-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NkG3084nMk2DGSWa7vms6FwlEkwg4EQD0OJqy9XNzqfk0rv3gdEjThL7D4TLiN8A F46nEWKFabA4GHRhFTvMvQ== 0001017062-97-000984.txt : 19970520 0001017062-97-000984.hdr.sgml : 19970520 ACCESSION NUMBER: 0001017062-97-000984 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROELECTRONIC PACKAGING INC /CA/ CENTRAL INDEX KEY: 0000916232 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943142624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23562 FILM NUMBER: 97607329 BUSINESS ADDRESS: STREET 1: 9350 TRADE PLACE CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195301660 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED 3-31-97 ================================================================================ 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. =============================================================================== Index Page No. - ----- ------- 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
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31, 1997 1996 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
3 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, ----------------------------- 1997 1996 - ----------------------------------------------------------------------------------- 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 ===================================================================================
4 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, ------------------------------ 1997 1996 - ------------------------------------------------------------------------------------------------------ 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 ======================================================================================================
5 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT (unaudited)
Common Stock ----------------------- Accumulated Shares Amount Deficit Total ---------- ----------- ------------- ------------ 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) ========== =========== ============= ============
6 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
Inventories consist of the following: MARCH 31, 1997 December 31, 1996 -------------- ----------------- (unaudited) 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 =========== ===========
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. 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.
Historical Pro Forma Pro Forma March 31, 1997 Adjustments March 31, 1997 ======================================================================================= 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 =======================================================================================
(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.
Historical Pro Forma Three Months Ended Pro Forma Three Months Ended March 31, 1997 Adjustments March 31, 1997 ========================================================================================= 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) =======================================================================================
(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. 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. 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. 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. 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. 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 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. 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. 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 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 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, 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. 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 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 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 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 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 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. 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. 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 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. 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. 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 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 EXHIBIT INDEX
Number Description - ------ ----------- 11.1 Computation of Net Income (Loss) per Common Share 27.1 Financial Data Schedule
EX-11.1 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE EXHIBIT 11.1 MICROELECTRONIC PACKAGING, INC. COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Three months ended March 31, ---------------------------- 1997 1996 - ------------------------------------------------------------------------------- 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 ===============================================================================
EX-27.1] 3 FINANCIAL DATA SCHEDULE
5 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. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 2,949 0 4,732 0 13,560 22,120 3,264 0 26,258 52,000 4,390 0 0 39,839 (69,789) (29,950) 13,894 13,894 13,177 13,177 0 0 390 (1,219) 0 (1,219) 0 0 0 (1,219) (0.13) (0.13)
-----END PRIVACY-ENHANCED MESSAGE-----