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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Microelectronic Packaging, Inc.
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(Name of Registrant as Specified In Its Charter)
Microelectronic Packaging, Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
MICROELECTRONIC PACKAGING, INC.
May 29, 1996
TO THE SHAREHOLDERS OF MICROELECTRONIC PACKAGING, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Microelectronic Packaging, Inc. (the "Company"), a California corporation, will
be held on May 29, 1996, at 9:00 a.m., local time, at 9350 Trade Place, San
Diego, California 92126, for the following purposes:
1. To approve the convertibility of a debenture (the "Debenture") issued
by MPM (S) Pte., Ltd. ("MPM"), a wholly-owned subsidiary of the Company, to a
group of related investors (collectively, "Transpac"), into shares of the
Company's Common Stock, with the effect that, upon conversion of the Debenture,
Transpac could own in excess of 20% of the number of shares of the Company's
Common Stock outstanding prior to and after the conversion of the Debenture.
2. To approve an amendment to the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") to increase the authorized
shares of Common Stock from 10,000,000 shares to 15,000,000 shares, which
amendment is necessary in part to effect an increase in the number of shares of
Common Stock that may be necessary to provide for the convertibility of the
Debenture submitted for approval pursuant to Proposal One.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on April 10, 1996 are
entitled to notice of and to vote at the meeting. A list of shareholders
entitled to vote at the Special Meeting will be available for inspection at the
executive offices of the Company for a period of ten days before the Special
Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to sign and
return the enclosed Proxy as promptly as possible in the envelope enclosed for
that purpose.
Please note that this Notice of Special Meeting of Shareholders and related
proxy statement call for a different meeting than the Annual Meeting to be held
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on May 29, 1996. Different proposals are to be voted upon for this meeting, so
even if you have already voted for the Annual Meeting proposals, please sign and
return the enclosed proxy card for the Special Meeting.
Any shareholder attending the meeting may vote in person even if such
shareholder has returned a Proxy.
Sincerely,
Timothy da Silva
President and Chief Executive Officer
May 15, 1996
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE READ THE ATTACHED PROXY
STATEMENT CAREFULLY, AND COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE.
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PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
General............................................................ 1
Revocability of Proxies....................................... 1
Solicitation.................................................. 1
Deadline for Receipt of Shareholder Proposals................. 1
Record Date and Voting........................................ 1
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING.................... 2
PROPOSAL ONE -- APPROVAL OF THE CONVERTIBILITY OF
DEBENTURE ISSUED TO TRANSPAC................................. 2
PROPOSAL TWO -- INCREASE IN AUTHORIZED CAPITAL STOCK.......... 5
DESCRIPTION OF CAPITAL STOCK.................................. 7
OWNERSHIP OF SECURITIES....................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 11
Results of Operations.................................... 11
Years Ended 1993, 1994 and 1995.......................... 11
Liquidity and Capital Resources.......................... 15
Future Operating Results................................. 16
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 27
FORM 10-K..................................................... 28
</TABLE>
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MICROELECTRONIC PACKAGING, INC.
9350 Trade Place
San Diego, California 92126
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1996
GENERAL
The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors of Microelectronic Packaging, Inc., a California corporation (the
"Company"), for use at the Special Meeting of Shareholders to be held on May 29,
1996 (the "Special Meeting"). The Special Meeting will be held at 9:00 a.m.,
local time, at the Company's corporate headquarters at 9350 Trade Place, San
Diego, California, 92126.
These proxy solicitation materials were mailed on or about May 15,
1996 to all shareholders entitled to vote at the Special Meeting.
REVOCABILITY OF PROXIES
Any person giving a Proxy has the power to revoke it at any time
before its exercise. It may be revoked by filing with the Chief Executive
Officer of the Company at the Company's principal executive offices, 9350 Trade
Place, San Diego, California, 92126, a notice of revocation or another signed
Proxy with a later date. You may also revoke your Proxy by attending the
Special Meeting and voting in person.
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional soliciting materials furnished to shareholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees or agents
of the Company. No compensation will be paid to these individuals for any such
services. Except as described above, the Company does not presently intend to
solicit proxies other than by mail.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be
presented by such shareholders at the Company's 1997 Annual Meeting must be
received by the Company no later than December 21, 1996 in order that they may
be included in the proxy statement and form of proxy relating to that meeting.
RECORD DATE AND VOTING
Shareholders of record on April 10, 1996 are entitled to notice of and
to vote at the Special Meeting. At the record date, 5,508,813 shares of the
Company's Common Stock, no par value, were issued and outstanding. Abstentions
and broker non-votes are counted as present for the purpose of determining the
presence of a quorum for the transaction of business. Each shareholder is
entitled to one vote for each share
<PAGE>
of Common Stock held by such shareholder. All votes will be tabulated by the
inspector of election appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
PROPOSAL ONE -- APPROVAL OF THE CONVERTIBILITY OF
DEBENTURE ISSUED TO TRANSPAC
GENERAL
On March 27, 1996, pursuant to a subscription agreement, the Company
consummated the sale and issuance of 842,013 shares of Common Stock
(collectively, 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, the average of the closing prices of the Company's Common Stock as
reported on the Nasdaq National Market during the ninety trading days
immediately preceding February 2, 1996 (the "Transpac Financing"). In addition,
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 and at Transpac's option, the Debenture can be
convertible into shares of MPM's Common Stock provided MPM is then a publicly
traded company or, subject to approval by the Company's shareholders, into
shares of the Company's Common Stock (the "Conversion Shares") or the Debenture
can be repaid in cash. In addition, Transpac was granted board observer rights
and the right in the future to appoint a representative of Transpac to the
Company's Board of Directors. The terms and conditions of the Transpac
Financing are more specifically set forth in the subscription agreement (the
"Subscription Agreement") by and among the Company and Transpac attached hereto
as Exhibit A. All shareholders are encouraged to review this agreement very
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carefully and any summary contained herein is qualified by such agreement. The
Company intends to use the proceeds from the Transpac transaction to finance
MPM's product development efforts utilizing licensed technology from IBM, as
more fully discussed under "--Advantages and Disadvantages of Proposal One."
The purpose of the Special Meeting is in part to obtain shareholder approval for
the convertibility of the Debenture into the Company's Common Stock. Except as
set forth in Exhibit A, Transpac will not receive any payment or other corporate
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distribution from the Company if this Proposal One is not approved.
As of March 31, 1996, the Company had issued and outstanding 5,508,813
shares of Common Stock. The Transpac Shares represented approximately 15.3% of
the Common Stock issued and outstanding after the consummation of the Transpac
Financing. The Transpac Shares and the Conversion Shares could potentially in
the aggregate equal up to 49% of the number of shares of Common Stock then
outstanding prior to and after the conversion of the Debenture. Shareholder
approval of Proposal One is necessary in order for the Company to comply with
the requirements of the Nasdaq National Market, on which the Company's Common
Stock is traded. Specifically, Section 6(i)(1)(d)(ii) of the Bylaws of the NASD
(the "NASD Bylaws") provides that shareholder approval is required for the
issuance of securities in connection with a transaction other than a public
offering involving the sale or issuance by a company listed on the Nasdaq
National Market of common stock or securities convertible into common stock
equal to 20% or more of such company's common stock or 20% or more of the voting
power outstanding before the issuance for less than the greater of book or
market value of the company's common stock. Furthermore, Section 6(i)(1)(b) of
the NASD Bylaws provides that each Nasdaq National Market issuer shall obtain
shareholder approval of a plan or to the issuance of securities when the
issuance will result in a change of control of the issuer. Neither the
California General Corporation Law nor the Company's Amended and Restated
Articles of Incorporation currently requires shareholder approval for the
issuance of the Transpac Shares or the Conversion Shares. However, because the
Debenture is potentially convertible at a price per share price lower than the
current closing price or book value of the Company's Common Stock into an
aggregate number of shares of Common Stock that, when combined with the Transpac
Shares, would exceed 20% of the number of shares of Common Stock outstanding
before and after the conversion of the Debenture, shareholder approval of the
convertibility of the Debenture (and related share issuance), which may cause
the 20% limit to be exceeded, is required to maintain the Common Stock's
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listing on the Nasdaq National Market. In addition, because the Transpac Shares
and the Conversion Shares could potentially in the aggregate equal up to 49% of
the number of shares of Common Stock then outstanding prior to and after the
conversion of the Debenture, which could possibly be deemed to be a "change of
control" under the NASD Bylaws and, therefore, require shareholder approval
thereunder.
THE DEBENTURE
The Debenture has a term of five years and bears interest at the rate
of 8.5% per annum. Accrued and unpaid interest is due and payable in cash in
annual installments at the end of each year of the term of the Debenture.
Unless earlier converted by Transpac, the principal outstanding under the
Debenture is due and payable in full at the end of the five-year term of the
Debenture. From and after April 23, 1997, the Debenture is convertible at
Transpac's option into shares of Common Stock of MPM provided MPM is a then
publicly traded company. Subject to shareholder approval of this Proposal One,
the Debenture will also be convertible at Transpac's option into Conversion
Shares of MPI. If this Proposal One is approved, the number of Conversion
Shares issuable to Transpac upon conversion of the Debenture will be determined
based on a formula that is based upon (i) the Company's and MPM's profitability
at the time of conversion; or (ii) the price per share obtained by the Company
after the closing of the Transpac Financing in a financing with proceeds of at
least $3.0 million, or a series of related financings during an eighteen-month
period that generates proceeds of up to $6.5 million. The conversion formula
and the terms and conditions of the issuance of the Debenture are more
specifically set forth on Schedule 5 to the convertible loan agreement by and
among the Company, MPM and Transpac (the "Loan Agreement") attached hereto as
Exhibit B. All shareholders are encouraged to review this agreement very
- - - ---------
carefully and any summary contained herein is qualified by such agreement. By
the terms of this conversion formula, the greater the future profitability of
MPM compared to the future profitability of the Company, the greater the number
of shares of MPI Common Stock that could be issued to Transpac as Conversion
Shares and the greater the average selling price per share in future equity
financings up to $6.5 million, the fewer the number of shares of MPI Common
Stock that could be issued to Transpac as Conversion Shares. By its terms, the
Debenture can only be converted into the number of Conversion Shares that, when
combined with the Transpac Shares, equals up to 49% of the Company's then issued
and outstanding Common Stock after the conversion of the Debenture.
Alternatively, if Transpac chooses to have the Debenture repaid in cash, the
Debenture will not be converted into any shares of MPI Common Stock. Assuming
the Company's currently outstanding capitalization remains unchanged and taking
into account that the Transpac Shares represent approximately 15.3% of such
current capitalization, the Company could be obligated to issue up to an
aggregate of 4,187,813 shares of Common Stock to Transpac in the form of
Conversion Shares. In addition, to the extent that the Company's capitalization
increases in the future due to additional issuances of Common Stock, the Company
could be obligated to issue an even greater number of shares to Transpac upon
conversion of the Debenture. Since 5,508,813 shares of Common Stock were issued
and outstanding as of March 31, 1996 and 568,325 shares of Common Stock were
reserved for issuance upon the exercise of currently outstanding options and
warrants, the 10,000,000 shares of Common Stock currently authorized for
issuance by the Company's Articles of Incorporation may be insufficient to
permit the maximum conversion of the Debenture. Therefore the Company is
requesting in Proposal Two that the Articles of Incorporation be amended to
increase the number of shares of Common Stock authorized for issuance from
10,000,000 to 15,000,000. Because the increase in authorized stock is necessary
to permit maximum conversion of the Debenture, Proposals One and Two are
interrelated such that Proposal One cannot be effected unless Proposal Two is
also approved. In such regard, negative votes, broker non-votes and abstentions
as to Proposal Two will have the practical effect of votes against Proposal One.
However, the approval of Proposal One is not necessary for Proposal Two to be
effected, and thus negative votes, broker non-votes or abstentions as to
Proposal One will not have the effect of votes against Proposal Two. In this
regard, Proposal Two, if approved, will be implemented even if Proposal One is
rejected. See, however, "--Advantages and Disadvantages of Proposal One." The
Company intends to file a listing application with the Nasdaq National Market if
and when the Company receives notice of conversion from Transpac.
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ADVANTAGES AND DISADVANTAGES OF PROPOSAL ONE
The Company's Board of Directors believes that approval of this
Proposal One is in the best interests of the Company and its shareholders. In
reaching this conclusion, the Board of Directors noted that there are
significant advantages and disadvantages to this Proposal One.
The Company requires significant capital to develop its products, in
particular the technology licensed from IBM for product development at MPM. The
Transpac Financing is an important step in continuing to finance MPM's product
development. If MPM cannot meet its performance milestones with IBM on a timely
basis, the license agreement with IBM could terminate. Without the financing
from Transpac, one of the Company's current providers of working capital, such
product development could not continue. The structure of the investment was
negotiated at arms length, after a review of the lack of alternatives, by
representatives of the Company and MPM. The financing was structured as a sale
of a convertible debenture to achieve two objectives: first, to give Transpac a
preference over the shareholders of the Company in the case of a bankruptcy and
second, to give Transpac the possibility of sharing on an equity basis if the
Company prospers, rather than being limited solely to principal and interest
payments on the debt. The possibility of a conversion to equity under the right
circumstances results in potentially greater return to Transpac on its
investment. These rights were necessary to obtain Transpac's investment.
Failure to comply with the terms of the investment could materially adversely
affect the Company's ability to continue as an ongoing concern. Failure to
obtain such approvals could constitute a breach of the agreements covering such
investment and entitle Transpac to request damages from the Company and MPM.
Failure to comply with the terms of the Transpac investment, including receipt
of shareholder approvals, would materially adversely affect the Company's
business, financial condition and results of operations.
As shareholders of the Company may be aware, the Company is highly
leveraged, with approximately $44,000,000 in liabilities, including the
Debenture, various bank debt, trade payables, accrued expenses and other long
term obligations, but only approximately $7,400,000 in total shareholders'
equity. In addition to the above, the Transpac Financing increased the
Company's total debt and diluted the Company's earnings per share ("EPS")
because of the 842,013 shares of Common Stock issued to date, and may further
dilute EPS because of the convertibility feature. By enabling Transpac to
convert the Debenture into shares of the Company's Common Stock, the Company
would be potentially able to lower its debt to equity ratio, which would better
enable the Company to attract future debt and equity financing. In addition, by
enabling Transpac to increase its equity ownership of the Company and the value
of its initial investment in the Company through the convertibility of the
Debenture, the Company will be able to incentivize Transpac to work closely with
and support the Company in Transpac's capacity as a significant shareholder
and/or a director of the Company. The Company believes that a close on-going
relationship with Transpac could be beneficial to the Company's future results
of operations.
The disadvantages noted by the Board of Directors include the fact
that the issuance of the Conversion Shares will have the effect of significantly
reducing the percentage ownership of the Company's current shareholders. In the
absence of a proportionate increase in the Company's earnings and book value, an
increase in the aggregate number of the Company's issued and outstanding shares
of Common Stock caused by the issuance of the Conversion Shares would
significantly dilute the earnings per share and book value per share of all
outstanding shares of the Company's and MPM's capital stock. If such factors
were reflected in the price per share of Common Stock, the potential realizable
value of a shareholder's investment could be materially adversely affected. In
addition, the Conversion Shares may be freely tradeable at some point in time
after conversion of the Debenture. Sales of such freely tradeable Conversion
Shares in the open market from time to time would potentially have a negative
effect upon the trading price of the Company's Common Stock. The agreements
covering the financing contain numerous restrictions on the ability of the
Company and MPM to operate in certain ways. The existence of the Debenture and
its convertibility feature into shares of Common Stock of MPI would
significantly dilute any earnings per share amounts and significantly dilute the
ownership interests of MPI's shareholders. The existence of the Debenture and
its convertibility feature into shares of common stock of MPM
4
<PAGE>
could have the same effect on MPI, as the current sole shareholder, as the
potential creation of a minority interest in the earnings of MPM, if any, would
reduce the Company's proportionate share of earnings for MPM with a
corresponding reduction in the Company's results of operations. Such dilution
would be further exacerbated if IBM were to also exercise its option to purchase
up to 51% of the capital stock of MPM.
After a review of the foregoing points, the Board of Directors of the
Company and MPM determined that approval of this Proposal One is in the best
interests of the Company's shareholders. This Proposal One was approved by all
of the directors of the Company present at a meeting of the Board of Directors
on February 29, 1996 at which meeting a quorum was present. The affirmative
vote of (i) a majority of the shares of the Company's Common Stock represented
and voting at the Special Meeting and (ii) a majority of the required quorum is
required for the approval of this Proposal One. Thus, abstentions and broker
non-votes can have the effect of preventing approval of a proposal where the
number of affirmative votes, though a majority of the votes cast, does not
constitute a majority of the required quorum. Because the increase in
authorized stock in Proposal Two is necessary to permit conversion of the
Debenture, Proposals One and Two are interrelated such that Proposal One cannot
be effected unless Proposal Two is also approved. In such regard, negative
votes, broker non-votes and abstentions as to Proposal Two will have the
practical effect of votes against Proposal One. The Board of Directors
recommends that the shareholders vote FOR the approval of the convertibility of
the Debenture.
Prior to the Transpac Financing, Transpac was unaffiliated with the
Company. No director or officer of the Company, or any of their associates, has
any direct or indirect interest in the transactions which are the subject of
this Proposal One. The purchase price of the Transpac Shares and the terms of
the Debenture were determined by negotiation between the Company and Transpac
and an assessment of the terms necessary to attract the investment capital
sought by the Company.
PROPOSAL TWO -- INCREASE IN AUTHORIZED CAPITAL STOCK
The Board of Directors is requesting shareholder approval of an
amendment of the Company's Articles of Incorporation to increase the number of
shares of Common Stock authorized for issuance from 10,000,000 to 15,000,000.
On March 31, 1996, 5,508,813 shares of the Company's Common Stock were issued
and outstanding. On March 31, 1996, there were 568,325 shares of the Company's
Common Stock reserved for issuance upon exercise of currently outstanding
options or warrants. The remaining 3,922,862 shares of authorized but unissued
Common Stock are not reserved for any specific use and are available for future
issuance, other than for the convertibility of the Debenture that is the subject
of Proposal One. Since the increase in authorized stock is necessary to permit
maximum conversion of the Debenture, Proposals One and Two are interrelated such
that Proposal One cannot be fully effected unless Proposal Two is also approved.
However, the approval of Proposal One is not necessary for Proposal Two to be
effected.
The Board of Directors considers it advisable to have the additional
shares available for possible future issuance upon conversion of the Debenture.
As the maximum number of Conversion Shares, when combined with the Transpac
Shares, could in the aggregate equal up to 49% of the Company's issued and
outstanding Common Stock after conversion of the Debenture, the Company will not
have a sufficient number of authorized but unissued shares of Common Stock for
issuance upon conversion of the Debenture. In addition, the Board of Directors
considers it advisable to have the additional shares of Common Stock available
for future financings, acquisitions, stock dividends or stock splits, for
issuance under the Company's employee benefit plans and for other general
corporate purposes. Although the Company does not have any other current plan
to issue its stock in exchange for financing (other than shares that may be
issued in the future as Conversion Shares), the Company from time to time has
and will continue to seek outside financing to fund its operations. The Company
anticipates that it may in the future enter into an agreement to obtain
financing in exchange for the issuance of shares of Common Stock that would be
authorized by the approval of this Proposal Two. The
5
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availability of such shares for issuance in the future will give the Company
greater flexibility and permit such shares to be issued without the expense and
delay of a special shareholders' meeting.
If this amendment is adopted, Article III of the Company's Articles of
Incorporation will be amended to read in its entirely as follows:
"(a) Class of Stock. The Corporation is authorized to issue one class of
--------------
stock to be designated "Common Stock," no par value per share. The total
number of Common Stock that the Corporation is authorized to issue is
Fifteen Million (15,000,000) shares."
If this amendment is adopted, the additional shares of Common Stock may be
issued by direction of the Board of Directors in the form of Conversion Shares,
or at such times, in such amounts and upon such terms as the Board of Directors
may determine, without further approval of the shareholders unless, in any
instance, such approval is expressly required by regulatory agencies or
otherwise. As discussed in part under Proposal One, the Nasdaq National Market,
on which the issued shares of Common Stock are currently included for quotation,
requires shareholder approval as a prerequisite to continued inclusion of the
shares in several situations, including acquisition transactions, where the
issuance of additional shares could result in an increase of 20% or more in the
number of shares of capital stock of the Company outstanding. The Common Stock
carries no preemptive rights to purchase additional shares.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's shareholders depending upon the
exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company so as to dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal.
In addition, an issuance of additional shares by the Company could have an
effect on the potential realizable value of a shareholder's investment. In the
absence of a proportionate increase in the Company's earnings and book value, an
increase in the aggregate number of outstanding shares of the Company caused by
the issuance of the additional shares would dilute the earnings per share and
book value per share of all outstanding shares of the Company's stock. If such
factors were reflected in the price per share of Common Stock, the potential
realizable value of a shareholder's investment could be adversely affected.
The proposed amendment to the Company's Articles of Incorporation was
approved by all of the directors of the Company present at a meeting of the
Board of Directors on February 29, 1996 at which meeting a quorum was present.
The affirmative vote of a majority of the outstanding shares of Common
Stock is required for approval of the amendment to the Company's Amended and
Restated Articles of Incorporation although broker non-votes and abstentions
have the effect of votes against this Proposal Two. Because the increase in
authorized stock in Proposal Two is necessary to permit conversion of the
Debenture, Proposals One and Two are interrelated such that Proposal One cannot
be effected unless Proposal Two is also approved. In such regard, negative
votes, broker non-votes and abstentions as to Proposal Two will also have the
practical effect of votes against Proposal One. The Board of Directors
recommends that the shareholders vote FOR the increase in the Company's
authorized shares of Common Stock from 10,000,000 to 15,000,000.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The holders of the Company's Common Stock are entitled to one vote per
share on all matters to be voted upon by the shareholders, except that all such
holders are entitled to cumulate their votes in the election of directors. Each
shareholder voting for the election of directors may cumulate such shareholder's
votes and give one candidate the number of votes equal to the number of
directors to be elected multiplied by the number of votes to which the
shareholder's shares are entitled, or distribute such shareholder's votes on the
same principle among as many candidates as the shareholder may select, provided
that votes cannot be cast for more than the number of director positions subject
to such election. However, no shareholder shall be entitled to cumulate votes
unless the names of candidates for which votes are being cumulated have been
placed in nomination prior to the voting and the shareholder, or any other
shareholder, has given notice prior to the commencement of the voting of such
shareholder's intention to cumulate the shareholder's votes. These cumulative
voting provisions will terminate if and when the Company meets certain listing
and trading standards, including a requirement for 800 record holders of the
Company's securities as of the record date of the Company's most recent annual
meeting of shareholders. This provision may have the effect of delaying,
deferring or preventing a change in control of the Company. The holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
REGISTRATION RIGHTS
Under the terms of a registration rights agreement, waiver agreement
and conversion agreement, subject to certain exceptions, if the Company proposes
to register any of its shares of Common Stock (other than the 160,000 shares
underlying a warrant issued by the Company to the underwriter (the
"Underwriter") of its initial public offering (the "Underwriter's Warrant"))
under the Securities Act of 1933, as amended (the "Securities Act"), either for
its own account or the account of any shareholder, in any public offering,
investors holding approximately 3,043,000 shares in the aggregate (the
"Registrable Securities") are entitled to notice of such registration and are
entitled on three separate occasions to include for registration therein their
Registrable Securities. In addition, the holder or holders of an aggregate of
at least 35% of the then outstanding Registrable Securities shall have the right
to require the Company to file a registration statement under the Securities Act
in order to register the Registrable Securities then held by such holder or
holders, provided that (i) the fair market or book value of the Registrable
Securities requested to be so registered is not less than $300,000, and (ii) the
Company is only obligated to file registration statements on no more than four
separate occasions in the aggregate and no more than two of which shall require
the use of registration statements on Form S-1. The right to include any of the
above-described Registrable Securities in any registration is subject to certain
limitations and conditions, including the underwriters' right to limit on a pro
rata basis the number of shares being registered by all holders. The Company is
required to indemnify holders of Registrable Securities and the underwriters, if
any, for such holders under certain circumstances. In general, the Company is
required to bear the expenses of all requested demand and piggyback
registrations, except for the selling shareholders' pro rata portion of the
underwriting discounts and commissions.
In connection with its public offering, the Company granted
registration rights to the Underwriter with respect to the 160,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrant. If the
Company shall cause a registration statement, or offering statement under
Regulation A, to be filed with the Commission, the Underwriter shall have the
right commencing one year after the date of this Prospectus and continuing for a
four-year period thereafter to include in such registration statement and
offering statement the
7
<PAGE>
Underwriter's Warrant and/or the securities issuable upon its exercise at no
expense to the Underwriter. Additionally, the Company has agreed that, upon
written request by a holder of 50% or more of the Underwriter's Warrant which is
made during the exercise period of the Underwriter's Warrant, the Company will,
on two separate occasions, register the Underwriter's Warrant and/or any of the
securities issuable upon the exercise thereof. The initial such registration
will be at the Company's expense and the second at the expense of the holder of
the Underwriter's Warrant.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Company's Common Stock is
American Stock Transfer & Trust Company, New York, New York.
OWNERSHIP OF SECURITIES
The following table sets forth information known to the Company
regarding the ownership of the Company's Common Stock as of March 31, 1996 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 salary and bonus for 1995 were in excess
of $100,000 and (iv) all executive officers and Directors of the Company as a
group.
<TABLE>
<CAPTION>
Number of Shares Percent of Total Shares
Name and Address of Beneficial Owner (9) Beneficially Owned(1) Outstanding Beneficially Owned
- - - ---------------------------------------------------- --------------------- -------------------------------
<S> <C> <C>
Entities that may be deemed to be
affiliated with Transpac Capital Pte Ltd
6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809 (2)................................ 842,013 15.30%
Wilmer R. Bottoms (3)............................... 832,610 15.09%
Entities that may be deemed to be affiliated with
Patricof & Co. Ventures, Inc.
2100 Geng Road, Suite 220
Palo Alto, CA 94303 (3)............................. 828,110 15.00%
Cabot Ceramics, Inc.
c/o Cabot Corporation
75 State Street
Boston, MA 02119-1806 (4)........................... 656,992 11.90%
Portal Investments, Inc.
c/o Levon Kasarjian, Jr.
8180 North Hayden Road
Suite D-100
Scottsdale, AZ 85258 (5)............................ 398,546 7.20%
Entities that may be deemed to be affiliated with
TBM Associates
101 Federal Street, 4th Floor
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Boston, MA 02110 (6)................................ 369,267 6.70%
Timothy da Silva (7)................................ 211,919 3.70%
Jee Fook Pak (8).................................... 11,194 *
Waldemar Heeb (8)................................... 13,326 *
Charles F. Wheatley (8)............................. 7,108 *
Ernest J. Joly (8).................................. 5,330 *
Frank Howland (8)................................... 2,250 *
Cecil E. Smith, Jr. (8)............................. 4,500 *
William R. Thompson................................. 1,000 *
All directors and executive officers
as a group (10 persons) (9)......................... 1,098,323 19.00%
- - - -----------
</TABLE>
* Less than 1%
(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 5,508,813 shares of Common Stock issued and
outstanding as of March 31, 1996. Shares of Common Stock subject to options
or warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of March 31, 1996 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
9
<PAGE>
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
have 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.
(3) Includes 201,308, 412,557, 104,593 and 106,795 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 1,428, 1,143, 286 and zero shares,
respectively, in the form of immediately exercisable warrants owned by such
entities. Dr. Bottoms, the Chairman of the Board of the Company, is a
general partner of APA Excelsior Fund and APA Partners, which is a general
partner of APA Excelsior II, and a Senior Vice President of Patricof & Co.
Ventures, Inc., which is an investment manager to APA Excelsior Venture
Capital Holding (Jersey) Ltd. and APA Venture Capital Fund, and as such may
be deemed to share voting and investment power with respect to such shares,
along with Alan Patricof, Patricia Cloherty, George Jenkins, Janet Effland
and Robert Chefitz. Dr. Bottoms and such other named individuals disclaim
beneficial ownership of such shares except to the extent of their
respective pecuniary interest therein.
(4) Includes 654,326 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 397,213 shares owned by Portal Investments, Inc. and 1,333
shares issuable upon exercise of warrants. Portal Investments, Inc. is an
Arizona corporation, eighty-eight percent of whose common stock is beneficially
owned by Bell Atlantic Systems Leasing International, Inc., a New York
corporation, a wholly-owned subsidiary of Bell Atlantic Capital Corporation, a
Delaware corporation, which is a wholly-owned subsidiary of Bell Atlantic
Investments, Inc., a Delaware corporation, which is a wholly-owned subsidiary
of Bell Atlantic Corporation, a Delaware corporation.
(6) Includes 368,094 shares owned by N.V. Bever Holding, and 1,173 shares
issuable upon exercise of warrants owned by N.V. Bever Holding. Joost
Tjaden, the chairman of the board and a principal shareholder of TBM
Associates, Inc., is a managing director of Bever Management B.V., a Dutch
Company, which is the managing director of N.V. Bever Holding. Mr. Tjaden
and John W. Blackburn are the two shareholders of Bever Management B.V.
TBM Associates, Inc. disclaims beneficial ownership of the shares owned by
N.V. Bever Holding.
(7) 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,
1996.
(8) All shares in the form of stock options exercisable within 60 days of
March 31, 1996.
(9) See Notes 3, 7 and 8 above.
10
<PAGE>
To the Company's knowledge, based solely upon representations from such
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in any such forward-looking statements as a result of
certain factors, including those set forth in Future Operating Results,
beginning on page 16.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 85.5 89.1 80.0
------- -------- ------
Gross profit...................................................... 14.5 10.9 20.0
Selling, general and administrative............................... 10.0 11.9 13.6
Engineering and product development............................... 4.3 4.1 3.7
Provision for revaluation of subsidiary and
other related assets............................................ -- -- 1.7
------- -------- ------
Income (loss) from operations..................................... 0.2 (5.1) 1.0
Other income (expense):
Foreign exchange loss........................................... (1.3) (2.4) (2.2)
Interest expense................................................ (1.4) (1.0) (2.2)
Royalty revenue................................................. 0.3 0.4 --
Other income.................................................... 1.8 1.2 1.0
------- -------- ------
Loss before income taxes and the cumulative effect of change in
accounting principle............................................. (0.4) (6.9) (2.4)
======= ======== ======
Net loss.......................................................... (0.4) (6.9) (2.4)
======= ======== ======
</TABLE>
For a detailed description of the Company's Consolidated Balance Sheets as
of March 31, 1996, December 31, 1995 and 1994 and the Consolidated Statements of
Operations, Statements of Cash Flows and Statements of Shareholders' Equity for
each of the three fiscal years in the period ended December 31, 1995, and the
three month period ended March 31, 1996, together with the reports of the
Independent Certified Public Accountants, please see Exhibit C to this Proxy
---------
Statement.
YEARS ENDED 1993, 1994 AND 1995
11
<PAGE>
Net sales. The Company's net sales increased by 21.9% from $34.7 million
in 1993 to $42.3 million in 1994 and by 37.1% to $58.0 million in 1995. The
increase in net sales during 1994 is primarily attributable to a $6.4 million
increase in revenues from the sale of multichip modules ("MCM") products at the
Company's CTM Electronics, Inc. subsidiary ("CTM"). The increase in net sales
during 1995 is primarily attributable to increases in revenues from sales of
pressed ceramics products at the Company's Microelectronic Packaging (S) Pte.,
Ltd. ("MPS") and Microelectronic Packaging America ("MPA") subsidiaries of
approximately $12.4 million (which includes the effect of $1.2 million derived
from transfer of technology in 1994 referred to below), and a $4.6 million
increase in revenues from the sale 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 sales by $1.4
million during 1995.
