still located at its Singapore
facility. The operation of the Indonesia facility by PTI is designed to increase
MPS's manufacturing capacity and to lower costs of production. Partial
processing of pressed ceramic products, which are completed in MPS'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. MPS's increasing reliance on PTI as a subcontractor involves certain
risks, including reduced control over delivery schedules, quality assurance,
manufacturing yields and cost. Although MPS has not experienced material
disruptions in supply from PTI 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.
PTI is not under any obligation to fully equip such facility and there are a
number of other conditions that must be satisfied before such Indonesian
facilities can be fully equipped. There can be no assurance, therefore, that
the Indonesian facility will be fully completed. PTI is also not subject to any
written contractual obligation to continue operating such facility. Thus, there
can be no assurance that the agreement with PTI is enforceable or that any
judgment secured by MPS, whether in Singapore or elsewhere, upon a breach of
such agreement will be upheld by Singapore courts. MPS is also under no
obligation to continue its business relationship with PTI. PTI is entitled to
the first $4.5 million in defined profits generated by the Indonesian facility
within five years of project start-up. In addition, pursuant to the Innoventure
Agreement, MPI agreed to provide Innoventure with raw materials and production
supplies necessary for the commencement of production in the Indonesian
facility. This obligation to provide raw materials and production supplies has
subsequently been modified by both parties such that MPS is now purchasing these
items from its suppliers on behalf of PTI. As of March 31, 1997, PTI owed the
MPS approximately $1.3 million related to the supply of such raw materials and
related production supplies, and MPS anticipates that it will continue to
purchase such items on PTI's behalf for the foreseeable future. It is
anticipated that the foregoing amount will be repaid to MPS by PTI 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 PTI will not increase in the future, however, or that such amounts will be
repaid by PTI in a timely fashion, or at all. There can also be no assurance
that MPS will have adequate funds to provide such materials and production
supplies to PTI. During the third quarter of 1995, the Company located certain
CERDIP manufacturing equipment acquired from Samsung Corning in the PTI
facility. Pressed ceramic products that are partially processed in the
Indonesian facility are then completed in MPS's Singapore facilities. The
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Company currently anticipates, but there can be no assurance, that the facility
may be able to fully process and produce pressed ceramic products at the
earliest by the end of 1997.
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 PTI'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 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 decreased or terminated (in the case of SGS-
Thomson) their product purchase orders with the Company. Any further reduction
in orders by any of these customers, including reductions due to market,
economic or competitive conditions in the semiconductor, personal computer or
electronic industries or in other industries that manufacture products utilizing
semiconductors or MCMs, could materially adversely affect the Company's
business, financial condition and results of operations. Sales to one customer,
Schlumberger, accounted for 29% of the Company's net sales in 1996 and is
expected to continue to account for substantially all of the Company's MCM
sales. Given the Company's anticipated continued increasing reliance on its MCM
business as a percentage of overall net sales, the failure to meet
Schlumberger's requirements will materially adversely affect the Company's
ability to continue as an ongoing concern. The supply agreements with certain of
the Company's customers do not obligate them to purchase products from the
Company. The Company's ability to increase its sales in the future will also
depend in part upon its ability to obtain orders from new customers. There can
be no assurance that the Company's sales will increase in the future or that the
Company will be able to retain existing customers or to attract new ones. There
can also be no assurance that any of the Company's subsidiaries will be able to
diversify or enhance its customer base. Failure to develop new customer
relationships could materially adversely affect each such subsidiary's results
of operations and would materially adversely affect the Company's business,
financial condition and results of operations.
Mature Market; Dependence on Semiconductor and Personal Computer Industries.
Historically, a significant portion of the Company's revenues have been derived
from sales of pressed ceramic products to customers in the semiconductor
industry. The market for the pressed ceramic product is relatively mature and
demand for pressed ceramic products has been declining and may continue to
decline in the future. Accordingly, the Company believes that sales of its
pressed ceramic products will decrease in the future and, as a result, the
Company's business, financial condition and results of operations may be
materially adversely affected.
