-----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, JZ8ksVnKRiP2LRhtwIe/mayKMCYsGwJ5/sSsMraXpwp4XvVtZrQlcYsyGueeRypc vsh733mdT+mSJIEuuZANyw== 0001017062-97-001257.txt : 19970630 0001017062-97-001257.hdr.sgml : 19970630 ACCESSION NUMBER: 0001017062-97-001257 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970627 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-23562 FILM NUMBER: 97631880 BUSINESS ADDRESS: STREET 1: 9350 TRADE PLACE CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195301660 10-K/A 1 FORM 10-K/A AMENDMENT #3 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-K/A This report amends the Registrant's Annual Report on Form 10-K originally filed on April 15, 1997 with the Securities and Exchange Commission. (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 ----------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from_______________________ to________________________ Commission file number: 0-23562 MICROELECTRONIC PACKAGING, INC. (Exact name of Registrant as specified in its charter) California 94-3142624 (State of Incorporation) (I.R.S. Employer Identification No.) 9350 Trade Place, San Diego, California 92126 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (619) 530-1660 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, no par value. Indicate by check mark 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of April 10, 1997 was approximately $2,769,526 (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq Electronic Bulletin Board for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On April 14, 1997, approximately 10,793,280 shares of the Registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. None. =============================================================================== ITEM 7. 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 Annual Report on Form 10-K. RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data of the Company expressed as a percentage of net sales for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 ------- ------ ------- Net sales............................... 100.0% 100.0% 100.0% Cost of goods sold...................... 89.1 80.0 87.1 ----- ----- ----- Gross profit............................ 10.9 20.0 12.9 Selling, general and administrative..... 11.8 13.2 14.8 Impairment of long-lived assets......... -- -- 11.0 Engineering and product development..... 4.1 3.7 4.8 ----- ----- ----- Income (loss) from operations........... (5.0) 3.1 (17.7) Other income (expense): Interest expense....................... (1.1) (1.9) (3.6) Foreign exchange gain (loss)........... (2.4) (2.2) 0.5 Royalty revenue........................ 0.4 -- -- Other income........................... 1.2 1.1 0.6 ----- ----- ----- Income (loss) from continuing operations............................. (6.9) 0.1 (20.2) Loss from discontinued operations...... -- (2.5) (54.5) ----- ----- ----- Net (loss).............................. (6.9) (2.4) (74.7) ----- ----- -----
YEARS ENDED 1994, 1995 AND 1996 Net sales. The Company's net sales increased by 37.1% from $42.3 million in 1994 to $58.0 million in 1995 and decreased 3.6% to $56.0 million in 1996. The increase in net sales from 1994 to 1995 is primarily attributable to increases in revenues from sales of pressed ceramics products at the Company's MPS subsidiary, and a $4.6 million increase in revenues from the sales of MCM products at the Company's CTM subsidiary. The increase in sales of pressed ceramic products reflects both an increase in units sold and a general price increase implemented by MPS in the second quarter of 1995. The increase in revenue from the sale of MCMs was due to both an increase in units sold and a change in the product components sold to CTM's primary customer. Beginning in March 1994, CTM began purchasing a component of the end product from its primary customer and in turn increasing the sales price for the increase in cost. Prior to March 1994, the customer had provided the component for use in the products it was purchasing from CTM. The effect of this change was to increase both sales and cost of goods sold by $5.9 million during 1995 and $11.0 in 1996. The decrease in net sales during 1996 was primarily attributable to a $6.6 million reduction in revenues from sales of pressed ceramics products at the Company's MPS subsidiary, which was partially offset by a $4.7 million increase in revenues from the sale of MCM products at the Company's CTM subsidiary. The decrease in sales of pressed ceramic products is due primarily to a decrease in units sold. The increase in revenue from the sale of MCMs was due to both an increase in units sold and higher selling prices on new components being produced, which corresponds to a higher raw material cost for these new components. The increase from 1994 to 1995 in sales of pressed ceramic products reflects a 26.0% increase in units shipped and a 7.7% increase in the average revenue per unit. The increase in revenue from the sale of MCMs for the same period was due to an 80.3% increase in the number of units shipped, partially offset by a 13.0% decrease in the average revenue per unit. The reduction in the average revenue per unit resulted from an increase in sales of lower-priced units while the sales of higher-priced units remained relatively constant. The decrease in sales from 1995 to 1996 of pressed ceramic products reflects a 25.0% decrease in units shipped, partially offset by a 10.3% increase in the average revenue per unit. The increase in revenue from the sale of MCMs for this same period was due to a 41.3% increase in the number of units shipped and a 3.6% increase in the average revenue per unit. 15 Net sales in 1994 also includes $1.2 million derived from the transfer of certain production equipment and related production supplies to a third party pursuant to an equipment resale arrangement. There were no such revenues during 1995. Net sales in 1996 also includes $1.8 million derived from the transfer of certain production equipment and related production supplies to a third party pursuant to an equipment and technology resale arrangement. Cost of goods sold. The Company's cost of goods sold increased from $37.7 million in 1994 to $46.4 million in 1995 and to $48.8 million in 1996. The increases were primarily the result of increased sales during these periods. The cost associated with the inclusion by CTM in its furnished MCM products of components that, in previous years, were purchased by CTM's customers from third party suppliers and provided to CTM, accounted for $5.9 million of cost of goods sold in 1995 and $11.0 million in 1996. As discussed in more detail under Foreign Exchange Loss, cost of goods sold has also been materially adversely affected by exchange rate fluctuations during 1994 and 1995. The appreciation of the Japanese yen and the Singapore dollar relative to the United States dollar during those periods increased the Company's cost of goods sold and decreased its margins on products sold. Such fluctuations in exchange rates resulted in increases in the Company's cost of goods sold of $1,545,000 and $875,000 in 1994 and 1995, respectively. Cost of goods sold as a percentage of net sales decreased from 89.1% in 1994 to 80.0% in 1995 primarily due to a lesser impact of exchange rate fluctuations on the gross margins generated by the Company's Singapore operations (as discussed under Foreign Exchange Loss) and an improvement in overhead absorption at MPA due to higher product sales. Cost of goods sold as a percentage of net sales increased to 87.1% in 1996 due primarily to the reduction in sales volume during 1996. During 1995, gross margin from sales in percentage terms increased as the impact of improved pricing at MPS and improved overhead absorption at MPS, CTM and MPA due to improved shipping volumes offset increases in the costs of certain of the Company's raw materials and the impact of exchange rate fluctuations on gross margins generated by the Company's Singapore operations. However, during 1996, gross margin in percentage terms decreased due primarily to a decrease in sales volume. In addition, gross margin declined due to lower overall margins at CTM and increased gross margin degradation at MPA. The reduction in sales volume for the pressed ceramic division in 1996, was not accompanied by a corresponding reduction in production overhead, resulting in reduced overhead absorption. This generated cost of goods sold which were a higher percentage of revenue than for 1995. Selling, General and Administrative. Selling, general and administrative expenses increased from $5.0 million in 1994 to $7.6 million in 1995 to $8.3 million in 1996. The increase of approximately $2.6 million or 52.0% in 1995 is attributable to several factors, including the expenses associated with establishing a reserve relating to certain uncollectible notes, the costs associated with certain litigation, an increase in sales commissions at CTM as a result of the increase in sales of MCM products, additional personnel and other selling costs associated with the Company's operating as a sales representative for IBM, and an increase in legal, personnel and other administrative costs. An increase of less than $1.0 million in 1996 is attributable primarily to the Company's delay in responding to decreasing sales at its MPS facility. Impairment of Long-Lived Assets. As of December 31, 1996, the Company decided to dispose of its excess equipment located in Singapore and Indonesia. This equipment is used to manufacture pressed ceramic products and represents excess capacity that the Company has determined it will not need due to market turns to other packaging materials. The Company has written off the remaining net book value for specifically-identified assets in the amount of $6.36 million, net of salvage value. Of this amount, $3.0 million is for assets held in Singapore and $3.36 million is for assets in Indonesia. Engineering and Product Development. Engineering and product development costs increased from $1.7 million in 1994 to $2.2 million in 1995 and to $2.7 million in 1996. The increases in 1995 and 1996 primarily reflect an increase in personnel costs and expenditures on materials used in product development at the Company's MPS and CTM facilities. These increases were offset by a reduction in engineering and product development expenses at MPA due to the sale of most of its assets effective as of September 30, 1996. The Company currently anticipates that engineering and product development costs will remain the same or decrease in absolute dollars in the 1997. More of the Company's engineering and product development costs will be directed towards the production of MCMs in 1997. See "--Future Operating Results--Highly Competitive Industry; Significant Price Competition." Discontinued Operations. In July 1995, the Company's Board of Directors directed management to undertake the sale of the Company's MPM subsidiary (multilayer ceramic operations) and certain other related assets. In connection with this decision, the Company recorded a write down of $1.0 million during the second quarter of 1995 for the revaluation of this subsidiary to its net realizable value and the establishment of a reserve for certain exit costs to be incurred during the anticipated phase-out period. In January 1996, the Company's Board of Directors elected to continue the Company's development program associated with multilayer ceramic operations. In March 1996, the Company consummated the Transpac financing and thereby obtained additional funds to continue equipping the MPM production facility. The reserve for exit costs established during the second quarter of 1995 was completely utilized by the end of 1995. In March 1997, the Board of Directors of the Company decided to discontinue the multilayer ceramic operations and has recorded the effect of this decision as of December 31, 1996. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchase products from the Company were the main reasons that the Board decided to discontinue the multilayer ceramic operations. All of MPM's Singapore employees have since been terminated and the two remaining expatriate employees of MPM will be terminated in April 1997. MPM is currently in receivership as defined under the laws of Singapore. The receiver for MPM has asked the Company to assist him in selling off all of the remaining tangible assets for MPM. The proceeds from the sale of MPM assets will be used to retire a portion of MPM's debts. The Company anticipates that the liquidation of the multilayer ceramic operations will be completed by July 1997. As of December 31, 1996, the Company reduced the carrying value of its multilayer ceramic operation's property, plant and equipment by approximately $14.8 million, wrote-off deferred preproduction costs of $8.9 million, prepaid royalties of $2.0 million, accrued $1.5 million of costs associated with the discontinuation of this operation and accrued estimated losses through the date of disposal of $2.1 million. 