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. The revenues arising from this
arrangement are included in other sales. There were no such revenues during
1995.
Cost of goods sold. The Company's cost of goods sold increased from $29.7
million in 1993 to $37.7 million in 1994 to $46.4 million in 1995. The increases
were primarily the result of increased sales during these periods. The cost
associated with the inclusion by CTM in its finished MCM products of components
that, in previous years, were purchased by CTM's customers from third party
suppliers and provided to CTM, accounted for $2.3 million of the $8.0 million
increase in 1994 and $1.4 million of the $8.7 million increase in 1995. Cost of
goods sold has also been materially adversely affected by exchange rate
fluctuations during such periods. The appreciation of the Japanese yen and the
Singapore dollar relative to the United States dollar during such periods has
increased the Company's cost of goods sold and decreased its margins on products
sold. Such fluctuations in exchange rates have resulted in increases in the
Company's cost of goods sold of $198,000, $1,545,000 and $875,000 in 1993, 1994
and 1995, respectively. Cost of goods sold as a percentage of net sales
increased from 85.5% in 1993 to 89.1% in 1994 primarily due to the material
adverse impact of exchange rate fluctuations on the gross margins generated by
the Company's Singapore operations and inadequate overhead absorption at MPA due
to low product sales. Cost of goods sold as a percentage of net sales decreased
to 80.0% in 1995. 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.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.5 million in 1993 to $5.0 million in 1994 to $7.9
million in 1995. The increase of approximately $1.6 million or 44.5% in 1994 is
primarily attributable to the inclusion of expenses related to the operations
acquired as part of the Company's acquisition of CTM of $380,000, administrative
costs related to an equipment transfer agreement with an entity in China of
$111,000, the expenses associated with establishing reserves relating to certain
uncollectible receivables of $157,000, an increase in legal and accounting costs
of $220,000, an increase of approximately $600,000 in personnel costs and
approximately $284,000 of other costs associated with the Company's operating as
a public company together with other increases of $282,000 relating to an
increase in activity, offset by a decrease of approximately $434,000 in expenses
due to a down-sizing of business operations in a business sector. The increase
of approximately $2.8 million or 56.6% in 1995 is attributable to several
factors, including the establishment of a reserve for uncollectible receivables
of $980,000, legal settlement costs of $525,000, an increase in legal costs of
approximately $400,000, an increase in sales commissions at CTM of approximately
$140,000 as a result of the increase in sales of MCM products, additional
personnel
12
<PAGE>
costs of approximately $380,000 and a further $375,000 related to the
overall increase in activity in 1995. Selling, general and administrative
expenses may increase in absolute dollars during 1996.
Engineering and Product Development. Engineering and product development
costs increased from $1.5 million in 1993 to $1.7 million in 1994 to $2.2
million in 1995. The increase of approximately $240,000 or 16.1% in 1994
primarily reflects the inclusion of expenses related to the new operations
acquired in the CTM acquisition. The increase of approximately $418,000 or 24.1%
in 1995 primarily reflects an increase in personnel costs and expenditures on
materials used in product development. The Company currently anticipates that
engineering and product development costs will increase in absolute dollars in
the future as it continues to develop products such as cerquads for commercial
applications, low-temperature co-fired multilayer ceramics for use in the
production of MCMs, white ceramic packages for the telecommunications industry
and products incorporating thick film technology, and programs associated with
technology licenses.
Provision for Revaluation of Subsidiary and Other Related Assets. In July
1995, the Company's Board of Directors directed management to undertake the sale
of the Company's MPM subsidiary and certain other related assets. In connection
with this decision, the Company recorded a writedown of $1,000,000 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 the IBM technology. 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 the year. The Company did not recognize any additional exit costs beyond
those recorded in the second quarter of 1995.
Foreign Exchange Loss. During 1993, 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
134 Japanese yen to 1 U.S. dollar to as low as 83.1 Japanese yen to 1 U.S.
dollar and the Singapore dollar exchange rate declined from 1.60 Singapore
dollars to 1 U.S dollar to as low as 1.39 Singapore dollars to 1 U.S. 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 $645,000, $2,552,000 and $2,129,000 in 1993,
1994 and 1995, respectively. For financial reporting purposes, a portion of
these additional costs is included in cost of goods sold, while the remainder is
recorded in the caption foreign exchange loss. Such fluctuations in exchange
rates have resulted in reductions of the Company's gross profit on product sales
of $198,000, $1,545,000 and $875,000 in 1993, 1994 and 1995, respectively.
During such periods, the Company also reported foreign exchange transaction
losses of $447,000, $1,007,000 and $1,254,000, respectively.
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 the Development Bank of Singapore ("DBS"), the Company enters into forward
foreign currency contracts to hedge foreign currency transactions such as
purchases
13
<PAGE>
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 (U.S.$21,216,000 at
December 31, 1995) 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.
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 owing 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. Any future weakening of the U.S. 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 U.S. dollar, the Company
increased the sales prices of certain of its products during the second quarter
of 1995. The Company will attempt to further offset the material adverse effect
of the weaker U.S. dollar by qualifying non-Japanese sources of key materials,
and completing the relocation of its pressed ceramic products manufacturing
operations to Indonesia from Singapore. There can be no assurance that such
measures can or will be taken or financed to a sufficient degree such that they
will offset the impact of the weaker U.S. dollar on the Company's operating
results.
Interest Expense. Interest expense decreased from $490,000 in 1993 to
$443,000 in 1994 and increased to $1,298,000 in 1995. The decrease in 1994 of
$47,000 is primarily due to the reduction in interest expense resulting from the
retirement of various interest bearing obligations during the second quarter of
1994, which decrease more than offset the interest on the additional borrowings
under the Company's various credit facilities with DBS and the interest on
additional indebtedness incurred and assumed in the CTM acquisition. The
increase of $855,000 in 1995 is primarily due to additional borrowings by the
Company under its borrowing arrangements with DBS Bank (see Liquidity and
Capital Resources), an increase in the Singapore prime rate during the second
half of 1994 and the additional borrowings associated with the program to
acquire equipment from SSC (see Note 4 of Notes to Consolidated Financial
Statements attached hereto as Exhibit C). The Company currently anticipates that
---------
interest expense will continue to increase in absolute dollars during 1996 due
to the increase in Company borrowings.
Royalty Revenue. Royalty revenues from the Company's licensee were
$114,000 and $153,000 in 1993 and 1994, respectively. The Company's royalty
arrangement with its licensee terminated at the conclusion of the second quarter
of 1994; accordingly, the Company has had no royalty revenue during 1995. The
increase in royalty revenue in 1994 was due to an increase in licensee product
sales during the first quarter of 1994.
Other income. Other income was $634,000, $496,000 and $614,000 in 1993,
1994 and 1995, 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 a
$375,000 payment from an insurance policy (net of legal expenses) covering
product losses incurred in 1988 due to the contamination of products during the
14
<PAGE>
manufacturing process. The Company believes this will be the final payment
relating to any insurance recovery relating to this loss.
Effects of income taxes. The Company's operating results were not impacted
by income taxes during 1993, as taxable income during this period was offset by
the utilization of a net operating loss carryforward. During 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, 1995, the Company had net
operating loss carryforwards of $11.3 million for United States income tax
purposes. In addition, at December 31, 1995, the Company had $435,000 in federal
and state research and development credits and $31,000 in investment tax credits
available for United States income tax purposes. The Company believes that it
has incurred an ownership change pursuant to Section 382 of the Internal Revenue
Code and, as a result, the Company believes that its ability to utilize its
current net operating loss and credit carryforwards in subsequent periods will
be subject to annual limitations. As of December 31, 1995, the Company had
capital allowance carryforwards of $2.4 million for Singapore income tax
purposes.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109 effective January 1, 1993. SFAS 109 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 bases of assets and
liabilities using enacted tax rates in effect for the year(s) in which the
differences are expected to reverse. Upon implementation of SFAS 109, on January
1, 1993, the Company recorded a cumulative benefit of a one-time change in
accounting principle of $346,000, which represents the future tax benefits
expected to be realized upon utilization of the Company's foreign tax loss
carryforwards. These loss carryforwards were utilized during 1993.
LIQUIDITY AND CAPITAL RESOURCES
During 1993, 1994 and 1995, 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 1995,
operations provided net cash of $300,000. Investing activities, primarily
consisting of acquisitions of fixed assets, used $11.8 million and financing
activities provided net cash of $13.1 million during the same period. At
December 31, 1995, the Company had a working capital deficiency of $4,883,000
and an accumulated deficit of $26,910,000. In March 1996, the Company
consummated an equity financing of $2,000,000 with Transpac and MPM raised an
additional $9,000,000 through the issuance of the Debenture to Transpac.
The Company's principal sources of liquidity at December 31, 1995 consisted
of $2,923,000 of cash, and certain limited available borrowing capacity with
DBS. MPS has a S$9,500,000 (US$6,719,000) 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, 1995, MPS
had outstanding borrowings under this arrangement of $6,045,000. MPC has a
S$500,000 (US$354,000) borrowing arrangement with DBS, guaranteed by both MPI
and MPS, consisting of a working capital line 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, 1995, MPC
had outstanding borrowings under this arrangement of $3,000. In February 1995,
MPM activated 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 will 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 will mature
in May 1996 unless converted into a term loan at the election of DBS upon the
Company's satisfaction of certain criteria. This facility automatically
terminates in the event of the termination of the Company's technology transfer
agreement with IBM. At December 31, 1995,
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MPM had outstanding borrowings under this arrangement of $3,197,000. Borrowings
under this arrangement are secured by substantially all of the assets of MPM.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earnings levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt, the most restrictive of these covenants
being those associated with maintaining certain quarterly profitability levels.
The MPM and MPC agreements also contain restrictive provisions. As of December
31, 1995, each of MPM, MPS and MPC were in violation of certain covenants set
forth in their respective agreements with DBS, such violations including a
breach of profitability covenant by MPC, a breach of debt-to-equity ratio
covenant by MPM and a breach of the prohibition on intercompany advances. Such
violations were waived by DBS as of such date. As of March 31, 1996, the Company
was in default under one of its debt covenants. Such default was waived by the
lender after March 31, 1996.
At December 31, 1995, the Company also had borrowings of $10,000,000 under
notes payable to, or guaranteed by, various customers bearing interest at rates
ranging from 7.0% to 14.0% (see Note 8 of Notes to Financial Statements),
$1,424,000 under mortgage notes bearing interest at rates of 7.5% and 7.75%,
$207,000 under term loans bearing interest at 12.2%, and $864,000 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 noninterest bearing obligations in connection with the CTM
acquisition that have been discounted to their net present value of $394,000 at
December 31, 1995.
Since the execution of the IBM technology agreements, 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 totalled approximately $9,200,000. 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 and capital resources. In addition to the $2.0 million payment, the
Company has significant continuing royalty obligations under the IBM Agreement.
Under the IBM Agreement, the Company is also required to attain certain
production milestones at specified dates. If the Company fails to achieve these
specified milestones in a timely manner, the IBM Agreement is terminable by IBM.
In addition, commencing in August 1996, the IBM Agreement is terminable by
either party without cause upon six months prior written notice. Although the
Company currently believes that with adequate financing it can achieve the
production milestones set forth in the IBM Agreement, there can be no assurance
that the Company will be able to achieve such milestones on a timely basis, or
at all. Furthermore, there can be no assurance that IBM will not terminate the
IBM Agreement after August 1996. If the Company does not timely achieve the
production milestones under the IBM Agreement, the Company could lose its rights
to the technology licensed to the Company by IBM under such agreement. If IBM
terminates the IBM Agreement after August 1996, the Company would lose its right
to such technology. The loss of such rights would have a material adverse impact
on the Company's future revenues and on the Company's future.
The Company is in the process of seeking additional financing, but other
than credit facilities discussed above, had no legally binding commitments or
arrangements for such financing as of March 31, 1996 other than $1.0 million
loaned to the Company by a bank lender in February 1996 and a term sheet entered
into with a bank lender in March 1996 for an additional $1.0 million and there
can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all, when required by the Company.
FUTURE OPERATING RESULTS
Future Capital Needs; Need for Additional Financing. The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the
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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. Absent outside debt or equity
financing, and excluding significant expenditures required for the Company's
major projects and obligations associated with MPM, the Company currently
anticipates that cash on hand, excluding the remaining funds from the Transpac
financing, anticipated cash flow from operations and funds available from MPS's
bank line of credit and borrowings from customers will be adequate to fund its
operations excluding MPM in the ordinary course through the twelve months
subsequent to March 31, 1996. See "Repayment of Bank Obligations by MPM; Need
for Additional Financing by MPM." There can be no assurance, however, that the
Company will not require additional financing prior to such date to fund its
operations. In addition, the Company will require additional financing after
such date to fund its operations in the ordinary course and retire its
significant debt obligations. Furthermore, the Company will require significant
additional financing in order to carry out its current corporate development
programs including the provision of certain raw materials and production
supplies to a third party supplier in Indonesia and the consolidation of MPS's
Singapore operations. There can be no assurance that the Company will be able to
obtain such additional financing on terms acceptable to the Company, or at
all.
Pursuant to a subcontract manufacturing agreement between the Company and
Innoventure, a third party supplier, Innoventure established a manufacturing
facility in Indonesia that partially processes pressed ceramic products on
behalf of the Company. Partial processing of pressed ceramic products commenced
in the second quarter of 1995. Pressed ceramic products that are partially
processed in the Indonesian facility are completed in the Company's Singapore
facility. The Company currently anticipates that the Indonesian facility may be
able to fully process and produce pressed ceramic products by the 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 this agreement, the Company agreed to provide Innoventure with raw
materials and other production supplies necessary for the commencement of
production in this facility. This obligation to provide raw materials and
production supplies has subsequently been modified by both parties such that the
Company is now purchasing these items from its suppliers on behalf of
Innoventure. Innoventure currently owes the Company approximately $1,434,000
related to the supply of such raw materials and related production supplies, and
the Company anticipates that it will continue to purchase such items on
Innoventure's behalf for the foreseeable future. The foregoing amount is
structured to be repaid to the Company by Innoventure with the form and timing
of such payments being agreed to by both parties. There can be no assurance that
amounts of raw materials and production supplies being provided to Innoventure
will not increase in the future, however, or that such amounts will continue to
be repaid by Innoventure in a timely fashion, or at all. Under this agreement,
the Company also agreed to lease certain production equipment to Innoventure. To
date, the parties have not finalized the terms of this leasing arrangement. In
the interim, the Company moved certain of its production equipment from its
Singapore facilities and certain of the equipment purchased from Samsung Corning
to the Innoventure facility. There can be no assurance that the Company will not
be required to replace such equipment in MPS's Singapore facilities or incur
additional costs as a result of replacing such equipment.
Although limited processing of pressed ceramic products commenced in
Indonesia during the second quarter of 1995, the full transition of the
Company's pressed ceramic production operations from Singapore to Indonesia has
not yet been completed and such operations are still primarily located at its
Singapore facility. 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 cost a minimum
of $1.0 to $3.0 million and such consolidation may be completed no earlier than
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.
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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's high level of outstanding indebtedness and
the numerous restrictive covenants set forth in the agreements covering this
indebtedness prohibit the Company from obtaining additional bank lines of credit
and from raising funds through the issuance of debt or other securities without
the prior consent of DBS and Transpac. The Company is in the process of seeking
additional financing, but as of March 31, 1996, had no legally binding
commitments or arrangements for such financing other than a $1.0 million term
loan from a bank lender, a term sheet for an additional $1.0 million and the
Transpac financing which was consummated in late March 1996. The $9.0 million
raised by MPM is not available for use in other portions of the Company's
business. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all, when required by the
Company. If additional funds are raised by issuing equity or convertible
securities, further dilution to the existing shareholders will result. If
adequate funds are not available, the Company will be required to delay, scale
back or eliminate programs such as the consolidation of MPS's Singapore facility
or development of the IBM technology, which could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. In addition the Company will be required to take similar action with
respect to other research and development or manufacturing, construction
or transitioning programs or alliances or obtain funds through arrangement with
third parties that may require the Company to relinquish rights to certain of
its technologies or potential products or other assets that the Company would
not otherwise relinquish. The delay, scaling back or elimination of any such
programs or alliances or the relinquishment of any such rights could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Future Operating Results. The Company's operating results have fluctuated
significantly in the past and may continue to fluctuate significantly in the
future depending upon a variety of factors, including foreign currency losses,
losses associated with the Company's MPM subsidiary, downward pressure in gross
margins at the Company's subsidiaries, continued losses at the Company's
subsidiaries due to low shipping volume, market acceptance of new and enhanced
versions of the Company's products, delays, cancellations or reschedulings of
orders, delays in product development, defects in products, the mix of products
sold, integration of acquired businesses, political and economic instability,
natural disasters, outbreaks of hostilities, gains or losses due to foreign
currency fluctuations, variations in manufacturing yields, changes in
manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
pressed ceramic and personal computer industries. In addition, operating results
may fluctuate significantly based upon several other factors, including the
Company's ability to attract new customers, seasonal fluctuations in business
activity worldwide, changes in pricing by the Company, its competitors,
subcontractors, customers or suppliers, the conversion, if any, of existing
Singapore facilities, and fluctuations in manufacturing yields at the Singapore
and Indonesian facilities. Although the Company recently consummated the
Transpac financing, there can be no assurance that revenue levels during the
start-up phase of operations will be adequate to cover MPM's fixed overhead
costs, which may result in significant operating losses arising at this
subsidiary and thereby materially adversely affect the Company's business,
prospects, financial condition and results of operation. 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
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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
operation.
Repayment of Bank Obligations by MPM; Need for Additional Financing by MPM.
As of December 31, 1995, MPM had outstanding borrowings of approximately
$3,200,000 under its borrowing arrangement with DBS. The facility, which is
guaranteed by both MPI and MPS, expires in May 1996 unless converted into a term
loan at the discretion of DBS. Borrowings under this short term credit facility
cannot remain outstanding for more than 30 days although the facility does
permit rolling over of existing outstanding balances. In March, 1996, MPM issued
the Debenture to Transpac, which Debenture is due and payable in March 2001
unless earlier converted. The existence of the debenture and its convertibility
feature into shares of common stock of MPI would significantly dilute any
earnings per share amounts and significantly dilute the ownership interests of
MPI's investors. The existence of the debenture and its convertibility feature
into shares of Common Stock of MPM could have the same effect on MPI, as the
current sole shareholder, as the potential creation of a minority interest in
the earnings of MPM, if any, would reduce the Company's proportional earnings
from this subsidiary with a corresponding reduction in the Company's overall
results of operations. The Company currently anticipates that the proceeds
generated by the Transpac financing will enable MPM to commence the limited
production of partially processed revenue producing units by the end of 1996;
provided, however, that if DBS does not convert MPM's $3.2 million short term
credit facility into a term loan upon the expiration of such facility in May
1996, MPM may require additional financing to commence such limited production
by the end of 1996 because a portion of the proceeds from the Transpac financing
will be utilized to retire the DBS facility. With adequate additional financing,
the Company currently anticipates that volume production of fully processed
revenue producing units may commence by the end of 1997. The Company currently
anticipates that expenditures associated with equipping the MPM facility so that
it may commence limited production of partially processed revenue producing
units by the end of 1996 will total several million dollars, and, thereafter,
tens of millions of dollars in order for the facility to commence full
production of fully processed revenue producing units by the end of 1997. The
Company will require significant additional financing above and beyond the
proceeds from the Transpac financing to adequately fund its obligations under
the IBM Agreement and the manufacture of products based on such technology.
Neither MPI nor any of its subsidiaries is currently able to generate such funds
from their respective operations. Therefore, if additional funds are required,
the Company would be required to undertake another offering of its debt and/or
equity securities. There can be no assurances that the Company would be able to
obtain such additional funds on terms acceptable to the Company, or at all, if
required. A failure to obtain such additional funds as required would have a
material adverse effect on MPM's operations and, therefore, on the business,
financial condition and results of operations of the Company. Furthermore, if
the Company is unable to obtain additional funds as needed and MPM defaults on
its obligations under the facility with DBS or the Debenture with Transpac, MPM
would be unable to achieve the production milestones under the IBM Agreement,
giving IBM the right to terminate such agreement. In the event of such
termination by IBM, the Company would lose the rights to the technology licensed
to it by IBM under the IBM Agreement. The failure by the Company to obtain the
necessary additional funds to maintain MPM's operations, a default by MPM under
the DBS or Transpac facility or MPM's loss of its technology rights under the
IBM Agreement would materially and adversely affect the Company's business,
prospects, financial condition and results of operations.
Adverse Impact of MPM Default on MPS and MPI; Repayment of Bank Obligations
by MPS; Adverse Impact of MPS Default on MPM. At December 31, 1995, MPS had
outstanding borrowings of approximately $7.5 million with DBS. In addition,
during 1995, MPS borrowed an aggregate of approximately $8.5 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
bank obligations also consist of borrowings of $3.2 million from DBS. If MPM
defaults on its obligations under the DBS facility, DBS could, as one of its
numerous remedies, declare the debt owed to it by MPS to be immediately due and
payable. Such an action would also result in defaults under certain of MPS's
loan agreements pursuant to which it borrowed funds from the Consortium, among
other lenders. Such accelerations would materially adversely affect the
Company's ability to continue as an ongoing concern. In addition, in November
1995 Motorola, Inc.
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("Motorola") guaranteed MPS's repayment of $2.0 million in borrowings from a
certain bank lender. Under the terms of the agreement relating to Motorola's
guarantee, MPI granted Motorola a security interest in all of the issued and
outstanding capital stock of MPS and two other subsidiaries of the Company. In
the event that MPS defaults under its obligations to this bank lender and while
such event of default continues, Motorola will have the right to vote and give
consents with respect to all of the issued and outstanding capital of MPS and
such subsidiaries (the "Subsidiary Voting Rights"). As a result, during the
continuation of any such event of default, MPI would be unable to control at the
shareholder level the direction of the subsidiaries that generate substantially
all of the Company's revenues and hold substantially all of the Company's
assets. Any such loss of control would have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Furthermore, the acquisition by Motorola of the Subsidiary Voting Rights would
constitute an event of default under the IBM Agreement and the Manufacturing and
Technology Agreements with Carborundum, thereby giving IBM and Carborundum the
right to terminate the IBM Agreement and the Manufacturing and Technology
Agreements. Upon such a termination by IBM or Carborundum, the Company would
lose the rights to the technology that it has licensed from each of such
entities, as applicable. The Company's loss of either of these rights would
preclude the Company from manufacturing and selling products based on such
technologies and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. The acquisition of the
Subsidiary Voting Rights by Motorola would also constitute a default under the
IBM Option Agreement, thereby triggering IBM's right to purchase up to 51% of
the then outstanding capital stock of MPM. IBM's exercise of this right would
cause MPI to lose voting control over MPM, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The agreements covering the Transpac financing, including the Debenture and
MPI's guarantee of such MPM indebtedness, contain numerous restrictions and
events of default that could be triggered by the aforementioned actions and
would, if they became effective, materially adversely affect the Company's
business, prospects, results of operations and condition.
High Leverage. The Company is highly leveraged and has substantial debt
service requirements. After giving effect to the Transpac financing, the Company
and its subsidiaries currently have $31.1 million in debt obligations. At
December 31, 1995, the Company had a total shareholders' equity of approximately
$7.4 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. The Company must continue to raise capital
in order to increase the production capacity of its MPM and another subsidiary's
facilities. These additional capital requirements will be substantial and may be
financed largely by the issuance of additional 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.
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 1995 consolidated financial statements related to a
substantial doubt with respect to the Company's ability to continue as a going
concern, although the financial statements do not presently include any
adjustments that might result from the uncertainty of the Company's ability to
continue as a going concern. There can be no assurance that the Company will
operate profitably in the future and that losses will not continue to occur.
Absent outside debt or equity financing, and excluding significant expenditures
required for the Company's major projects and obligations associated with MPM,
the Company currently anticipates that cash on hand, anticipated cash flow from
operations and funds available from the MPS bank line of credit and borrowings
from customers and Transpac may be adequate to fund its operations, excluding
MPM, in the ordinary course throughout 1996. The Company is currently seeking
additional financing through sales of debt or equity securities and through bank
or lessor financing alternatives, if available, to finance its future capital
projects. These efforts will be hampered by the Company's high level of existing
indebtedness, secured or otherwise. Any significant increase in planned capital
expenditures or other costs or any decrease in or elimination of anticipated
sources of financing could cause the Company to restrict its business and
product development efforts. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company. If adequate funds are not available, the Company will
be unable to execute its business development efforts and will be required to
delay, scale back or eliminate programs such as the
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transition of the Singapore operations to Indonesia and may be unable to
continue as a going concern. There can be no assurance that the Company's future
consolidated financial statements will not include another going concern
explanatory paragraph if the Company is unable to raise sufficient funds to fund
its operations. The factors leading to and the existence of the explanatory
paragraph will have a material adverse effect on the Company's ability to obtain
additional financing. See " -- Future Capital Needs; Need for Additional
Financing," "Liquidity and Capital Resources" and "Consolidated Financial
Statements."
Foreign Currency Fluctuations. Although the Company's sales are denominated
in United States dollars, the majority of the Company's operating expenditures
are made in other currencies, namely Japanese yen and Singapore dollars. As a
result, the Company's operating results have been and will continue to be
materially adversely affected by any weakening of the United States dollar
relative to these currencies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Any appreciation of such
currencies relative to the United States dollar would result in exchange losses
for the Company and could have the effect of increasing the Company's costs of
goods and general and administrative expenses and decreasing its margins or in
making the prices of the Company's or its customers' products less competitive.
Accordingly, such effects have had and will continue to have a material adverse
effect upon the business, financial condition and results of operations of the
Company. Although the Company seeks to mitigate its currency exposure through
hedging measures, these measures have been and may in the future be
significantly limited in their effectiveness. In the future, the Company's
operating results will also be materially adversely affected by any weakening of
the United States dollar relative to Indonesia's currency. See "New
Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore."
New Manufacturing Facilities in Indonesia; Transition of Existing Singapore
Operations; New Manufacturing Facilities in Indonesia and Singapore. In 1993,
the Company entered into a subcontract manufacturing agreement with Innoventure
pursuant to which Innoventure designed and constructed a new manufacturing
facility in Indonesia. The Company currently anticipates moving its pressed
ceramic production operations presently located in MPS's facilities in Singapore
to Indonesia. In connection with such move, the Company may consolidate MPS's
Singapore operations, which currently occupy two facilities, into one facility.
Such consolidation, if undertaken by the Company, will cost a minimum of $1.0 to
$3.0 million and such consolidation would be completed no earlier than the end
of 1997. To date, the transition of the Company's pressed ceramic production
operations from Singapore to Indonesia has not yet been completed and the bulk
of such operations are still located at its Singapore facility. The operation of
the Indonesia facility by Innoventure is designed to increase the Company's
manufacturing capacity and to lower costs of production. Partial processing of
pressed ceramic products, which are completed in the Company's Singapore
facility, commenced in the second quarter of 1995. The Company currently
anticipates that it will be increasingly dependent on the Indonesian facility to
conduct the initial processing of its pressed ceramic products in future
periods. The Company's increasing reliance on Innoventure as a subcontractor
involves certain risks, including reduced control over delivery schedules,
quality assurance, manufacturing yields and cost. Although the Company has not
experienced material disruptions in supply from Innoventure to date, there can
be no assurance that manufacturing problems will not occur in the future. Any
such material disruption could have a material adverse effect on the Company's
business, financial condition and results of operations. The complete equipping
and operation of the facility in Indonesia could take several years to
accomplish. Innoventure is not under any unconditional obligation to fully equip
such facility and there are a number of other conditions that must be satisfied
before such Indonesian facilities can be fully equipped. There can be no
assurance, therefore, that such Indonesian facility will be fully completed.
Innoventure is also not subject to any written contractual obligation to
continue operating such facility. Thus, there can be no assurance that the
agreement with Innoventure is enforceable or that any judgment secured by the
Company, whether in Singapore or elsewhere, upon a breach of such agreement will
be upheld by Singapore courts. Innoventure is entitled to the first $4.5 million
in profits generated by the Indonesian facility within five years of project
start-up. In addition, pursuant to the Innoventure Agreement, the Company 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 the Company is now purchasing these items from its
suppliers on behalf of Innoventure.
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Innoventure currently owes the Company approximately $1,434,000 related to the
supply of such raw materials and related production supplies, and the Company
anticipates that it will continue to purchase such items on Innoventure's behalf
for the foreseeable future. The foregoing amount will be repaid to the Company
by Innoventure with the form and timing of such payments being agreed to by both
parties. There can be no assurance that amounts of raw materials and production
supplies being provided to Innoventure will not increase in the future, however,
or that such amounts will be repaid by Innoventure in a timely fashion, or at
all. There can also be no assurance that the Company will have adequate funds to
provide such materials and production supplies to Innoventure. See "-- Future
Capital Needs; Need for Additional Financing."
If the Company's revenues do not increase commensurate with the anticipated
increase in capacity in Indonesia, the Company's results of operations could be
materially adversely affected. As is typical in the semiconductor industry, new
manufacturing facilities initially experience low production yields. Any
inability on the Company's or Innoventure's part to obtain adequate production
yields or to maintain such yields in the future could delay shipments of
products. No assurance can be given that the facility in Indonesia will not
experience production yield problems or delays in completing product testing
required by a customer to qualify the Company as a vendor, either of which,
given that such facilities will be manufacturing pressed ceramic products and
advanced multilayer packages could materially adversely affect the Company's
business, financial condition and results of operations.
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. Recently, certain of the
Company's key customers have notified the Company that they intend to decrease
their product purchase orders with the Company. The loss of or any reduction in
orders by any of these customers, including reductions due to market, economic
or competitive conditions in the semiconductor, personal computer or electronic
industries or in other industries that manufacture products utilizing
semiconductors or multichip modules, could materially adversely affect the
Company's business, financial condition and results of operations. The supply
agreements with certain of these customers do not obligate them to purchase
products from the Company. The Company's ability to increase its sales in the
future will also depend in part upon its ability to obtain orders from new
customers. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to retain existing customers or to
attract new ones. There can also be no assurance that any of the Company's
subsidiaries will be able to diversify or enhance its customer base. Failure to
develop new customer relationships could materially adversely affect each such
subsidiary's results of operations and could materially adversely affect the
Company's business, financial condition and results of operations.
Mature Market; Dependence on Semiconductor and Personal Computer
Industries. To date, a significant portion of the Company's revenues have been
derived from sales of pressed ceramic products to customers in the semiconductor
industry. The market for the pressed ceramic product is relatively mature and
demand for pressed ceramic products may decline in the future. Accordingly, the
Company believes that sales of its pressed ceramic products may decrease in the
future and, as a result, the Company's business, financial condition and results
of operations may be materially adversely affected.