The financial performance of the Company is dependent in large part upon the
current and anticipated market demand for semiconductors and products such as
personal computers that incorporate semiconductors. The semiconductor industry
is highly cyclical and historically has experienced recurring periods of
oversupply, resulting in significantly reduced demand for the Company's pressed
ceramic products. The Company believes that the markets for new generations of
semiconductors will also be subject to similar fluctuations. The semiconductor
industry has lately demonstrated a slowdown in demand. There can be no assurance
that such growth will return and that the slowdown will not continue. A
continued 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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
the semiconductor or personal computer industry may materially adversely affect
the Company's business, financial condition and results of operations. There can
be no assurance that the 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
continue or again occur in the future.
Technological Change; Importance of Timely Product Introduction; Uncertainty of
Market Acceptance and Emerging Markets. The markets for the Company's products
are subject to technological change and new product introductions and
enhancements. Customers in the Company's markets require products embodying
increasingly advanced electronics 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, 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-user products achieve and sustain market penetration
will materially adversely affect the Company's business, financial condition and
results of operations. The Company's financial performance will depend in
significant part on the continued development of new and emerging markets such
as the market for MCMs. The Company is unable to predict with any certainty any
growth rate and potential size of emerging markets. Accordingly, there can be no
assurance that emerging markets targeted by the Company, such as the market for
MCMs, will develop or that the Company's products will achieve market acceptance
in such markets. The failure of emerging markets targeted by the Company to
develop or the failure by the Company's products to achieve acceptance in such
markets could materially adversely affect the Company's business, financial
condition and results of operations.
International Operations. For several years, most of the Company's net sales
have been made to foreign subsidiaries of European and United States
corporations. The Company anticipates that sales to foreign subsidiaries of
European and U.S. corporations will continue to account for a significant but
declining portion of its net sales in the foreseeable future. As a result, a
significant portion 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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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,
if the Company transfers additional 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. If the Company increases the amount of its assets in Indonesia,
there can be no assurance that changes in economic and political conditions in
Indonesia will not have a material adverse effect on the Company's business,
financial condition and results of operations. Enforcement of existing and
future laws and private contracts is uncertain, and the implementation and
interpretation thereof may be inconsistent.
Sole or Limited Sources of Supply. Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. In the production of its CERDIP products the Company
has one supplier for its alumina powder, two suppliers for its ultraviolet
lenses and one supplier of certain sealing glasses. The Company also has one
supplier of the ICs that are sold with the Company's packaging products. In
addition, there are a limited number of qualified suppliers of laminate
substrates which are of critical importance to the production of the Company's
MCM products. In the manufacturing process, the Company also utilizes consigned
materials supplied by certain of its customers. The Company's reliance on sole
or a limited group of suppliers and certain customers for consigned materials
involves several risks, including a potential inability to obtain an adequate
supply of required materials and reduced control over the price, timely
delivery, and quality of raw materials. There can be no assurance that problems
with respect to yield and quality of such materials and timeliness of deliveries
will not continue to occur. Disruption or termination of these sources could
delay shipments of the Company's products and could have a material adverse
effect on the Company's business, financial condition and operating results.
Such delays could also damage relationships with current and prospective
customers, including customers that supply consigned materials.
Product Quality and Reliability; Need to Increase Production. The Company's
customers establish demanding and time-consuming specifications for quality and
reliability that must be met by the Company's products. From initial customer
contact to actual qualification for production, which may take as long as three
years, the Company typically expends significant resources. Although the Company
has generally met its customers' quality and reliability product specifications,
the Company has in the past experienced and is currently experiencing
difficulties in meeting some of these standards. Although the recent 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 continue or
recur in the future. If such problems did continue or 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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Expansion of Operations. In order to be competitive, the Company must implement
a variety of systems, procedures and controls and greatly improve its
communications between its U.S. and Singapore and Indonesian operations. The
Company expects its operating expenses to continue to increase. If orders
received by the Company do not result in sales or if the Company is unable to
sustain net sales at anticipated levels, the Company's operating results will be
materially adversely affected until operating expenses can be reduced. The
Company's expansion will also continue to cause a significant strain on the
Company's management, financial and other resources. If the Company is to grow,
it must expand its accounting and other internal management systems and greatly
improve its communications between its U.S. and Singapore and Indonesian
operations, and there can be no assurance that the Company will be successful in
effecting such expansion. Any failure to expand these areas in an efficient
manner at a pace consistent with the Company's business could have a material
adverse effect on the Company's results of operations. Moreover, there can be no
assurance that net sales will increase or remain at or above recent levels or
that the Company's systems, procedures and controls will be adequate to support
the Company's operations. The Company's financial performance will depend in
part on its ability to continue to improve its systems, procedures and controls.