16 Foreign Exchange Loss. During 1994 and 1995, the Company's results of operations were materially adversely affected by the declining value of the United States dollar compared to the Japanese yen and the Singapore dollar. During this time period, the Japanese yen exchange rate declined from 112 Japanese yen to 1 US dollar to as low as 83.1 Japanese yen to 1 US dollar, and the Singapore dollar exchange rate declined from 1.60 Singapore dollars to 1 US dollar to as low as 1.39 Singapore dollars to 1 US dollar. In 1996, the Japanese yen exchange rate rebounded from 1995's low of 83.1 Japanese yen to 1 US dollar to 115.85 Japanese yen to 1 US dollar, while the Singapore exchange rate stabilized during 1996, only ranging from a high of $1.4215 to a low of $1.3975 Singapore dollars to 1US dollar. The fluctuations in the relative value of these currencies from their relative values at the beginning of each respective fiscal year resulted in the Company's experiencing additional costs of $2,552,000 and $2,129,000 in 1994 and 1995, respectively. The fluctuations in the relative value of these currencies from their relative values at the beginning of fiscal year 1996 resulted in the Company's experiencing a gain of $1,388,000. For financial reporting purposes, a portion of these additional costs and gains is included in cost of goods sold, while the remainder is recorded in the caption foreign exchange loss/gain. Such fluctuations in exchange rates have resulted in reductions of the Company's gross profit on product sales of $1,545,000 and $875,000 in 1994 and 1995, respectively, and an increase in the Company's gross profit on product sales of $1,096,000 in 1996. During 1994 and 1995, the Company reported foreign exchange transaction losses of $1,009,000 and $1,233,000, respectively, with discontinued operations including a $2,000 gain and $21,000 loss on foreign exchange transactions, respectively. During 1996, the Company reported foreign exchange transaction gains of $292,000. Fluctuations in foreign exchange rates have a significant impact on the Company's results of operations. Certain of the Company's raw material purchases and other costs of production and administration are denominated in Japanese yen and Singapore dollars, while all of the Company's sales are denominated in U.S. dollars. Consequently, a change in exchange rates between the U.S. dollar and the Japanese yen or the Singapore dollar can affect the Company's cost of goods sold or its selling, general and administrative expenses, resulting in gains or losses that are included in the Company's results of operations. Exchange rate fluctuations also impact the carrying value of certain of the Company's obligations, resulting in foreign currency transaction gains or losses that are likewise included in the Company's results of operations. Fluctuations in exchange rates also subject the Company to gains or losses on its outstanding forward foreign currency contracts. For financial reporting purposes, the gain or loss arising from exchange rate fluctuations between the transaction date for a transaction denominated in a foreign currency and that transaction's settlement date, or reporting date for transactions which have not settled, is characterized as a foreign exchange gain or loss, as is the gain or loss suffered on outstanding forward foreign currency contracts. In an effort to minimize the impact of foreign exchange rate movements on the Company's operating results, and subject to financing from and the consent of 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 terms of the forward contracts generally involve the exchange of U.S. dollars for either Japanese yen or Singapore dollars at a future date, with maturities generally ranging from one to nine months from the execution date of the forward contract. At contract maturity, the Company makes net settlements of U.S. dollars for foreign currencies at forward rates that were agreed to at the execution date of the forward contracts. The Company utilizes its S$30,000,000 (US$21,436,000 at December 31, 1996) foreign exchange line of credit with DBS to finance the purchase of forward foreign currency contracts with maturities of up to 12 months. Advances under this line of credit are guaranteed by MPI and are secured by all of the assets of MPS, including a second mortgage on MPS's leasehold land and buildings. The Company's ability to utilize this line is subject to significant limitations imposed by DBS. Another factor which restricts the Company's hedging activities is the available borrowing capacity of the foreign exchange line of credit. In addition, the Company generally enters into forward contracts only when it anticipates future weakening of the U.S. dollar relative to the Singapore dollar or Japanese yen. As a result of these and other factors, the Company's hedging measures have been and may continue to be severely limited in their effectiveness. 17 The Company's operating results have been and will continue to be materially adversely affected by any weakening in the U.S. dollar relative to either the Japanese yen or the Singapore dollar. During the first half of 1995, both the Japanese yen and the Singapore dollar appreciated in value against the U.S. dollar. The appreciation of these currencies had the effect of increasing the Company's cost of goods sold and selling, general and administrative expenses and decreasing the margins of the Company's products. During the second half of 1995, although the value of the U.S. dollar rebounded against both the Japanese yen and the Singapore dollar, the Company incurred additional foreign exchange losses due to its obligations under its outstanding forward foreign currency contracts, which required the Company to purchase Japanese yen and Singapore dollars at contract rates that were below prevailing market rates at the date of settlement. In 1996, the US dollar appreciated in value against the Japanese yen and did not fluctuate significantly against the Singapore dollar. Any future weakening of the US dollar relative to either the Singapore dollar or the Japanese yen will have a material adverse effect upon the Company's business, financial condition and results of operations. To mitigate the effects of the weaker US dollar, the Company increased sales prices of certain of its products during the second quarter of 1995. In the second half of 1996, the Company, under pressure from customer reaction to the weakening Japanese yen, reduced prices by approximately half of the 1995 price increase. The Company will attempt to further minimize the potential material adverse effect of a weaker US dollar by qualifying non-Japanese sources of key materials. There can be no assurance that such measures will offset the impact of the weaker US dollar on the Company's operating results. Interest expense. Interest expense increased from $443,000 in 1994 to $1,123,000 in 1995 to $2,032,000 in 1996. The increase of $680,000 in 1995 is primarily due to additional borrowings by the Company under its borrowing arrangements with DBS Bank (see Liquidity and Capital Resources), and the additional borrowings associated with the program to acquire equipment from SSC (see Notes 4 and 8 of Notes to Consolidated Financial Statements). The increase of $909,000 in 1996 is primarily due to the discount and interest on the convertible debentures issued to offshore investors and the effect of borrowings to acquire equipment. The Company is negotiating with Transpac Capital Pte. Ltd. in an effort to convert the Company's entire indebtedness of $9.0 million plus accrued interest owed to Transpac into the Company's equity. If successful, the Company's future interest expense will be reduced by a significant amount. Other income. Other income was $496,000, $614,000 and $369,000 in 1994, 1995 and 1996, respectively. Other income in 1994 reflects primarily the inclusion of $100,000 of interest income and approximately $136,000 of non- recurring technology and training fees billed to a third party. The majority of other income arising in 1995 reflects the receipt during the first quarter of 1995 of a $375,000 payment from an insurance policy (net of legal fees) covering product losses incurred in 1988 due to the contamination of products during the manufacturing process. The Company believes this will be the final payment relating to any insurance recovery relating to this loss. The majority of other income in 1996 represents interest income and the sale of scrap (which is generated during normal operations). Effects of income taxes. During 1996 and 1994, the Company's foreign and domestic operations generated operating losses for both financial reporting and income tax purposes. During 1995, taxable income at the Company's domestic and foreign operations was offset by the utilization of net operating loss and other carryforwards. As of December 31, 1996, the Company had net operating loss carryforwards of $11.8 million for federal income tax purposes and approximately $0.8 million for California tax purposes. In addition, at December 31, 1996, the Company had $0.4 million in federal research and development credits and $31,000 in investment tax credits available for United States income tax purposes. The Company believes it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. As of December 31, 1996, the Company had capital allowance carryforwards of approximately $5.7 million for Singapore income tax purposes. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax 18 bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion of all of the deferred tax assets will not be realized. As a result of the Company's significant losses in 1996 and prior years and uncertainties surrounding the realization of the net operating loss carryforward which was generated during 1996 and prior years, management has determined that the realization of deferred tax assets is not more likely than not. Accordingly, a 100% valuation allowance has been recorded as of December 31, 1995 and December 31, 1996 in the amounts of $5.59 million and $7.36 million, respectively. LIQUIDITY AND CAPITAL RESOURCES During 1994, 1995 and 1996, the Company financed its operations through a combination of cash flow from operations, bank and other borrowings, equipment lease financings and certain other debt and equity financings. During 1996, operating activities of continuing operations provided $2.5 million of cash, while discontinued operations used $6.7 million. Investing activities, primarily consisting of acquisitions of fixed assets, used $9.5 million and financing activities provided net cash of $13.7 million during the same period. At December 31, 1996, the Company had a working capital deficiency of $30,015,000 and an accumulated deficit of $68,752,000. During 1996, the Company completed an equity financing of $2,000,000 with Transpac and the Company also issued to Transpac $9,000,000 of convertible debentures. In October 1996, the Company raised an additional $2,800,000 by issuing a series of convertible debentures to various investors. Such convertible debentures were not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided by Regulation S promulgated thereunder. During 1996, MPM financed approximately $1.8 million of equipment purchases with lease financing. MPS borrowed $1,000,000 from DBS in October 1996 under a one-year loan guaranteed by Samsung- Corning. The Company's principal sources of liquidity at December 31, 1996 consisted of $2,954,000 of cash, and very limited available borrowing capacity with DBS. MPS has a $6,788,000 borrowing arrangement with DBS, guaranteed by MPI, consisting of a working capital line of credit facility and an overdraft facility. Borrowings under this arrangement are due on demand and are secured by substantially all of the assets of MPS. Borrowings under the working capital line and the overdraft facility bear interest at the Singapore prime rate plus 1/2% and plus 3/4%, respectively. At December 31, 1996, MPS had outstanding borrowings under this arrangement of $5,062,000. In addition, MPS had loans from, or guaranteed by, customers totaling $10,333,000. MPC has a $357,000 borrowing arrangement with DBS, guaranteed by both MPI and MPS, consisting of a working capital line of credit facility and an overdraft facility. Borrowings under this arrangement are due on demand and are secured by all of the assets of MPC. Borrowings under the working capital line of credit facility and the overdraft facility bear interest at the Singapore prime rate plus 1/2% and plus 3/4%, respectively. At December 31, 1996, MPC had outstanding borrowings under this arrangement of $139,000. MPM has a $3,500,000 borrowing facility with DBS. The facility, which is guaranteed by both MPI and MPS, consists of a $3.2 million short-term advance facility and a $300,000 import/export bills facility. Advances under this credit facility 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 December 31, 1996, MPM had outstanding borrowings under this arrangement of $3,298,000. Borrowings under this arrangement are secured by substantially all of the assets of MPM and have been guaranteed by MPS and MPI. On April 10, 1997, DBS sent to MPS a written demand for payment of the outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS imposed the default interest rate (additional 3% interest rate) on the outstanding debt (as discussed below). 