The financial performance of the Company is dependent in large part upon
the current and anticipated market demand for semiconductors and products such
as personal computers that incorporate semiconductors. The semiconductor
industry is highly cyclical and historically has experienced recurring periods
of oversupply, resulting in significantly reduced demand for the Company's
pressed ceramic products. The Company believes that the markets for new
generations of semiconductors will also be subject to similar fluctuations. The
semiconductor industry is currently experiencing rapid growth. There can be no
assurance that such growth will 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 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
22
<PAGE>
Company's net sales and results of operations will not be materially
adversely affected if downturns or slowdowns in the semiconductor, personal
computer industry or other industries utilizing the Company's products occur in
the future.
Highly Competitive Industry; Significant Price Competition. The electronic
packaging and interconnection technology industries are intensely competitive.
The Company experiences intense competition worldwide from a number of
manufacturers, including Kyocera Corporation, Sumitomo Metal Mining Co., Ltd.,
Motorola, Inc., TI, Fujitsu, Ltd., Hitachi, Ltd. and Toshiba Corporation, all of
which have substantially greater financial resources and production, marketing
and other capabilities than the Company with which to develop, manufacture,
market and sell their products. The market for sales of the Company's pressed
ceramic products is highly concentrated with a few competitors, all of which
provide intense competition and have substantially greater financial resources
and production, marketing and other capabilities than the Company with which to
develop, manufacture, market and sell pressed ceramic products. The Company
faces competition from certain of its customers that have the internal
capability to produce products competitive with the Company's products and may
face competition from new market entrants in the future. In addition,
corporations with which the Company has agreements are conducting independent
research and development efforts in areas which are or may be competitive with
the Company. The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide improved performance characteristics. New product
introductions by the Company's competitors could cause a significant decline in
sales or loss of market acceptance of the Company's existing products which
could materially adversely affect the Company's business, financial condition
and results of operations. Moreover, the Company has historically experienced
significant price competition in the sale of its pressed ceramic products, which
has materially adversely affected the prices and gross margins of such products
and the Company's business, financial condition and results of operations. The
Company is also experiencing significant price competition, which may materially
adversely affect the Company's business, financial condition and results of
operations. The Company believes that to remain competitive in the future it
will need to continue to develop new products and to invest significant
financial resources in new product development. There can be no assurance that
such new products will be developed or that sales of such new products will be
achieved. There can be no assurance that the Company will be able to compete
successfully in the future.
Technological Change; Importance of Timely Product Introduction;
Uncertainty of Market Acceptance and Emerging Markets. The markets for the
Company's products are subject to technological change and new product
introductions and enhancements. Customers in the Company's markets require
products embodying increasingly advanced electronics packaging and
interconnection technology. Accordingly, the Company must anticipate changes in
technology and define, develop and manufacture or acquire new products that meet
its customers' needs on a timely basis. The Company anticipates that
technological changes, such as FLASH memory, advances in plastic materials
technology and other semiconductor devices that may be more cost effectively
assembled into plastic packages and that do not require the protection
characteristics of the Company's ceramic packages, could cause the Company's net
sales to decline in the future. There can be no assurance that the Company will
be able to identify, develop, manufacture, market, support or acquire new
products successfully, that any such new products will gain market acceptance,
or that the Company will be able to respond effectively to technological
changes. If the Company is unable for technological or other reasons to develop
products in a timely manner in response to changes in technology, the Company's
business, financial condition and results of operations will be materially
adversely affected. There can be no assurance that the Company will not
encounter technical or other difficulties that could in the future delay the
introduction of new products or product enhancements. In addition, new product
introductions by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's products, which could materially
adversely affect the Company's business, financial condition and results of
operations. Even if the Company develops and introduces new products, such
products must gain market acceptance and significant sales in order for the
Company to achieve its growth objectives. Furthermore, it is essential that the
Company develop business relationships with and supply products to customers
whose end-user products achieve and sustain market penetration. There can be no
assurance that the Company's products will achieve widespread market acceptance
or that the Company will successfully develop such customer relationships.
Failure by the Company to develop products that gain widespread market
acceptance and significant sales or to develop relationships
23
<PAGE>
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 such types of customers will continue to
account for most of its net sales in the foreseeable future. As a result, most
of the Company's sales will continue to be subject to certain risks, including
changes in regulatory requirements, tariffs and other barriers, political and
economic instability, difficulties in staffing and managing foreign subsidiary
and branch operations, difficulties in managing contract manufacturers and
customers that are provided with contract manufacturing, potentially adverse tax
consequences, extended payment terms, and difficulty in accounts receivable
collection. The Company is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States or any other
country upon the importation or exportation of the Company's products in the
future. Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws or other trade policies, could materially adversely affect the Company's
ability to manufacture or sell in foreign markets. There can be no assurance
that any of these factors or the adoption of restrictive policies will not have
a material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, as the Company continues to transfer an
increasing amount of production equipment to the facility in Indonesia, the
Company will be increasingly subject to the risks associated with conducting
business in Indonesia, including economic conditions in Indonesia, the burdens
of complying with Indonesian laws, particularly with respect to private
enterprise and commercial activities, and, possibly, political instability. As
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 integrated circuits 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-L 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
24
<PAGE>
products. From initial customer contact to actual qualification for production,
which may take as long as one year, the Company may expend significant
resources. Although recently the Company has generally met its customers'
quality and reliability product specifications, the Company has in the past
experienced difficulties in meeting some of these standards. Although the
Company has addressed past concerns and has resolved a number of quality and
reliability problems, there can be no assurance that such problems will not
recur in the future. If such problems did recur, the Company could experience
delays in shipments, increased costs, delays in or cancellation of orders and
product returns, any of which would have a material adverse effect on the
Company's business, financial condition or results of operations. In addition,
the contract manufacturing of pressed ceramic products in Indonesia and
commencement of operations in such new facility and conversion of its existing
facilities in Singapore for new products will increase the probability of many
such risks. The manufacture of the Company's products is complex and subject to
a wide variety of factors, including the level of contaminants in the
manufacturing environment and the materials used and the performance of
personnel and equipment. The Company has in the past experienced lower than
anticipated production yields and written off defective inventory as a result of
such factors. The Company must also successfully increase production to support
anticipated sales volumes. There can be no assurance that the Company will be
able to do so or that it will not experience problems in increasing production
in the future. The Company's failure to adequately increase production or to
maintain high quality production standards would have a material adverse effect
on the Company's business, financial condition and results of operations.
Expansion of Operations. In order to be competitive, the Company must
implement a variety of systems, procedures and controls and greatly improve its
communications between its U.S. and Singapore operations. The Company expects
its operating expenses to continue to increase significantly. If orders received
by the Company do not result in sales or if the Company is unable to sustain net
sales at anticipated levels, the Company's operating results will be materially
adversely affected until operating expenses can be reduced. The Company's
expansion will also continue to cause a significant strain on the Company's
management, financial and other resources. If the Company is to grow, it must
expand its accounting and other internal management systems and greatly improve
its communications between its U.S. and Singapore operations, and there can be
no assurance that the Company will be successful in effecting such expansion.
Any failure to expand these areas in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's results of operations. Moreover, there can be no assurance that net
sales will increase or remain at or above recent levels or that the Company's
systems, procedures and controls will be adequate to support the Company's
operations. The Company's financial performance will depend in part on its
ability to continue to improve its systems, procedures and controls.
Intellectual Property Matters. Although the Company attempts to protect
its intellectual property rights through patents, trade secrets and other
measures, it believes that its financial performance will depend more upon the
innovation, technological expertise, manufacturing efficiency and marketing and
sales abilities of its employees. 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
25
<PAGE>
intellectual property matter are currently pending against the Company, there
can be no assurance that infringement or invalidity claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future or that such assertions, if proven to be true, will not
materially adversely affect the Company's business, financial condition and
results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, the Company
could decide to litigate such claims, which could be extremely expensive and
time-consuming and could materially adversely affect the Company's business,
financial condition and results of operations.
Potential Divestiture of MPC (S) Pte. Ltd. Aluminum Nitride Subsidiary;
Obligation to Purchase Products. In connection with the agreements with the
Carborundum Company ("Carborundum") for the manufacture of microelectronic
packages fabricated with aluminum nitride compounds, the Company granted to
Carborundum an irrevocable option, exercisable at any time through December 31,
1996, to acquire for an agreed-upon price set forth in the agreements up to 75%
of the ownership of MPC, a subsidiary of the Company organized to manufacture
and sell such products only to Carborundum. In addition, Carborundum has a right
to acquire for an agreed-upon price set forth in the agreements up to 100% of
the ownership of MPC in the event that competitors of Carborundum's
microelectronics business acquire more than 10% of the ownership of the Company
or gain access to any confidential information of either MPC or the Company
relating to Carborundum's microelectronics business. In either event, the
Company would lose control of the management and direction of MPC and, in the
event of a total divestiture, the right to participate in the profits, if any,
of MPC. The exercise of either such option could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
although Carborundum is obligated to purchase certain specified quantities of
such packages from MPC, Carborundum may purchase such products from any other
party without regard to such purchase requirements if Carborundum determines in
good faith that such third party is more attractive to Carborundum than MPC on
an economic, quality or risk basis. The Manufacturing Agreement and Technology
Agreement expire on December 31, 1996 if not renewed by the parties.
Furthermore, commencing January 1, 1997, Carborundum may unilaterally terminate
the Manufacturing Agreement without cause, which termination would also
terminate the Technology Agreement. There can be no assurance that Carborundum
will not terminate the Manufacturing Agreement after January 1, 1997. The
Company would lose its rights to the technology currently licensed to it by
Carborundum and the right to manufacture products based on such technology as a
result of the expiration of the Manufacturing Agreement or if Carborundum
terminates the Manufacturing Agreement. Accordingly, any such expiration or
termination would have a material adverse effect on the Company's business,
financial condition and results of operation. The Company was recently notified
that the new owner of Carborundum has announced its intention to sell such
corporation. The Company is unable to determine what impact, if any, such
announcement or sale will have on the Company's agreements with
Carborundum.
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.
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
26
<PAGE>
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 performance depends in
significant part upon the continued services of its President and Chief
Executive Officer, Timothy da Silva, the Senior Vice President of MPS, Jee Fook
Pak, as well as other key personnel, many of whom would be difficult to replace.
Mr. Pak is not bound by an employment agreement with the Company. The Company's
financial performance also depends in part upon its ability to attract and
retain qualified management, technical, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his current position or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.
Nasdaq National Market Listing Requirements. The Company will be subject
to continuing requirements to be listed on the Nasdaq National Market. There can
be no assurance that the Company can continue to meet such requirements. The
price and liquidity of the Common Stock may be materially adversely affected if
the Company is unable to meet such requirements in the future.
Sale of Shares Into The Market Place. On April 29, 1996, upon termination
of the two-year lock-up agreement entered into in connection with the Company's
initial public offering, more than an additional 3,000,000 shares of Common
Stock became available for sale in the public market, subject, in part, to the
volume restrictions of Rule 144. Sales of a significant number of such shares
could materially adversely affect the Company's stock price.
Volatility of Stock Price. The Company believes that factors such as
announcements of 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, 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective November 21, 1995, the Board of Directors appointed the firm of
BDO Seidman, LLP ("BDO"), independent accountants, to audit the consolidated
financial statements of the Company for the fiscal year ending December 31,
1995.
27
<PAGE>
Prior to November 21, 1995, the Company's independent accountants were
Price Waterhouse LLP ("Price Waterhouse"). Price Waterhouse had audited the
Company's financial statements annually since 1984. Effective November 21,
1995, the Company dismissed Price Waterhouse as the Company's independent
accountants. The decision to dismiss Price Waterhouse was approved by the
Company's Board of Directors and Audit Committee on November 20, 1995. The
Company retained BDO as the Company's independent certified accountants
effective November 21, 1995. The decision to retain BDO was approved by the
Company's Board of Directors and Audit Committee on November 20, 1995. Prior to
November 21, 1995, the Company did not consult with BDO regarding any matters
relating to accounting principles or practices, financial statement disclosure,
the type of opinion that might be rendered on the Company's financial
statements, or on any matter that was either the subject of a disagreement or a
reportable event with Price Waterhouse.
Prior to its dismissal, Price Waterhouse delivered to the Company Reports
of Independent Accountants dated March 1, 1994 and April 11, 1995, on the
Company's financial statements for the past two fiscal years ended December 31,
1993 and December 31, 1994, respectively. Neither of these reports contained an
adverse opinion or a disclaimer of opinion and neither of such reports was
qualified or modified as to uncertainty, audit scope, or accounting principles
except that each of such reports contained an explanatory paragraph regarding
the Company's ability to continue as a going concern.
In connection with the audits for the fiscal years ended December 31, 1993
and December 31, 1994 and through November 20, 1995 (the date of dismissal),
there were no disagreements with Price Waterhouse over any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Price
Waterhouse, would have caused Price Waterhouse to make reference thereto in
their reports on the financial statements for such years.
In connection with its audit of the Company's financial statements for the
fiscal year ended December 31, 1994, Price Waterhouse reported to the Audit
Committee of the Company's Board of Directors that the Company's accounting
treatment for foreign currency transactions represented a material weakness in
the Company's internal controls.
A representative of BDO is not expected to be present at the Special
Meeting.
FORM 10-K
The Company files an Annual Report on Form 10-K with the SEC. Shareholders
may obtain a copy of this report, without charge, by writing to the Chief
Executive Officer of the Company, at the Company's executive offices at 9350
Trade Place, San Diego, California 92126.
THE BOARD OF DIRECTORS OF MICROELECTRONIC
PACKAGING, INC.
Dated: May 15, 1996
28
<PAGE>
EXHIBIT A
---------
DATED 25TH MARCH, 1996
----------------------
MICROELECTRONIC PACKAGING, INC.
as Company
- and -
TRANSPAC CAPITAL PTE LTD
TRANSPAC INDUSTRIAL HOLDINGS LTD
REGIONAL INVESTMENT COMPANY LTD
NATSTEEL EQUITY III PTE LTD
as Investors
-------------------------------
SUBSCRIPTION AGREEMENT
relating to the common stock of
Microelectronic Packaging, Inc.
-------------------------------
BIH LI & LEE
Advocates & Solicitors
79, Robinson Road
#24-01 CPF Building
Singapore 068897
<PAGE>
C O N T E N T S
---------------
<TABLE>
<CAPTION>
CLAUSE HEADING PAGE
- - - ------ ------- ----
<C> <S> <C>
1. DEFINITIONS 1
2. CONDITIONAL AGREEMENT 3
3. SUBSCRIPTION FOR AND ISSUANCE
OF SHARES 4
4. TERMS OF ISSUE 5
5. COMPLETION 5
6. RESTRICTIONS PENDING COMPLETION 5
7. WARRANTIES 6
8. UNDERTAKINGS 7
9. REPRESENTATIONS AND
WARRANTIES OF THE INVESTORS 8
10. RELEASE AND INDULGENCE 10
11. REMEDIES 10
12. TIME OF ESSENCE 10
13. FURTHER ASSURANCE 10
14. SEVERANCE 10
15. COSTS AND EXPENSES 10
16. NOTICES 11
17. GOVERNING LAW 11
SCHEDULE 1 - THE INVESTORS 13
SCHEDULE 2 - PARTICULARS OF SUBSIDIARIES 14
SCHEDULE 3 - TERMS AND CONDITIONS OF
THE PREFERENCE SHARES 16
SCHEDULE 4 - WARRANTIES BY THE COMPANY 17
APPENDIX I - PARTICULARS OF PROPERTIES 34
</TABLE>
<PAGE>
T H I S S U B S C R I P T I O N A G R E E M E N T is made
-----------------------------------------------------
on 25th March, 1996 B E T W E E N :
-------------
(1) MICROELECTRONIC PACKAGING, INC., a company organised under the laws of the
-------------------------------
State of California and having its office at 9350 Trade Place, San Diego,
California 92126 (the "Company"); and
(2) THE INVESTORS WHOSE NAMES ARE SET OUT IN SCHEDULE 1 (collectively, the
---------------------------------------------------
"Investors" and individually, an "Investor").
W H E R E A S :
-------------
(A) The Company is a public company incorporated under the laws of the State of
California and has at the date of this Agreement an authorised share
capital of 10,000,000 shares of common stock, with no par value.
(B) The Company has requested the Investors to, and the Investors have agreed
to, subscribe for the Shares (as defined below) upon the terms and
conditions contained in this Agreement.
I T I S A G R E E D as follows:
-----------------------
1. DEFINITIONS
-----------
1.1 In this Agreement, unless something in the subject or context
otherwise requires, the following words or expressions shall have the following
meanings:
"Accounts" means the consolidated audited accounts for the financial
--------
year ending 31st December, 1994 and the consolidated management
accounts for the period commencing on 1st January, 1995 and ending on
30th September, 1995 of the Company;
"Balance Sheet Date" means in relation to the audited accounts of the
------------------
Company, the balance sheet date of the audited accounts and in
relation to its management accounts, 30th September, 1995;
"Board" means the board of Directors of the Company;
-----
"Completion Date" means the date falling 7 days from the date hereof
---------------
(or such other date as the parties hereto may agree in writing);
Convertible Loan Agreement" means the Convertible Loan Agreement of
--------------------------
even date executed or to be executed amongst (1) the Company, (2) MPM,
(3) the Investors and (4) Transpac Capital Pte Ltd;
"Directors" means the directors for the time being of the Board;
---------
"Disclosure Letter" means the letter of even date from the Company to
-----------------
the Investors disclosing information constituting exceptions to the
warranties set
<PAGE>
-2-
out in Schedule 4;
"Group" means the Company and the Subsidiaries;
-----
"MPM" means MPM Singapore Pte Ltd, a company incorporated in Singapore
---
with its registered office at 1003 Bukit Merah Central, #04-01,
Singapore 159836;
"NASDAQ" means the National Association of Securities Dealers
------
Automated Quotation System;
"Ordinary Shares" means the issued and fully paid shares of common
---------------
stock of the Company;
"Shares" means the 842,013 shares of common stock of the Company to be
------
subscribed by the Investors in accordance with Clause 3;
"Subsidiaries" means the companies listed under the heading
------------
Subsidiaries in Schedule 2 and further means, at any particular time,
any company more than 50 per cent. of which issued and outstanding
share capital (or equivalent) is then beneficially owned, by the
Company and/or one or more of its Subsidiaries OR a subsidiary (as
--
defined in Section 5 of the Singapore Companies Act, Cap. 50) of the
Company; and
"US Dollars" and the symbol "US$" mean the lawful currency of the
---------- ---
United States of America.
1.2 Any reference to "completion" shall mean completion of the
----------
subscription of the Shares under this Agreement.
1.3 Any reference to:-
(a) "Claim" includes any notice, demand, assessment, letter or
-----
other document issued or action taken by the inland revenue or
other statutory or governmental authority, body or official
whosoever (whether of the United States of America or elsewhere
in the world) whereby the Company is or may be placed or sought
to be placed under a liability to make a payment or deprived of
any relief, allowance, credit or repayment otherwise available
(unless such liability to make payment or deprivation is a
result of the introduction of or any change in, or in the
interpretation or application of, any law which has effect
retrospectively); and
(b) "Transaction" includes any transaction, act, event or omission
-----------
of whatever nature.
1.4 Any reference to a statutory provision shall include such provision
and any regulations made in pursuance thereof as from time to time modified or
re-enacted whether
<PAGE>
-3-
before or after the date of this Agreement so far as such modification or re-
enactment applies or is capable of applying to any transactions entered into
prior to completion and (so far as liability thereunder may exist or can arise)
shall include also any past statutory provisions or regulations (as from time to
time modified or re-enacted) which such provisions or regulations have directly
or indirectly replaced.
1.5 Any reference to "audited accounts" shall include the relevant balance
----------------
sheets and profit and loss accounts together with all documents which are
required by law to be annexed to the accounts of the company concerned to be
laid before the company in general meeting for the accounting period in
question.
1.6 References to any Transaction effected on or before completion include
the combined result of two or more transactions, the first of which shall have
taken place (or be deemed to have taken place) or the commencement of which
shall have occurred (or be deemed to have occurred) on or before completion.
1.7 References to "Taxation" comprise all forms of taxation whether of the
--------
United States of America or elsewhere in the world, past, present and future
(including, without limitation, income tax and stamp duty) and all other
statutory or governmental impositions, duties and levies and all penalties,
charges, costs and interest, in each of the foregoing cases relating to any
Claim in relation to any transactions, events or activities, which took place or
occurred on or prior to the Balance Sheet Date.
1.8 References to the Appendices, Clauses, Recitals and Schedules are to
the appendices to, clauses and recitals of, and schedules to, this Agreement.
1.9 Unless the context otherwise requires or permits, references to the
singular number shall include references to the plural number and vice versa and
references to natural persons shall include firms, associations and bodies
corporate and vice versa.
2. CONDITIONAL AGREEMENT
---------------------
2.1 The obligations of the Investors under this Agreement are conditional
upon the fulfilment of the following conditions on or before the Completion
Date:
(a) the Investors having received certified true copies of the
Board's resolutions (in form and substance reasonably
satisfactory to the Investors) approving the entry by the
Company into this Agreement and authorising the execution of
this Agreement by the Company;
(b) the Investors having received certified true copies of the
Board's resolutions (in form and substance reasonably
satisfactory to the Investors) authorising the issuance of the
Shares to the Investors or to any other persons nominated by
the Investors;
(c) no material adverse change in the operations or financial
condition of the Company and its Subsidiaries taken as a whole
occurring
<PAGE>
-4-
between the date of this Agreement and the Completion Date;
(d) the business of each company in the Group having been carried
on in a satisfactory manner up to the Completion Date and the
Group not having between the date of this Agreement and the
Completion Date, disposed of any material assets or assumed or
incurred any material liability (including contingent
liabilities) other than in connection with the ordinary course
of business of the Group or in connection with this Agreement;
(e) such other approvals (if any) as may be necessary from any
relevant competent authority wherever located having
jurisdiction over the transactions described in this Agreement
being obtained, and not withdrawn or amended, on or before the
Completion Date and all conditions attaching thereto required
to be complied with on or before the Completion Date being
complied with on or before the Completion Date;
(f) the entry into the Convertible Loan Agreement by the Company
and MPM and the issue of the notice of drawdown of the Advance
(as defined in the Convertible Loan Agreement) by MPM in
accordance with Clause 4 of the Convertible Loan Agreement;
(g) the completion of the conversion of at least S$6,580,001 of
loans extended by the Company and Microelectronic Packaging (S)
Pte Ltd to MPM into non-redeemable preference shares of MPM
(the "Preference Shares"), the terms of which are more
specifically described in Schedule 3 and satisfactory evidence
thereof being furnished to the Investors; and
(h) the Investors having received legal opinions dated on or after
the date of this Agreement from Brobeck, Phleger & Harrison
LLP, legal advisers in the United States of America to the
Company, as to such matters of the laws of the United States of
America relevant to this Agreement as the Investors may
reasonably request.
2.2 The Company shall use its best efforts, to ensure that such conditions
are fulfilled. If such conditions are not fulfilled, unless the fulfilment of
the conditions is otherwise waived by the Investors, this Agreement shall ipso
facto cease and determine and none of the parties hereto shall have any claim
against the other party hereto for costs, damages, compensation or otherwise.
3. SUBSCRIPTION FOR AND ISSUANCE OF SHARES
---------------------------------------
3.1 Subject to the terms and conditions of this Agreement, the Company
agrees to sell and issue, and each of the Investors agrees to subscribe for the
number of Shares specified against the name of such Investor in column 2 of
Schedule 1 at an aggregate issue price of US$2,000,000.
<PAGE>
-5-
3.2 The Shares shall, subject to payment of the aggregate issue price for
the Shares, in the manner set out in Clause 5.3, be fully paid and non-
assessable and will be free of restrictions on transfer other than restrictions
under applicable securities laws and be free from all charges, liens or other
encumbrances whatsoever and with all rights attached thereto.
4. TERMS OF ISSUE
--------------
The Shares when issued and sold and delivered in accordance with the
terms of this Agreement for the consideration set forth herein shall be duly and
validly issued and shall rank pari passu in all respects with the currently
---- -----
issued and outstanding common stock of the Company.
5. COMPLETION
----------
5.1 Without prejudice to Clause 2 and subject as hereinafter provided,
completion shall take place at the office of Transpac Capital Pte Ltd (or at
such place as the parties hereto may agree in writing) on the Completion Date.
5.2 On or prior to completion:
(a) the Company shall procure that a meeting of the Board is held
at which the sale and issuance of the Shares to the Investors,
or such other persons as may be nominated by the Investors at
an aggregate issue price of US$2,000,000 for the Shares shall
be authorised and approved; and
(b) the Company shall deliver to the Investors the share
certificates in respect of the Shares.
5.3 Against compliance with the foregoing provisions, the Investors shall
pay to the Company in US Dollars and in immediately available and freely
transferable funds the aggregate issue price for the Shares referred to in
Clause 3.1 to such account of the Company with such bank in the United States of
America as the Company may notify the Investors in writing 3 clear business days
before the Completion Date. For the purposes of this Clause 5.3, "business day"
means a day on which banks in Singapore and the United States of America are
open for business, excluding Saturday and Sunday.
5.4 If the actions required to be taken and the documents required to be
delivered on completion are not performed or, as the case may be, delivered for
any reason or if in any other respect the provisions of Clause 5.2 are not fully
complied with, the Investors shall be entitled (in addition to and without
prejudice to all other rights or remedies available to the Investors) to elect
to rescind this Agreement or to effect completion so far as practicable having
regard to the defaults which have occurred or to fix a new date for completion.
6. RESTRICTIONS PENDING COMPLETION
-------------------------------
Between the date of this Agreement and the Completion Date, the
Company shall:-
<PAGE>
-6-
(a) cause the business of the Group to be conducted only in the
ordinary and regular course;
(b) ensure that no contract or commitment is entered into by the
Group which may have a material adverse effect upon the
operations or activities of the Group;
(c) cause the Group to take all reasonable steps to preserve and
protect its assets and notify the Investors in writing promptly
of any adverse change therein (whether or not covered by
insurance or other indemnity); and
(d) not take, and procure that the Group does not take, any action
which will result in any of the warranties contained herein
being materially incorrect on the Completion Date by reference
to the facts and circumstances then existing or which is
inconsistent with the provisions of this Agreement or the
consummation of the transactions contemplated herein.
7. WARRANTIES
----------
7.1 The Company acknowledges that it has made representations to the
Investors as set out in Schedule 4, and the Investors have relied upon, inter
alia, such representations to enter into this Agreement and the Convertible Loan
Agreement.
7.2 The Company warrants and undertakes to and with the Investors and
their respective successors in title (with the intent that this Clause 7 shall
continue to have full force and effect notwithstanding completion) in relation
to the Group on the terms set out in Schedule 4 subject only to:
(a) any exceptions disclosed in the Disclosure Letter or expressly
provided for under the terms of this Agreement; and
(b) any matter or thing hereinafter done or omitted to be done at
the request in writing or with the prior approval in writing of
the Investors.
7.3 The said warranties and undertakings shall be separate and independent
and save as expressly otherwise provided shall not be limited by reference to
any paragraph of Schedule 4 or by anything in this Agreement.
7.4 The Company further warrants and undertakes to and with the Investors
and their respective successors in title that:
(a) subject as aforesaid all warranties and undertakings herein
contained will be fulfilled down to and will be true and
correct at completion in all material respects as if they had
been entered into afresh at completion; and
<PAGE>
-7-
(b) if after the signing hereof and before completion any event
shall occur which results in any of the said warranties or
undertakings being unfulfilled, untrue or incorrect at
completion or if any event within the meaning of Clause 7.6(ii)
occurs, the Company shall immediately notify the Investors
thereof prior to completion.
7.5 The warranties and undertakings given hereunder or pursuant hereto
shall not in any respect be extinguished or affected by completion and the
benefits thereof may be assigned in whole or in part by the Investors.
7.6 If prior to completion (i) it shall be found that any of the
warranties or undertakings on the part of the Company under this Agreement have
not been materially carried out or materially complied with or are otherwise
materially untrue or materially incorrect or (ii) any event shall occur (other
than an event constituting or giving rise to a breach of any of the said
warranties or undertakings) which affects adversely to a material degree the
operations, financial position or business prospects of the Group, the Investors
shall be entitled, by notice in writing to the Company to rescind or terminate
(as the case may be) this Agreement, but failure to exercise this right shall
not constitute a waiver of any other rights of the Investors or their respective
successors in title arising out of any breach of warranty or undertaking and the
occurrence of any of the events specified in this Clause 7.6(ii) shall not give
rise to any right to damages or compensation.
7.7 Rescission of this Agreement under Clause 7.6 shall not extinguish any
remedy or right to damages to which the Investors or their respective successors
in title may be entitled in respect of a breach of this Agreement.
8. UNDERTAKINGS
------------
8.1 The Company undertakes to each of the Investors that:-
(a) it shall within 14 days of the Completion Date transfer to MPM
the assets representing S$2,800,000 in prepaid royalties paid
by the Company to International Business Machines Corporation
pursuant to the terms of the Multilayer Technology and
Information Licensing Agreement dated 4th August, 1994 in
exchange for 2,800,000 ordinary shares of S$1 each of the
capital of MPM and satisfactory evidence thereof shall be
furnished to the Investors;
(b) it shall ensure that any new issue of ordinary shares by the
Company (excluding shares of common stock or securities issued
to service providers under the Company's stock option or other
plans) shall be first offered to the Investors in the
proportion of its shareholding in the Company;
(c) it shall forthwith at the request of the Investors appoint a
nominee of the Investors as a Director of the Company and shall
execute in favour of the said Director a deed of indemnity in
the form as reasonably required by the Investors; and
<PAGE>
-8-
(d) it shall ensure that, so long as any Investor holds any
Ordinary Shares of the Company, the Ordinary Shares of the
Company are and shall remain duly designated for inclusion on
the NASDAQ National Market System.
8.2 The Company further undertakes that so long as any Investor holds more
than 5 per cent. shares in the Company, the Company shall give to that Investor
at least 30 days prior written notice of the following events:-
(i) sell or dispose of the whole or a substantial part of its
undertaking, goodwill or assets;
(ii) increase, reduce or cancel its authorised or issued share
capital of, or grant any option over its unissued share
capital;
(iii) issue any shares of any class;
(iv) change or diversify substantially the nature of its business or
undertaking;
(v) amend its Charter and By-laws; or
(vi) take any step for its dissolution (except for the purpose of
and followed by a reconstruction, amalgamation or
reorganisation on terms approved by that Investor before that
step is taken) or for the appointment of a liquidator
(including a provisional liquidator), receiver, judicial
manager, trustee, administrator, agent or similar officer of or
over any part of its assets or business.
8.3 Each of the Investors undertakes to the Company that it will not sell
or otherwise dispose of the Shares subscribed by it pursuant to this Agreement
prior to 23rd April, 1997. Provided that this restriction shall cease to apply
in the event there is a breach of any material warranty, representation or
undertaking by the Company under this Agreement or there occurs an Event of
Default or Potential Event of Default under the Convertible Loan Agreement, in
which event, the Investors shall be free to dispose of the Shares or part
thereof as the Investors deem fit subject to compliance with applicable
securities laws.
9. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
-----------------------------------------------
Each of the Investors hereby represents and warrants that:-
(i) Authorisation: It has full power and authority to enter into
-------------
this Agreement and this Agreement constitutes its respective
valid and legally binding obligation, enforceable in accordance
with its terms;
(ii) Purchase Entirely for Own Account: This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to
the
<PAGE>
-9-
Company, which by the Investor's execution of this Agreement
the Investor hereby confirms that the common stock to be
received by the Investor and the common stock issuable upon
conversion of the loan under the Convertible Loan Agreement
(collectively, the "Securities") will be acquired for
investment for the Investor's own account, not as a nominee or
agent (except in the case of Transpac Capital Pte Ltd which is
acquiring the Securities for various venture funds managed by
it) and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the
same. By executing this Agreement, the Investor further
represents that the Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third
person, with respect to any of the Securities;
(iii) Accredited Investor: The Investor is an "accredited investor"
-------------------
within the meaning of United States Securities and Exchange
Commission ("SEC") Rule 501 of Regulation D, as presently in
effect;
(iv) Restricted Securities: The Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they
are being acquired from the Company in a transaction not
involving a public offering and that under such laws and
applicable regulations such securities may be resold without
registration under the Securities Act of 1933 only in certain
limited circumstances. In this connection, the Investor
represents that it is familiar with SEC Rule 144, as presently
in effect, and understands the resale limitations imposed
thereby and by the Securities Act of 1933;
(v) Further Limitations on Disposition: If reasonably requested by
----------------------------------
the Company, the Investor shall furnish the Company with an
opinion of counsel, reasonably satisfactory to the Company that
the disposition will not require registration of such shares
under the Securities Act of 1933, as amended. It is agreed
that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual
circumstances; and
(vi) Representations by Foreign Investor: The Investor hereby
-----------------------------------
represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with
any invitation to subscribe for the Securities or any use of
this Agreement, including (i) the legal requirements within its
jurisdiction for the purchase of the Securities, (ii) any
foreign exchange restrictions applicable to such purchase,
(iii) any governmental or other consents that may need to be
obtained, and (iv) the income tax and other tax consequences,
if any, that may be relevant to the purchase, holding,
redemption, sale, or transfer of the Securities. The
Investor's subscription and payment for, and its continued
beneficial ownership of the
<PAGE>
-10-
Securities, will not violate any applicable securities or other
laws of its jurisdiction.
10. RELEASE AND INDULGENCE
----------------------
Any liability to any party hereunder may in whole or in part be
released, compounded or compromised or time or indulgence given by any other
party hereto in writing in their absolute discretion as regards any of the
parties under such liability without in any way prejudicing or affecting their
rights against any other or others under the same or a like liability whether
joint and several or otherwise.
11. REMEDIES
--------
No remedy conferred by any of the provisions of this Agreement is
intended to be exclusive of any other remedy which is otherwise available at
law, in equity, by statute or otherwise, and each and every other remedy shall
be cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law, in equity, by statute or otherwise. The
election of any one or more of such remedies by any of the parties hereto shall
not constitute a waiver by such party of the right to pursue any other available
remedies.
12. TIME OF ESSENCE
---------------
Any time, date or period mentioned in any provision of this Agreement
may be extended by mutual agreement between the parties hereto but as regards
any time, date or period originally fixed and not extended or any time, date or
period so extended as aforesaid time shall be of the essence.
13. FURTHER ASSURANCE
-----------------
The parties hereto shall execute and do and take such steps as may be
in their power to procure all other persons, firms or companies if necessary, to
execute such further documents, agreements, deeds, and do such further acts and
things, as may be required so that full effect may be given to the provisions of
this Agreement.
14. SEVERANCE
---------
Wherever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law.
If any portion of this Agreement is declared invalid for any reason in any
jurisdiction, such declaration shall have no effect upon the remaining portions
of this Agreement which shall continue in full force and effect as if this
Agreement has been executed with the invalid portions thereof deleted.
Furthermore, the entirety of this Agreement shall continue in full force and
effect in all other jurisdictions.
15. COSTS AND EXPENSES
------------------
All reasonable costs and expenses incurred in the preparation,
negotiation and
<PAGE>
-11-
execution of this Agreement and the subscription of the Shares shall be borne by
the Company.
16. NOTICES
-------
All notices, demands or other communications required or permitted to
be given or made hereunder shall be in writing and delivered personally or sent
by prepaid registered post or by facsimile addressed to the intended recipient
thereof at its address or, as the case may be, facsimile number set out on the
signature page of this Agreement (or to such other address or facsimile number
as any party hereto may from time to time notify the other in accordance with
this Clause). Any such notice, demand or communication shall be deemed to have
been duly served (if given or made by facsimile) immediately or (if delivered
personally) at the time of delivery or (if given or sent by prepaid registered
post) two days after posting and in providing the same it shall be sufficient to
show that the envelope containing the same was duly addressed, stamped and
posted.
17. GOVERNING LAW
-------------
(A) Governing Law: This Agreement shall be governed by and construed in
-------------
accordance with the laws of Singapore.
(B) Singapore Courts: For the benefit of the Investors, the Company irrevocably
----------------
agrees that the courts of Singapore are to have jurisdiction to settle any
disputes which may arise out of or in connection with this Agreement and
that, accordingly, any legal action or proceedings arising out of or in
connection with this Agreement ("Proceedings") may be brought in those
-----------
courts and the Company irrevocably submits to the jurisdiction of those
courts.
(C) Service of Process: (i) The Company irrevocably appoints MPM to receive,
------------------
for it and on its behalf, service of process in any Proceedings in
Singapore. Such service shall be deemed to be completed on delivery to MPM
(whether or not it is forwarded to and received by the Company). The
Company undertakes not to revoke the authority of MPM and if, for any
reason MPM ceases to be able to act as such or no longer has an address in
Singapore, the Company irrevocably agrees and undertakes to promptly
appoint a substitute process agent acceptable to the Investors and to
forthwith deliver to the Investors the new agent's acceptance of that
appointment Provided that until the Investors receive such acceptance, it
shall be entitled to treat MPM (or its successor) as the agent of the
Company for the purposes of this Clause.
(ii) The Company irrevocably consents to any process in any
Proceedings anywhere being served by mailing a copy by registered prepaid
airmail post to it in accordance with Clause 16. Such service shall become
effective 14 days after mailing.
(iii) Nothing shall affect the right to serve process in any other
manner permitted by law.
(D) Consent to Enforcement, etc: The Company irrevocably and generally consents
---------------------------
in respect of any Proceedings anywhere to the giving of any relief or the
issue of any process
<PAGE>
-12-
in connection with those Proceedings including, without limitation, the
making, enforcement or execution against any assets whatsoever
(irrespective of their use or intended use) of any order or judgment which
may be made or given in those Proceedings.
<PAGE>
-13-
SCHEDULE 1
----------
T H E I N V E S T O R S
-------------------------
<TABLE>
<CAPTION>
(1) (2)
<S> <C>
Name of Investor Number of Shares
---------------- ----------------
to be subscribed
----------------
Transpac Capital Pte Ltd 339,331
Transpac Industrial Holdings Ltd 334,069
Regional Investment Company Ltd 92,066
Natsteel Equity III Pte Ltd 76,547
</TABLE>
<PAGE>
-14-
<TABLE>
<CAPTION>
SCHEDULE 2
----------
PARTICULARS OF SUBSIDIARIES
---------------------------
<S> <C> <C> <C>
No. of shares in
Name and registered no. Registered office issue and type of Name of shareholders
held address shares and no. of shares
- - - ----------------------- ------------------- ----------------------------------- ----------------------------------
CTM Electronics 9350 Trade Place 1,000,000 shares of preferred stock Microelectronic Packaging, Inc.*
San Diego, CA 92126 authorised; none issued and (225,000 shares of common stock)
outstanding
1,000,000 shares of common stock
authorised; 225,000 issued and
outstanding
Microelectronic 11065 Roselle Street 100 shares of common stock Microelectronic Packaging, Inc.*
Packaging America San Diego, CA 92121 authorised; issued and (100 shares of common stock)
outstanding
Microelectronic Packaging 1003, Bukit Merah 17,231,541 ordinary shares Microelectronic Packaging, Inc.
(S) Pte Ltd Central #04-01 of S$1 each 17,231,541
178/1979-R Singapore 159836
</TABLE>
*Shares assigned to Motorola per security assignment related to their guarantee
<PAGE>
-15-
<TABLE>
<CAPTION>
SCHEDULE 2 (CONT'D)
-------------------
PARTICULARS OF SUBSIDIARIES
---------------------------
<S> <C> <C> <C>
No. of shares in
Registered office issue and type of Name of shareholders
Name and registered no. address shares and no. of shares held
- - - ------------------------ ------------------ ----------------------------- -------------------------------
MPC (S) Pte Ltd 28 Tuas Avenue 10 2 ordinary shares of S$1 each Microelectronic Packaging, Inc.
199000208Z Singapore 639148 2, held in trust by 2 staff
Tan Yew Bock and
Philip Leng Yew Chee
Furnace Technology Pte 1003, Bukit Merah Central 166,500 ordinary shares of Microelectronic Packaging, Inc.
Ltd 199000208Z #04-01 Singapore 159836 S$1 each 166,500
MPM Singapore Pte Ltd 1003, Bukit Merah Central 2 ordinary shares of S$1 each Microelectronic Packaging, Inc.
199402437D #04-01 Singapore 159836 2, held in trust by 2
staff Pak Jee Fook and
Philip Leng Yew Chee
</TABLE>
<PAGE>
-16-
SCHEDULE 3
----------
TERMS AND CONDITIONS OF THE PREFERENCE SHARES
---------------------------------------------
<TABLE>
<S> <C> <C> <C>
(a) Issue Price Per
Preference Share : S$1
(b) Par Value Per
Preference Share : S$1
(c) Number of
Preference Shares : 6,580,001
(d) Liquidation Preference : ce : In the event of liquidation of
MPM, the holders of Ordinary
Shares have priority in the
repayment of capital (based on
the issue price) over holders of
Preference Shares with respect
to any net proceeds from
liquidation of MPM after
payments to all the creditors of
MPM, whether secured or
unsecured.
(e) Redemption : The Preference Shares shall be
non-redeemable.
(f) Voting Rights : The Preference Shares shall not
have any voting rights.
(g) Dividends : The Preference Shares shall be
entitled to dividends of 8.5 per
cent. a year on a cummulative
basis.
</TABLE>
<PAGE>
-17-
SCHEDULE 4
----------
WARRANTIES BY THE COMPANY
-------------------------
1. INFORMATION
-----------
The Recitals are true and correct in all respects and all information
contained in the Disclosure Letter and all other written information which has
been given by the Company, MPM or officials or professional advisers of the
Company or MPM to the directors or officials or professional advisers of the
Investors in the course of negotiations leading to this Agreement was when given
true, complete and accurate in all material respects.
2. ORGANISATION AND QUALIFICATION OF GROUP COMPANIES
-------------------------------------------------
Each of the companies in the Group is duly organised, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
(except in the case where under the laws of a jurisdiction in which the concept
of good standing is inapplicable, as to which no representation or warranty
regarding good standing is made). Each of the companies in the Group has the
requisite corporate power and authority to enter into and perform the
transactions to be entered into by it under this Agreement.
3. AUTHORITY OF COMPANY
--------------------
(a) This Agreement when executed and delivered in accordance with
its respective terms will constitute the valid and binding
obligations of the Company and shall be enforceable against it
in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganisation, moratorium
and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief,
or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in this Agreement may be
limited by applicable laws.
(b) The execution, delivery and performance of this Agreement
delivered or to be delivered by the Company has been, or when
delivered will be, duly authorised by all necessary corporate
action of the Company.
(c) The execution, delivery and performance by the Company of this
Agreement does not and will not with the passage of time or the
giving of notice or both :-
(i) result in a material breach of or constitute a material
default by the Company or result in any material right
of termination or other effect materially adverse to the
<PAGE>
-18-
Company under any agreement, lease or instrument to
which the Company is a party or by which the Company is
bound or affected, the effect of which breach or default
would hinder, delay, interfere with or prohibit the
transactions contemplated by this Agreement;
(ii) result in a violation of any law, rule or regulation now
in effect to which the Company is subject, or any order,
writ, judgment, injunction, decree, determination or
award, now in effect which is applicable to the Company;
and
(iii) violate any provisions of the Charter and by-laws of the
Company, as amended.
4. COPIES OF ACCOUNTS, CHARTER AND BY-LAWS
---------------------------------------
The copies of the Accounts and of the Charter and by-laws or
equivalent documents of the Company and each of the Subsidiaries delivered or
made available to the Investors are true copies.
5. THE ACCOUNTS
------------
(a) The Accounts have been prepared in accordance with the law and
on a consistent basis in accordance with accounting principles,
standards and practices generally accepted at the date hereof
in the United States of America so as to give a true and fair
view of the state of affairs of the Company at the Balance
Sheet Date and of the profits or losses for the period
concerned and as at the date make:
(i) full provision for all actual liabilities;
(ii) proper provision (or note in accordance with good
accountancy practice) for all contingent and disputed
liabilities;
(iii) provision reasonably regarded as adequate for all bad
and doubtful debts; and
(iv) due provision for depreciation and amortisation and any
obsolescence of assets.
(b) The stock and work-in-progress were included in the Accounts at
figures not exceeding the amounts which could in the
circumstances existing at the Balance Sheet Date reasonably be
expected to be realised in the normal course of carrying on the
business of the Company.
<PAGE>
-19-
(c) Full provision or reserve has been made in the Accounts for all
Taxation liable to be assessed on the Company or for which it
is or may become accountable in respect of:
(i) profits, gains or income (as computed for Taxation
purposes) arising or accruing or deemed to arise or
accrue on or before the Balance Sheet Date;
(ii) any Transaction effected or deemed to be effected on or
before the Balance Sheet Date or provided for in the
Accounts; and
(iii) distributions made or deemed to be made on or before the
Balance Sheet Date or provided for in the Accounts.
(d) Proper provision or reserve for deferred taxation in accordance
with accounting principles and standards generally accepted at
the date hereof in the United States of America has been made
in the Accounts.
(e) The profits of the Company as shown by the Accounts have not
been affected to a material adverse extent by inconsistencies
of accounting practices, by the inclusion of non-recurring
items of income or expenditure, by transactions entered into
otherwise than on normal commercial terms or by any other
factors rendering such profits exceptionally high or low.
6. CHANGES SINCE BALANCE SHEET DATE
--------------------------------
For the period commencing on the Balance Sheet Date and ending on the
date of this Agreement and the Completion Date respectively, as regards each of
the companies in the Group:-
(a) its business has been carried on in the ordinary course and so
as to maintain the same as a going concern;
(b) it has not disposed of any material assets or assumed or
incurred any material liabilities (including contingent
liabilities) otherwise than in the ordinary course of carrying
on its business;
(c) its business has not been materially and adversely affected by
the loss of any important customer or source of supply or by
any abnormal factor not affecting similar businesses to a like
extent and the Company is not aware of any facts which are
likely to give rise to any such effects;
(d) no dividend or other distribution has been declared, made or
paid to its members except as provided for in the relevant
balance sheet;
<PAGE>
-20-
(e) its turnover, trading position or financial condition has not
materially deteriorated;
(f) no material change has been made in the basis of the emoluments
or other terms of employment of its directors or any of its
employees who on the Balance Sheet Date were in receipt of
remuneration at a rate in excess of US$250,000 per annum;
(g) it has not borrowed any money other than as disclosed in the
Accounts; and
(h) there is not in existence any circumstance making bad or
doubtful its book debts in an amount exceeding US$100,000.
7. LITIGATION
----------
(a) Since the Balance Sheet Date no claim sounding in damages has
been made against any of the companies in the Group that would
have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(b) None of the companies in the Group is at present engaged
whether as plaintiff or defendant or otherwise in any material
legal action, proceeding or arbitration (other than as
plaintiff in the collection of debts arising in the ordinary
course of its business) or is being prosecuted for any criminal
offence.
(c) There are no circumstances known to the Company after making
due and careful enquiries likely to lead to any such claim or
legal action, proceeding or arbitration (other than as
aforesaid) or prosecution.
(d) There are no actions or proceedings pending or, to the
knowledge of the Company, threatened against, relating to or
affecting the Company which could reasonably be expected to
result in the issuance of an order restraining, enjoining or
otherwise prohibiting or making illegal the consummation of any
of the transactions contemplated by this Agreement or otherwise
result in a material diminution of the benefits contemplated by
this Agreement to the Investors.
(e) There are no facts or circumstances known to the Company that
could reasonably be expected to give rise to any action or
proceeding that would be required to be disclosed pursuant to
sub-paragraph (d).
<PAGE>
-21-
8. TAXATION
--------
For the period commencing on the Balance Sheet Date and ending on the
date of this Agreement and the Completion Date respectively, to the best of the
Company's knowledge and belief after making due and careful enquiries, there
exists no grounds for any claim for tax against any of the companies in the
Group under the provisions of any taxation statutes in connection with the
transfer of assets to or for the provision of any material benefit to any person
or whereby any of the companies in the Group may be held liable for taxation
primarily chargeable against some other person or company, which claim or
provision would have a material adverse effect on the business, financial
condition and results of operation of the Company and its subsidiaries taken as
a whole.
9. CONTRIBUTIONS
-------------
(a) All deductions and payments required to be made by each of the
companies in the Group in respect of contributions (including
employer's contributions) to any relevant competent authority
have been so made.
(b) Proper records have been maintained in respect of all such
deductions and payments and all regulations applicable thereto
have been complied with.
10. TAX RETURNS
-----------
(a) Each of the companies in the Group has duly made all returns
and given or delivered all notices, accounts and information
which on or before the date hereof ought to have been made,
given or delivered for the purposes of Taxation and all such
returns, notices, accounts and information (and all other
information supplied to the inland revenue or the customs and
excise or other fiscal authority concerned for any such
purpose) have been correct in all material respects and made on
a proper basis and none of such returns, notices, accounts or
information is disputed in any material respect by the fiscal
authority concerned and to the Company's knowledge, there is
not in existence any fact which might be the occasion of any
such dispute or of any claim for Taxation in respect of any
financial period down to and including the Balance Sheet Date
not provided for in the Accounts.
(b) Without limiting the generality of sub-paragraph (a) above, the
tax returns of each of the companies in the Group have at all
times been correct in all material respects and on a proper
basis and to the Company's knowledge, no taxes, levies or
duties, including but not limited to goods and services tax,
value added tax, sales tax and property tax, if any, are the
subject of any arrears or other dispute with the tax
authorities in the United States of America or elsewhere and to
the Company's knowledge, there is no liability to Taxation
<PAGE>
-22-
in respect of which a claim could be made against any of the
companies in the Group which claim would have a material
adverse effect on the business, financial condition and results
of operation of the Company and its subsidiaries taken as a
whole and there are no circumstances likely to give rise to
such a claim.
(c) To the Company's knowledge, all documents in the enforcement of
which any of the companies in the Group may be interested and
are subject to ad valorem stamp duty have been duly stamped and
no document belonging to any of the companies in the Group now
or at completion which is subject to ad valorem stamp duty is
or will be unstamped or insufficiently stamped; nor to the
Company's knowledge has any relief from such duty been
improperly obtained nor to the Company's knowledge has any
event occurred as a result of which any such duty from which
any of the companies in the Group has obtained relief has or
will become payable.
(d) None of the companies in the Group has received any tax
concession, relief or other special tax treatment, whether in
relation to its assets or the business carried on by it or
otherwise which, if revoked or otherwise removed, will or may
give rise to any additional liability to Taxation which would
have a material adverse effect on the business, financial
condition and results of operation of the Company and its
subsidiaries taken as a whole and, to the extent that any of
the companies in the Group has received any such tax
concession, relief or other special tax treatment, the Company
is not aware of any facts or circumstances which will or may
lead to the revocation or removal of the same.
11. EMPLOYEES
---------
(a) There are not in existence any contracts of service with
directors or employees of any of the companies in the Group nor
any consultancy agreements with any of the companies in the
Group, which cannot be terminated by three months' notice or
less or (where not reduced to writing) by reasonable notice
without giving rise to any material claim for damages or
compensation.
(b) There are no material amounts owing to any present or former
directors or to members of any of the companies in the Group
other than remuneration accrued due or for reimbursement of
business expenses.
(c) Save to the extent (if any) to which provision or allowance has
been made in the Accounts, none of the companies in the Group
has made or agreed to make any material payment to or provided
or agreed to provide any material benefit for any present or
former director or employee which is not allowable as a
deduction for the
<PAGE>
-23-
purposes of Taxation.
(d) Save to the extent (if any) to which provision or allowance has
been made in the Accounts:
(i) no liability has been incurred by any of the companies
in the Group for breach of any contract of service or
for services, for redundancy payments or for
compensation for wrongful dismissal or unfair dismissal
or for failure to comply with any order for the
reinstatement or re-engagement of any employee which
would have a material adverse effect on the business,
financial condition and results of operation of the
Company and its subsidiaries taken as a whole; and
(ii) no gratuitous payment has been made or promised by any
of the companies in the Group in connection with the
actual or proposed termination or suspension of
employment or variation of any contract of employment of
any present or former director or employee which would
have a material adverse effect on the business,
financial condition and results of operation of the
Company and its subsidiaries taken as a whole.
(e) Each of the companies in the Group has in relation to each of
its employees (and so far as relevant to each of its former
employees) complied with:-
(i) all obligations imposed on it by all statutes,
regulations and codes of conduct and practice relevant
to the relations between it and its employees or any
trade union and has maintained current, adequate and
suitable records regarding the service of each of its
employees;
(ii) all collective agreements and customs and practices for
the time being dealing with such relations or the
conditions of service of its employees; and
(iii) all relevant orders and awards made under any relevant
statute, regulation or code of conduct and practice
affecting the conditions of service of its employees.
(f) None of the companies in the Group is involved in any
industrial or trade dispute or any dispute or negotiation
regarding a claim of material importance with any trade union
or association of trade unions or organisation or body of
employees.
(g) None of the companies in the Group has in existence or is
proposing
<PAGE>
-24-
to introduce any share incentive scheme, share option scheme or
profit sharing scheme for all or any of its directors or
employees.
12. PENSIONS
--------
There are not in existence nor has any proposal been announced to
establish any retirement, death or disability benefit schemes for directors or
employees nor are there any obligations to or in respect of present or former
directors or employees with regard to retirement, death or disability pursuant
to which any of the companies in the Group is or may become liable to make
payments in any material amounts and no pension or retirement or sickness
gratuity is currently being paid or has been promised by any of the companies in
the Group to or in respect of any former director or former employee.
13. DEBTS TO, CONTRACTS WITH, CONNECTED PERSONS
-------------------------------------------
(a) There are:-
(i) no loans in any material amounts made by any of the
companies in the Group to any shareholder and/or any
director of any of the companies in the Group and/or any
person connected with any director of any of the
companies in the Group;
(ii) no debts in any material amounts owing to any of the
companies in the Group by any shareholder and/or any
director of any of the companies in the Group and/or any
person connected with any director of any of the
companies in the Group; and
(iii) no debts in any material amounts owing by any of the
companies in the Group other than debts which have
arisen in the ordinary course of business.
(b) There are no existing contracts or engagements to which any of
the companies in the Group is a party and in which any director
of any of the companies in the Group is interested.
14. CAPITAL COMMITMENTS, UNUSUAL CONTRACTS, GUARANTEES
--------------------------------------------------
Each of the companies in the Group:-
(a) does not have any capital commitments exceeding in total the
sum of US$1,000,000 nor will prior to the Completion Date
undertake any capital commitments exceeding in total the sum of
US$1,000,000 without the written consent of the Investors;
(b) is not a party to any contract entered into otherwise than in
the ordinary and usual course of business or any contract of an
onerous
<PAGE>
-25-
or long term nature;
(c) has not delegated any powers under a power of attorney which
remains in effect;
(d) is not by reason of any default by it in any of its obligations
bound or liable to be called upon to repay prematurely any loan
capital or borrowed moneys which would have a material adverse
effect on the business, financial condition and results of
operation of the Company and its subsidiaries taken as a whole;
(e) is not a party to any agreement which is or may become
terminable as a result of the entry into or completion of this
Agreement; and
(f) has not entered into or is bound by otherwise than in the
ordinary and usual course of business any guarantee or
indemnity under which any liability or contingent liability is
outstanding which would have a material adverse effect on the
business, financial condition and results of operation of the
Company and its subsidiaries taken as a whole.
15. BOOK DEBTS
----------
(a) None of the book debts which are included in the Accounts or
which have subsequently arisen have been outstanding for more
than three (3) months from their due dates for payment and all
such debts have realised or will realise in the normal course
of collection their full value as included in the Accounts or
in the books of any of the companies in the Group after taking
into account the provisions for bad and doubtful debts in the
Accounts.
(b) No part of the amounts included in the Accounts or in the books
of any of the companies in the Group as due from debtors has
been released on terms that any debtor pays less than the net
book value after any provisions made in the Accounts as at the
Balance Sheet Date or has been written off or has proved to any
extent to be irrecoverable or is now regarded as being
irrecoverable.
16. INSURANCE
---------
All the assets of each of the companies in the Group which are of an
insurable nature have at all material times been and are as at the Completion
Date insured in amounts reasonably regarded as adequate against fire and other
risks normally insured against by companies carrying on similar businesses or
owning property of a similar nature and each of the companies in the Group has
at all material times been, and is at the date hereof, adequately covered
against accident, third party errors and omissions and other risks normally
covered by insurance by such companies. The particulars of the insurance of
each of the companies in the Group which have been supplied to the Investors are
true and correct
<PAGE>
-26-
in all material respects. In respect of all such insurances:
(a) all premiums have been duly paid up; and
(b) all the policies are in force and are not voidable on account
of any act, omission or non-disclosure on the part of the
insured party.
17. TITLE TO ASSETS
---------------
All assets of each of the companies in the Group and all debts due to
it which are included in the Accounts or have otherwise been represented as
being the property of or due to any of the companies in the Group or at the
Balance Sheet Date used or held for the purposes of its business were at the
Balance Sheet Date the absolute property of such of the companies in the Group
and (save for those subsequently disposed of or realised in the ordinary course
of trading) all such assets and all assets and debts which have subsequently
been acquired or arisen are as at the Completion Date the absolute property of
such companies in the Group free from all and any encumbrance of whatever nature
and to the Company's knowledge, there are no circumstances under which by
operation of law or otherwise such companies' title, right or interest in and to
such assets may be adversely affected in any way whatsoever.
18. PROPERTIES
----------
(a) The Group has good marketable title to the properties shown in
Appendix I to this Schedule (the "Property") free from all and
any leases, tenancies, licences, mortgages, charges, liens and
incumbrances.
(b) With the exception of the Property, the Group does not use or
occupy any other freehold or leasehold property or occupies any
other land or building whether under a licence or otherwise.
(c) All covenants, obligations, restrictions and conditions
affecting the Property or any of the companies in the Group as
lessee thereof have been observed and performed in all material
respects and all material outgoings in respect thereof have
been duly paid.
(d) The Property complies (as to buildings and use) in all material
respects with all applicable statutory and by-law requirements
as to fire precautions, public health and the health and safety
of those who work in or about it.
(e) The Property or the Group as lessee thereof:
(i) is not subject to any covenants, obligations,
restrictions or conditions which are of an unusual or
onerous nature or which would materially adversely
affect the use or continued use of the Property for the
purposes of and
<PAGE>
-27-
extent to or the manner in which it is now used;
(ii) does not enjoy precariously any right, easement or
privilege the withdrawal or cessation of which would
materially adversely affect the use or continued use of
the Property for the purposes of or the extent to or the
manner in which it is now used; and
(iii) is not materially adversely affected by any of the
following matters:
(aa) any closing order, demolition order or clearance
order;
(bb) any enforcement notice which has not been
complied with; or
(cc) any order or proposal publicly advertised or of
which written notice has been received for the
compulsory acquisition or requisition of the
whole or any part thereof.
(f) The Property and the operations thereon and the uses made
thereof, are in compliance in all material respects with all
applicable, and are not in violation in any material respect of
any Environmental Laws (as defined in paragraph 26).
(g) To the Company's knowledge, there has been no generation, use,
treatment, handling, storage or disposal of Hazardous Materials
(as defined in paragraph 26) on or from the Property by the
Company and the past and present officers, employees and agents
of the Company at any time except in full compliance with all
Environmental Laws.
(h) The Property has not been used at any time by the Company in
such a manner as to cause a violation of any Environmental Law
or to give rise to any liability or obligation for the
remediation or restoration of the Property or for the
treatment, storage, removal, disposal, release, arrangement for
removal or disposal or transportation of any Hazardous
Materials, which liability or obligation would result in a
material adverse effect on the business, financial condition
and results of operation of the Company and its subsidiaries
taken as a whole.
(i) None of the companies in the Group has received any notice of,
nor are any of such companies aware of any basis of an
Environmental Action (as defined in paragraph 26) arising out
of or relating to the Property or the generation, use,
treatment, handling, storage or
<PAGE>
-28-
disposal of Hazardous Materials thereon, or the release or
transportation of Hazardous Materials thereto or therefrom
which Environmental Action would result in a material adverse
effect on the business, financial condition and results of
operation of the Company and its subsidiaries taken as a whole.
(j) Each of the companies in the Group has obtained all permits,
approvals, licences and other authorisations required under
Environmental Laws, such licences and permits being in full
force and effect and each such company is complying in all
material respects therewith.
(k) Each of the companies in the Group has delivered to the
Investors true, complete and correct copies or results of any
and all reports, studies or tests in the possession of or
initiated by it pertaining to the existence of Hazardous
Materials and other environmental concerns on any part of the
Property or concerning compliance with or liability under
Environmental Laws in the operation of the Business (as defined
in paragraph 26).
19. GENERAL ENVIRONMENTAL MATTERS
-----------------------------
(a) No order has been issued, no Environmental Claim (as defined in
paragraph 26) has been filed, no penalty has been assessed and
no investigation or review is pending or, to the knowledge of
the Company, threatened by any Governmental or Regulatory
Authority with respect to any alleged failure by the Company to
have any licence required under applicable Environmental Laws
in connection with the conduct of the Business or with respect
to any generation, treatment, storage, recycling,
transportation, discharge, disposal or release of any Hazardous
Material in connection with the Business and to the knowledge
of the Company there are no facts or circumstances in existence
which could reasonably be expected to form the basis for any
such order, Environmental Claim, penalty or investigation.
(b) The Company has not transported or arranged for the
transportation of any Hazardous Material in connection with the
operation of the Business to any location that is :-
(i) listed on the NPL (as defined in paragraph 26) under
CERCLA (as defined in paragraph 26);
(ii) listed for possible inclusion on the NPL by the
Environmental Protection Agency in CERCLIS (as defined
in paragraph 26) or on any similar state or local list;
or
<PAGE>
-29-
(iii) the subject of enforcement actions by federal, state or
local Governmental or Regulatory Authority that may lead
to Environmental Claims against the Company or the
Business.
(c) No Hazardous Material generated in connection with the
operation of the Business has been recycled, treated, stored,
disposed of or released by the Company at any location.
20. COMPLIANCE WITH AGREEMENTS
--------------------------
(a) The terms of all contracts and agreements of whatsoever nature
to which any of the companies in the Group is a party have been
duly complied with in all material respects by the relevant
company in the Group.
(b) No such contract or agreement will become subject to avoidance,
revocation or be otherwise affected upon or in consequence of
the making or implementation of this Agreement.
21. LICENCES AND CONSENTS
---------------------
To the best of the Company's knowledge and belief after making due and
careful enquiries:
(a) Each of the companies in the Group has complied with all
applicable laws, regulations and directives of the relevant
jurisdiction in all respects and each of the companies in the
Group is in possession of all permits, licences, authorities
and other rights necessary for the ownership of its assets and
carrying on of its business and nothing has been done whereby
all or any of such permits, licences, authorities and other
rights may be revoked or annulled and modified which revocation
annullment or modification would result in a material adverse
effect on the business, financial condition and results of
operation of the Company and its subsidiaries taken as a whole.