Intellectual Property Matters. Although the Company attempts to protect its
intellectual property rights through patents, trade secrets and other measures,
it believes that its financial performance will depend more upon the innovation,
technological expertise, manufacturing efficiency and marketing and sales
abilities of its employees. There can be no assurance that others will not
independently develop similar proprietary information and techniques or gain
access to the Company's intellectual property rights or disclose such technology
or that the Company can meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products, duplicate the Company's products
or design around the patents owned by the Company, or that third parties will
not assert intellectual property infringement claims against the Company. In
addition there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights.
Litigation is becoming necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not conducted any patent searches or obtained an
opinion of counsel with respect to its proprietary rights. Although no claims or
litigation related to any 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.
Environmental Regulations. The Company is subject to a variety of local, state,
federal and foreign governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture the Company's products. The Company
believes that it is currently in compliance in all material respects with such
regulations and that it has obtained all necessary environmental permits to
conduct its business. Nevertheless, the failure to comply with current or future
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Compliance with such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses. Any failure by the
Company to control the use, disposal, removal or storage of, or to adequately
restrict the discharge of, or assist in the cleanup of, hazardous or toxic
substances, could subject to the Company to significant liabilities, including
joint and several liability under certain statutes. The imposition of such
liabilities could materially adversely affect the Company's business, financial
condition or results of operations.
Growth Strategy Through Acquisitions. As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition of comparable or
complementary businesses or technologies. The implementation of this strategy
will depend on many factors, including the availability of acquisitions at
attractive prices and the ability of the Company to make acquisitions, the
integration of acquired businesses into existing operations, the expansion of
the Company's customer base and the availability of required capital.
Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
Dependence on Key Personnel. The Company's financial performance 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 Electronic Bulletin Board Listing Requirements. The Company was delisted
from the Nasdaq National Market on March 13, 1997, at which date the Company's
Common Stock began trading on the Nasdaq Electronic Bulletin Board. The Company
will be subject to continuing requirements to be listed on the Nasdaq Electronic
Bulletin Board. 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. There can be no assurance that the Company will be able to requalify
for listing on the Nasdaq National Market.
Volatility of Stock Price. The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's financial results, general conditions or developments in the
semiconductor and personal computer industry and the general economy, sales of
the Company's Common Stock into the marketplace, the ability of the Company to
sell its stock on an exchange or over-the-counter, an outbreak of hostilities,
natural disasters, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in the Company's
relationships with its customers and suppliers, or a shortfall or changes in
revenue, gross margins or earnings or other financial results from analysts'
expectations could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In recent years the stock market in general, and the
market for shares of small capitalization stocks in particular, including the
Company, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
Net Operating Loss. The Company's decision to discontinue its multilayer
ceramic operations was the factor contributing to its 1996 net loss of $41.8
million. On March 31, 1997, the Company had a
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
working capital deficiency of $29.9 million, which included $2.9 million line of
credit borrowings that were due on demand, the then-current portion of long-term
debt of $7.9 million, plus the net current liabilities of discontinued
operations of $20.4 million.