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 and MPC agreements also contain restrictive provisions. As of December 31, 1996, MPS was in violation of certain covenants set forth in its agreements with DBS. As a result of the cross default provisions, the borrowing agreements between DBS and MPC and MPM are in default. These borrowing agreements permit DBS to charge an increased rate of interest (the "default interest rate"), which is equal to the interest rate stated above plus 3%, or such other rate as may be determined by DBS, while the borrowing agreements are in default. The Company is attempting to renegotiate the covenants of the borrowing agreements between MPS and DBS. As of April 11, 1997, the Company has been unable to obtain a waiver of compliance from DBS with respect to the MPS borrowing agreements; however, DBS has not declared a default with respect to the MPS borrowing agreements and has continued to permit MPS and MPC to utilize the 19 credit facilities within the previously established limits. Also, if DBS appoints a receiver for MPS, any liquidation of MPS would not provide sufficient resources to repay the loan obligations of MPS, which, as described previously, could result in the foreclosure of assets of CTM, MPA and MPI pledged as security, and perfection of the guarantees by MPI. Additionally, the receiver would demand payment of accounts receivable from CTM ($1,326,000). Since the original terms of these borrowing agreements call for the balances to be due on demand, the Company continues to report the balances due as current liabilities on the Consolidated Balance Sheet as of December 31, 1996. The Company anticipates that the industry-wide depressed market for pressed ceramics will continue into 1997. Should this softening market continue, the Company will continue to have difficulty in meeting its covenants with DBS. The Company is in regular communication with DBS, providing DBS with data on the Company and the industry. No assurances can be made that the Company will receive a waiver of compliance with these covenants. Failure to receive these waivers would materially adversely affect the Company's results of operations, financial position and prospects for raising additional capital and continued viability. At December 31, 1996, the Company also had borrowings of $9.0 million under the Transpac debenture (see Note 17 of Notes to Consolidated Financial Statements), $1.3 million under a note payable to a customer bearing interest at 14.0% (see Note 8 of Notes to Consolidated Financial Statements), $1.3 million under mortgage notes bearing interest at rates of 7.5% and 7.75%, $80,000 under a term loan bearing interest at 12.2%, and $2.0 million under capital lease obligations, consisting of various machinery and equipment financing agreements, bearing interest at various rates. Borrowings under the above arrangements are secured by various assets of the Company. The Company also incurred certain non-interest bearing obligations in connection with the CTM acquisition that have been discounted to their net present value of $291,000 at December 31, 1996. As of December 31, 1996, approximately $600,000 of accrued interest was due and payable under the Transpac debenture. As of April 11, 1997, this accrued interest remains unpaid. The Transpac debenture, mortgage notes and two of the customer loans contain cross default provisions. In the event of default, the interest rate on the Transpac debenture may increase from 8.5% to 9% per annum, and interest on the mortgage notes may increase by 3% over their rates of 7.5% and 7.75%. As of April 11, 1997, no demand for acceleration of the principal has been made on any of these debt instruments under their respective cross default provisions, nor has the Company been informed that the interest rate penalties discussed above have been implemented by any of these creditors. As a result, the Company reports the entire balance of debt obligations with cross default provisions as current liabilities on the Consolidated Balance Sheet as of December 31, 1996. 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 failed to make timely principal payments under its loan obligations to TI and SGS-Thomson, as of December 31, 1996. Additionally, MPS has failed, as of March 1997, to make timely principal payments to Citibank N.A. under a note 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. 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 on the outstanding balance 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 note with SGS-Thomson and Citibank to cure any current defaults and to restructure the note to be more favorable to the Company. There can be no assurance that the Company will be successful in these negotiations or that the lenders will not avail themselves of the remedies available to them. MPI has failed to make timely principal payments under a note with NSEB which was due on January 2, 1997. Remedies available to NSEB include acceleration of the balance of the note and attachment and/or foreclosure of certain MPI assets and receivables. 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 (and extended) payment schedule. The interest rate on the outstanding balance, however, was raised from 14% per annum to 18% per annum. 20 The Company informed DBS in March 1997 that MPM would be unable to repay its borrowings with DBS as part of the liquidation of the Company. DBS has informed MPM that it intends to demand immediate payment of the entire $3,298,000 currently due under the MPM loan. Since MPM has insufficient resources to repay DBS, 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. MPM owes approximately $2.0 million on these equipment leases. The Company believes that the disposal of MPM's assets will be insufficient to fully repay the debt obligations of MPM. These obligations have been fully guaranteed by MPI. The Company is currently attempting to negotiate repayment terms with DBS and with the leasing companies for the anticipated shortfall. On April 10, 1997, DBS sent to MPS a written demand for payment of the outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS imposed the default interest rate (additional 3% interest rate) on the outstanding debt (as discussed above). 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 obligations of MPS and may not be discharged by the liquidation of MPM. The Company has reflected these anticipated obligations in its Consolidated Balance Sheet as of December 31, 1996. The financial resources of MPS are insufficient for it to immediately repay the MPM trade creditors. MPS may need to be reorganized under Judicial Management, as that term is defined under Singapore law or under Chapters 7 or 11 of Title 11 of the United States Code, or DBS 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. There can be no assurance that, if MPS is placed under Judicial Management or under Chapter 11 of Title 11 of the United States Code, any reorganization of MPS's debt obligations can be successfully completed. 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. In October 1996, the Company issued $2,800,000 of convertible debentures at a per annum interest rate of 8% to a group of offshore investors. This offering was not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided by Regulation S promulgated thereunder. The Company also issued to one of the offshore investors a warrant to purchase 75,421 shares of the Company's Common Stock. The exercise price of the warrant is the lesser of the average price at which the debentures are converted ($0.55 per share) or 110% of the closing bid price of the Company's Common Stock as reported by Nasdaq National Market on October 23, 1996 (which was $2.75 per share). The warrant became exercisable 45 days after October 23, 1996 and will remain exercisable until October 23, 1997. The debentures were converted beginning December 13, 1996 and completely converted on February 20, 1997. The offshore investors were issued an aggregate of 5,108,783 shares of the Company's Common Stock. The conversion of these debentures significantly diluted any earnings per share amount and significantly diluted the ownership interests of MPI's shareholders. The Company's inventory levels were significantly higher as of December 31, 1996 than in prior years. One of the Company's customers, Schlumberger, is a supplier of raw materials to the Company and such materials are used by the Company to manufacture products sold to Schlumberger. In late 1996, Schlumberger had difficulty delivering the proper mix of raw materials needed by the Company to fully produce products for Schlumberger. Schlumberger's inability to deliver the missing raw materials, while continuing to deliver other components, resulted in an unanticipated increase in the Company's inventory levels. The Company expects these inventory levels to return to lower levels in mid-1997. There can be no assurance, however, that Schlumberger will able to provide in the future an adequate supply of raw materials in the proper mix; if not, then the Company may again be required to carry significantly higher than historical inventory levels, thereby affecting the Company's liquidity and scarce working capital. 21 Since the execution of the IBM Agreement, expenditures associated with the establishment by MPM of a production facility in Singapore to manufacture products incorporating the technology licensed from IBM under the IBM Agreement have totaled over $25,000,000. During the same period, the Company also paid an additional $2,000,000 of up-front nonrefundable royalties to IBM. These expenditures, which have been partially funded through bank and lease financing, have had a material adverse effect on the Company's cash flow conditions, business, operations and capital resources. TRADE ACCOUNTS PAYABLE The Company's trade accounts payable increased from $9.3 million in 1995 to $12.5 million in 1996 due mostly to the purchase of raw materials from Schlumberger, such purchase corresponding to an increase in inventory. FUTURE 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 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 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 have a material adverse effect on the Company's ability to obtain additional financing. See "Future Capital Needs; Need for Additional Financing -- Liquidity and Capital Resources -- Consolidated Financial Statements." 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. In fact, if the Company were to be reorganized or liquidated under the applicable laws of either the United States or Singapore, the bankruptcy laws of 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 research 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 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 at the earliest by the end of 1997. Equipping such facility to fully process and produce pressed ceramic products is subject to a number of conditions, including, but not limited to, additional transfers of pressed ceramic manufacturing equipment from Singapore, and there can be no assurance that such facility will be so equipped. Pursuant to the terms of 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 $2.0 million related to the supply of such raw 22 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 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. Upon the completion of the transfer of its pressed ceramic production operations to the facility in Indonesia, the Company may consolidate the MPS Singapore operations, which currently occupy two facilities, into one facility. Such consolidation, if undertaken by the Company, would require significant expenditures and such consolidation may not be complete until the end of 1997. The Company does not currently have the resources to consolidate MPS's Singapore facilities. In the event that the Company requires additional funds to finance the consolidation of MPS's facilities, the Company will seek additional financing through subsequent sales of its debt or equity securities or through bank or lessor financing alternatives, if available. There can be no assurance that the Company will not incur additional costs with respect to the establishment of the manufacturing facility in Indonesia or the consolidation, if any, of MPS's Singapore operations. 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. If the Company cannot reach an agreement with its creditors to repay its obligations, the Company will not be able to continue as an ongoing 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 and Transpac. 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 may 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 alleged 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 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 similar bankruptcy laws of Singapore. See "Liquidity and Capital Resources." 