(b) All statutory or other requirements, regulations, directives
and guidelines and conditions applicable in the relevant
jurisdiction to any licences and consents involved in the
ownership of its assets and carrying on of the business of each
of the companies in the Group as now carried on have been
complied with and the Company is not aware, after making due
and careful enquiries, of any intended or contemplated
revocation or refusal of any such licence or consent which
revocation or refusal would result in a material adverse effect
on the business, financial condition and results of operation
of the Company and its subsidiaries taken as a whole.
<PAGE>
-30-
(c) The terms of all licences and agreements relating to or entered
into in connection with the ownership of its assets and the business of each of
the companies in the Group has been duly complied with in all material respects
by the relevant company in the Group and no event has occurred as a result of
which any such licence or agreement has become void or voidable or subject to
revocation at the instance of any party and the making or implementation of this
Agreement will not have any such effect.
22. BOOKS AND RECORDS
-----------------
The records, statutory books and books of account of each of the
companies in the Group are duly entered up and maintained in all material
respects in accordance with all legal requirements applicable thereto and
contain true, full and accurate records in all material respects of all matters
required to be dealt with therein and all such books and all records and
documents (including documents of title) which are its property are in its
possession or under its control and all accounts, documents and returns required
to be delivered or made to the relevant authorities have been duly and correctly
delivered or made.
23. ISSUE OF SHARES
---------------
None of the companies in the Group has issued or agreed to issue any
shares or given or agreed to give any option in respect of any shares and has
not issued or agreed to issue or given or agreed to give any option in respect
of any debentures or other securities since the Balance Sheet Date save for the
issue of the Shares.
24. INTELLECTUAL PROPERTY RIGHTS
----------------------------
(a) To the best of the Company's knowledge and belief, after making
due and careful enquiries, none of the operations of any of the
companies in the Group infringes any right in confidential
information or other intellectual property right held or
alleged to be held by any third party.
(b) None of the companies in the Group has entered into any
agreement:-
(i) for the use by any third party of any know how or
technical information or other intellectual property
right held by any of the companies in the Group; or
(ii) which restricts the disclosure or use by any of the
companies in the Group of any know how or technical
information or other intellectual property right, and to
the Company's knowledge, there is no infringement by any
third party of any of the rights in confidential
information or other intellectual property rights held
by any of the companies in the Group.
<PAGE>
-31-
(c) To the best of the Company's knowledge and belief, after making
due and careful enquiries, each of the companies in the Group
has taken all steps reasonably necessary for the protection of
all processes, inventions, designs, copyrights and trade names
used by it including, without limitation, applying for and
maintaining in force all possible patents, trade mark
registrations and registered designs in all relevant
jurisdictions.
(d) The Company is not in any way making any unlawful or wrongful
use of any trade secrets, customer lists, manufacturing
processes, secret processes, technology, know-how or any other
confidential information of any third party. The Company has
sufficient title to and ownership of manufacturing processes,
secret processes, know-how and any other intellectual property
and confidential information resulting from the development
activities engaged in by any employees of the Company on behalf
of and in their capacities as employees of the Company.
(e) The Company has not provided to any entities in which the
Company has a beneficial equity or ownership interest but which
are not Subsidiaries ("Investees") any material know-how or
---------
technology with respect to the Business other than Investees
that are subject to confidentiality arrangements with the
Company and to the knowledge of the Company, no Investees have
any material know-how or technology with respect to the
Business other than Investees that are subject to
confidentiality arrangements with the Company.
25. EXISTING CONTRACTS
------------------
No contract, licence, permit or arrangement to which any of the
companies in the Group is a party shall be abrogated or affected by the
subscription of the Shares by the Investors.
26. DEFINITIONS
-----------
As used in this Schedule 4:-
"Business" means the business carried on by the Company;
--------
"CERCLA" means the Comprehensive Environmental Response, Compensation
------
and Liability Act of 1980, as amended, and the rules and regulations
promulgated thereunder;
"CERCLIS" means the Comprehensive Environmental Response and Liability
-------
Information System, as provided for by 40 C.F.R. S300.5;
"Environmental Action" means any administrative, regulatory or
--------------------
judicial action, suit, demand, demand letter, claim, notice of non-
compliance or
<PAGE>
-32-
violation, investigation, proceeding, consent order or consent
agreement relating in any way to any Environmental Law, including,
without limitation:-
(a) any claim by any Governmental or Regulatory Authority (as
hereinafter defined) for enforcement, clean-up, removal,
response, remedial or other actions or damages pursuant to any
Environmental Law; and
(b) any claim by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive
relief resulting from Hazardous Materials or arising from
alleged injury or threat of injury to the environment;
"Environmental Claim" means, with respect to any person, any written
-------------------
or oral notice, claim, demand or other communication (collectively, a
"claim") by any other person alleging or asserting such person's
liability for investigatory costs, cleanup costs, Governmental or
Regulatory Authority response costs, damages to natural resources or
other property, personal injuries, fines or penalties arising out of,
based on or resulting from :-
(a) the presence, or release into the environment, of any Hazardous
Material at any location, whether or not owned by such person;
or
(b) circumstances forming the basis of any violation or alleged
violation, of any Environmental Law;
The term "Environmental Claim" shall include, without limitation, any
claim by any Governmental or Regulatory Authority for enforcement,
cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law, and any claim by any
third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from the
presence of Hazardous Materials or arising from alleged injury or
threat of injury to health, safety or the environment;
"Environmental Laws" and "Environmental Law" mean any applicable
------------------ -----------------
national, federal, provincial, state or local law of any country or
any political subdivision thereof, rule, regulation, order, writ,
judgement, injunction, decree, determination or award of any
jurisdiction relating to the environment or Hazardous Materials;
"Governmental or Regulatory Authority" means any court, tribunal,
------------------------------------
arbitrator, authority, agency, commission, official or other
instrumentality of the United States, any foreign country or any
domestic or foreign state, county, city or other political
subdivision;
"Hazardous Materials" means :-
-------------------
(a) petroleum or petroleum products, natural or synthetic gas and
<PAGE>
-33-
asbestos in any form;
(b) any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted hazardous
wastes", "toxic substances", "toxic pollutants", "contaminants"
or "pollutants" or words of any similar import under any
Environmental Law; and
(c) any other substance exposure to which is regulated under any
Environmental Law; and
"NPL" means the National Priorities List under CERCLA.
---
<PAGE>
-34-
APPENDIX 1
----------
PARTICULARS OF PROPERTIES
-------------------------
USA
- - - ---
No property owned
<TABLE>
<CAPTION>
Leased Property
- - - ---------------
Current
Monthly
Property Description Lessor Lease Term Rental
- - - -------------------- ------------------------- ---------- ---------
<S> <C> <C> <C>
Portion of commercia l CTM Electronics 3/1/91 to US$12,630
building 2/18/97
9350 Trade Place
San Diego, CA 92126
Commercial building Microelectronic Packaging 9/15/95 to US$11,331
11065 Roselle Street America 3/31/97
San Diego, CA 92121
</TABLE>
<PAGE>
-35-
I N W I T N E S S W H E R E O F this Agreement has been
-----------------------------------
entered into on the date stated at the beginning.
The Company
- - - -----------
MICROELECTRONIC PACKAGING, INC.
9350 Trade Place
San Diego, California
92126
Fax No. (619) 530-1661
By : /s/ Pak Jee Fook
-------------------------
Name : Pak Jee Fook
-------------------------
Designation : Sr Vice President
-------------------------
The Investors
- - - -------------
TRANSPAC CAPITAL PTE LTD
6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
-------------------------
Name : Steven Koo
-------------------------
Designation : Vice President
-------------------------
<PAGE>
-36-
TRANSPAC INDUSTRIAL HOLDINGS LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
-------------------------
Name : Steven Koo
-------------------------
Designation : Vice President
-------------------------
REGIONAL INVESTMENT COMPANY LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
-------------------------
Name : Steven Koo
-------------------------
Designation : Vice President
-------------------------
<PAGE>
-37-
NATSTEEL EQUITY III PTE LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Ang Hong Hua
-------------------------
Name : Ang Hong Hua
-------------------------
Designation : M.D.
-------------------------
<PAGE>
EXHIBIT B
---------
DATED 25TH MARCH, 1996
----------------------
MICROELECTRONIC PACKAGING, INC.
as Holding Company
MPM SINGAPORE PTE LTD
as Company
TRANSPAC CAPITAL PTE LTD
TRANSPAC INDUSTRIAL HOLDINGS LTD
REGIONAL INVESTMENT COMPANY LTD
NATSTEEL EQUITY III PTE LTD
as Investors
- and -
TRANSPAC CAPITAL PTE LTD
as Agent
--------------------------
CONVERTIBLE LOAN AGREEMENT
--------------------------
BIH LI & LEE
Advocates & Solicitors
79 Robinson Road #24-01
CPF Building
Singapore 068897
<PAGE>
C O N T E N T S
---------------
<TABLE>
<CAPTION>
CLAUSE HEADING PAGE
- - - ------ ------- ----
<S> <C> <C>
1. INTERPRETATION 1
2. THE ADVANCE 6
3. CONDITIONS PRECEDENT TO DRAWDOWN 6
4. DRAWDOWN 8
5. REPAYMENT 8
6 PREPAYMENT 9
7. INTEREST 9
8. TAXES 9
9. ILLEGALITY 10
10. REPRESENTATIONS AND WARRANTIES 10
11. INFORMATION 14
12. UNDERTAKINGS 15
13. EVENTS OF DEFAULT 16
14. DEFAULT INTEREST 19
15. INDEMNITIES 20
16. EXPENSES AND STAMP DUTY 20
17. CALCULATIONS AND EVIDENCE 21
18. SUBSCRIPTION SHARES ON CONVERSION OF ADVANCE 22
19. HOLDING COMPANY'S OBLIGATIONS 24
20. WARRANTIES AS TO THE COMPANY 29
21. BUSINESS OF THE COMPANY 30
22. TRANSFER OF SHARES 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-ii-
<S> <C> <C>
CLAUSE HEADING PAGE
- - - ------ ------- ----
23. LISTING 32
24. THE AGENT 32
25. ASSIGNMENT 32
26. REMEDIES, WAIVERS, AMENDMENTS AND CONSENTS 33
27. COMMUNICATIONS 33
28. PARTIAL INVALIDITY 34
29. CONTINUATION OF CERTAIN OBLIGATIONS 34
30. GOVERNING LAW AND JURISDICTION 34
SCHEDULE 1 - THE INVESTORS 36
SCHEDULE 2 - FORM OF REQUEST FOR
ADVANCE 37
SCHEDULE 3 - NOTICE OF EXERCISE OF MPM OPTION 39
SCHEDULE 4 - NOTICE OF EXERCISE OF MPI OPTION 40
SCHEDULE 5 - SUBSCRIPTION SHARES 41
SCHEDULE 6 - WARRANTIES AS TO THE COMPANY 44
APPENDIX 1 - PARTICULARS OF PROPERTIES 56
</TABLE>
<PAGE>
-1-
T H I S A G R E E M E N T is made on 25th March, 1996
---------------------------
B E T W E E N:-
- - - -------------
(1) MICROELECTRONIC PACKAGING, INC. (the "Holding Company"), a corporation
-------------------------------
organised under the laws of the State of California;
(2) MPM SINGAPORE PTE LTD (the "Company"), a company incorporated in
---------------------
Singapore with its registered office at 1003 Bukit Merah Central, #04-
01, Singapore 159836;
(3) THE INVESTORS WHOSE NAMES ARE SET OUT IN SCHEDULE 1 (collectively, the
---------------------------------------------------
"Investors" and individually, an "Investor"); and
(4) TRANSPAC CAPITAL PTE LTD (the "Agent"), a company incorporated in
------------------------
Singapore with its registered office at 6 Shenton Way, #20-09 DBS
Building Tower Two, Singapore 068809, in its capacity as agent for the
Investors.
W H E R E A S:-
-------------
(A) The Company is a private company limited by shares and has at the date
of this Agreement an authorised share capital of S$500,000 consisting of
500,000 ordinary shares of par value S$1 each, 2 of which have been issued
and are fully paid up.
(B) The Company and the Holding Company have requested the Investors to,
and the Investors have agreed to, invest in the Company in accordance with
the terms and subject to the conditions of this Agreement. The investment
in the Company by the Investors shall initially be in the form of a lump
sum advance made available by the Investors to the Company in accordance
with the terms and subject to the conditions of this Agreement and
subsequently, at the option of the Investors, shall be convertible into
shares in the Company or shares of common stock in the Holding Company
arising from the application by the Investors of such advance towards the
subscription of new shares in the Company or shares of common stock in the
Holding Company, in accordance with the terms and subject to the conditions
of this Agreement.
I T I S A G R E E D as follows:-
-----------------------
1. INTERPRETATION
--------------
(A) Definitions: In this Agreement, except to the extent that the context
-----------
requires otherwise:-
"Advance" means the lump sum advance of US$9,000,000 made or to be
-------
made by the Investors on the Advance Date to the Company under this
Agreement or, as the case may be, the outstanding principal amount of
such advance;
"Advance Date" means, depending on the context, the date the Advance
------------
is or is to be made to the Company pursuant to this Agreement;
<PAGE>
-2-
"Board of Directors" or "Directors" means the directors for the time
------------------ ---------
being of the Company;
"Business Day" means a day (other than Saturday or Sunday) on which
------------
(i) US Dollar deposits may be dealt with in the Singapore inter-bank
market and (ii) commercial banks are open for business in Singapore
and the State of California;
"Claim" means any notice, demand, assessment, letter or other document
-----
issued or action taken by any tax, fiscal or other statutory or
governmental authority, body or official whatsoever (whether of
Singapore or elsewhere in the world) whereby the Company is or may be
placed or sought to be placed under a liability to make a payment or
deprived of any relief, allowance, credit or repayment otherwise
available;
"Commitment" means, in relation to an Investor and subject as provided
----------
in this Agreement, the commitment of that Investor to make available
to the Company, the amount set opposite its name in Schedule 1;
"Completion Date" means the date of completion of the subscription and
---------------
issuance of the Subscription Shares under this Agreement;
"Disclosure Letter" means the letter of even date from the Holding
-----------------
Company and the Company to the Investors disclosing information
constituting exceptions to the warranties hereinafter contained;
"Event of Default" means one of the events mentioned in Clause 13;
----------------
"Guarantee" means an unconditional and irrevocable guarantee executed
---------
or to be executed by the Holding Company in favour of the Agent acting
for and on behalf of the Investors in the agreed form;
"Interest Payment Date" means the last day of an Interest Period;
---------------------
"Interest Period" means a period by reference to which interest is
---------------
calculated and payable on the Advance or overdue sum;
"Key Personnel" means the Chief Executive Officer and the Chief
-------------
Operations Officer of the Company and the Holding Company;
"MPI Subscription Price" means the aggregate issue price of the MPI
----------------------
Subscription Shares determined in accordance with Clause 18(G);
"MPM Subscription Price" means the aggregate issue price of the MPM
----------------------
Subscription Shares determined in accordance with Clause 18(G);
"MPI Subscription Shares" means the shares of common stock of the
-----------------------
Holding Company which may be subscribed by and issued to the Investors
pursuant to
<PAGE>
-3-
Clause 18;
"MPM Subscription Shares" means the ordinary shares of S$1 each in the
-----------------------
capital of the Company which may be subscribed by and issued to the
Investors pursuant to Clause 18;
"Option Period" means the period commencing from 23rd April 1997 to
-------------
the Repayment Date;
"Potential Event of Default" means any event or circumstance which, if
--------------------------
it continued after the giving of any notice, the expiry of any grace
period and/or (as the case may be) the making of any determination by
the Agent acting on behalf of the Investors, provided for in Clause
13, would become an Event of Default;
"Repayment Date" means the date falling 5 years from the Advance Date;
--------------
"Singapore Dollar(s)" and the symbol "S$" mean the lawful currency of
------------------- --
the Republic of Singapore;
"Subscription Agreement" means the Subscription Agreement of even date
----------------------
executed or to be executed between (1) the Holding Company and (2) the
Investors;
"Subscription Shares" means the MPM Subscription Shares and/or the MPI
-------------------
Subscription Shares as the case may be; and
"US Dollar(s)" and the symbol "US$" mean the lawful currency of the
------------ ---
United States of America.
(B) Construction of Certain References: Except to the extent that the
----------------------------------
context requires otherwise, any reference in this Agreement to:-
an "agency" of a state includes, at any particular time:-
------
(i) any agency, authority, central bank, department, government,
legislature, minister, ministry, official, or public or statutory
person or state-owned organisation (whether autonomous or not)
of, or of the government of, that state or any political sub-
division in or of that state; and
(ii) any person who in any capacity whatsoever then owns, holds,
administers or controls any of the reserves of that state;
an "agreement" also includes a written concession, contract, deed,
---------
franchise, licence, treaty or undertaking;
the "assets" of any person shall be construed as a reference to the
------
whole or
<PAGE>
-4-
any part of its business, undertaking, property, assets and revenues
(including any right to receive revenues) and uncalled capital;
"borrowed money" includes any indebtedness (i) for or in respect of
--------------
money borrowed or raised (whether or not for a cash consideration), by
whatever means (including acceptances, deposits, discounting,
factoring, finance leases, hire purchase, sale-and-leaseback, sale-
and- repurchase and any form of "off-balance sheet" financing), or
(ii) for the deferred purchase price of assets or services (other than
goods or services obtained on normal commercial terms in the ordinary
course of trading);
a "consent" also includes an approval, authorisation, exemption,
-------
filing, licence, order, permission, permit, recording or registration
(and references to obtaining consents shall be construed accordingly);
a "directive" includes any present or future directive, regulation,
---------
request, requirement, rule or credit restraint programme of any agency
of any state or of any self- regulating organisation (but, if not
having the force of law, the compliance with which is in accordance
with the general practice of persons to whom the directive is
addressed);
"disposal" includes any sale, assignment, exchange, transfer,
--------
concession, loan, lease, surrender of lease, licence, reservation,
waiver, compromise, release of security, dealing with or the granting
of any option or right or interest whatsoever or any agreement for any
of the same and "dispose" means to make a disposal, and "acquisition"
------- -----------
and "acquire" shall be construed mutatis mutandis;
------- ------- --------
a "guarantee" also includes an indemnity, and any other obligation
---------
(whatever called) of any person to pay, purchase, provide funds
(whether by the advance of money, the purchase of or subscription for
shares or other securities, the purchase of assets or services, or
otherwise) for the payment of, indemnify against the consequences of
default in the payment of, or otherwise be responsible for, any
indebtedness of any other person (and "guaranteed" and "guarantor"
---------- ---------
shall be construed accordingly);
"indebtedness" includes any obligation (whether present or future,
------------
actual or contingent, secured or unsecured, as principal or surety or
otherwise) for the payment or repayment of money;
a "law" includes common or customary law and any constitution, decree,
---
judgment, legislation, order, ordinance, regulation, statute, treaty
or other legislative measure, in each case of any jurisdiction
whatsoever (and "lawful" and "unlawful" shall be construed
------ --------
accordingly);
something having a "material adverse effect" on:-
-----------------------
(i) the Company is a reference to it having a material adverse effect
(a)
<PAGE>
-5-
on its financial condition, operations or business or (b) on its
ability to perform and comply with its obligations under this
Agreement; and
(ii) on the Holding Company is a reference to it having a material
adverse effect (a) on its financial condition, operations or
business or on the consolidated financial condition, operations
or business of it and its subsidiaries taken as a whole or (b) on
its ability to perform and comply with its obligations under this
Agreement and the Guarantee;
a "month" means a period beginning in one calendar month and ending in
-----
the next calendar month on the day numerically corresponding to the
day of the calendar month on which it commences or, where there is no
date in the next calendar month numerically corresponding as
aforesaid, the last day of such calendar month (and "months" and
------
"monthly" shall be construed accordingly);
--------
any "obligation" of any party under this Agreement or any other
----------
agreement or document shall be construed as a reference to an
obligation expressed to be assumed by or imposed on it under this
Agreement or, as the case may be, such other agreement or document
(and "due", "owing", "payable" and "receivable" shall be similarly
--- ----- ------- ----------
construed);
a "person" includes any individual, company, corporation, firm,
------
partnership, joint venture, association, organisation, trust, state or
agency of a state (in each case, whether or not having separate legal
personality);
"security" includes any mortgage, pledge, lien, hypothecation,
--------
security interest, trust arrangement or other charge or encumbrance
and any other agreement or arrangement having substantially the same
economic effect (including any "hold-back" or "flawed asset"
arrangement) (and "secured" shall be construed accordingly);
-------
"subsidiary" means, at any particular time, any person more than 50
----------
per cent. of whose issued share capital (or equivalent) is then
beneficially owned by the Holding Company and/or one or more of its
subsidiaries;
"tax(es)" includes any present or future tax, levy, impost, duty,
-------
charge, fee, deduction or withholding of any nature and whatever
called, by whomsoever, on whomsoever and wherever imposed, levied,
collected, withheld or assessed;
"tax on overall net income" of a person shall be construed as a
-------------------------
reference to tax (other than tax deducted or withheld from any
payment) imposed by the jurisdiction in which its principal office is
located on (i) its net income, profits or gains of that person
worldwide or (ii) such of its net income, profits or gains as arise in
or relate to that jurisdiction; and
"transaction" includes any transaction, act, event or omission of
-----------
whatever nature;
<PAGE>
-6-
the "winding-up" of a person includes the amalgamation,
----------
reconstruction, reorganisation, administration, dissolution,
liquidation, merger or consolidation of that person, and any
equivalent or analogous procedure under the law of any jurisdiction in
which that person is incorporated, domiciled or resident or carries on
business or has assets.
(C) Miscellaneous: The headings in this Agreement are inserted for convenience
-------------
only and shall be ignored in construing this Agreement. Unless the context
otherwise requires, words (including words defined herein) denoting the
singular number only shall include the plural and vice versa. The words
"written" and "in writing" include any means of visible reproduction.
References to "Clauses" and "Schedules" are to be construed as references
to clauses of and schedules to this Agreement. Any reference to a sub-
Clause or a paragraph is to a sub-Clause or paragraph of the Clause in
which such reference appears. References to a time of day are to Singapore
time unless otherwise stated.
2. THE ADVANCE
-----------
(A) Advance: The Investors hereby agree to make available to the Company the
-------
Advance upon the terms and subject to the conditions of this Agreement.
Each Investor shall participate in the Advance in an amount equal to its
Commitment.
(B) Liability Several: The liability of the Investors is several. No party to
-----------------
this Agreement shall be responsible for the obligations of any other party.
The failure of an Investor to perform its obligations shall not release any
other party from its obligations; nor shall any other party be liable for
the failure of such Investor to perform its obligations hereunder.
(C) Rights Several: The rights of the Investors are also several. The amount
--------------
at any time owing by the Company to any party under this Agreement shall be
a separate and independent debt from the amount owing to any other party.
Each party to this Agreement shall have the right to protect and enforce
its rights arising out of this Agreement and it shall not be necessary for
the Agent or any Investor to be joined as an additional party in any
proceedings for this purpose.
3. CONDITIONS PRECEDENT TO DRAWDOWN
--------------------------------
(A) The obligations of the Agent and the Investors under this Agreement are
conditional upon the fulfilment of the following conditions on or before
the Advance Date:-
(i) the Agent having received satisfactory evidence that the
Company is the wholly owned subsidiary of the Holding
Company;
(ii) the Agent having received certified true copies of the
Company's Memorandum and Articles of Association;
(iii) the Agent having received certified true copies of the
resolutions of the Company's Board of Directors approving
this
<PAGE>
-7-
Agreement and authorising the persons specified therein to
execute this Agreement, give any certificate or
communications and take any other action required under or
in connection with this Agreement on its behalf;
(iv) the Agent having received the undertakings and
confidentiality agreements referred to in Clause 19(L)(ii)
of this Agreement, duly executed by each of the Key
Personnel in favour of the Investors;
(v) the Agent having received certified true and correct copies
of the Holding Company's current Articles of Incorporation
and By-laws;
(vi) the Agent having received certified true copies of
resolutions of the Board of Directors of the Holding Company
(a) authorising the entry into of this Agreement and the
Guarantee and (b) authorising the persons specified therein
to execute and deliver this Agreement and the Guarantee on
behalf of the Holding Company and to take any action
contemplated in this Agreement and the Guarantee;
(vii) the Agent having received the Guarantee duly executed by the
Holding Company;
(viii) the Agent having received legal opinions dated on or after
the date of this Agreement from Brobeck, Phleger & Harrison
LLP, legal advisers in the United States of America to the
Holding Company, as to such matters of the laws of the
United States of America relevant to this Agreement and the
Guarantee and applicable to the Holding Company as the
Investors may reasonably request;
(ix) the Investors being reasonably satisfied with their due
diligence investigation on the Company and the Holding
Company, including without limitation, an audit of the
financial condition of the Company and the Holding Company
and a legal and financial analysis of the Company and the
Holding Company;
(x) the entry into the Subscription Agreement by the Holding
Company and the fulfilment of the conditions set out in
Clause 2.1 of the Subscription Agreement other than Clause
2.1(g); and
(xi) such additional information and/or other documents as the
Agent may reasonably request.
(B) Each of the Holding Company and the Company shall use its best efforts to
<PAGE>
-8-
ensure that such conditions are fulfilled. If such conditions are not
fulfilled, unless the fulfilment of the conditions is otherwise waived by
the Agent acting on behalf of the Investors, this Agreement shall ipso
facto cease and determine and none of the parties hereto shall have any
claim against the other party hereto for costs, damages, compensation or
otherwise.
4. DRAWDOWN
--------
Subject to the provisions of this Agreement, the Advance will be made
in one lump sum by the Investors to the Company if the following additional
conditions are fulfilled:-
(i) not later than 10 a.m. on the second Business Day before the
proposed Advance Date of the Advance (or such other Business Day
before the proposed Advance Date as the Agent acting on behalf of
the Investors may agree), the Agent has received from the Company
a notice substantially in the form set out in Schedule 2
specifying:-
(a) the proposed Advance Date (which must be a Business Day) of
the Advance; and
(b) details of the bank and account to which the Company wishes
the proceeds of the Advance to be made available by the
Investors;
(ii) all representations and warranties in Clause 10 (except to any
extent waived in accordance with Clause 26(B) have been complied
with in all material respects and would be correct in all
material respects if repeated on the proposed Advance Date by
reference to the circumstances then existing;
(iii) no Event of Default or Potential Event of Default has occurred
and is continuing on or before the proposed Advance Date or will
occur as a result of making the Advance (unless otherwise waived
in accordance with Clause 26(B)); and
(v) not later than 10 a.m. on the proposed Advance Date, the Agent
has received and found satisfactory such additional information
and/or other documents relevant in the context of or relating to
this Agreement as it may reasonably request.
5. REPAYMENT
---------
Unless previously applied by the Investors towards the subscription of
the Subscription Shares in accordance with Clause 18, the Company shall repay
the Advance in full on the Repayment Date.
<PAGE>
-9-
6. PREPAYMENT
----------
The Company may not repay or prepay all or any part of the Advance
except as expressly provided in this Agreement or except with the agreement of
the Investors.
7. INTEREST
--------
(A) Interest Periods: Interest shall be calculated on the Advance by reference
----------------
to successive Interest Periods. Each Interest Period shall be of twelve
months duration except as follows:-
(i) the first Interest Period relating to the Advance shall begin on
the Advance Date and end on the last day of that calendar year
and each subsequent Interest Period shall begin on the last day
of the previous Interest Period;
(ii) in the event that the Advance is wholly applied by the Investors
towards the subscription of the Subscription Shares, any Interest
Period which would otherwise extend beyond the Completion Date
shall instead end on the Completion Date; and
(iii) any Interest Period which would otherwise extend beyond the
Repayment Date shall instead end on the Repayment Date.
(B) Interest Rate: The Company shall, unless the Advance or any part thereof
-------------
shall have been applied by the Investors towards the subscription of the
Subscription Shares (in which event, the interest payable on the Advance or
any part thereof shall stop to accrue from the Completion Date) pay
interest on the Advance at the rate of eight point five per cent. (8.5%)
per annum, such interest to be payable in arrear on each Interest Payment
Date.
8. TAXES
-----
(A) Payments to be Free and Clear: All sums payable by the Company under this
-----------------------------
Agreement shall be paid (i) free of any restriction or condition, (ii) free
and clear of and (except to the extent required by law) without any
deduction or withholding for or on account of any tax and (iii) without
deduction or withholding (except to the extent required by law) on account
of any other amount, whether by way of set-off or otherwise.
(B) Grossing-up of Payments: (i) If the Company or any other person (whether or
-----------------------
not a party to, or on behalf of a party to, this Agreement) must at any
time deduct or withhold any tax or other amount from any sum paid or
payable by, or received or receivable from, the Company under this
Agreement, the Company or that other person shall pay such additional
amount as is necessary to ensure that the Agent and/or the Investors
receive(s) on the due date and retain(s) (free from any liability other
than tax on its own overall net income) a net sum equal to what it would
have received and so retained had no such deduction or withholding been
required or made.
(ii) If the Company or any other person (whether or not a party to, or on
behalf
<PAGE>
-10-
of a party to, this Agreement) must at any time pay any tax or other amount on,
or calculated by reference to, any sum received or receivable by the Agent
and/or any Investor under this Agreement (except for a payment by the Agent
and/or that Investor of tax on its own overall net income), the Company or that
other person shall pay or procure the payment of that tax or other amount before
any interest or penalty becomes payable or, if that tax or other amount is
payable and paid by the Agent and/or that Investor, shall reimburse it on demand
for the amount paid by it.
(iii) The Company shall:-
(a) within 30 days after paying any sum from which it is required by
law to make any deduction or withholding, and within 30 days
after the due date of payment of any tax or other amount which it
is required by paragraph (ii) to pay, deliver to the Agent
evidence reasonably satisfactory to the Agent of that deduction,
withholding or payment and (where remittance is required) of the
remittance thereof to the relevant taxing or other authority; and
(b) promptly after receipt from the relevant taxing or other
authority of its acknowledgement of receipt for any payment made
pursuant to paragraph (ii) above, deliver an original or
certified copy thereof to the Agent.
(iv) As soon as the Company is aware that any such deduction, withholding
or payment is required (or of any change in any such requirement), it shall
notify the Agent.
9. ILLEGALITY
----------
(A) Illegality: If at any time any Investor reasonably determines that it is or
----------
will become unlawful or contrary to any directive of any agency of any
state for it to allow all or part of its Commitment to remain outstanding,
to make, fund or allow to remain outstanding all or part of its share of
the Advance and/or to carry out all or any of its other obligations under
this Agreement, upon that Investor notifying the Company, the Company shall
prepay all or part of that Investor's share of the Advance as the case may
be on such date as that Investor shall certify to be necessary to comply
with the relevant law or directive with all unpaid accrued interest thereon
and any other sum then due to that Investor under any provision of this
Agreement.
(B) Warranty: Each of the Investors represents and warrants that to its
--------
knowledge as at the date hereof it is not unlawful or contrary to any
directive of any agency of Singapore for it to allow all or part of its
Commitment to remain outstanding, to make, fund or allow to remain
outstanding all or part of its share of the Advance and/or to carry out all
or any of its other obligations under this Agreement.