Risk of Limitation of Use of Net Operating Loss Carryforwards. As of March 31,
1997, the Company had net operating loss carryforwards of approximately
$11,840,000 for federal income tax purposes, which may be utilized through 2000
to 2011, and approximately $11,840,000 for state income tax purposes, which may
be utilized through 2000 to 2011 (subject to certain limitations). As of March
31, 1997, the Company's deferred tax assets, consisting primarily of the net
operating loss carryforwards, have been fully reserved since the assets are not
more likely than not realizable. The conversion of the $2.8 million of
convertible debentures issued in October, 1997 and certain other equity
transactions resulted in an "ownership change" as defined in Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company's use of its net operating loss carryforwards to offset taxable income
in any post-change period may be subject to certain specified annual
limitations. If there has been an ownership change for purposes of the Code,
there can be no assurance as to the specific amount of the net operating loss
carryforwards, if any, available in any post-change year since the calculation
is based upon fact-dependent formula.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of May 9, 1997, various creditors have instituted legal actions
against the Company and its subsidiaries in order to recover
amounts due. In addition, numerous other creditors and parties to
contracts have threatened or initiated litigation to recoup their
loans and/or investments. If these claims are not favorable
resolved, they will have a material adverse effect on the Company's
financial condition, results of operations and ability to continue
as a going concern.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
As of March 31, 1997, the Company and its subsidiaries were in
default on substantially all of their debt obligations, which total
$7,931,000, due to non-payment of principal or interest payments
due. In addition, the Company's MPM subsidiary is in default under
the terms of its debenture issued to Transpac due to non payment of
interest which was due on December 31, 1996. These debentures have
been guaranteed by MPI.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
March 31, 1997:
Report on Form 8-K dated March 1, 1997 was filed with the
Securities and Exchange Commission on March 13, 1997, regarding the
Board of Directors' decision to liquidate MPM (S) Pte., Ltd., one
of the Company's wholly-owned Singapore subsidiaries; the Board of
Directors' approval of the restructuring of MPS (S) Pte., Ltd.,
another of the Company's wholly-owned Singapore subsidiaries,
pursuant to which MPS may be placed under Judicial Management, as
defined under Singapore law; and the conversion of the remaining
outstanding Convertible Debentures sold to Dusseldorf Securities,
Ltd. and various offshore investors on October 24, 1996, for an
aggregate of 5,108,783 shares of the Company's Common Stock.
Report on Form 8-K dated December 16, 1996 was filed with the
Securities and Exchange Commission on January 15, 1997, regarding
the amendment of the terms of subscription agreements for
Convertible Debentures with Dusseldorf Securities, Ltd. and various
offshore investors to eliminate a provision of the subscription
agreements which limited the conversion of such Convertible
Debentures to no more than 20% of the outstanding Common Stock of
the Company, pursuant to an exemption granted by the Nasdaq Stock
Market, Inc.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K (continued)
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
<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.
MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Registrant)
Date: May 14, 1997 By: /s/ ALFRED JAY MORAN JR.
------------ ----------------------------
ALFRED JAY MORAN, JR.
PRESIDENT & CHIEF
EXECUTIVE OFFICER
Date: May 14, 1997 BY: /s/ DENIS J. TRAFECANTY
------------ ----------------------------
DENIS J. TRAFECANTY
CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Primary Net Income (Loss) Per Share:
Net income (loss) $(1,219,000) $ 565,000
- -------------------------------------------------------------------------------
Weighted average shares outstanding:
Shares outstanding from beginning of period 6,991,493 4,707,000
Conversion of $1.9 million of debentures
into 3,801,787 shares of common stock 2,048,010 -
Common equivalents - options to directors,
officers and employees, net of treasury shares - 196,000
- -------------------------------------------------------------------------------
Weighted average common and
common equivalent shares outstanding 9,039,503 4,903,000
===============================================================================
Primary net income (loss) per common share $ (0.13) $ 0.12
===============================================================================
Fully Diluted Net Income (Loss) Per Share:
Net income (loss) $(1,219,000) $ 565,000
- -------------------------------------------------------------------------------
Weighted average shares outstanding:
Shares outstanding from beginning of period 6,991,493 4,707,000
Conversion of $1.9 million of debentures into
3,801,787 shares of common stock 2,048,010 -
Common equivalents - options to directors,
officers and employees, net of treasury shares - 196,000
- -------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding 9,039,503 4,903,000
===============================================================================
Fully diluted net income (loss) per common share $ (0.13) $ 0.12
===============================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF MARCH 31, 1997 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND
SHAREHOLDERS EQUITY FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,949
<SECURITIES> 0
<RECEIVABLES> 4,732
<ALLOWANCES> 0
<INVENTORY> 13,560
<CURRENT-ASSETS> 22,120
<PP&E> 3,264
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,258
<CURRENT-LIABILITIES> 52,000
<BONDS> 4,390
0
0
<COMMON> 39,839
<OTHER-SE> (69,789)
<TOTAL-LIABILITY-AND-EQUITY> (29,950)
<SALES> 13,894
<TOTAL-REVENUES> 13,894
<CGS> 13,177
<TOTAL-COSTS> 13,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390
<INCOME-PRETAX> (1,219)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,219)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