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 23 results of operations. In addition, the Company has been forced to delay, downsize or eliminate other research 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. Future Operating Results. The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future depending upon a variety of factors, including foreign currency losses, corporate and debt restructurings, creditor relationships, conversions of significant amounts of debt into a significant amount of equity, downward pressure in gross margins, 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 research and development, capital equipment and other commitments of the Company, among other factors, will make it difficult for the Company to reduce its expenses in a particular period if the Company's sales goals for such period are not met. A large portion of the Company's operating expenses are fixed and are difficult to reduce or modify should revenues not meet the Company's expectations, thus magnifying the material adverse impact of any such revenue shortfall. Accordingly, there can be no assurance that the Company will not continue to sustain losses in the future or that such losses will not have a material adverse effect on the Company's business, financial condition and results of operations. Repayment of Debt Obligations by MPM. As of December 31, 1996, 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 the assets will be insufficient to fully repay its outstanding debt. Since the borrowings have been guaranteed by MPI, the Company is currently attempting to negotiate terms with DBS for the repayment of the remaining indebtedness. On April 10, 1997, DBS sent to MPS a written demand for payment of the outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS imposed the default interest rate (additional 3% interest rate) on the outstanding debt (as discussed above). The failure by the Company to obtain favorable repayment terms would materially adversely affect the Company's financial condition. As of December 31, 1996, 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 24 remaining indebtedness. The failure by the Company to obtain favorable repayment terms would materially and 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. 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 a substantial amount of money. 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. In order to protect itself from creditors, MPS may need to seek protection under Judicial Management, as that term is defined under Singapore law or under Chapter 7 or 11 of Title 11 of the United States Code. DBS, as the primary secured creditor of MPS, may elect to appoint a receiver over MPS if MPS chooses to appoint a judicial manager. 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 MPS will be successful in reorganizing itself if it is placed into judicial management. There can also 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 any outstanding debt 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 December 31, 1996, MPS had outstanding borrowings of approximately $5.1 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 revenues and hold substantially all of the Company's assets. Any such loss of 25 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. Furthermore, the acquisition by Motorola of the Subsidiary Voting Rights would constitute an event of default under the Manufacturing and Technology Agreements with Carborundum, thereby giving Carborundum the right to terminate the Manufacturing and Technology Agreements. Upon such a termination by Carborundum, the Company may lose the rights to the technology that it has licensed from such entity. The Company's loss of these rights would preclude the Company from manufacturing and selling products based on such technology and could have a material adverse effect on the Company's business, financial condition and results of operations. The agreements covering the Transpac Financing, including the convertible debenture and MPI's guarantee of such MPM indebtedness, contain numerous restrictions and events of default that 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 $34.9 million in debt obligations as of December 31, 1996. On December 31, 1996, the Company had a total shareholders' deficit of approximately $30.6 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 26 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 will continue to be materially adversely affected by any weakening of the United States dollar relative to these currencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Any appreciation of such currencies relative to the United States dollar would result in exchange losses for the Company and could have the effect of increasing the Company's costs of goods and general and administrative expenses and decreasing its margins or in making the prices of the Company's products less competitive. Accordingly, such effects have had and will continue to have a material adverse effect upon the business, financial condition and results of operations of the Company. Although the Company seeks to mitigate its currency exposure through hedging measures, these measures have been and may in the future be significantly limited in their effectiveness. In the future, the Company's operating results will also be materially adversely affected by any weakening of the United States dollar relative to Indonesia's currency. See "New Manufacturing Facilities in Indonesia; Transition of Existing Singapore Operations; New Manufacturing Facilities in Indonesia and Singapore." New Manufacturing Facilities in Indonesia; Transition of Existing Singapore Operations; New Manufacturing Facilities in Indonesia and Singapore. In 1993, 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 27 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 December 31, 1996, PTI owed the MPS approximately $2.0 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 Company currently anticipates but there can be no assurances that the facility may be able to fully process and produce pressed ceramic products at the earliest by the end of 1997. See "Future Capital Needs; Need for Additional Financing." If the Company's revenues do not increase commensurate with the anticipated increase in capacity in Indonesia, the Company's results of operations could be materially adversely affected. As is typical in the semiconductor industry, new manufacturing facilities initially experience low production yields. Any inability on the Company's or 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- Thompson) 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. To date, a significant portion of the Company's revenues have been derived from sales of pressed ceramic products to customers in the semiconductor industry. The market for the pressed ceramic product is relatively mature and demand for pressed ceramic products 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 already been is currently experiencing rapid growth but lately has demonstrated a slowdown in demand. There can be no assurance that such growth will return and that the slowdown will not continue. A reduced rate of growth in the demand for semiconductor component parts due, for example, to competitive factors, technological change or otherwise, may materially adversely affect the markets for the Company's products. From time to time, the 28 personal computer industry, like the semiconductor industry, has experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions. Accordingly, any factor adversely affecting the semiconductor or the personal computer industry or particular segments within the semiconductor or personal computer industry may materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the 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. Most of the Company's net sales to date have been made to foreign subsidiaries of European and United States corporations. The Company anticipates that sales to 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 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 29 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. See "New Manufacturing Facilities in Indonesia; Transition of Existing Singapore Operations; New Manufacturing Facilities in Indonesia and Singapore." Sole or Limited Sources of Supply. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. In the production of its CERDIP products the Company has one supplier for its alumina powder, two suppliers for its ultraviolet lenses and one supplier of certain sealing glasses. The Company also has one supplier of the 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. 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 30 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. Potential Divestiture of MPC (S) Pte. Ltd. Aluminum Nitride Subsidiary; Obligation to Purchase Products. In connection with the agreements with Carborundum for the manufacture of microelectronic packages fabricated with aluminum nitride compounds, the Company originally granted to Carborundum an irrevocable option, exercisable at any time through December 31, 1996, to acquire for an agreed-upon price set forth in the agreements up to 75% of the ownership of MPC, a subsidiary of the Company organized to manufacture and sell products only to Carborundum. In addition, Carborundum has a right to acquire for an agreed-upon price set forth in the agreements up to 100% of the ownership of MPC in the event that competitors of Carborundum's microelectronics business acquire more than 10% of the ownership of MPI or gain access to any confidential information of either MPC or MPI relating to Carborundum's microelectronics business. In either event, MPI would lose control of the management and direction of MPC and, in the event of a total divestiture, the right to participate in the profits, if any, of MPC. The exercise of either such option could materially adversely affect the Company's business, financial condition and results of operations. In addition, although Carborundum is obligated to purchase certain specified quantities of products from MPC, Carborundum may purchase such products from any other party without regard to such purchase requirements if Carborundum determines in good faith that such third party is more attractive to Carborundum than MPC on an economic, quality or risk basis. The Manufacturing Agreement and Technology Agreement were to expire on December 31, 1996. On October 1, 1996, MPC and Carborundum agreed to amend and extend the terms of the Manufacturing Agreement for an additional two years. The amendment permitted MPC to increase its profit margin on sales to Carborundum by 3.5% in 1997 and by 7% in 1998. On April 5, 1997, a fire at the Company's MPC facility caused damage to the building and some equipment. Although the extent of the damage is still being investigated, the damage is sufficient for the building to be declared unsafe for use. The Company believes that the parent company of Carborundum has entered into discussions with a third party regarding the possible sale of Carborundum. The Company is unable to determine what impact, if any, such announcement or sale will have on the Company's agreements with Carborundum. 31 Environmental Regulations. The Company is subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject to the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, financial condition or results of operations. See "Legal Proceedings." 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. 32 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. The discontinuation of this operation resulted in a write-off of $8.98 million of preproduction costs, $2.0 million of prepaid royalties, a reduction in the carrying amount of property, plant and equipment by $14.9 million and the accrual of certain costs and estimated losses to be incurred through the disposal date aggregating $3.5 million. Other factors contributing to the Company's 1996 loss were (i) a $6.2 million reduction in the carrying amounts of pressed ceramic equipment at the MPS facility in Singapore and in Indonesia, (ii) a $1.6 million allowance against MPS's receivables for inventory advanced to the Company's joint venture partner in Indonesia and (iii) a significant decline in sales of pressed ceramic products by MPS, due to an industry-wide over-supply of pressed ceramic products. On December 31, 1996, the Company had a working capital deficiency of $30.0 million, which included $5.2 million line of credit borrowings that were due on demand, the then-current portion of long- term debt of $10.6 million, plus the net current liabilities of discontinued operations of $19.3 million. 33 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS OF THE REGISTRANT The Bylaws of the Company provide that the Board of Directors shall be comprised of no fewer than four (4) nor greater than seven (7) Directors, with the exact number to be fixed by the Board. The currently authorized number of Directors is five (5), and, as of April 10, 1997 (the latest practicable date prior to the filing of Form 10-K), was comprised of Messrs. Solomon, Bryan, Howland, da Silva and Thompson. The Board of Directors has selected four (4) nominees to be elected at the next Annual Meeting, Messrs. Solomon, Bryan, Howland and Stein. Mr. Thompson resigned effective June 12, 1997 for health reasons and has been replaced by Mr. Stein. Mr. da Silva is not seeking reelection to the Board of Directors and his term will end on the date set for the Annual Meeting. The fifth position will remain vacant until the Board of Directors locates a suitable candidate. Set forth below is information regarding the nominees, including information furnished by them as to principal occupations, certain other directorships held by them, any arrangements pursuant to which they were selected as directors or nominees and their ages as of June 12, 1997.