10. REPRESENTATIONS AND WARRANTIES
------------------------------
Each of the Company and the Holding Company jointly and severally
represents and warrants to and for the benefit of each other party to this
Agreement that:-
<PAGE>
-11-
(i) Status: it is duly incorporated and validly existing under the
------
laws of the jurisdiction of its incorporation and has the power
and authority to own its assets and to conduct the business which
it conducts and/or proposes to conduct;
(ii) Powers: it has the power to enter into, exercise its rights and
------
perform and comply with its obligations under this Agreement;
(iii) Authorisation and Consents: all action, conditions and things
--------------------------
required to be taken, fulfilled and done (including the obtaining
of any necessary consents) in order (a) to enable it lawfully to
enter into, exercise its rights and perform and comply with its
obligations under this Agreement, except for the approval of the
shareholders of the Holding Company for the grant of the MPI
Option as defined in Clause 18(A) and the issuance of the MPI
Shares on the exercise of the MPI Option by the Investors, (b) to
enable the Holding Company lawfully to enter into, exercise its
rights and comply with its obligations under the Guarantee, (c)
to ensure that those obligations are valid, legally binding and
enforceable, except (i) as limited by applicable bankruptcy,
insolvency, reorganisation, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally,
(ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and
(iii) to the extent the indemnification provisions contained
herein may be limited by applicable federal or state securities
laws and (d) to make this Agreement and the Guarantee admissible
in evidence in the courts of Singapore and the courts of the
State of California have been taken, fulfilled and done;
(iv) Non-Violation of Laws: its entry into, exercise of its rights
---------------------
and/or performance of or compliance with its obligations under
this Agreement do not violate or exceed any borrowing or other
power or restriction granted or imposed by (a) any law to which
it is subject, (b) any provision of its constitutive documents or
(c) any agreement to which it is a party or which is binding on
it or its assets and do not result in the creation of, or oblige
it to create, any security over those assets;
(v) Non-Violation of Laws by Holding Company: the entry into,
----------------------------------------
exercise of its rights and/or performance of or compliance with
its obligations by the Holding Company under the Guarantee do not
violate (a) any law to which it is subject, (b) any provision of
its Articles of Incorporation or By-laws or (c) any agreement to
which it is a party or which is binding on it or its assets, and
do not and will not result in the creation of, or oblige it to
create, any security over those assets;
(vi) Obligations Binding: its obligations under this Agreement are
-------------------
valid, binding and enforceable in accordance with its terms,
except (i) as
<PAGE>
-12-
limited by applicable bankruptcy, insolvency, reorganisation,
moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by
laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained herein may be
limited by applicable federal or state securities laws;
(vii) Obligations Binding on Holding Company: the obligations of the
--------------------------------------
Holding Company under the Guarantee are valid, binding and
enforceable in accordance with its terms, except (i) as limited
by applicable bankruptcy, insolvency, reorganisation, moratorium,
and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or
other equitable remedies, and (iii) to the extent the
indemnification provisions contained herein may be limited by
applicable federal or state securities laws;
(viii) Litigation: no litigation, arbitration or administrative
----------
proceeding is current or pending or, so far as it is aware,
threatened (a) to restrain the entry into, exercise of its rights
under and/or performance or enforcement of or compliance with its
obligations under this Agreement, (b) to restrain the entry into
by the Holding Company, exercise of its rights under and/or
performance or enforcement of or compliance with its obligations
under the Subscription Agreement or the Guarantee or (c) which
has or could have a material adverse effect on it and its
subsidiaries taken as a whole;
(ix) No Default: no Event of Default or Potential Event of Default has
----------
occurred, or will occur as a result of making the Advance, other
than any waived in accordance with Clause 26(B), and neither it
nor any of its subsidiaries is in breach of or default under any
agreement to an extent or in a manner which has or could have a
material adverse effect on it;
(x) Accounts: the audited accounts of the Company for the financial
--------
year then ended and as delivered to the Agent (with copies of the
reports and approvals referred to in (a) below) are its latest
available annual audited accounts and:-
(a) include such financial statements as are required by the
laws of Singapore and were prepared, audited, examined,
reported on and approved by an internationally recognised
firm of independent accountants acceptable to the Investors
in accordance with accounting principles and practices
generally accepted in Singapore and consistently applied and
in accordance with the laws of Singapore and its Memorandum
and Articles of Association;
<PAGE>
-13-
(b) together with those notes, give a true and fair view of its
state of affairs and financial condition and operations of
the Company as at that date and for the year then ended; and
(c) together with those notes and to the extent required by
accounting principles, standards and practices generally
accepted in Singapore, disclose or reserve against all
liabilities (contingent or otherwise) of the Company as at
that date and all unrealised or anticipated losses from any
commitment entered into by the Company and which existed on
that date;
(xi) No Material Adverse Change: there has been no material adverse
--------------------------
change in the financial condition or operations of the Company
since the date of its accounts referred to in paragraph (x);
(xii) Winding-up of Company: no meeting has been convened for the
---------------------
winding-up of the Company or for the appointment of a receiver,
trustee, judicial manager or similar officer of the Company, its
assets or any of them, no such step is intended by the Company
and, so far as the Company is aware, no petition, application or
the like is outstanding for the winding-up of the Company or for
the appointment of a receiver, trustee, judicial manager or
similar officer of the Company, its assets or any of them;
(xiii) Winding-up of Holding Company: no meeting has been convened
-----------------------------
for the winding-up of the Holding Company or for the appointment
of a receiver, trustee, judicial manager or similar officer of
the Holding Company, its assets or any of them, no such step is
intended by the Holding Company and, so far as the Holding
Company is aware, no petition, application or the like is
outstanding for the winding-up of the Holding Company or for the
appointment of a receiver, trustee, judicial manager or similar
officer of the Holding Company, its assets or any of them;
(xiv) No Immunity: neither the Company nor any of its respective
-----------
assets is entitled to immunity from suit, execution, attachment
or other legal process, and its entry into this Agreement
constitutes, and the exercise of its rights and performance of
and compliance with its obligations under this Agreement will
constitute, private and commercial acts done and performed for
private and commercial purposes;
(xv) No Misstatement: no information, exhibit or report furnished in
---------------
writing to the Agent and/or the Investors by it in connection
with the negotiation of this Agreement contained any material
misstatement of material fact as at the date of such exhibit or
report or as at the date when such information was given which
was material in the context of this Agreement or omitted to state
a material fact as at such date which in any such case would be
materially adverse to the interests of the
<PAGE>
-14-
Investors under this Agreement; and
(xvi) Repetition: each of the above representations and warranties
----------
will be correct and complied with in all respects so long as any
sum remains payable under this Agreement as if repeated then by
reference to the then existing circumstances.
11. INFORMATION
-----------
The Company undertakes that, so long as any sum remains payable under
this Agreement:-
(i) Preparation of Accounts: it will ensure that all audited accounts
-----------------------
to be delivered by it under this Agreement are prepared in such
manner that Clause 10(x) would be complied with if applied to
those accounts by Clause 10(xvi);
(ii) Audited Accounts: as soon as available and in any event within
----------------
120 days after the end of each of its financial years (beginning
with the current one), it will deliver to the Agent its annual
report and audited accounts as at the end of and for that
financial year, together with copies of the related reports and
approvals referred to in Clause 10(x)(a) and the certificate
referred to in paragraph (vi);
(iii) Quarterly Financial Information: as soon as available and in
-------------------------------
any event within 120 days after the end of each three months
period of each of its financial years, it will deliver to the
Agent its unaudited accounts as at the end of and for that three
months period together with a certificate, signed by its duly
authorised officer(s), certifying that such unaudited accounts
are true in all material respects and give a true and fair view
of its state of affairs and financial condition as at the end of
the relevant three months period;
(iv) Information to Shareholders: at the same time as sent to its
---------------------------
shareholders, it will deliver to the Agent any circular, document
or other written information sent to its shareholders as such;
(v) Litigation: it will promptly deliver to the Agent details of any
----------
litigation, arbitration or administrative proceeding which, if to
its knowledge had been current, pending or threatened at the date
of this Agreement, would have rendered the representation and
warranty in Clause 10(viii) incorrect;
(vi) Events of Default: it will notify the Agent of the occurrence of
-----------------
any Event of Default or Potential Event of Default (and of any
action taken or proposed to be taken to remedy it) promptly after
becoming aware of it. With each financial statement delivered by
it under paragraph (ii) or (iii), and promptly after any request
made by the Agent from
<PAGE>
-15-
time to time, it will deliver to the Agent a certificate signed
by its duly authorised officer(s) confirming that, so far as it
is aware and (if applicable) except as previously notified to the
Agent or waived in accordance with Clause 26(B), no Event of
Default or Potential Event of Default has occurred or (as the
case may be) setting out details of any which has occurred and
has not been so notified and of which it is aware and of any
action taken or proposed to be taken to remedy it; and
(vii) Other Information: it will promptly deliver to the Agent such
-----------------
other information relating to its financial condition or business
as the Agent may from time to time reasonably require.
12. UNDERTAKINGS
------------
(A) Company's Undertakings: The Company undertakes that, so long as any
----------------------
sum remains payable under this Agreement:-
(i) Ranking of Oligations: subject to sub-Clause (B), its payment
---------------------
obligations rank and will at all times rank at least equally and
rateably in all respects with all its other unsecured
indebtedness except for such indebtedness as would, by virtue
only of the law in force in Singapore or the State of California,
be preferred in the event of its winding-up;
(ii) Disposals: it will not (whether by a single transaction or a
---------
number of related or unrelated transactions and whether at one
time or over a period of time) sell, transfer, lease out, lend or
otherwise dispose of (whether outright, by a sale-and-repurchase
or sale-and-leaseback arrangement, or otherwise) all or
substantially all of its assets nor of any part of its assets
which, either alone or when aggregated with all other disposals
required to be taken into account under this paragraph (ii), is
substantial in relation to its assets or the disposal of which
(either alone or when so aggregated) could have a material
adverse effect on it;
(iii) Change of Business: it will ensure that there is no material
------------------
change in the nature of its business (whether by a single
transaction or a number of related or unrelated transactions,
whether at one time or over a period of time and whether by
disposal or acquisition);
(iv) Taxes: it will pay and discharge all taxes, levies and charges
-----
made by any government authority having jurisdiction over the
Company prior to the date upon which penalties attach thereto,
except to the extent that such taxes, levies and charges are
being contested in good faith and that adequate reserves shall
have been set aside for the payment thereof;
<PAGE>
-16-
(v) Authorisations and Consents: it will maintain in full force and
---------------------------
effect all such authorisations and consents as are referred to in
Clause 10(iii), take immediate steps to obtain any other
authorisation or consent which are necessary for the purposes
specified in Clause 10(iii), and comply with all terms,
conditions and restrictions (if any) imposed in connection with
any of such authorisations and consents and maintain or
accomplish any filing or registration with any court or judicial,
administrative or governmental agency or other authority which
are or become necessary for such purposes;
(vi) Nasdaq: and so long as the MPI Option has not expired or any
------
Investor holds any ordinary share in the Holding Company, it
shall ensure that the ordinary shares of the Holding Company are
and shall remain duly designated for inclusion on the NASDAQ
National Market System;
(vii) Licensing Agreement: it shall procure that the Holding Company
-------------------
shall as soon as possible assign and transfer all its rights and
obligations under the Multilayer Technology Transfer & Licensing
Agreement dated 4th August, 1994 by and between International
Business Machines Corporation ("IBM") and the Holding Company, to
the Company with the consent of IBM and satisfactory evidence
thereof shall be furnished to the Agent; and
(viii) Further Assurance: it will from time to time on request by the
-----------------
Agent do or procure the doing of all such acts and will execute
or procure the execution of all such documents as the Agent may
reasonably consider necessary or desirable for giving full effect
to this Agreement or securing to the Agent and/or the Investors
the full benefits of all rights, powers and remedies conferred
upon the Agent and/or the Investors in this Agreement.
(B) Investors' Undertaking: The Investors agree and undertake that the
----------------------
Advance made pursuant to this Agreement shall be subordinated to the
indebtedness of the Company in respect of borrowed moneys (whether of
principal or interest) which are or at any time may be or become due from
or owing by the Company to The Development Bank of Singapore Ltd.
13. EVENTS OF DEFAULT
-----------------
(A) Events of Default: The following are Events of Default:-
-----------------
(i) Non-Payment: the Company does not pay in the manner provided in
-----------
this Agreement any sum payable under it when due;
(ii) Breach of Other Obligations: the Company does not perform or
---------------------------
comply with any one or more of its material obligations (other
than the payment obligation of the Company referred to in
paragraph (i)) under
<PAGE>
-17-
this Agreement or the Holding Company does not perform or comply
with any one or more of its material obligations under the
Subscription Agreement or the Guarantee and, if in the reasonable
opinion of the Agent acting on behalf of the Investors, that
default is capable of remedy, it is not in the opinion of the
Agent remedied within 14 days after written notice from the
Agent;
(iii) Breach of Warranty: any material representation, warranty,
------------------
certification or statement by the Company or the Holding Company
in this Agreement or in any other document delivered under this
Agreement or by the Holding Company in the Subscription Agreement
or the Guarantee is not complied with in all material respects or
is or proves to have been incorrect in any material respect when
made or, if it had been made on any later date by reference to
the circumstances then existing, would have been incorrect in any
material respect on that later date, or is not complied with in
all material respects or is or proves to have been incorrect in
all material respects when made or deemed repeated;
(iv) Cross Default: any other indebtedness of the Company or the
-------------
Holding Company in respect of borrowed money is or is declared to
be or is capable of being rendered due and payable before its
normal maturity by reason of any actual or potential default,
event of default or the like (however described) or is not paid
when due nor within any applicable grace period in any agreement
relating to that indebtedness or, as a result of any actual or
potential default, event of default or the like (however
described) any facility relating to any such indebtedness is or
is declared to be or is capable of being cancelled or terminated
before its normal expiry date or any person otherwise entitled to
use any such facility is not so entitled;
(v) Insolvency: the Company or the Holding Company is (or is, or
----------
could be, deemed by law or a court to be) insolvent or unable to
pay its debts, stops, suspends or threatens to stop or suspend
payment of all or a material part of (or of a particular type of)
its indebtedness, begins negotiations or takes any other step
with a view to the deferral, rescheduling or other readjustment
of all of (or all of a particular type of) its indebtedness (or
of any part which it will or might otherwise be unable to pay
when due), proposes or makes a general assignment or an
arrangement or composition with or for the benefit of the
relevant creditors or a moratorium is agreed or declared in
respect of or affecting all or a material part of (or of a
particular type of) the indebtedness of the Company or the
Holding Company;
(vi) Enforcement Proceedings: a distress, attachment, execution or
-----------------------
other legal process is levied, enforced or sued out on or against
the assets of the Company or the Holding Company and is not
discharged or stayed within 14 days;
<PAGE>
-18
(vii) Security Enforceable: any security on or over the assets of the
--------------------
Company or the Holding Company becomes enforceable;
(viii) Winding-up: any step is taken by any person with a view to the
----------
winding-up of the Company or the Holding Company (except for the
purpose of and followed by a reconstruction, amalgamation,
reorganisation, merger or consolidation on terms approved by the
Investors before that step is taken) or for the appointment of a
liquidator (including a provisional liquidator), receiver,
judicial manager, trustee, administrator, agent or similar
officer of the Company or the Holding Company or over any part of
the assets of the Company or the Holding Company;
(ix) Cessation of Business: the Company ceases or threatens to cease
---------------------
to carry on all or a substantial part of its business;
(x) Nationalisation: any step is taken by any person with a view to
---------------
the seizure, compulsory acquisition, expropriation or
nationalisation of all or a material part of the assets of the
Company or the Holding Company;
(xi) Authorisations and Consents: any action, condition or thing
---------------------------
(including the obtaining of any necessary consent, approvals or
licences) at any time required to be taken, fulfilled or done for
any of the purposes stated in Clause 10(iii) is not taken,
fulfilled or done, or any such consent, approval or licence is
revoked, withdrawn, cancelled or otherwise ceases to be in full
force and effect without modification or any condition in or
relating to any such consent is not complied with (unless that
consent or condition is no longer required or applicable);
(xii) Illegality: it is or will become unlawful for the Company or
----------
the Holding Company to perform or comply with any one or more of
its obligations under this Agreement or for the Holding Company
to perform or comply with any one or more of its obligations
under the Subscription Agreement or the Guarantee;
(xiii) Cessation: this Agreement, the Subscription Agreement or the
---------
Guarantee or any of them ceases for any reason (or is claimed by
the Company and/or the Holding Company not) to be the legal and
valid obligations of the Company and/or the Holding Company as
the case may be, binding upon it in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency,
reorganisation, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and
(iii) to the extent the indemnification provisions contained
herein may be limited by applicable federal or state securities
laws;
<PAGE>
-19
(xiv) Litigation: any litigation, arbitration or administrative
----------
proceeding is current or pending to (a) restrain the exercise
of any of the rights and/or the performance or enforcement of
or compliance with any of the obligations of the Company or the
Holding Company under this Agreement or (b) to restrain the
exercise of any of the rights and/or the performance or
enforcement of or compliance with any of the obligations of the
Holding Company under the Subscription Agreement or the
Guarantee or (c) which has or could have a material adverse
effect on the Company or the Holding Company;
(xv) Analogous Event: any event occurs which, under the law of any
---------------
relevant jurisdiction, has an analogous or equivalent effect to
any of the events mentioned in paragraphs (v), (vi), (viii) or
(x); and
(xvi) Material Adverse Change: any event occurs or circumstances
-----------------------
arise which the Agent acting on behalf of the Investors
reasonably determines give(s) reasonable grounds for believing
that the Company may not (or may be unable to) perform or comply
with any one or more of its obligations under this Agreement or
the Holding Company may not (or may be unable to) perform or
comply with any one or more obligations under this Agreement,
the Subscription Agreement or the Guarantee.
(B) Cancellation/Acceleration: If at any time and for any reason (and
-------------------------
whether within or beyond the control of any party to this Agreement) any
Event of Default has occurred and is continuing then at any time
thereafter, whether or not any Event of Default is continuing, the Agent
acting on behalf of the Investors may by written notice to the Company
declare the Advance, all unpaid accrued interest and any other sum then
payable under this Agreement to be immediately due and payable, whereupon
they shall become so due and payable.
14. DEFAULT INTEREST
----------------
(A) Interest on Overdue Sums: If the Company does not pay any sum payable
------------------------
under this Agreement (including, without limitation, any sum payable under
this Clause) when due, it shall pay interest on the amount from time to
time outstanding in respect of that overdue sum for the period beginning on
its due date and ending on the date of its receipt by the Agent (both
before and after judgment) at the rate of nine per cent. (9%) per annum.
(B) Default Interest Periods: Interest under this Clause shall be
------------------------
calculated by reference to successive Interest Periods, each of which
(other than the first, which shall begin on the due date) shall begin on
the last day of the previous one. Each such Interest Period shall be of one
month's duration.
(C) Payment and Compounding of Default Interest: (i) On the last day of
-------------------------------------------
each Interest Period, the Company shall pay the unpaid interest accrued
during that Interest Period on the overdue sum to which it relates at that
rate.
<PAGE>
-20-
(ii) Interest accrued under this Clause on an overdue sum shall be due on
demand by the Agent but, if not previously demanded, shall be paid when
due in accordance with paragraph (i). If not paid when due, the interest
shall be added to that overdue sum and itself bear interest accordingly.
15. INDEMNITIES
-----------
(A) Currency Indemnity: (i) US Dollars is the sole currency of account and
------------------
payment for all sums payable by the Company under or in connection with
this Agreement, including damages.
(ii) Any amount received or recovered in a currency other than US Dollars
(whether as a result of, or of the enforcement of, a judgment or order of
a court of any jurisdiction, in the winding-up of the Company or
otherwise) by the Agent and/or any Investor in respect of any sum
expressed to be due to it from the Company under this Agreement shall
only constitute a discharge to the Company to the extent of the amount in
US Dollars which the Agent and/or that Investor is able, in accordance
with its usual practice, to purchase with the amount so received or
recovered in such other currency on the date of that receipt or recovery
(or, if it is not practicable to make that purchase on that date, on the
first date on which it is practicable to do so).
(iii) If that amount in US Dollars referred to in paragraph (ii) is less than
the amount in US Dollars expressed to be due to the Agent and/or that
Investor under this Agreement, the Company shall indemnify it against any
loss sustained by it as a result. In any event, the Company shall
indemnify the Agent and/or that Investor against the cost of making any
such purchase. For the purpose of this sub-Clause (A), it will be
sufficient for the Agent and/or that Investor to demonstrate that it
would have suffered a loss had an actual exchange or purchase been made.
(B) Indemnities Separate: Each of the indemnities in this Agreement constitutes
--------------------
a separate and independent obligation from the other obligations in this
Agreement, shall give rise to a separate and independent cause of action,
shall apply irrespective of any indulgence granted by the Agent and/or any
Investor and shall continue in full force and effect despite any judgment,
order, claim or proof for a liquidated amount in respect of any sum due
under this Agreement or any other judgment or order.
16. EXPENSES AND STAMP DUTY
-----------------------
(A) Expenses and Stamp Duties: The Company shall pay:-
-------------------------
(i) on demand, all reasonable costs and expenses (including
reasonable legal fees) incurred by the Agent and/or the Investors
in connection with the preparation, negotiation or entry into of
this Agreement and/or any amendment of, supplement to or waiver
in respect of this Agreement;
(ii) on demand, all reasonable costs and expenses (including
reasonable legal fees) incurred by the Agent and/or the Investors
in protecting or
<PAGE>
-21-
enforcing any rights under this Agreement and/or any such
amendment, supplement or waiver; and
(iii) promptly, and in any event before any interest or penalty
becomes payable, any stamp, documentary, registration or similar
duty or tax payable in connection with the entry into,
performance, enforcement or admissibility in evidence of this
Agreement and/or any such amendment, supplement or waiver, and
shall indemnify the Agent and/or the Investors against any
liability with respect to or resulting from any delay in paying
or omission to pay any such duty or tax.
(B) Goods and Services Tax: (i) All sums including principal, interest, charges
----------------------
and expenses expressed to be payable by the Company under this Agreement
shall be exclusive of any applicable goods and services tax, imposition,
duty and levy whatsoever (hereinafter collectively called "Taxes") which
from time to time may be imposed or charged by any government, statutory or
tax authority in Singapore on or calculated by reference to the amount of
any such sums received or receivable by the Agent and/or the Investors
under this Agreement and the Company shall pay all such Taxes in the manner
and within the period prescribed in accordance with the applicable laws and
regulations.
(ii) If the Agent and/or the Investors (or any person on its behalf) is/are
required by law to make any deduction or withholding or to make any payment, on
account of any such Taxes, from or calculated by reference to the amount of any
sum received or receivable by the Agent and/or the Investors under this
Agreement:-
(a) the Company shall pay all such Taxes on receipt of written notice
from the Agent, such payment to be made (if the liability to pay
is imposed on the Company) for its own account or (if that
liability is imposed on the Agent and/or the Investors) on behalf
of and in the name of the Agent and/or the Investors, as the case
may be and without prejudice to the foregoing, if the law
requires the Agent and/or the Investors to collect and to account
for such Taxes, the Company shall pay such Taxes to the Agent
and/or the Investors on receipt of written notice from the Agent;
and
(b) the sum payable by the Company in respect of which relevant
deduction, withholding or payment is required on account of such
Taxes, shall be increased to the extent necessary to ensure that
after the making of that deduction, withholding or payment, the
Agent and/or the Investors receive(s) on the due date and
retain(s) (free from any liability in respect of any such
deduction, withholding or payment) a net sum equal to what it
would have received and so retained had no such deduction,
withholding or payment been required or made.
17. CALCULATIONS AND EVIDENCE
-------------------------
(A) Basis of Calculation: All interest (including default interest) shall
accrue from day to day and shall be calculated on the basis of a year of
360 days and the actual
<PAGE>
-22-
number of days elapsed.
(B) Accounts: The entries made in the accounts maintained by each Investor in
--------
accordance with its usual practice shall be prima facie evidence of the
----- -----
existence and amounts of the obligations of the Company recorded in them.
(C) Certificate Conclusive: A certificate by the Agent and/or any Investor as
----------------------
to any sum payable to it under this Agreement, and any other certificate,
determination, notification, opinion or the like of the Agent and/or any
Investor provided for in this Agreement, shall be conclusive save for
manifest error.
18. SUBSCRIPTION SHARES ON CONVERSION OF ADVANCE
--------------------------------------------
(A) Subscription: (i) Subject to the approval of the Holding Company at the
------------
extraordinary general meeting of the Company referred to in Clause 19, the
Company shall grant to the Investors the right during the Option Period to
convert and apply the entire amount of the Advance or part thereof towards
the subscription of the MPM Subscription Shares at the MPM Subscription
Price (the "MPM Option").
(ii) Subject to the approval of the shareholders of the Holding Company,
the Holding Company shall grant to the Investors the right during the Option
Period to convert and apply the entire amount of the Advance or part thereof
towards the subscription of the MPI Subscription Shares at the MPI Subscription
Price (the "MPI Option").
(B) Exercise: (i) The MPM Option may be exercised by the Agent acting on behalf
--------
of the Investors serving written notice (substantially in the form set out
in Schedule 3) on the Company of such exercise, within the Option Period.
(ii) The MPI Option may be exercised by the Agent acting on behalf of the
Investors serving written notice (substantially in the form set out in Schedule
4) on the Holding Company of such exercise, within the Option Period.
(C) Number of Shares: (i) The number of shares comprising the MPM Subscription
----------------
Shares to be subscribed by the Investors and allotted and issued by the
Company shall be determined in accordance with Part A of Schedule 5.
(ii) The number of shares comprising the MPI Subscription Shares to be
subscribed by the Investors and allotted and issued by the Holding Company shall
be determined in accordance with Part B of Schedule 5.
(D) Issue: (i) The Company hereby agrees that it will upon the exercise of the
-----
MPM Option by the Investors issue to the Investors the MPM Subscription
Shares at the MPM Subscription Price on the terms and subject to the
conditions of this Agreement.
(ii) The Holding Company hereby agrees that it will upon the exercise of
the MPI Option by the Investors issue to the Investors the MPI Subscription
Shares at the MPI Subscription Price on the terms and subject to the conditions
of this Agreement.
<PAGE>
-23-
(E) Completion: (i) Completion of the subscription and the issue of the MPM
----------
Subscription Shares pursuant to the exercise of the MPM Option shall take
place at the office of the Company (or at such other place as the Company
and the Investors may agree) on the date falling 15 Business Days after the
exercise of the MPM Option by the Investors when:-
(a) the Company shall, and the Holding Company undertakes to procure
that the Company shall, effect the allotment and issue of the MPM
Subscription Shares to the Investors; and
(b) there shall be delivered to the Agent such additional waivers and
consents as the Agent may require signed by members of the
Company to enable the Investors to be registered as holders of
the MPM Subscription Shares.
(ii) Completion of the subscription and the issue of the MPI Subscription
Shares pursuant to the exercise of the MPI Option shall take place at the office
of the Company (or at such other place as the Holding Company and the Investors
may agree) on the date falling 15 Business Days after the exercise of the MPI
Option by the Investors when:-
(a) the Holding Company shall effect the allotment and issue of the
MPI Subscription Shares to the Investors; and
(b) there shall be delivered to the Agent such additional waivers and
consents as the Agent may require signed by members of the
Holding Company to enable the Investors to be registered as
holders of the MPI Subscription Shares.
(F) Rescission: If the documents required to be delivered in respect of the MPM
----------
Subscription Shares or the MPI Subscription Shares on the Completion Date
are not forthcoming for any reason or if in any other respect the foregoing
provisions of this Clause are not fully complied with, the Agent acting on
behalf of the Investors shall be entitled (in addition to and without
prejudice to all other rights or remedies available to it) to withdraw the
exercise of the MPM Option or the MPI Option as the case may be, or to
effect completion so far as practicable having regard to the defaults which
have occurred or to fix a new day for completion (not being more than 7
days after the Completion Date).
(G) Subscription Price: For the purposes of this Agreement:-
------------------
(i) the MPM Subscription Price shall be deemed to be the amount of
the Advance to be converted to the MPM Subscription Shares
pursuant to the exercise of the MPM Option; and
(ii) the MPI Subscription Price shall be deemed to be the amount of
the Advance to be converted to the MPI Subscription Shares
pursuant to the exercise of the MPI Option.
(H) Option to subscribe for rights shares:
-------------------------------------
(i) The Investors shall have the right to subscribe to their
proportion of
<PAGE>
-24-
any rights issue of shares of the Company proposed in accordance
with the terms of this Agreement, such proportion to be
determined on the basis as if the Advance and all accrued
interest thereon are converted into the MPM Subscription Shares
at the then MPM Subscription Price; and
(ii) the Holding Company hereby undertakes to procure that the right
comprised herein shall be made available to the Investors in the
manner as set out in this Clause.
19. HOLDING COMPANY'S OBLIGATIONS
-----------------------------
(A) Extraordinary General Meeting:
-----------------------------
(i) As soon as practicable after the date hereof and in any event not
later than the date falling 15 Business days after the date of
this Agreement, the Holding Company shall procure the holding of
an extraordinary general meeting of the Company for the purposes
referred to in sub-Clause (A)(ii) below.
(ii) The Holding Company shall vote at the extraordinary general
meeting in favour of resolutions (in form and substance
satisfactory to the Agent) authorising the grant of the MPM
Option and the issue of the MPM Subscription Shares by the
Directors on the conversion of the entire amount of the Advance
or part thereof on the terms and conditions of this Agreement.
(iii) Upon the passing of the aforesaid resolutions, the Holding
Company shall provide the Agent with a certified true copy of
such resolutions and shall execute such documents and do such
acts as may be required by the Agent to give effect to the MPM
Option.
(B) Compliance: The Holding Company undertakes that it shall at all times and
----------
from time to time comply in all material respects with all representations,
warranties, undertakings and obligations in accordance with this Agreement.
(C) Procure Compliance: The Holding Company undertakes that it shall procure
------------------
for the Company to comply in all material respects with all the
representations, warranties, undertakings and obligations in accordance
with this Agreement.
(D) Audit: The Holding Company undertakes that it shall procure for the Company
-----
to procure an annual audit of its accounts by certified public auditors
acceptable to the Agent.
(E) Financial Information: The Holding Company undertakes that it shall procure
---------------------
for the Company to deliver to the Agent, so long as any sum remains payable
under this Agreement or so long as any Investor is the holder of any MPM
Subscription Shares, audited accounts and unaudited monthly financial
statements and annual operating budgets of the Company.
<PAGE>
-25-
(F) Unissued Capital: (i) The Holding Company undertakes that it shall procure
----------------
for the Company to retain sufficient unissued capital for the issue of the
MPM Subscription Shares.
(ii) The Holding Company undertakes that it shall retain sufficient
unissued capital for the issue of the MPI Subscription Shares.
(G) Issue of Subscription Shares: (i) The Holding Company undertakes that it
----------------------------
will, upon the exercise of the MPM Option by the Investors, procure for the
Company to effect the issue and allotment of the MPM Subscription Shares to
the Investors in accordance with this Agreement and will procure for the
Company to make the necessary entries in the Share Register Book of the
Company in connection therewith.
(ii) The Holding Company undertakes that it shall, upon the exercise of the
MPI Option by the Investors, effect the issue and allotment of the MPI
Subscription Shares to the Investors in accordance with this
Agreement.