POSITIONS AND OFFICES HELD NAME AGE WITH THE COMPANY - ---- --- -------------------------- Lewis Solomon(1)(2)(4)................... 63 Chairman of the Board of Directors Anthony J.A. Bryan(1).................... 74 Director Frank Howland(1)(3)(4)................... 70 Director Gary S. Stein(2)......................... 48 Director William R. Thompson(2)(3)................ 62 Director (resigned effective June 12, 1997) Timothy da Silva......................... 61 Director, Former President and Chief Executive Officer (Mr. da Silva's term will end on the date set for the next Annual Meeting)
- -------- (1) Member of the Compensation Committee (2) Member of the Audit Committee (3) Member of the Stock Option Plan Administration Committee (4) Member of the Technology Committee BUSINESS EXPERIENCE OF DIRECTORS The principal occupations of each current director of the Company for at least the last five (5) years are as follows: Lewis Solomon has served on the Board of Directors of the Company and as a consultant to the Company since November 1996. Since 1988, Mr. Solomon has been Chairman of the Board of Directors of G&L Investments, a strategic business consulting firm ("G&L"). Mr. Solomon previously served on the Board of Directors of the Company from January 1984 to February 1995. From October 1983 to February 1987, Mr. Solomon was Executive Vice President with Alan Patricof & Associates, an international venture capital fund. From 1969 to October 1983, Mr. Solomon worked at General Instrument Corporation, a semiconductor and electronics manufacturing company ("General Instrument"), where his last position was Senior Vice President and Assistant to the Chief Executive Officer. Mr. Solomon also serves on the Boards of Directors of Anacomp, Inc. a manufacturer of magnetic products, Anadigics, Inc., a manufacturer of gallium arsenide semiconductors, and Computer Products, Inc., a communications company. Mr. Solomon holds a B.S. degree in physics from St. Joseph's College and an M.S. in industrial engineering from Temple University. Anthony J. A. Bryan has served on the Company's Board of Directors since November 1996. Since March 1996, Mr. Bryan has been Senior Managing Director of The Watley Group, LLC, a firm that specializes in corporate restructurings, management consulting, merchant banking and mergers and acquisitions. From December 1987 to December 1995, Mr. Bryan was Chairman of the Executive Committee of Hospital Corporation International, a hospital management and health care company. From March 1988 to February 1991, Mr. Bryan was Chairman and Chief Executive Officer of Oceanics Group, a company specializing in offshore surveying and positioning services. Prior to that, Mr. Bryan was Chairman, President and Chief Operating Officer of Copperweld Corporation and President and Chief Executive Officer of Cameron Iron Works. Mr. Bryan has served on the boards of directors of several industrial, charitable and educational institutions, including Federal Express, Chrysler Corporation, Pittsburgh National Corporation and Imetal (Paris). Mr. Bryan holds a Masters Degree in Business Administration from Harvard University. Frank L. Howland has served on the Company's Board of Directors since June 1994. Since March 1989, Dr. Howland has been President of Frank L. Howland Inc., a consulting company specializing in the area of assembly and packaging of electronic components. From 1955 to 1989, Dr. Howland was a manager in the Electronic Component Research and Development divisions of Bell Laboratories, Inc. Dr. Howland holds a B.S. degree in civil engineering from Rutgers University and an M.S. and Ph.D. in civil/structural engineering from the University of Illinois. Gary S. Stein was appointed to the Board of Directors on June 12, 1997, and has served as a consultant to the Company since November 1996. Since 1988, Mr. Stein has been President of G&L. Since 1993, Mr. Stein has been Director, President and Chief Operating Officer of Liverpool Industries, Inc., a manufacturer of precision sheet metal fabricated products and other components. From 1972 to 1988, Mr. Stein was employed by General Instrument, where he was a Vice President and Corporate Officer, and subsequently, was Vice President for Corporate Strategic Marketing. Previously, at General Instrument, Mr. Stein held the chief operating officer positions of President of the Worldwide Wagering Group and Chairman of American Totalisator, Inc., Vice President and General Manager--Power Semiconductor Division and Vice President and General Manager of a joint venture in pay television between Mattel, Inc. and General Instrument. Mr. Stein holds a B.A. degree in economics from Beloit College and received a Masters degree in Business Administration in Finance from the Wharton School of Business at the University of Pennsylvania. Mr. Stein has also completed the Executive Marketing Management Program at the Harvard Business School. There are no family relationships among executive officers or directors of the Company. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages as of April 10, 1997, and their positions as follows:
NAME AGE POSITION - ---- --- -------- Alfred Jay Moran, Jr.... 53 President and Chief Executive Officer Denis J. Trafecanty..... 54 Senior Vice President, Chief Financial Officer and Secretary Charles F. Wheatley..... 62 Executive Vice President Jee Fook Pak............ 49 Senior Vice President of MPS and Managing Director for CERDIPs
35 BACKGROUND The principal occupations of each executive officer of the Company for at least the last five years are as follows: Alfred Jay Moran, Jr. joined the Company as a Consultant to the Company and as acting President and Chief Executive Officer in November 1996. On January 1, 1997, Mr. Moran became President and Chief Executive Officer of the Company. Since March 1996, Mr. Moran has been Senior Managing Director of The Watley Group, LLC, a firm that specializes in corporate restructurings, management consulting, merchant banking and mergers and acquisitions. From November 1992 to February 1996, Mr. Moran was Chairman, President and Chief Executive Officer of SeraCare, Inc., a hyperimmune plasma company (formerly known as American Blood Institute). From April 1993 to February 1996, Mr. Moran was Chairman, President and Chief Executive Officer of Gerant Companies, Inc., a holding company for turnaround companies (now known as Xplorer, Inc.). From August 1990 to August 1992, Mr. Moran was President and Chief Operating Officer of Web Enterprises, Inc., an international water feature design engineering and installation company. From March 1988 to October 1992, Mr. Moran was a senior consultant at Kibel, Green, Inc., a crisis management consulting firm. Mr. Moran holds a B.A. Degree in Philosophy from the University of North Carolina at Chapel Hill and a Master Degree in Business Administration from Harvard University. Denis J. Trafecanty joined the Company in August 1996 as its Vice President and Chief 36 Financial Officer and Secretary. In March 1997, he was promoted to Senior Vice President, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Trafecanty was the Vice President and Chief Financial Officer for Tandon Magnetics/Tandon USA, a manufacturer and distributor of personal computers and a distributor of computer hard disk drives, from September 1995 to August 1996. From December 1984 to August 1995, he was Vice President and Chief Financial Officer for Tandon Corporation (renamed TSL Holdings, Inc. in 1993), a manufacturer and distributor of personal computers and peripheral equipment. Charles F. Wheatley has been Senior Vice President, Sales and Marketing of MPI since January 1994. In March 1997, he was promoted to Executive Vice President. Prior to joining the Company, from May 1988 to January 1994, Mr. Wheatley served as a financial planning independent contractor for IDS/American Express Corp., a personal and business financial planning company. Mr. Wheatley also has 23 years of electronics industry experience in a variety of manufacturing, marketing and general management positions with several companies. Mr. Wheatley holds a B.A. degree in political science from Boston University. Jee Fook Pak has been the Senior Vice President of MPS and Managing Director for CERDIPs since January 1993. Mr. Pak joined the Company as Operation Manager for CERDIPs in 1984. Mr. Pak holds a B.S. degree in mathematics and chemistry from the National University of Singapore. To the Company's knowledge, based solely upon representations from its shareholders, each beneficial owner of more than ten percent of the Company's capital stock and all officers and directors filed all reports and reported all transactions on a timely basis with the Securities and Exchange Commission (the "Commission"), the NASD and the Company, except for Mr. Lewis Solomon. Mr. Lewis Solomon filed an amended Form 3 on February 14, 1997 indicating that he beneficially owned 616 shares of the Company's Common Stock. Such ownership was not reported on Mr. Solomon's initial Form 3 filed on or about November 21, 1996. 37 ITEM 11. EXECUTIVE COMPENSATION DIRECTOR REMUNERATION Directors are reimbursed for expenses incurred in connection with attending Board and Committee meetings. Between April 1994 and October 31, 1996, each non-employee Board member received a fee of $1,000 for each meeting attended. Effective as of November 7, 1996, each non-employee Director began to receive a fee of $1,500 for each meeting attended, $750 for each Board committee meeting that does not occur on the date of a Board meeting and a fee of $1,000 for each month of Board service as a Director. Directors who are also employees of the Company receive no additional remuneration for serving as Directors (other than reimbursement for expenses incurred). Assuming shareholder approval of certain amendments to the Company's 1993 Stock Option/Stock Issuance Plan (the "Plan") at the upcoming 1997 annual shareholders' meeting (the "1997 Annual Meeting"), each individual who first joins the Board as a non-employee director at any time after November 21, 1996, such as Mr. Stein, or who was a member of the Board of Directors on November 21, 1996, will receive an option grant for 15,000 shares of Common Stock under the Automatic Option Grant Program in effect for non-employee Board members under the amended Plan. In addition, at each annual shareholders' meeting, beginning with the 1997 Annual Meeting, each individual who is to continue to serve as a non-employee Board member, whether or not he is standing for re-election at that particular meeting, will receive an option grant for 10,000 shares of Common Stock. Each grant under the Automatic Option Grant Program will have an exercise price per share equal to the fair market value per share of the Common Stock on the grant date and will have a maximum term of ten years, subject to earlier termination should the optionee cease to serve as a Board member. Each option granted under the Automatic Option Grant Program becomes exercisable in four successive equal annual installments over the optionee's period of continued Board service, measured from the grant date. However, the shares subject to each outstanding option under the Automatic Option Grant Program will immediately vest in full upon (i) an acquisition of the Company by merger or asset sale, (ii) a hostile takeover of the Company or (iii) the optionee's death or disability while continuing to serve as a Board member. Under the Automatic Option Grant Program, a stock option for 900 shares of Common Stock was granted on May 29, 1996 to each of Dr. Howland, Mr. Thompson, Dr. Wilmer Bottoms (former director) and Mr. Cecil Smith (former director), who continued to serve as non-employee Board members following the Annual Shareholders Meeting held on that date. Each option has an exercise price of $4.19 per share. Each individual serving as a non-employee Board member on November 21, 1996 (Mr. Howland and Mr. Thompson), and each non-employee director appointed on such date (Mr. Solomon and Mr. Bryan), received a stock option grant under the Automatic Option Grant Program on such date for 15,000 shares of Common Stock. Each such option has an exercise price of $1.91 per share, the fair market value of the Common Stock on the date of grant. On June 12, 1997, Mr. Stein was appointed to the Board to fill the vacancy created by the resignation of Mr. Thompson. Pursuant to the Automatic Option Grant Program of the 1993 Plan, Mr. Stein (a non-employee director) received a stock option grant for 15,000 shares of Common Stock, which has an exercise price of $0.22 per share, the fair market value of the Common Stock on the date of grant. Such option grant is subject to shareholder approval. On November 21, 1996, each of Messrs. Solomon, Bryan, Thompson, Stein (in his capacity as a consultant to the Company), Howland and da Silva (an employee-director) were also awarded an option grant under the Discretionary Option Grant Program of the 1993 Plan to purchase shares of Common Stock at an exercise price of $1.91 per share, the fair market value of the Common Stock on such date. The number of shares subject to each such grant is as follows: Mr. Solomon--187,500; Mr. Bryan--125,000; Mr. Thompson--100,000; Mr. Stein-- 187,500; Mr. Howland--100,000; and Mr. da Silva--15,000. With respect to the options granted to Mr. Solomon, Mr. Stein and Mr. Bryan, such options were immediately vested as to 150,000, 150,000 and 100,000 of the option shares, respectively, and each of the remaining option shares are to become vested upon the provision of six (6) full years of continuous service to the Company, subject to acceleration of vesting upon the consummation by the Company of a Board-approved financing plan for up to $15 million at a price per share of not less than $1.875. With respect to the options granted to Messrs. Thompson, Howland and da Silva, vesting of all of the option shares was also conditional upon the provision of six (6) full years of continuous service to the Company, subject to acceleration of vesting upon the consummation of such a Board- approved financing plan for up to $15 million at a price per share of not less than $1.875. In addition, the Board of Directors agreed to grant at a later date additional options to Messrs. Bryan (75,000), Stein (112,500) and Solomon (112,500) at the then fair market value of the Company's Common Stock on the date that is the earlier of (i) two full business days after the public announcement of the execution of a Board-approved term sheet for a financing plan as described in this paragraph or (ii) July 1, 1997. The vesting on such shares shall be identical to the first set of option grants to such three individuals as set forth above. All such options referred to in this paragraph vest in full on a change of control. The Company currently intends to cancel and regrant substantially all existing options (other than options granted pursuant to the Automatic Option Grant Program), including the options described in this section after the 1997 Annual Meeting. Based in part upon the delisting of the Company's Common Stock from the Nasdaq National Market, the financial condition of the Company, the stock price, the probable lack of a request for a $15 million financing, the desire to avoid any compensation expense in the Company's financial statements and the necessity of retaining its employees, the Company believes that this cancellation and regrant program would be in the best interests of the shareholders. As such, the Board of Directors and the Stock Option Plan Administration Committee currently intend to cancel and regrant substantially all options outstanding under the Discretionary Option Grant Program of the Plan and grant an equivalent number of additional options to persons who have received options under the Automatic Option Grant Program with an exercise price in excess of the fair market value of the Common Stock of the Company as traded on the Nasdaq Electronic Bulletin Board on the Grant Date. Pursuant to such program, each such outstanding option will be cancelled and a new replacement option will be granted for the same number of shares, with an exercise price based on the fair market value of the Common Stock on the new grant date, and with a new vesting schedule measured from such date. In addition, on the new grant date, each of the non-employee directors will be granted an additional option under the Discretionary Option Grant Program of the 1993 Plan to purchase shares of Common Stock. 38 For options granted to Messrs. Solomon and Bryan on November 21, 1996, on the new grant date, it is currently anticipated that such options shall be immediately vested with respect to 50% of the option shares and will become vested for the remaining option shares in a series of equal annual installments over the consultant's two-year period of service with the Company measured from new grant date. It is presently anticipated that the director grants to Messrs. Thompson and Howland shall vest in full on such new grant date. In addition, it is currently anticipated that the additional options to be granted under certain future events to Messrs. Solomon (112,500), Stein (112,500) and Bryan (75,000) will be granted to such persons on such new grant date with the fair market value on the new date of grant with the same vesting schedule as set forth in the sentence preceding the previous sentence. Vesting of all of these option shares will be subject to full acceleration in the event of a change in control of the Company. The options granted to the nonemployee directors and consultants on November 21, 1996 and subsequently cancelled and regranted on the new grant date will be subject to approval by the shareholders of the amendments to the 1993 Plan at the Annual Meeting. During 1996, the Company paid Dr. Howland $6,840 for fees and expenses incurred in connection with consulting services provided to the Company. In November 1996, the Company entered into an agreement for consulting services with G&L, which establishes a consulting relationship with, among others, Lewis Solomon (Chairman of the Board of Directors) and Gary Stein (appointed to the Board on June 12, 1997 to replace Mr. Thompson). In exchange for consulting services, G&L, through an affiliate, receives $15,000 plus reasonable expenses for each month that G&L provides services to the Company. In January 1997, the Company agreed to pay an additional aggregate sum of $50,000 to G&L, through an affiliate, over the six-month period starting in January 1997. In June 1997, the Company agreed to pay an additional aggregate sum of $50,000 to G&L, through an affiliate, over the six month period starting in July 1997 (which payments are cancelable upon 90 days prior written notice by the Board of Directors to G&L). In November 1996, the Company also entered into an agreement for consulting services with The Watley Group, LLC ("Watley") which employs Mr. Moran and Mr. Anthony Bryan (a Director), among others, pursuant to which Watley receives $15,000 plus reasonable expenses for each month that it provides services to the Company. Through the agreement with Watley, the Company has retained Mr. Moran as President and Chief Executive Officer of the Company. In January 1997, the Company agreed to pay Watley an additional aggregate sum of $50,000 over the six-month period starting in January 1997. In June 1997, the Company agreed to pay an additional aggregate sum of $50,000 to Watley over the six month period starting in July 1997 (which payments are cancelable upon 90 days prior written notice by the Board of Directors to Watley). Starting in January 1997, the Company also retained Mr. Moran as a full-time employee and will pay Mr. Moran the prevailing minimum wage (which prevailing wage shall be deducted from the additional $50,000 fee referred to above). 39 SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION FOR EXECUTIVE OFFICERS The following table provides certain summary information concerning compensation earned, for services rendered in all capacities to the Company and its subsidiaries, for the fiscal years ending December 31, 1994, 1995 and 1996, respectively, by the Company's Chief Executive Officer and each of the other most highly compensated executive officers of the Company who earned more than $100,000 in compensation for the 1996 fiscal year (hereafter referred to as the Named Executive Officers). SUMMARY COMPENSATION TABLE
Long Term Compen- sation Annual Compensation Awards --------------------------------------------------- -------- Other Securities Name and Annual Underlying All Other Principal Compen- Options Compensa- Position Year Salary ($)(1) Bonus($) sation($) (#) tion($)(2) --------- ---- ------------- -------- --------- ---------- ---------- Alfred Jay Moran, Jr. 1996 --(6) -- --(6) -- -- President and Chief 1995 -- -- -- -- -- Executive Officer 1994 -- -- -- -- -- Timothy da Silva (3) 1996 196,309 -- -- 15,000 20,473 Former President and 1995 180,000 -- -- 97,471 19,691 Chief Executive Officer 1994 169,730 -- -- 76,500 17,363 Jee Fook Pak 1996 175,186 -- 36,857(4) -- 26,744 Senior Vice 1995 161,810 -- 34,371(4) 16,396 18,617 President - MPS 1994 139,130 -- 20,426(4) 6,396 20,673 Charles F. Wheatley 1996 120,000 6,670 -- -- 3,330 Executive Vice President 1995 120,000 -- 77,348(5) 10,661 3,046 1994 108,460 -- 60,028(5) 10,661 3,600 Ernest J. Joly 1996 100,000 -- -- -- 2,712 Senior Vice 1995 100,006 -- -- 7,996 2,423 President and 1994 98,083 -- -- 15,992 2,250 General Manager - MPA
(1) Includes pre-tax contributions by the Named Executive Officers to the Company's 401(k) Plan or, in the case of Mr. Pak, the Central Provident Fund. (2) All other compensation is comprised of (i) the Company's matching contributions to its 401(k) Plan or, in the case of Mr. Pak, to the Central Provident Fund, and (ii) annual premiums paid for whole life insurance policies maintained for Messrs. da Silva and Pak. Under such policies, Messrs. da Silva and Pak may designate the beneficiary of the insurance proceeds payable upon death. In addition, Messrs. da Silva and Pak will be entitled to the cash surrender value of the policy should such individual continue in the Company's employ through the year 2002. The amounts of the Company's matching contribution to its 401(k) Plan and the life insurance premiums are set forth below: 40
Matching 401(k) Life Insurance Contribution Premium --------------- -------------- Alfred Jay Moran, Jr. 1996 $ --(6) $ -- 1995 -- -- 1994 -- -- Timothy da Silva 1996 4,500 15,973 1995 4,569 15,122 1994 4,470 12,893 Jee Fook Pak 1996 20,557 6,187 1995 12,496 6,121 1994 15,008 5,665 Charles F. Wheatley 1996 3,330 -- 1995 3,046 -- 1994 3,600 -- Ernest J. Joly 1996 2,712 -- 1995 2,423 -- 1994 2,250 --
(3) Mr. da Silva resigned as President and Chief Executive Officer effective December 31, 1996, although Mr. da Silva remained an employee until February 14, 1997. (4) The Company provided Mr. Pak with a 1990 Toyota Corona for his use during 1994,1995 and 1996, the value of which in Singapore is estimated to be $20,426 for 1994, $34,371 for 1995 and $36,857 for 1996. (5) For 1995, Other Annual Compensation is comprised of housing reimbursement of $31,280 and the value of the use of a 1989 Toyota Corona estimated to be $34,371, reimbursement of relocation and storage costs of $8,220, and reimbursement of medical expenses of $3,477, all in connection with Mr. Wheatley's overseas assignment. For 1994, Other Annual Compensation is comprised of the value of the use of a 1989 Toyota Corona provided to Mr. Wheatley by the Company which is estimated to be $20,426, $22,832 of living expenses, reimbursement of relocation and storage costs (for Mr. Wheatley's personal effects while in Singapore) of $12,538 reimbursement of medial expenses of $4,232, all in connection with Mr. Wheatley's overseas assignment. (6) Although Mr. Moran was not paid a salary in 1996, Mr. Moran is a member of The Watley Group, LLC, which is being paid a monthly fee by the Company of $15,000 starting in October 1996. Starting in January 1997, The Watley Group, LLC will be paid an aggregate of $50,000 additionally for the six month period beginning in January 1997. In addition, starting in January 1997, Mr. Moran will be paid the prevailing minimum wage (which prevailing wage shall be deducted from the additional $50,000 fee). OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning stock option grants made to the Company's Chief Executive Officer and each of the other Named Executive Officers during the fiscal year ended December 31, 1996. No stock appreciation rights were granted or exercised during such fiscal year. 41
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ------------------------------------------------------------------------- ------------------------------------- NAME NUMBER OF - ---- SECURITIES % OF TOTAL UNDERLYING OPTIONS EXERCISE OPTIONS GRANTED TO OR GRANTED EMPLOYEES IN BASE PRICE EXPIRATION (#) FISCAL YEAR ($/SH)(2) DATE 5% ($) (3) 10% ($) (3) ---------- ------------ ----------- ---------- --------- --------- Alfred J. Moran, Jr. 125,000(4) 11.2% 1.9063 11/21/06 149,858 379,769 Timothy da Silva 15,000(1) 1.34% 1.9063 11/21/06 18,056 45,572 Jee Fook Pak -- -- -- -- -- -- Charles F. Wheatley -- -- -- -- -- -- Ernest J. Joly -- -- -- -- -- --
(1) Mr. da Silva's option grant was awarded on November 21, 1996 at an exercise price of $1.91 per share, the fair market value of the Common Stock on such date, and is subject to shareholder approval at the 1997 Annual Meeting of the 4,000,000-share increase to the number of shares reserved for issuance under the 1993 Plan. Mr. da Silva's option would have vested upon the provision of six(6) full years of continuous service to the Company, subject to acceleration of vesting upon the consummation of a Board-approved financing plan for up to $15 million at a price per share of not less than $1.875. The option will become immediately exercisable for all the option shares in the event of a change in control of the Company. The option has a maximum term of ten years, subject to earlier termination in the event of Mr. da Silva's cessation of service with the Company or one of its subsidiaries. Mr. da Silva continued to be employed by the Company until February 14, 1997. (2) The exercise price may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The plan administrator of the 1993 Plan ("Plan Administrator") may also permit the optionee to pay the exercise price in installments over a period of years. The Plan Administrator has the discretionary authority to reprice outstanding options through the cancellation of those options and the grant of replacement options with an exercise price equal to the fair market value of the option shares on the regrant date. (3) The 5% and 10% rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimates or projections of future Common Stock prices. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the ten (10)-year option term will be at the assumed 5% and 10% levels or at any other defined level. (4) It is presently anticipated that Mr. Moran's stock options will be cancelled and a new option granted in its place after the 1997 Annual Meeting. See "Director Remuneration." AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth information concerning option exercises and option holdings for the fiscal year ended December 31, 1996 with respect to the Company's Chief Executive Officer and each of the other Named Executive Officers. The fair market value of the Common Stock at fiscal year-end was $0.96875 per share, based on the closing selling price on The Nasdaq National Market. The exercise price of all of the outstanding options held by the Chief Executive Officer and the other Named Executive Officers as of December 31, 1996, was in excess of the fair market value on such date. No stock appreciation rights were exercised or outstanding during such fiscal year. 42