(H) Actions requiring approval of the Agent: The Holding Company agrees and
---------------------------------------
undertakes to procure the Company and the Company agrees and undertakes
that so long as any sum remains payable under this Agreement or so long as
any Investor holds any MPM Subscription Shares or any MPI Subscription
Shares, the Company shall not without the prior written consent of the
Agent:-
(i) acquire, dispose, or suffer a dilution of any interest in any
other company or partnership;
(ii) purchase, sell, mortgage or charge any property or any interest
therein (other than in the ordinary course of business or
operation);
(iii) sell or dispose of the whole or a substantial part of its
undertaking, goodwill or assets;
(iv) make any distribution of profits amongst its shareholders by way
of dividend, capitalisation of reserves or otherwise;
(v) incur any capital commitment in excess of US$200,000 in respect
of any one transaction or in excess of an aggregate of
US$1,000,000 in any one financial year;
(vi) dispose of any asset with a book value in excess of US$500,000
(other than in the normal course of business);
(vii) increase, reduce or cancel its authorised or issued share
capital of, or grant any option over its unissued share capital;
(viii) issue any shares of any class;
(ix) create, allow to arise or issue any debenture constituting a
charge on
<PAGE>
-26-
all or any of its undertaking, assets or rights in respect of an
amount in excess of US$1,000,000 per year or US$500,000 per
transaction or US$2,000,000 in aggregate;
(x) adopt any policy for managerial staff salary scales, staff
benefit schemes or staff development programmes exceeding
US$200,000 per person per annum;
(xi) adopt any policy on the payment of directors' fees and
remuneration exceeding US$200,000 per annum in aggregate;
(xii) adopt any policy on accounting practices, depreciation
practices or other financial matter which differs substantially
from usual Singapore accounting, depreciation, commercial or
financial practices;
(xiii) apart from utilisation of existing facilities as of the date
hereof, borrow, raise, guarantee or lend (excluding suppliers'
credit) more than US$200,000 in respect of any one transaction or
more than US$1,000,000 in aggregate outstanding at any one time;
(xiv) appoint, dismiss or settle the terms of appointment or
dismissal of any managing director, associate director or general
manager;
(xv) adopt its annual budgets;
(xvi) change or diversify substantially the nature of its business or
undertaking;
(xvii) amend its Memorandum or Articles of Association;
(xviii) settle the terms of any employee share option or share
participation scheme;
(xix) institute, withdraw or settle any legal action or proceeding in
excess or anticipated to be in excess of US$2,000,000;
(xx) adopt its accounts;
(xxi) approve any transaction with any company or business in which
any of the shareholders has any interest (whether directly or
indirectly);
(xxii) take any step for its dissolution (except for the purpose of
and followed by a reconstruction, amalgamation or reorganisation
on terms approved by the Agent acting on behalf of the Investors
before that step is taken) or for the appointment of a liquidator
(including a provisional liquidator), receiver, judicial manager,
trustee, administrator, agent or similar officer of or over any
part of its assets or business; or
<PAGE>
-27-
(xxiii) take any step towards the listing of its shares on any stock
exchange.
(I) Amendment of Articles of Association: The Holding Company shall upon the
------------------------------------
request of the Agent procure for the Articles of Association of the Company
to be amended to incorporate this sub-Clause and such other provisions of
this Agreement as may be determined by the Agent.
(J) Indemnity: The investment by the Investors under this Agreement being made
---------
on the basis of the representations, warranties and obligations of the
Company and the Holding Company in this Agreement and with the intention
that such representations, warranties and obligations shall remain true and
accurate in all material respects as long as any sum remains payable under
this Agreement or any Investor is the holder of any Subscription Shares,
the Company and the Holding Company hereby agrees to fully indemnify and
keep indemnified each of the Investors and the Agent against any loss,
liability, cost, claim, action, demand or expenses (including, but not
limited to, all costs, charges and expenses paid or incurred in disputing
or defending any of the foregoing or any depletion in or reduction in value
of assets of any or all of the Investors in relation to the Company or the
Holding Company or increase in all or any of its liabilities in relation to
the Company or the Holding Company) which any of the Investors or the Agent
may incur or which may be made against it arising out of or in relation to
or in connection with any proven breach of any such material
representations, warranties or obligations.
(K) Taxation: (i) Subject as hereinafter provided, the Holding Company agrees
--------
with and undertakes to the Investors to indemnify and keep indemnified the
Company against any depletion in or reduction in value of its assets or
increase in its liabilities as a result or in consequence of any Claim for
tax which has been made or may hereafter be made:-
(a) in respect of or arising from any transaction effected on or
deemed to have been effected on or before completion; or
(b) by reference to any income, profits or gains earned, accrued or
received on or before completion.
(ii) The indemnity in this sub-Clause shall include all reasonable costs
and expenses properly payable in connection with any Claim or liability referred
to herein.
(iii) The indemnity in this sub-Clause shall not cover any Claim for tax:-
(a) to the extent that provision or reserve specifically in respect
thereof was made in the audited or unaudited accounts;
(b) in respect of tax arising out of the ordinary course of the
normal trading of the Company since the latest balance sheet
date; and
(c) to the extent that such Claim arises as a result only of any
provision or reserve in respect thereof being insufficient by
reason of any increase in rates of tax made after the date hereof
with retrospective effect.
<PAGE>
-28-
(iv) In the event of the Agent and/or the Investors becoming aware of any
Claim which could give rise to a liability under this Agreement, the Agent
and/or the Investors shall procure that notice thereof be given to the Holding
Company in the manner hereinafter provided and as regards any such Claim, the
Holding Company shall or shall procure the Company to, take such action as the
Agent may reasonably request to avoid, dispute, resist, appeal, compromise or
defend the Claim and any adjudication in respect thereof but subject to the
Agent, the Investors and the Company being indemnified and secured to their
reasonable satisfaction by the Holding Company against all losses (including
additional taxes), costs, damages and expenses which may thereby be incurred.
(L) Covenants: (i) The Holding Company agrees with and undertakes to the
---------
Investors that it will not for so long as any Investor holds any MPM
Subscription Shares in the Company and for a period of five (5) years after
the disposal by any Investor of its entire shareholding in the capital of
the Company, be directly or indirectly interested in any business competing
with the Business.
(ii) The Holding Company agrees with and undertakes to the Investors that
it will procure that each of the Key Personnel from time to time execute
undertakings in favour of the Investors that he will not by any means and at any
time during his employment:-
(a) and for a period of six months thereafter be in the employment or
service of or be directly or indirectly engaged or concerned in
the conduct of any business competing with the Business;
(b) and for a period of 5 years thereafter:-
(i) carry on his own account either alone or in partnership (or
be concerned as a director in any company engaged in) any
business competing with the Business;
(ii) assist any person, firm or company with technical advice in
relation to any business competing with the Business;
(iii) otherwise be interested, directly or indirectly, in any
business competing with the Business;
(iv) induce any director or employee of the Company to terminate
such person's directorship or to leave the employment of the
Company;
(v) solicit or attempt to solicit any such business in
competition with the Company; or
(vi) solicit or attempt to solicit the custom of any person, firm
or company who is or who was a customer of the Company.
(iii) The Holding Company agrees with and undertakes to the Investors that
it will procure that each of the Key Personnel from time to time execute
confidentiality agreements
<PAGE>
-29-
in favour of the Investors in such form as the Investors may reasonably require.
(iv) While the restrictions aforesaid are considered by the parties to be
reasonable in all the circumstances it is agreed that if any one or more of such
restrictions shall either taken by itself or themselves together be adjudged to
go beyond what is reasonable in all the circumstances for the protection of the
Investors' legitimate interest but would be adjudged reasonable if any
particular restriction or restrictions were deleted or if any part or parts of
the wording thereof were deleted, restricted or limited in a particular manner
then the restrictions shall apply with such deletions, restrictions, or
limitations, as the case may be.
(v) In this sub-Clause, "Business" means the business(es) carried on from
--------
time to time by the Company.
(M) Shareholders' Approval: (i) As soon as practicable after the date hereof
----------------------
and in any event not later than the date falling 3 months after the date of
this Agreement, the Holding Company shall procure the holding of an
extraordinary general meeting of its shareholders for the purposes referred
to in sub-Clause (M)(ii) below.
(ii) The Holding Company shall procure that its shareholders vote at the
extraordinary general meeting in favour of resolutions (in form and substance
satisfactory to the Agent acting on behalf of the Investors) authorising the
grant of the MPI Option and the issuance of the MPI Subscription Shares by the
Holding Company on the conversion of the entire amount of the Advance or part
thereof on the terms and conditions of this Agreement.
(iii) Upon the passing of the aforesaid resolutions, the Holding Company
shall provide the Agent with a certified true copy of such resolutions and
shall execute such documents and do such acts as may be required by the Agent to
give effect to the MPI Option.
20. WARRANTIES AS TO THE COMPANY
----------------------------
(A) Warranties as to the Company: Each of the Holding Company and the Company
----------------------------
warrants and undertakes to and with the Investors and their respective
successors in title (with the intent that the provisions of this Clause 20
shall continue to have full force and effect notwithstanding completion) in
relation to the Company in the terms set out in Schedule 6 subject only
to:-
(i) any exceptions provided for under the terms of this Agreement or
set out in the Disclosure Letter; and
(ii) any material matter or thing hereafter done or omitted to be done
at the request in writing or with the prior written approval of the Agent acting
on behalf of the Investors.
The said warranties and undertakings shall be separate and independent and save
as expressly otherwise provided, shall not be limited by reference to any other
paragraph of this Agreement.
<PAGE>
-30-
(B) Completion: Each of the Holding Company and the Company further warrants
----------
and undertakes to and with the Investors and its successors in title that:-
(i) all warranties and undertakings herein contained will be fulfilled
down to and will be true and correct on the Advance Date and the Completion Date
in all material respects as if they had been entered into afresh on the Advance
Date and the Completion Date; and
(ii) if after the signing hereof and before the Completion Date any
event shall occur which results or may result in any of the said warranties or
undertakings being unfulfilled, untrue or incorrect in any material respect, the
Holding Company shall immediately notify the Agent thereof.
(C) Rights Not Extinguished: The warranties and undertakings given hereunder or
-----------------------
pursuant hereto shall not in any respect be extinguished or affected by the
making of the Advance or by completion and the benefits thereof may be
assigned in whole or in part by the Investors.
(D) Rescission: If prior to the Advance Date it shall be found that any of the
----------
warranties or undertakings on the part of the Company or the Holding
Company under this Agreement have not in any material respect been carried
out or complied with or are otherwise untrue or incorrect in any material
respect, the Agent acting on behalf of the Investors shall be entitled by
notice in writing to the Company and the Holding Company to rescind this
Agreement.
21. BUSINESS OF THE COMPANY
-----------------------
(A) Nature of the Company's business: The Holding Company agrees that the
--------------------------------
principal business of the Company shall comprise the design, manufacture
and sale of ceramic packages and substrates (including the assembly of
integrated circuits thereon) using the multilayer ceramic technology
licensed by IBM to the Holding Company pursuant to the Multilayer
Technology Transfer & Licensing Agreement dated 4th August, 1994 and to be
assigned and transferred by the Holding Company to the Company as required
by Clause 12(A)(vii).
(B) Appointment of Directors: With effect from the Advance Date (or such
------------------------
earlier date as the Holding Company and the Agent may agree):-
(i) The Board of Directors of the Company shall at all times consist
of a maximum of 5 Directors, of which 2 may be appointed by the Investors at
their option and the Holding Company shall, if necessary, procure that the
Articles of Association of the Company be amended accordingly.
(ii) The quorum necessary for the transaction of the business of the
Directors shall be 3 or more, consisting of at least 1 Director who has been
appointed by the Investors in accordance with paragraph (i) above.
(iii) If within an hour from the time appointed for the holding of a
meeting
<PAGE>
-31-
of Directors a quorum is not present, it shall stand adjourned to the same day
in the next week at the same time and place.
(iv) The right of appointment of a Director of the Company conferred
on any of the parties hereto shall include the right to remove and replace at
any time from such office any such person appointed by it, and from time to time
determine the period which such person shall hold office as Director.
(v) Any Director appointed pursuant to this Clause may from time to
time and at any time appoint any person to be an alternate Director of the
Company and may at any time remove the alternate Director. An alternate
Director so appointed shall not be entitled to receive any remuneration from the
Company, but shall be entitled to receive notices of and attend all meetings of
Directors and to vote as a Director at any such meeting at which the Director
appointing him is not present, and generally in the absence of his appointer to
perform all the functions of his appointer as a Director. An alternate Director
shall ipso facto cease to be an alternate Director if his appointer ceases for
any reason to be a Director.
(vi) All appointments and removals of alternate Directors made by any
Director in accordance with paragraph (v) above shall be in writing under the
hand of the Director making the same and left at the office of the Company. The
nomination of an alternate Director shall be valid if made by facsimile or telex
or cable or telegram, provided that such nomination shall be confirmed within
three months from the date of such facsimile or telex or cable or telegram by a
written nomination complying with the above mentioned requirements, and any act
done by the alternate Director nominated in such facsimile or telex or cable or
telegram between the date thereof and the date of the receipt within the
prescribed period of the Company of the written nomination shall be as valid and
effectual as if such alternate Director has been duly appointed in the first
instance, whether such written nomination shall be received by the Company
within the prescribed period or not.
22. TRANSFER OF SHARES
------------------
(A) Holding Company
---------------
(i) The Holding Company shall not sell, transfer, charge, encumber or
otherwise dispose of all or any part of its interest in any shares of the
Company save with the prior written consent of the Agent acting on behalf of the
Investors and upon any terms and conditions that such consent may be made
subject to. Provided that the Agent's consent shall not be required in relation
to the disposal of shares of the Company by the Holding Company pursuant to the
Purchase Option Agreement dated 4th August, 1994 by and between the Holding
Company and IBM.
(ii) Subject to paragraph (i) above and sub-Clause (B), in the event
that the Holding Company wishes to sell all or any part of its interest in the
shares of the Company to a bona fide third party including to IBM pursuant to
the Purchase Option Agreement referred to in paragraph (i) above (the "Third
Party Buyer"), the Investors shall be entitled to sell a proportionate amount of
the MPM Subscription Shares to the Third Party Buyer on the same terms and
conditions. Provided that if the shareholding of the Holding Company
<PAGE>
-32-
in the Company as a result of any proposed sale to the Third Party Buyer shall
be less than 10 per cent., the Investors shall be entitled to sell all or any of
the MPM Subscription Shares to the Third Party Buyer on the same terms and
conditions.
(B) Condition Precedent: It shall be a condition precedent to the right of any
-------------------
shareholder (in this Clause referred to as the "Transferor") to transfer
shares in the Company that the transferee (if not already bound by the
provisions of this Agreement) (the "Transferee") executes in such form as
may be reasonably required by and agreed between the other shareholders a
deed of ratification and accession under which the Transferee shall agree
to be bound by and shall be entitled to the benefit of this Agreement as if
an original party hereto in place of the Transferor.
23. LISTING
-------
The Holding Company and the Company jointly and severally undertake
that each of them shall use their best endeavours to ensure that the shares of
the Company will be listed on a Recognised Stock Exchange (as declared from time
to time by the Monetary Authority of Singapore for the purpose of the Securities
Industry Regulations) as soon as practicable and in any event by the date
falling 5 years from the date of this Agreement including but not limited to
giving all the necessary consents and approvals to enable the Company to obtain
the listing as aforesaid.
24. THE AGENT
---------
(A) Appointment of Agent: Each of the Investors irrevocably appoints the Agent
--------------------
to act as its agent for the purpose of this Agreement. Each of the
Investors authorises the Agent to take such action and exercise such
rights, powers and discretions as are specifically delegated to Agent by
this Agreement and such other action, rights, powers and discretions as are
reasonably incidental. However, the Agent may not begin any legal action
or proceeding in the name of an Investor without its consent. The
relationship between the Agent and the Investors is of agent and principal
only. The Agent shall not be a trustee for any Investor, nor an agent or
trustee for the Company or the Holding Company, under or in relation to
this Agreement.
(B) Remedies: Any right remedy or power herein granted to or conferred upon the
--------
Agent under this Agreement shall be exercised by the Agent in its capacity
as agent for the Investors. All acts or obligations performed or assumed
or to be performed or assumed by the Agent under this Agreement shall
(unless otherwise specified by the Agent hereafter or from time to time) be
on behalf of the Investors and, unless the other parties hereto have
received written notice of revocation of authority from any Investor or the
Agent, the Agent shall be assumed to have full authority as agent for and
on behalf of each Investor, to exercise all such rights or powers and
discharge all such obligations under and in accordance with the terms of
this Agreement.
25. ASSIGNMENT
----------
(A) Benefit and Burden of Agreement: This Agreement shall benefit and be
-------------------------------
binding on the parties, their respective successors and any permitted
assignee or transferee of some
<PAGE>
-33-
or all of a party's rights or obligations under this Agreement. Any
reference in this Agreement to any party shall be construed accordingly.
(B) Company and Holding Company: Neither the Company nor the Holding Company
---------------------------
may assign or transfer all or part of its rights or obligations under this
Agreement save in accordance with Clause 22.
(C) Investors: Each of the Investors may assign all or part of its rights or
---------
transfer all or part of its obligations (if any) under this Agreement
without the consent of the Company or the Holding Company except to a
person who is in a business which competes with the business which is
carried on by the Holding Company. Any such assignee or transferee shall
be and be treated as a party for all purposes of this Agreement and shall
be entitled to the full benefit of this Agreement to the same extent as if
it were an original party in respect of the rights or obligations assigned
or transferred to it.
(E) Disclosure of Information: Any Investor may disclose to an actual or
-------------------------
potential assignee or transferee such information about the Company or the
Holding Company or any other person as it may think fit.
26. REMEDIES, WAIVERS, AMENDMENTS AND CONSENTS
------------------------------------------
(A) No Implied Waivers: No failure on the part of the Agent or any Investor to
------------------
exercise, and no delay on its part in exercising, any right or remedy under
this Agreement will operate as a waiver thereof, nor will any single or
partial exercise of any right or remedy preclude any other or further
exercise thereof or the exercise of any other right or remedy. The rights
and remedies provided in this Agreement are cumulative and not exclusive of
any other rights or remedies (whether provided by law or otherwise).
(B) Amendments, Waivers and Consents: Any provision of this Agreement may be
--------------------------------
amended or supplemented only if all the parties hereto so agree in writing
and any Event of Default, Potential Event of Default, provision or breach
of any provision of this Agreement may be waived before or after it occurs
only if the Agent acting on behalf of the Investors so agrees in writing.
Any consent by the Agent or any Investor under any provision of this
Agreement must also be in writing. Any such waiver or consent may be given
subject to any conditions thought fit by the person giving that waiver or
consent and shall be effective only in the instance and for the purpose for
which it is given.
27. COMMUNICATIONS
--------------
(A) Addresses: Each communication under this Agreement shall be made by fax,
---------
telex or otherwise in writing. Each communication or document to be
delivered to any party under this Agreement shall be sent to that party at
the fax number, telex number or address, and marked for the attention of
the person (if any), from time to time designated by that party for the
purpose of this Agreement. The initial fax number, telex number, address
and person (if any) so designated by each party are set out under its name
at the end of this Agreement.
(B) Deemed Delivery: Any communication from the Company shall be
---------------
<PAGE>
-34-
irrevocable, and shall not be effective until received by Agent and/or the
Investors. Any other communication from one party to the other party shall
be deemed to be received by such other party (if sent by fax or telex) on
the next working day in the place to which it is sent if there shall have
been a confirmed activity report or answer back respectively or (in any
other case) when left at the address required by sub-Clause (A) or within
seven days after being sent by prepaid post (by airmail) addressed to it at
that address.
28. PARTIAL INVALIDITY
------------------
The illegality, invalidity or unenforceability of any provision of
this Agreement under the law of any jurisdiction shall not affect its legality,
validity or enforceability under the law of any other jurisdiction nor the
legality, validity or enforceability of any other provision.
29. CONTINUATION OF CERTAIN OBLIGATIONS
-----------------------------------
The obligations of any party under or in respect of Clauses 8, 14, 15
and 16 shall continue even after the Advance has been fully repaid or applied
towards the subscription of the Subscription Shares.
30. GOVERNING LAW AND JURISDICTION
------------------------------
(A) Governing Law: This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of Singapore.
(B) Singapore Courts: For the benefit of the Investors and the Agent, each of
----------------
the Company and the Holding Company irrevocably jointly and severally
agrees that the courts of Singapore are to have jurisdiction to settle any
disputes which may arise out of or in connection with this Agreement and
that, accordingly, any legal action or proceedings arising out of or in
connection with this Agreement ("Proceedings") may be brought in those
-----------
courts and each of the Company and the Holding Company irrevocably jointly
and severally submits to the jurisdiction of those courts.
(C) Service of Process: (i) The Holding Company irrevocably appoints the
------------------
Company to receive, for it and on its behalf, service of process in any
Proceedings in Singapore. Such service shall be deemed to be completed on
delivery to the Company (whether or not it is forwarded to and received by
the Holding Company). The Holding Company undertakes not to revoke the
authority of the Company and if, for any reason, the Company ceases to be
able to act as such or no longer has an address in Singapore, the Holding
Company irrevocably agrees and undertakes to promptly appoint a substitute
process agent acceptable to the Agent acting on behalf of the Investors and
to forthwith deliver to the Agent the new agent's acceptance of that
appointment Provided that until the Agent receives such acceptance, it
shall be entitled to treat the Company (or its successor) as the agent of
the Holding Company for the purposes of this Clause.
(ii) The Holding Company irrevocably consents to any process in any
Proceedings anywhere being served by mailing a copy by registered prepaid
airmail post to it in accordance with Clause 27. Such service shall become
effective 14 days after mailing.
<PAGE>
-34-
(iii) Nothing shall affect the right to serve process in any other manner
permitted by law.
(D) Consent to Enforcement, etc: Each of the Company and the Holding Company
---------------------------
irrevocably and generally jointly and severally consents in respect of any
Proceedings anywhere to the giving of any relief or the issue of any
process in connection with those Proceedings including, without limitation,
the making, enforcement or execution against any assets whatsoever
(irrespective of their use or intended use) of any order or judgment which
may be made or given in those Proceedings.
<PAGE>
S C H E D U L E 1
--------------------
T H E I N V E S T O R S
---------------------------
Name of Investor Commitment
---------------- ----------
Transpac Capital Pte Ltd US$3,626,991
Transpac Industrial Holdings Ltd US$3,570,760
Regional Investment Company Ltd US$ 984,068
Natsteel Equity III Pte Ltd US$ 818,181
<PAGE>
-37-
S C H E D U L E 2
--------------------
FORM OF REQUEST FOR ADVANCE
---------------------------
To: TRANSPAC CAPITAL PTE LTD
6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
For the attention of: [Name and Title of relevant person]
Dear Sirs,
Convertible Loan Agreement
dated 25th March, 1996
__________________________
We refer to the above Agreement between (i) Microelectronic Packaging,
Inc., (ii) ourselves, (iii) Transpac Capital Pte Ltd, Transpac Industrial
Holdings Ltd, Regional Investment Company Ltd and Natsteel Equity III Pte Ltd
and (iv) yourselves. Terms defined in the Agreement have the same meaning in
this notice.
We give you notice that we request the Advance of US$9,000,000 to be
advanced to us under the Agreement on [date] (or, if that is not a Business Day,
the next succeeding Business Day).
We confirm that no Event of Default or Potential Event of Default has
occurred and is continuing as a result of the making of the Advance, we
represent and warrant that the representations and warranties contained in
Clause 10 of the Agreement have been complied with and would be correct in all
material respects if repeated today by reference to the circumstances now
existing and we confirm that all the undertakings on our part contained in
Clauses 11 and 12 of the Agreement have been fully performed and observed by us
in all material respects.
<PAGE>
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You are requested to make the proceeds of the Advance available to us
by crediting our account with [details of bank account].
Dated , 1996.
Yours faithfully,
For and on behalf of
MPM SINGAPORE PTE LTD
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
<PAGE>
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S C H E D U L E 3
------------------
NOTICE OF EXERCISE OF MPM OPTION
--------------------------------
To : MPM Singapore Pte Ltd
From : Transpac Capital Pte Ltd
We refer to the Convertible Loan Agreement (the "Convertible Loan
Agreement") dated 25th March, 1996 made amongst (1) Microelectronic Packaging,
Inc., (2) yourselves, (3) Transpac Capital Pte Ltd, Transpac Industrial Holdings
Ltd, Regional Investment Company Ltd and Natsteel Equity III Pte Ltd and (4)
ourselves. Terms defined in the Convertible Loan Agreement have the same
meanings herein.
We hereby give you notice that we are exercising the MPM Option to
convert [the amount of the Advance] towards the subscription of the MPM
Subscription Shares on the terms and conditions of the Convertible Loan
Agreement. The subscription and issue of the MPM Subscription Shares shall be
completed on the date falling 15 Business Days after the date hereof.
Dated , 199[ ].
Yours faithfully,
For and on behalf of
TRANSPAC CAPITAL PTE LTD
By: ______________________________
Name: ____________________________
Title: ___________________________
<PAGE>
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S C H E D U L E 4
------------------
NOTICE OF EXERCISE OF MPI OPTION
--------------------------------
To : Microelectronic Packaging, Inc.
From : Transpac Capital Pte Ltd
We refer to the Convertible Loan Agreement (the "Convertible Loan
Agreement") dated 25th March, 1996 made amongst (1) yourselves, (2) MPM
Singapore Pte Ltd, (3) Transpac Capital Pte Ltd, Transpac Industrial Holdings
Ltd, Regional Investment Company Ltd and Natsteel Equity III Pte Ltd and (4)
ourselves. Terms defined in the Convertible Loan Agreement have the same
meanings herein.
We hereby give you notice that we are exercising the MPI Option to
convert [the amount of the Advance] towards the subscription of the MPI
Subscription Shares on the terms and conditions of the Convertible Loan
Agreement. The subscription and issue of the MPI Subscription Shares shall be
completed on the date falling 15 Business Days after the date hereof.
Dated , 199[ ].
Yours faithfully,
For and on behalf of
TRANSPAC CAPITAL PTE LTD
By: ________________________________
Name: ______________________________
Title: _____________________________
<PAGE>
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S C H E D U L E 5
--------------------
SUBSCRIPTION SHARES
-------------------
Part A
------
MPM Subscription Shares
-----------------------
1. The number of shares comprising the MPM Subscription Shares to be
subscribed by the Investors pursuant to the exercise of the MPM Option
and allotted and issued by the Company shall be the number of shares
required to constitute the percentage (the "Percentage") (determined
in accordance with the formula set out in paragraph 2 and subject to
the limitation set out in paragraph 3) of the total issued ordinary
share capital of the Company, including the MPM Subscription Shares to
be subscribed by the Investors and to be allotted and issued by the
Company pursuant to the MPM Option.
2. The Percentage shall be determined as follows:-
Amount of Advance to be converted
_________________________________ %
US$20,000,000
3. If the Percentage exceeds 45 per cent., it shall be reduced to 45 per
cent.
<PAGE>
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Part B
------
MPI Subscription Shares
-----------------------
The number of shares comprising the MPI Subscription Shares to be
subscribed by the Investors pursuant to the exercise of the MPI Option and
allotted and issued by the Holding Company shall be the higher of (i) the
number of shares determined in accordance with the formula set out in
paragraph 1 and (ii) the number of shares determined in accordance with the
formula set out in paragraph 2. Provided that if the number of shares
comprising the MPI Subscription Shares as computed according to the
aforesaid formula together with the shares (the "Shares") of the Holding
Company subscribed by the Investors pursuant to the Subscription Agreement
exceeds 49 per cent. of the total issued ordinary share capital of the
Company at the time of the exercise of the MPI Option including the MPI
Subscription Shares, the number of shares comprising the MPI Subscription
Shares shall be reduced to such number of shares which together with the
Shares shall constitute 49 per cent. of the total issued ordinary share
capital of the Company at the time of the exercise of the MPI Option
including the MPI Subscription Shares.
Formula 1
---------
1. Number of MPI Subscription
Shares to be subscribed by
the Investors and to be = Y x S
allotted and issued by _____
the Holding Company k x Q
where
-----
Y shall be determined as follows:-
n x P x k
-------------
US$20,000,000
n shall be the amount of the Advance to be converted into MPI
Subscription Shares.
P shall be the audited after tax profit of the Company for the
financial year ending prior to the date of exercise of the MPI Option.
Q shall be the audited consolidated after tax profit of the Holding
Company and its subsidiaries for the financial year ending prior to
the date of exercise of the MPI Option.
<PAGE>
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k shall be the average price earnings ratio of the Holding Company for
the 180 trading days on the Nasdaq National Market preceding the
exercise of the MPI Option determined as follows:-
Average daily price of the
shares of the Holding Company
(as quoted by the New
York Stock Exchange or x S
if no price is quoted
on any particular trading
day, the last quoted price prior
to that day)
--------------------------------------------------
q
where
-----
q shall be the consolidated after tax profit of the Holding Company
and its subsidiaries for the 180 trading days used to calculate "k"
for purposes of the formula set out herein, or the closest 2 calendar
quarters most representative of that period of performance.
S shall be the number of all the issued ordinary shares of the Holding
Company including the ordinary shares which are the subject matter of
any warrants and options.
Formula 2
---------
2. Number of MPI Subscription Shares n
to be subscribed by the Investors = ________
and to be allotted and issued by
the Holding Company RP
where
-----
n shall be the amount of the Advance to be converted into MPI
Subscription Shares.
RP shall be equal to the average subscription price per share of the
Holding Company obtained in the first major offer of subscription of
new shares in the Holding Company after the drawdown of the Advance.
For the purpose of this paragraph the first major offer of
subscription of new shares of the Holding Company shall be one where
the Holding Company raises US$3,000,000 in one offer or an aggregate
of US$6,500,000 in a series of related offers over the period of the
Advance.
<PAGE>
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S C H E D U L E 6
--------------------
WARRANTIES AS TO THE COMPANY
----------------------------
1. INFORMATION
-----------
The Recitals are true and correct in all aspects and all information
contained in the Disclosure Letter and all other information which has been
given by the Company or officials or professional advisers of the Company to the
directors or officials or professional advisers of the Investors and/or the
Agent in the course of negotiations leading to this Agreement was when given
true, complete and accurate in all respects and there is no fact or matter which
renders any such information untrue, inaccurate or misleading.
2. COPIES OF ACCOUNTS, MEMORANDUM AND ARTICLES, ETC
------------------------------------------------
The copies of the Accounts and of the Memorandum and Articles of
Association of the Company delivered to the Agent are true copies and in the
case of the Memorandum and Articles of Association have attached thereto copies
of all such resolutions and agreements as are required by law to be delivered
for registration.
3. THE ACCOUNTS
------------
(a) The Accounts have been prepared in accordance with the law and on
a consistent basis in accordance with accounting principles,
standards and practices generally accepted at the date hereof in
Singapore so as to give a true and fair view of the state of affairs
of the Company at the Balance Sheet Date and of the profits or
losses for the period concerned and as at the date make:
(i) full provision for all actual liabilities;
(ii) proper provision (or note in accordance with good accountancy
practice) for all contingent and disputed liabilities;
(iii) provision reasonably regarded as adequate for all bad and
doubtful debts; and
(iv) due provision for depreciation and amortisation and any
obsolescence of assets.
(b) The stock and work-in-progress were included in the Accounts at
figures not exceeding the amounts which could in the circumstances
existing at the Balance Sheet Date reasonably be expected to be
realised in the normal course of carrying on the business of the
Company.