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS YEAR-END (#) AT FISCAL YEAR END NAME --------------------------------- -------------------------- - ------------------------ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Alfred Jay Moran, Jr. 100,000 25,000 0 0 Timothy da Silva 196,905 101,985 0 0 Jee Fook Pak 18,790 10,930 0 0 Charles F. Wheatley 10,662 10,660 0 0 Ernest J. Joly 7,996 7,996 0 0
The Company presently intends to cancel and regrant substantially all existing options (other than options granted pursuant to the Automatic Option Grant Program), including the options described in this section after the 1997 Annual Meeting. Based in part upon the delisting of the Company's Common Stock from the Nasdaq NMS, the financial condition of the Company, the stock price, the probable lack of a request for a $15 million financing, desire to avoid any compensation expense in the Company's financial statements and the necessity of retaining its employees, the Company believes that this program would be in the best interests of the shareholders. As such, the Board of Directors and the Stock Option Plan Administration Committee currently intends to cancel and regrant substantially all options outstanding under the Discretionary Option Grant Program of the Plan (and grant additional options to persons who have received options under the Automatic Option Grant Program) with an exercise price in excess of the fair market value of the Common Stock of the Company as traded on the Nasdaq Electronic Bulletin Board on the Grant Date. Pursuant to such program, each such outstanding option will be cancelled and a new replacement option will be granted for the same number of shares, with an exercise price based on the fair market value of the Common Stock on the new grant date. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The individuals who served on the Compensation Committee of the Company's Board of Directors during the fiscal year ended December 31, 1996 were Mr. Bryan, the Chairman, Mr. Thompson, Dr. Howland and Mr. Solomon. None of these individuals were at any time during such fiscal year, or at any other time, an officer or employee of the Company. The Company has entered into an indemnification agreement with each of its directors. The Company and certain of its shareholders entered into a registration rights agreement pursuant to which entities that may be deemed affiliated with a greater than five percent shareholder were granted certain registration rights. Such agreement provides for indemnification by the Company for such persons. See "Certain Relationships and Related Transactions." The Company entered into consulting agreements with G & L Investments which agreement establishes a consulting relationship with, among others, Lewis Solomon; and the Watley Group, LLL, which agreement establishes a consulting relationship with, among others, Messrs. Anthony Bryan and Alfred Moran. See "Director Remuneration." EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS Employment Agreement with Timothy da Silva In January 1994, the Company entered into a three (3)-year employment agreement with Timothy da Silva. Under the terms of such agreement, Mr. da Silva was entitled to a salary of not less than his then current salary of $150,000 per year, the exact amount of which was determined by the Board of Directors on an annual basis. Mr. da Silva was also entitled to receive monthly payments, in the amount of at least $599 per month, to be applied to costs related to his automobile plus payment of automobile insurance and maintenance costs. The employment agreement also included provision for an annual bonus to be awarded to Mr. da Silva by the Board of Directors based upon his performance during the applicable past year. However, no such bonus was awarded over the period of the employment agreement. Mr. da Silva participated in all of the Company's employee benefit plans and the Company was obligated to provide him with life and disability insurance premium payments. In the event of his termination other than for cause, Mr. da Silva was entitled to a severance payment equal to six (6) months of his then current salary plus six (6) months additional coverage under the Company's health, medical and dental plans. Mr. da Silva resigned as Chief Executive Officer of the Company effective December 31, 1996 but he has continued to serve as a Director since such date, and stayed as an employee of the Company until February 14, 1997. The Company has no continuing obligations to Mr. da Silva under his employment agreement beyond February 14, 1997. 43 Change in Control Arrangements The Compensation Committee of the Board of Directors has the authority as Plan Administrator of the 1993 Plan to provide for the accelerated vesting of the shares of Common Stock subject to outstanding options held by the Chief Executive Officer and the Company's other executive officers under that plan in the event their employment were to be terminated (whether involuntarily or through a forced resignation) following an acquisition of the Company by merger or asset sale. In connection with a hostile change in control of the Company effected through a successful tender offer for more than 50% of the Company's outstanding voting stock or through a proxy contest for the election of Board members, the Plan Administrator has the discretionary authority to provide for automatic acceleration of outstanding options under the Discretionary Option Grant Program of the 1993 Plan and the automatic vesting of outstanding shares under the Stock Issuance Program. COMPENSATION COMMITTEE REPORT For the 1996 fiscal year, the Compensation Committee of the Board of Directors was responsible for establishing the base salary and incentive cash bonus programs for the Company's executive officers and other key employees and administering certain other compensation programs for such individuals, subject in each instance to review by the full Board. The Compensation Committee also had the exclusive responsibility during such year for the administration of the Company's 1993 Plan under which grants may be made to executive officers and other key employees. General Compensation Policy. The fundamental policy of the Compensation Committee is to provide the Company's executive officers and other key employees with compensation opportunities based upon their contribution to the financial success of the Company and their personal performance. It is the Compensation Committee's objective to have a substantial portion of each officer's compensation contingent upon the Company's performance as well as upon his own level of performance. Accordingly, the compensation package for each executive officer and key employee is comprised of three elements: (i) base salary which reflects individual performance, (ii) annual variable performance awards payable in cash and tied to the Company's achievement of financial performance targets, and (iii) long-term stock-based incentive awards which strengthen the mutuality of interests between the executive officers and the Company's shareholders. As an executive officer's level of responsibility increases, it is the intent of the Compensation Committee to have a greater portion of his total compensation be dependent upon Company performance and stock price appreciation rather than base salary. Factors. For Timothy da Silva, the Compensation Committee followed the terms of his employment agreement with the Company in determining his compensation for 1996. That agreement specified the compensation, subject to Board adjustment, that was paid to Mr. da Silva during 1996. Several of the more important factors which the Compensation Committee considered in establishing the components of the compensation packages for executive officers who do not have an employment agreement with the Company for the 1996 fiscal year are summarized below. Additional factors were also taken into account, and the Compensation Committee may in its discretion apply entirely different factors, particularly different measures of financial performance, in setting executive compensation for future fiscal years. Base Salary. The base salary for each officer who does not have an employment agreement with the Company is determined on the basis of the following factors: experience, personal performance and internal comparability considerations. The weight given to each of these factors differs from individual to individual, as the Compensation Committee deems appropriate. Annual Incentive Compensation. Annual bonuses are earned by each executive officer primarily on the basis of the Company's achievement of certain corporate financial performance targets established for each fiscal year. For fiscal year 1996, as the Company's results did not meet the established targets, no bonuses were paid. Long-Term Incentive Compensation. Long-term incentives are provided through stock option grants. The grants are designed to align the interests of each executive officer with those of the shareholders and provide each 44 individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant allows the individual to acquire shares of the Common Stock at a fixed price per share (the market price on the grant date) over a specified period of time (up to ten (10) years). Each option generally becomes exercisable in installments over a two (2) or three (3)-year period, contingent upon the executive officer's continued employment with the Company or a subsidiary. Accordingly, the option will provide a return to the executive officer only if the executive officer remains employed by the Company during the two (2) or three (3)-year vesting period, and then only if the market price of the underlying shares appreciates over the option term. The number of shares subject to each option grant is set at a level intended to create a meaningful opportunity for stock ownership based on the officer's current position with the Company, the base salary associated with that position, the size of comparable awards made to individuals in similar positions within the industry, the individual's potential for increased responsibility and promotion over the option term, and the individual's personal performance in recent periods. The Compensation Committee also takes into account the number of vested and unvested options held by the executive officer in order to maintain an appropriate level of equity incentive for that individual. However, the Compensation Committee does not adhere to any specific guidelines as to the relative option holdings of the Company's executive officers. In 1996, only one executive officer, Mr. da Silva, received an option grant. Such option is described in the Summary Compensation Table, in the column entitled "Long Term Compensation Awards--Securities Underlying Options" and in the "Option Grants in Last Fiscal Year" Table. CEO Compensation. In setting the compensation payable to the Company's Chief Executive Officer, Mr. da Silva, the Compensation Committee followed the terms of the employment agreement that was previously negotiated between Mr. da Silva and the Company. In accordance with the terms of his employment agreement, as adjusted by the Board, Mr. da Silva received a base salary of $196,309 in 1996. No cash bonus was paid to Mr. da Silva for the 1996 fiscal year. In 1996, Mr. da Silva was granted an option to purchase 15,000 shares of Common Stock to make a portion of his total compensation contingent on increased value for the Company's shareholders; the option will have no value unless there is appreciation in the value of the Company's Common Stock over the option term and the option may not be exercised unless and until the shareholders approve a 4,000,000-share increase to the 1993 Plan. Compliance with Internal Revenue Code Section 162(m). As a result of Section 162(m) of the Internal Revenue Code, the Company will not be allowed a federal income tax deduction for compensation paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any one (1) year. This limitation applies to all compensation paid to the covered executive officers which is not considered to be performance based. Compensation which does qualify as performance-based compensation will not have to be taken into account for purposes of this limitation. The 1993 Plan is designed to assure that any compensation deemed paid in connection with the exercise of stock options granted under such plan with an exercise price equal to the market price of the option shares on the grant date will qualify as performance-based compensation. Dated as of April 10, 1997 Mr. Anthony J.A. Bryan Mr. William R. Thompson Dr. Frank L. Howland Mr. Lewis Solomon 45 COMPARISON OF SHAREHOLDER RETURN The graph below reflects a comparison of the cumulative total return (change in stock price plus reinvestment dividends) of the Company's Common Stock price with the cumulative total returns of the Nasdaq Market Index and the Company's Peer Group consisting of Altron, Inc., Ceramics Process Systems Corporation, Dense-Pac Microsystems, Inc., Irvine Sensors Corporation, and Microsemi Corp.
COMPANY: MICROELECTRONIC BROAD PACK PEER GROUP MARKET --------------- ---------- ------ BASE: 100.00 100.00 100.00 FISCAL YEAR ENDING: 06/30/1994 97.62 98.6 98.29 09/30/1994 88.1 112.83 103.52 12/30/1994 57.14 114.18 101.44 03/31/1995 33.33 116.84 104.44 06/30/1995 45.24 164.48 114.25 09/29/1995 45.24 216.68 127.3 12/29/1995 38.1 196.3 126.28 03/29/1996 78.57 185.08 132.11 06/28/1996 83.33 174.74 141.9 09/30/1996 64.29 124.56 145.81 12/31/1996 18.45 156.62 152.67
____________ (1) The graph covers the period from April 21, 1994, the date the Company's initial public offering commenced, through the fiscal year ended December 31, 1996. (2) The graph assumes that $100 was invested on April 21, 1994 in the Company's Common Stock and in each index and that all dividends were reinvested. No cash dividends have been declared on the Company's Common Stock. (3) Shareholder returns over the indicated period should not be considered indicative of future shareholder returns. (4) The performance graph and all of the material in the Compensation Committee Report is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference to any filing of the Company under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in any such filing. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who own more than ten percent of the Company's Common Stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Form 5s were required for such persons, the Company believes that it complied with all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners during the period from January 1, 1996 to December 31, 1996, with the exception of Mr. Lewis Solomon. Mr. Lewis Solomon 46 filed an amended Form 3 on February 14, 1997 indicating that he beneficially owned 616 shares of the Company's Common Stock. Such ownership was not reported on Mr. Solomon's initial Form 3 filed on or about November 21, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information known to the Company regarding the ownership of the Company's Common Stock as of March 31, 1997 for (i) each Director and nominee who owns Common Stock, (ii) all persons or entities who were known by the Company to be beneficial owners of five percent (5%) or more of the Company's Common Stock, (iii) the Chief Executive Officer and the other executive officers whose compensation for 1996 were each in excess of $100,000 and (iv) all executive officers and Directors of the Company as a group.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF TOTAL SHARES BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING BENEFICIALLY OWNED - ------------------- --------------------- ------------------------------ Entities that may be deemed to be affiliated with Transpac Capital Pte. Ltd. 6 Shenton Way #2D-09 DBS Building Tower Two Singapore 068809 (2)...... 842,013 7.8% Entities that may be deemed to be affiliated with Patricof & Co. Ventures, Inc. 2100 Geng Road, Suite 200 Palo Alto, CA 94303 (3)... 733,997 6.8% Cabot Ceramics, Inc. c/o Cabot Corporation 75 State Street Boston, MA 02119-1806 (4). 656,992 6.09% Timothy da Silva (5)...... 197,905 1.8% Lewis Solomon (6)......... -- * Anthony J.A. Bryan (6).... -- * William R. Thompson (7)... 3,250 * Frank Howland (6)......... 4,725 * Alfred J. Moran, Jr. (6).. -- * Jee Fook Pak (6).......... 18,790 * Charles F. Wheatley (6)... 10,662 * Ernest J. Joly (6)........ 10,661 * All directors and executive officers as a group (9 persons) (8)... 245,993 2.3%
- -------- * Less than 1% 47 (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Percentage beneficially owned is based on a total of 10,793,280 shares of Common Stock issued and outstanding as of March 31, 1997. Shares of Common Stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of March 31, 1997 are deemed outstanding for computing the percentage of the person holding such options or warrants but are not outstanding for computing the percentage of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned. (2) The Transpac entities include Transpac Capital Pte Ltd (the "Manager"), a Singapore private limited company; Transpac Industrial Holdings Limited ("TIH"), a Singapore private limited company; Regional Investment Company Limited ("Regional"), a Singapore public limited company; Transpac Equity Fund ("TEF"), a British Virgin Islands trust; Transpac Venture Partnership II ("TVP"), a collective investment scheme; Transpac Manager's Fund ("TMP"), a British Virgin Islands international business company; and NatSteel Equity III Pte Ltd ("NatSteel"), a Singapore private limited company. The Manager does not have any direct ownership interest in the Company's Common Stock. The Manager has, in its capacity as investment adviser to each of TIH, Regional, TEF and TVP, the power to control the voting and disposition of the 765,466 shares of Common Stock held in the aggregate by TIH, Regional, TEF and TVP and, therefore, may be deemed to be a beneficial owner of such shares. Such shares constitute approximately 13.90 percent of the outstanding Common Stock. TIH has direct beneficial ownership of 334,069 shares (approximately 6.1%) of the Common Stock. TIH shares the power to control the voting and disposition of such 334,069 shares of Common Stock with the Manager. TIH disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. Regional has direct beneficial ownership of 92,066 shares (approximately 1.79%) of the Common Stock. Regional shares the power to control the voting and disposition of such 92,066 shares of Common Stock with the Manager. Regional disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TEF has direct beneficial ownership of 197,285 shares (approximately 1.79%) of the Common Stock. TEF shares the power to control the voting and disposition of such 197,285 shares of Common Stock with the Manager. TEF disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TVP has direct beneficial ownership of 139,415 shares (approximately 2.5%) of the Common Stock. TVP shares the power to control the voting and disposition of such 139,415 shares of Common Stock with the Manager. TVP disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TMF has direct beneficial ownership of 2,631 shares (approximately 0.05%) of the Common Stock. NatSteel has direct beneficial ownership of 75,547 shares (approximately 1.4%) of the Common Stock. NatSteel and the Manager have no formal relationship, advisory or otherwise, in respect of the shares of Common Stock held by NatSteel. However, NatSteel anticipates that it may rely upon the advice of Transpac in connection with the voting and disposition of the shares of Common Stock held by it. NatSteel disclaims beneficial ownership of the shares of Common Stock held by any other Transpac entity. The preceding information was obtained from a Schedule 13D filed with the Securities and Exchange Commission on or about April 3, 1996. Mr. Steven Koo is Vice President of Transpac Capital Pte Ltd, and as such may be deemed to share voting and investment power with respect to the Transpac entities' shares. Mr. Koo disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. Amount does not include any shares that may be issued upon conversion of the Transpac Debenture. (3) Includes 202,736, 353,600, 90,466 and 87,195 shares owned by APA Excelsior Fund, APA Excelsior II, Coutts & Co. (Jersey) Ltd., Custodian for APA Excelsior Venture Capital Holding (Jersey) Ltd., and APA Venture Capital Fund, respectively, and 1,148, 1,143, 1,173 and zero shares, respectively, in the form of immediately exercisable warrants owned by such entities. (4) Includes 654,236 shares owned by Cabot Ceramics, Inc. and 2,666 shares issuable upon exercise of a warrant. Cabot Ceramics, Inc. is a corporation wholly-owned by Cabot Corporation. The executive management of Cabot Corporation has voting and investment power over such shares and may be deemed to beneficially own such shares. (5) Includes 1,000 shares registered in the name of Barbara da Silva, Mr. da Silva's spouse. All other shares beneficially owned by Mr. da Silva are in the form of stock options exercisable within sixty (60) days of March 31, 1997. (6) All shares in the form of stock options exercisable within 60 days of March 31, 1997. (7) Includes 1,000 shares owned by Mr. Thompson. All other shares beneficially owned by Mr. Thompson are in the form of stock options exercisable within sixty (60) days of March 31, 1997. (8) See Notes 4 and 5 above. Excludes Mr. Stein who was appointed to the Board of Directors on June 12, 1997. Mr. Stein's beneficial ownership of shares (including options exercisable within 60 days of March 31, 1997) are zero (0). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In November 1996, the Company entered into an agreement for consulting services with G&L, which establishes a consulting relationship with, among others, Lewis Solomon (Chairman of the Board of Directors) and Gary Stein (appointed to the Board on June 12, 1997 to replace Mr. Thompson). In exchange for consulting services, G&L, through an affiliate, receives $15,000 plus reasonable expenses for each month that G&L provides services to the Company. In January 1997, the Company agreed to pay an additional aggregate sum of $50,000 to G&L, through an affiliate, over the six-month period starting in January 1997. In June 1997, the Company agreed to pay an additional aggregate sum of $50,000 to G&L, through an affiliate, over the six month period starting in July 1997 (which payments are cancelable upon 90 days prior written notice by the Board of Directors to G&L). In November 1996, the Company also entered into an agreement for consulting services with The Watley Group, LLC ("Watley") which employs Mr. Moran and Mr. Anthony Bryan (a Director), among others, pursuant to which Watley receives $15,000 plus reasonable expenses for each month that it provides services to the Company. Through the agreement with Watley, the Company has retained Mr. Moran as President and Chief Executive Officer of the Company. In January 1997, the Company agreed to pay Watley an additional aggregate sum of $50,000 over the six-month period starting in January 1997. In June 1997, the Company agreed to pay an additional aggregate sum of $50,000 to Watley over the six month period starting in July 1997 (which payments are cancelable upon 90 days prior written notice by the Board of Directors to Watley). Starting in January 1997, the Company also retained Mr. Moran as a full-time employee and will pay Mr. Moran the prevailing minimum wage (which prevailing wage shall be deducted from the additional $50,000 fee referred to above). In March 1996, pursuant to a subscription agreement, the Company consummated the sale and issuance of 842,013 shares of Common Stock (the "Transpac Shares") to Transpac Capital Pte. Ltd. and a group of related investors (collectively, "Transpac"), at the purchase price of $2.37526 per share, for a total purchase price of $2,000,000 (the "Transpac Financing"). The Transpac Shares represented approximately 7.8% of the Common Stock issued and outstanding on March 31, 1997. In conjunction with the Transpac Financing, MPM (S) Pte. Ltd. ("MPM"), a wholly-owned subsidiary of the Company, issued a debenture ("Debenture") to Transpac in the principal amount of $9,000,000. From and after April 23, 1997, the Debenture can be converted into shares of MPM's Common Stock provided MPM is then a publicly traded company, or can be repaid in cash. In addition, the Debenture will also be convertible, at Transpac's option, into shares of the Company's Common Stock. Under its terms, the Debenture may be convertible into up to the number of shares of the Company's Common Stock that, when combined with the number of shares of the Company's Common Stock then issued to Transpac upon the closing of the Transpac Financing or otherwise, will equal 49.0% of the Company's then outstanding capitalization. The Debenture will also be convertible into the number of shares of MPM common stock that is equivalent to up to 45% of MPM's then outstanding capitalization at the time of conversion. Transpac has board observer rights and the right in the future to appoint a representative of Transpac to the Company's Board of Directors. The Company guaranteed the repayment of the Debenture. The Company and Transpac are currently negotiating an equity conversion of such debt since the conversion formula included in the Debenture is dependent upon the Company, or MPM, being profitable. Neither MPM nor the Company have been profitable, and MPM is currently in receivership under the laws of Singapore and will cease to exist thereafter. The only other option available to Transpac is to call upon the guarantee issued by the Company, which does not have the cash necessary to repay the Debenture. As of the date of this Proxy, the Company has not reached any agreement with Transpac regarding an equity conversion of the Debenture. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on June 20, 1997. MICROELECTRONIC PACKAGING, INC. Date: June 20, 1997 By: /s/ ALFRED J. MORAN, JR. ------------------------------------- Alfred J. Moran, Jr. President and Chief Executive Officer 51 -----END PRIVACY-ENHANCED MESSAGE-----