(c) Full provision or reserve has been made in the Accounts for all
taxes liable to be assessed on the Company or for which it is or may
become
<PAGE>
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accountable in respect of:
(i) profits, gains or income (as computed for tax purposes)
arising or accruing or deemed to arise or accrue on or before
the Balance Sheet Date;
(ii) any transaction effected or deemed to be effected on or before
the Balance Sheet Date or provided for in the Accounts; and
(iii) distributions made or deemed to be made on or before the
Balance Sheet Date or provided for in the Accounts.
(d) Proper provision or reserve for deferred taxation in accordance
with accounting principles and standards generally accepted at the
date hereof in Singapore has been made in the Accounts.
(e) The profits of the Company as shown by the Accounts have not been
affected to a material adverse extent by inconsistencies of
accounting practices, by the inclusion of non-recurring items of
income or expenditure, by transactions entered into otherwise than
on normal commercial terms or by any other factors rendering such
profits exceptionally high or low.
4. CHANGES SINCE BALANCE SHEET DATE
--------------------------------
For the period commencing on the Balance Sheet Date and ending on the
date of this Agreement and the Completion Date respectively, as regards the
Company:-
(a) its business has been carried on in the ordinary course and so as
to maintain the same as a going concern;
(b) it has not disposed of any material assets or assumed or incurred
any material liabilities (including contingent liabilities)
otherwise than in the ordinary course of carrying on its business;
(c) its business has not been materially and adversely affected by the
loss of any important customer or source of supply or by any
abnormal factor not affecting similar businesses to a like extent
and the Company is not aware of any facts which are likely to give
rise to any such effects;
(d) no dividend or other distribution has been declared, made or paid
to its members except as provided for in the relevant balance sheet;
(e) its turnover, trading position or financial condition has not
materially deteriorated;
(f) no material change has been made in the basis of the emoluments or
other terms of employment of its directors or any of its employees
who on the
<PAGE>
-46-
Balance Sheet Date were in receipt of remuneration at a rate in
excess of US$250,000 per annum;
(g) it has not borrowed any money other than as disclosed in the
Accounts; and
(h) there is not in existence any circumstance making bad or doubtful
its book debts in an amount exceeding US$100,000.
5. LITIGATION
----------
(a) Since the Balance Sheet Date no claim sounding in damages has been
made against the Company that would have a material adverse effect
on the Company.
(b) The Company is not at present engaged whether as plaintiff or
defendant or otherwise in any material legal action, proceeding or
arbitration (other than as plaintiff in the collection of debts
arising in the ordinary course of its business) or is being
prosecuted for any criminal offence.
(c) There are no circumstances known to the Company after making due
and careful enquiries likely to lead to any such claim or legal
action, proceeding or arbitration (other than as aforesaid) or
prosecution.
(d) There are no actions or proceedings pending or, to the knowledge
of the Company, threatened against, relating to or affecting the
Company which could reasonably be expected to result in the issuance
of an order restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions
contemplated by this Agreement or otherwise result in a material
diminution of the benefits contemplated by this Agreement to the
Investors.
(e) There are no facts or circumstances known to the Company that
could reasonably be expected to give rise to any action or
proceeding that would be required to be disclosed pursuant to sub-
paragraph (d).
6. TAXES
-----
For the period commencing on the Balance Sheet Date and ending on the
date of this Agreement and the Completion Date respectively:
(a) there is no tax liability in respect of which a Claim could be
made for a breach under paragraph 8 and there are no circumstances
likely to give rise to such a liability; and
(b) to the best of the Company's knowledge and belief after making due
and careful enquiries, there exists no grounds for any Claim for tax
against the Company under the provisions of any taxation statutes in
connection with
<PAGE>
-47-
the transfer of assets or for the provision of any material
benefit to any person or whereby the Company may be held liable
for taxes primarily chargeable against some other person or
company which claim or provision would have a material adverse
effect on the business, financial condition and results of
operation of the Company.
7. CONTRIBUTIONS
-------------
(a) All deductions and payments required to be made by the Company in
respect of contributions (including employer's contributions) to
any relevant competent authority have been so made.
(b) Proper records have been maintained in respect of all such
deductions and payments and all regulations applicable thereto
have been complied with.
8. TAX RETURNS
-----------
(a) The Company has duly made all returns and given or delivered all
notices, accounts and information which on or before the date
hereof ought to have been made, given or delivered for the
purposes of taxation and all such returns, notices, accounts and
information (and all other information supplied to the inland
revenue or the customs and excise or other fiscal authority
concerned to the Company's knowledge for any such purpose) have
been correct in all material respects and made on a proper basis
and none of such returns, notices, accounts or information is
disputed in any material respect by the fiscal authority concerned
and there is not in existence any fact which might be the occasion
of any such dispute or of any claim for tax in respect of any
financial period down to and including the Balance Sheet Date not
provided for in the Accounts.
(b) Without limiting the generality of sub-paragraph (a) above, the
tax returns of the Company has at all times been correct in all
material respects and on a proper basis and to the Company's
knowledge no taxes, levies or duties, including but not limited to
goods and services tax, value added tax, sales tax and property
tax, if any, are the subject of any arrears or other dispute with
the tax authorities in Singapore or elsewhere and to the Company's
knowledge there is no tax liability in respect of which a Claim
could be made against the Company which Claim would have a
material adverse effect on the business, financial condition and
results of operation of the Company and there are no circumstances
likely to give rise to such a Claim.
(c) To the Company's knowledge all documents in the enforcement of
which the Company may be interested and are subject to ad valorem
stamp duty have been duly stamped and no document belonging to the
Company now or at completion which is subject to ad valorem stamp
duty is or will be unstamped or insufficiently stamped; nor to the
Company's knowledge has any relief from such duty been improperly
obtained nor to the Company's
<PAGE>
-48-
knowledge has any event occurred as a result of which any such
duty from which the Company has obtained relief has or will become
payable.
(d) The Company has not received any tax concession, relief or other
special tax treatment, whether in relation to its assets or the
business carried on by it or otherwise which, if revoked or
otherwise removed, will or may give rise to any additional
liability to Taxation which would have a material adverse effect
on the business, financial condition and results of operation of
the Company and, to the extent that the Company has received any
such tax concession, relief or other special tax treatment, there
are not in existence any facts or circumstances which will or may
lead to the revocation or removal of the same.
9. EMPLOYEES
---------
(a) There are not in existence any contracts of service with directors
or employees of the Company nor any consultancy agreements with
the Company, which cannot be terminated by three months' notice or
less or (where not reduced to writing) by reasonable notice
without giving rise to any material claim for damages or
compensation.
(b) There are no material amounts owing to any present or former
directors or to members of the Company other than remuneration
accrued due or for reimbursement of business expenses.
(c) Save to the extent (if any) to which provision or allowance has
been made in the Accounts, the Company has not made or agreed to
make any material payment to or provided or agreed to provide any
material benefit for any present or former director or employee
which is not allowable as a deduction for the purposes of
taxation.
(d) Save to the extent (if any) to which provision or allowance has
been made in the Accounts:
(i) no liability has been incurred by the Company for breach of
any contract of service or for services, for redundancy
payments or for compensation for wrongful dismissal or unfair
dismissal or for failure to comply with any order for the
reinstatement or re-engagement of any employee which would
have a material adverse effect on the business, financial
condition and results of operation of the Company; and
(ii) no gratuitous payment has been made or promised by the
Company in connection with the actual or proposed termination
or suspension of employment or variation of any contract of
employment of any present or former director or employee
which would have a material adverse effect on the business,
financial condition and results of operation of the Company.
<PAGE>
-49-
(e) The Company has in relation to each of its employees (and so far
as relevant to each of its former employees) complied with:-
(i) all obligations imposed on it by all statutes, regulations and
codes of conduct and practice relevant to the relations between
it and its employees or any trade union and has maintained
current, adequate and suitable records regarding the service of
each of its employees;
(ii) all collective agreements and customs and practices for the
time being dealing with such relations or the conditions of
service of its employees; and
(iii) all relevant orders and awards made under any relevant
statute, regulation or code of conduct and practice affecting
the conditions of service of its employees.
(f) The Company is not involved in any industrial or trade dispute or
any dispute or negotiation regarding a claim of material importance with any
trade union or association of trade unions or organisation or body of employees.
(g) The Company has not in existence or is proposing to introduce any
share incentive scheme, share option scheme or profit sharing scheme for all or
any of its directors or employees.
10. PENSIONS
--------
There are not in existence nor has any proposal been announced to
establish any retirement, death or disability benefit schemes for directors or
employees nor are there any obligations to or in respect of present or former
directors or employees with regard to retirement, death or disability pursuant
to which the Company is or may become liable to make payments in any material
amounts and no pension or retirement or sickness gratuity is currently being
paid or has been promised by the Company to or in respect of any former director
or former employee.
11. DEBTS TO, CONTRACTS WITH, CONNECTED PERSONS
-------------------------------------------
(a) There are:-
(i) no loans in any material amounts made by the Company to any
shareholder and/or any Director of the Company and/or any
person connected with any Director of the Company;
(ii) no debts in any material amounts owing to the Company by any
shareholder and/or any Director of the Company and/or any
person connected with any Director of the Company; and
(iii) no debts in any material amounts owing by the Company other
than
<PAGE>
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debts which have arisen in the ordinary course of business.
(b) There are no existing contracts or engagements to which the
Company is a party and in which any Director of the Company is
interested.
12. CAPITAL COMMITMENTS, UNUSUAL CONTRACTS, GUARANTEES
--------------------------------------------------
The Company:-
(a) does not have any capital commitments exceeding in total the sum
of US$1,000,000 nor will prior to the Completion Date undertake
any capital commitments exceeding in total the sum of US$1,000,000
without the written consent of the Agent acting on behalf of the
Investors;
(b) is not a party to any contract entered into otherwise than in the
ordinary and usual course of business or any contract of an
onerous or long term nature;
(c) has not delegated any powers under a power of attorney which
remains in effect;
(d) is not by reason of any default by it in any of its obligations
bound or liable to be called upon to repay prematurely any loan
capital or borrowed moneys which would have a material adverse
effect on the business, financial condition and results of
operation of the Company;
(e) is not a party to any agreement which is or may become terminable
as a result of the entry into or completion of this Agreement; and
(f) has not entered into or is bound by otherwise than in the ordinary
and usual course of business any guarantee or indemnity under
which any liability or contingent liability is outstanding which
would have a material adverse effect on the business, financial
condition and results of operation of the Company.
13. BOOK DEBTS
----------
(a) None of the book debts which are included in the Accounts or which
have subsequently arisen have been outstanding for more than three
(3) months from their due dates for payment and all such debts
have realised or will realise in the normal course of collection
their full value as included in the Accounts after taking into
account the provisions for bad and doubtful debts in the Accounts.
(b) No part of the amounts included in the Accounts as due from
debtors has been released on terms that any debtor pays less than
the net book value after any provisions made in the Accounts as at
the Balance Sheet Date or has been written off or has proved to
any extent to be irrecoverable or is
<PAGE>
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now regarded as being irrecoverable.
14. INSURANCE
---------
All the assets of the Company which are of an insurable nature have at
all material times been and are as at the Completion Date insured in amounts
reasonably regarded as adequate against fire and other risks normally insured
against by companies carrying on similar businesses or owning property of a
similar nature and the Company has at all material times been, and is at the
date hereof, adequately covered against accident, third party errors and
omissions and other risks normally covered by insurance by such companies. The
particulars of the insurance of the Company which have been supplied to the
Agent are true and correct in all material respects. In respect of all such
insurances:
(a) all premiums have been duly paid up; and
(b) all the policies are in force and are not voidable on account of
any act, omission or non-disclosure on the part of the insured
party.
15. TITLE TO ASSETS
---------------
All assets of the Company and all debts due to it which are included
in the Accounts or have otherwise been represented as being the property of or
due to the Company or at the Balance Sheet Date used or held for the purposes of
its business were at the Balance Sheet Date the absolute property of the Company
and (save for those subsequently disposed of or realised in the ordinary couse
of trading) all such assets and all assets and debts which have subsequently
been acquired or arisen are as at the Completion Date the absolute property of
the Company free from all and any encumbrance of whatever nature and to the
Company's knowledge there are no circumstances under which by operation of law
or otherwise the Company's title, right or interest in and to such assets may be
adversely affected in any way whatsoever.
16. PROPERTIES
----------
(a) The Company has good marketable title to the properties shown in
Appendix I to this Schedule (the "Property") free from all and any
leases, tenancies, licences, mortgages, charges, liens and
incumbrances.
(b) With the exception of the Property, the Company does not use or
occupy any other freehold or leasehold property or occupies any
other land or building whether under a licence or otherwise.
(c) All covenants, obligations, restrictions and conditions affecting
the Property or the Company as lessee thereof have been observed
and performed in all material respects and all material outgoings
in respect thereof have been duly paid.
(d) The Property complies (as to buildings and use) in all material
respects with all applicable statutory and by-law requirements as
to fire
<PAGE>
-52-
precautions, public health and the health and safety of those who
work in or about it.
(e) The Property or the Company as lessee thereof:
(i) is not subject to any covenants, obligations, restrictions or
conditions which are of an unusual or onerous nature or which
would materially adversely affect the use or continued use of
the Property for the purposes of and extent to or the manner in
which it is now used;
(ii) does not enjoy precariously any right, easement or privilege
the withdrawal or cessation of which would materially adversely
affect the use or continued use of the Property for the
purposes of or the extent to or the manner in which it is now
used; and
(iii) is not materially adversely affected by any of the following
matters:
(aa) any closing order, demolition order or clearance order;
(bb) any enforcement notice which has not been complied
with; or
(cc) any order or proposal publicly advertised or of which
written notice has been received for the compulsory
acquisition or requisition of the whole or any part
thereof.
17. COMPLIANCE WITH LEASES AND OTHER AGREEMENTS
-------------------------------------------
(a) The terms of all leases, tenancies, licences, concessions and
agreements of whatsoever nature to which the Company is a party
have been duly complied with in all material respects by the
Company.
(b) No such lease, tenancy, licence, concession or agreement will
become subject to avoidance, revocation or be otherwise affected
upon or in consequence of the making or implementation of this
Agreement.
18. LICENCES AND CONSENTS
---------------------
To the best of the Company's knowledge and belief after making due and
careful enquiries:
(a) the Company has complied with all applicable laws, regulations and
directives of the relevant jurisdiction in all respects and the
Company is in possession of all permits, licences, authorities and
other rights necessary for the ownership of its assets and
carrying on of its business and nothing has been done whereby all
or any of such permits, licences,
<PAGE>
-53-
authorities and other rights may be revoked or annulled and
modified which revocation annullment or modification would result
in a material adverse effect on the business, financial condition
and results of operation of the Company.
(b) All statutory or other requirements, regulations, directives and
guidelines and conditions applicable in the relevant jurisdiction
to any licences and consents involved in the ownership of its
assets and carrying on of the business of the Company as now
carried on have been complied with and the Company is not aware,
after making due and careful enquiries, of any intended or
contemplated revocation or refusal of any such licence or consent
which revocation or refusal would result in a material adverse
effect on the business, financial condition and results of
operation of the Company.
(c) The terms of all licences and agreements relating to or entered
into in connection with the ownership of its assets and the
Business has been duly complied with in all material respects by
the Company and no event has occurred as a result of which any
such licence or agreement has become void or voidable or subject
to revocation at the instance of any party and the making or
implementation of this Agreement will not have any such effect.
19. BOOKS AND RECORDS
-----------------
The records, statutory books and books of account of the Company are
duly entered up and maintained in all material respects in accordance with all
legal requirements applicable thereto and contain true, full and accurate
records in all material respects of all matters required to be dealt with
therein and all such books and all records and documents (including documents of
title) which are its property are in its possession or under its control and all
accounts, documents and returns required to be delivered or made to the relevant
authorities have been duly and correctly delivered or made in all material
respects.
20. ISSUE OF SHARES
---------------
The Company has not issued or agreed to issue any shares or given or
agreed to give any option in respect of any shares and has not issued or agreed
to issue or given or agreed to give any option in respect of any debentures or
other securities since the Balance Sheet Date save for the MPM Option.
21. INTELLECTUAL PROPERTY RIGHTS
----------------------------
(a) To the best of the Company's knowledge and belief, after making
due and careful enquiries, the operations of the Company does not
infringe any right in confidential information or other
intellectual property right held or alleged to be held by any
third party.
<PAGE>
-54-
(b) The Company has not entered into any agreement:-
(i) for the use by any third party of any know how or technical
information or other intellectual property right held by the
Company; or
(ii) which restricts the disclosure or use by the Company of any
know how or technical information or other intellectual
property right, and to the Company's knowledge there is no
infringement by any third party of any of the rights in
confidential information or other intellectual property rights
held by the Company.
(c) To the best of the Company's knowledge and belief, after making
due and careful enquiries, the Company has taken all steps
reasonably necessary for the protection of all processes,
inventions, designs, copyrights and trade names used by it
including, without limitation, applying for and maintaining in
force all possible patents, trade mark registrations and
registered designs in all relevant jurisdictions.
(d) The Company is not in any way making any unlawful or wrongful use
of any trade secrets, customer lists, manufacturing processes,
secret processes, technology, know-how or any other confidential
information of any third party. The Company has sufficient title
to and ownership of manufacturing processes, secret processes,
know-how and any other intellectual property and confidential
information resulting from the development activities engaged in
by any employees of the Company on behalf of and in their
capacities as employees of the Company.
(e) The Company has not provided to any entities in which the Company
has a beneficial equity or ownership interest but which are not
subsidiaries ("Investees") any material know-how or technology
---------
with respect to the Business other than Investees that are subject
to confidentiality arrangements with the Company and to the
knowledge of the Company, no Investees have any material know-how
or technology with respect to the Business other than Investees
that are subject to confidentiality arrangements with the Company.
22. EXISTING CONTRACTS
------------------
No contract, licence, permit or arrangement to which the Company is a
party shall be abrogated or affected by the subscription of and the issuance and
allotment of the Subscription Shares by the Investors.
23. SUBSIDIARIES AND ASSOCIATED COMPANIES
-------------------------------------
The Company does not have any subsidiaries or associated companies
(that is to say, a company in which the Company has not less than twenty per
cent. (20%) of its issued share capital and in whose commercial and financial
policy decisions the Company
<PAGE>
-55-
participates) and is not a partner in any partnership.
24. DEFINITIONS
-----------
As used in this Schedule 6:-
"Accounts means the consolidated audited accounts for the financial
--------
year ending 31st December, 1994 and the consolidated management
accounts for the period commencing on 1st January, 1995 and ending on
30th September, 1995 of the Company;
"Balance Sheet Date" means in relation to the audited accounts of the
------------------
Company, the balance sheet date of the audited accounts and in
relation to its management accounts, 30th September, 1995; and
"Business" means the business carried on by the Company.
--------
<PAGE>
-56-
A P P E N D I X I
--------------------
PARTICULARS OF PROPERTIES
-------------------------
Properties leased by MPM Singapore Pte Ltd
1. No. 5 Tuas Basin Link
Singapore 638759
2. No. 7 Tuas Basin Link
Singapore 638761
3. No. 9 Tuas Basin Link
Singapore 638763
<PAGE>
-57-
I N W I T N E S S W H E R E O F this Agreement has been entered
-------------------------------------
into on the date stated at the beginning.
The Holding Company
- - - -------------------
MICROELECTRONIC PACKAGING, INC.
9350 Trade Place
San Diego, California
92126
Fax No. : (619) 530-1661
By : /s/ Pak Jee Fook
----------------------------
Name : Pak Jee Fook
----------------------------
Designation : Sr Vice President
----------------------------
The Company
- - - -----------
MPM SINGAPORE PTE LTD
9 Tuas Basin Link
Singapore 638763
Fax No. : (65) 863-3273
By : /s/ Pak Jee Fook
----------------------------
Name : Pak Jee Fook
----------------------------
Designation : Director
----------------------------
<PAGE>
-58-
The Investors
- - - -------------
TRANSPAC CAPITAL PTE LTD
6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
----------------------------
Name : Steven Koo
----------------------------
Designation : Vice President
----------------------------
TRANSPAC INDUSTRIAL HOLDINGS LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
----------------------------
Name : Steven Koo
----------------------------
Designation : Vice President
----------------------------
<PAGE>
-59-
REGIONAL INVESTMENT COMPANY LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Steven Koo
----------------------------
Name : Steven Koo
----------------------------
Designation : Vice President
----------------------------
NATSTEEL EQUITY III PTE LTD
c/o 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Fax No. : (65) 225-5538
By : /s/ Ang Kong Hua
----------------------------
Name : Ang Kong Hua
----------------------------
Designation : M.D.
----------------------------
<PAGE>
EXHIBIT C
FINANCIALS
<PAGE>
YEARS ENDED 1993, 1994, AND 1995
<PAGE>
EXHIBIT C
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Microelectronic Packaging, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Microelectronic
Packaging, Inc. as of December 31, 1995 and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microelectronic
Packaging, Inc. at December 31, 1995 and the results of its operations and its
cash flows for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficiency as of December 31, 1995 and
has an accumulated deficiency as of December 31, 1995. In addition the Company
has embarked on a significant business development effort which will require
significant amounts of additional debt and/or equity financing beyond the funds
raised through the Transpac financing (Note 17). These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Costa Mesa, California
March 12, 1996, except for
Note 2 paragraph 3 and
Note 17 paragraph 1 which
are as of April 4, 1996.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Microelectronic Packaging, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Microelectronic Packaging, Inc. and its subsidiaries at December 31,
1994, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
approximately $2.9 million during 1994 and has a working capital deficiency as
of December 31, 1994. In addition, the Company has embarked on a significant
business development effort and will require significant additional capital
resources to maintain its operations and business development efforts. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
April 11, 1995
F-2
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1995 1994
- - - --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,923,000 $ 1,346,000
Accounts receivable, net 6,815,000 7,457,000
Inventories 7,158,000 5,009,000
Other current assets 3,659,000 2,423,000
- - - --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 20,555,000 16,235,000
- - - --------------------------------------------------------------------------
Property, plant and equipment, net 16,943,000 7,157,000
Other non-current assets 4,929,000 4,243,000
- - - --------------------------------------------------------------------------
$ 42,427,000 $ 27,635,000
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit borrowings, due on demand $ 9,245,000 $ 5,668,000
Accounts payable 7,767,000 6,479,000
Accrued liabilities 4,538,000 2,932,000
Deferred revenue 572,000 617,000
Current portion of long-term debt 3,316,000 907,000
- - - --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 25,438,000 16,603,000
- - - --------------------------------------------------------------------------
Long-term debt, less current portion 9,573,000 2,230,000
- - - --------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- - - --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000,000
shares authorized, 4,660,093 shares
issued and outstanding 34,326,000 34,326,000
Accumulated deficit (26,910,000) (25,524,000)
- - - --------------------------------------------------------------------------
7,416,000 8,802,000
- - - --------------------------------------------------------------------------
$ 42,427,000 $ 27,635,000
==========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Product sales $57,996,000 $41,115,000 $34,691,000
Other sales -- 1,173,000 --
- - - -------------------------------------------------------------------------------------------
57,996,000 42,288,000 34,691,000
COST OF GOODS SOLD
Product sales 46,410,000 36,589,000 29,671,000
Other sales -- 1,070,000 --
- - - -------------------------------------------------------------------------------------------
46,410,000 37,659,000 29,671,000
- - - -------------------------------------------------------------------------------------------
GROSS PROFIT 11,586,000 4,629,000 5,020,000
Selling, general and administrative 7,882,000 5,033,000 3,483,000
Engineering and product development 2,152,000 1,734,000 1,494,000
Provision for revaluation of subsidiary
and other related assets 1,000,000 -- --
- - - -------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 552,000 (2,138,000) 43,000
- - - -------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Foreign exchange loss (1,254,000) (1,007,000) (447,000)
Interest expense (1,298,000) (443,000) (490,000)
Royalty revenue -- 153,000 114,000
Other income, net 614,000 496,000 634,000
- - - -------------------------------------------------------------------------------------------
Loss before provision for income taxes and
change in accounting principle (1,386,000) (2,939,000) (146,000)
Provision for income taxes -- -- (346,000)
- - - -------------------------------------------------------------------------------------------
Loss before change in accounting principle (1,386,000) (2,939,000) (492,000)
Cumulative effect of change in accounting
principle -- 346,000
- - - -------------------------------------------------------------------------------------------
Net loss $(1,386,000) $(2,939,000) $(146,000)
===========================================================================================
Net loss per common share:
Historical $ (0.30) $ -- $ --
Pro forma before change in accounting
principle (unaudited - Note 1) -- (0.70) (0.16)
Pro forma cumulative effect of change in
accounting principle -- -- 0.11
- - - -------------------------------------------------------------------------------------------
Net loss $ (0.30) $ (0.70) $ (0.05)
===========================================================================================
Shares used in historical and pro forma
per share calculation 4,660,000 4,174,000 3,076,000
===========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
Year ended December 31, 1995 1994 1993
- - - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,386,000) $ (2,939,000) $ (146,000)
- - - ---------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,521,000 2,346,000 2,034,000
Write down for revaluation of subsidiary 1,000,000 -- --
Unrealized loss on borrowings denominated
in foreign currency and from forward foreign
currency contracts 903,000 649,000 105,000
Realized benefit from forward foreign
currency contracts (358,000) (239,000) (516,000)
Gain (loss) on sale of fixed assets -- 2,000 (18,000)
Changes in assets and liabilities, net of
effects of acquisitions in 1993:
Accounts receivable 642,000 (1,600,000) (75,000)
Inventories (2,148,000) (173,000) (819,000)
Other current assets (1,236,000) (789,000) (376,000)
Other non-current assets (1,801,000) (1,508,000) (759,000)
Accounts payable, accrued liabilities
and deferred revenue 2,162,000 1,259,000 2,429,000
- - - ---------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 299,000 (2,992,000) 1,859,000
- - - ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition, net of cash acquired -- -- (64,000)
Acquisition of fixed assets (12,163,000) (2,443,000) (951,000)
Proceeds from sale of fixed assets -- 26,000 164,000
Advances under notes receivable (30,000) (940,000) --
Realized benefit from forward foreign
currency contracts 358,000 239,000 516,000
- - - ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,835,000) (3,118,000) (335,000)
- - - ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under factoring and line of
credit facilities 41,585,000 29,042,000 31,464,000
Repayments under factoring and line of
credit facilities (38,180,000) (28,504,000) (31,522,000)
Borrowings under long-term debt and
promissory notes 10,599,000 1,507,000 462,000
Principal payments on long-term debt
and promissory notes (891,000) (1,543,000) (1,193,000)
Issuance of common stock -- 5,906,000 --
- - - ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 13,113,000 6,408,000 (789,000)
- - - ---------------------------------------------------------------------------------------------------
Net increase in cash 1,577,000 298,000 735,000
Cash at beginning of year 1,346,000 1,048,000 313,000
- - - ---------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 2,923,000 $ 1,346,000 $ 1,048,000
===================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock A Preferred Stock B Common Stock
---------------------- ------------------------- ----------------------- Accumulated
Shares Amount Shares Amount Shares Amount Deficit Total
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1993 239,251 $ 9,401,000 1,231,123 $ 7,018,000 1,285,264 $12,001,000 $(22,439,000) $ 5,981,000
Net loss --- --- --- --- --- --- (146,000) (146,000)
- - - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1993 239,251 9,401,000 1,231,123 7,018,000 1,285,264 12,001,000 (22,585,000) 5,835,000
Common stock issued --- --- --- --- 1,600,021 5,906,000 --- 5,906,000
Conversion of
preferred stock (239,251) (9,401,000) (1,231,123) (7,018,000) 1,774,808 16,419,000 --- ---
Net loss --- --- --- --- --- --- (2,939,000) (2,939,000)
- - - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1994 --- --- --- --- 4,660,093 34,326,000 (25,524,000) 8,802,000
Net loss --- --- --- --- --- --- (1,386,000) (1,386,000)
- - - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1995 --- $ --- --- $ -- 4,660,093 $34,326,000 $(26,910,000) $ 7,416,000
===================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
Microelectronic Packaging, Inc. ("MPI" or the "Company") is a semiconductor
packaging company with design services, manufacturing and sales capability to
support the device packaging and electronic systems interconnection requirements
of integrated circuit ("IC") and electronic systems manufacturers. The Company
develops, manufactures, markets and sells a wide range of electronic packages
that are used to enclose and protect ICs from corrosion, humidity, shock,
handling and other contaminants. The Company's products, consisting of pressed
ceramic packages, advanced IC packaging products and multichip modules, are sold
to customers in the integrated circuit, communications, automatic test equipment
and other electronics related industries.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of MPI and its wholly-owned subsidiaries, Microelectronic Packaging (S)
Pte. Ltd. ("MPS") (including its wholly-owned subsidiary Furnace Technology (S)
Pte. Ltd.), Microelectronic Packaging America ("MPA"), MPC (S) Pte. Ltd.
("MPC"), CTM Electronics, Inc. ("CTM"), MPM (S) Pte. Ltd ("MPM") and Verro
Printing Screens Pte. Ltd. ("VPS"). VPS had been dormant since August 1984 and
was dissolved in March 1994. All significant intercompany accounts,
transactions and profits have been eliminated.
CASH AND CASH EQUIVALENTS - For the purpose of the statement of cash flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (determined using the
first-in, first-out method) or market.
PRODUCTION SUPPLIES - Production supplies, principally comprising printing
fixtures, pressing and graphite tools, and furnace refractories are stated at
cost and are charged to cost of goods sold as utilized in the production
process. Amounts expected to be utilized within the next year are included in
other current assets in the accompanying consolidated financial statements.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using the
straight-line method over estimated useful lives generally ranging from three to
thirty years. Leasehold improvements and assets under capital leases are
amortized over the shorter of the estimated useful lives of the assets or the
life of the lease.
LONG-TERM PREPAID AND INTANGIBLE ASSETS - Long-term prepaid and intangible
assets are comprised of prepaid royalties, deferred facility start-up costs and
certain other intangible assets. The amortization of such amounts is included
in the operating results of the period of expected benefit. The Company
periodically assesses the recoverability of these assets and would record an
impairment of such assets if the projected gross cash flows are no longer
estimated to be sufficient to recover such assets.
Prepaid Royalties - Under the terms of its technology transfer and licensing
agreement with International Business Machines Corporation ("IBM") (see Note
4), the Company agreed to pay an up-front minimum royalty of $2,000,000.
This up-front royalty has been included in other non-current assets, and will
be charged to earnings in accordance with the terms of the royalty provisions
of the IBM agreement.
Deferred Facility Start-up Costs - The Company is incurring costs associated
with establishing a production facility to manufacture product utilizing the
technology licensed from IBM (see Note 4). Such deferred facility start-up
costs primarily consist of direct incremental employee and employee related
costs and preoperating rent for new facilities which are included in other
non-current assets. Such costs will be amortized over their estimated period
of benefit of two years using the straight-line method.
Intangible Assets - Intangible assets consist of an acquired customer base
and purchased technology licenses and are classified as other non-current
assets. Intangible assets are amortized using the straight-line method over
estimated useful lives of 7 years.
F-7
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION - The Company recognizes revenue from product sales at the
time of shipment. Non-refundable license fees are recognized as revenue when
the Company has no material remaining performance obligations under the
associated license agreement. Other sales in 1994 includes the revenue arising
from the resale of certain production equipment and related production supplies.
The equipment and supplies were purchased by the Company on behalf of, and sold
to, a third party pursuant to purchase orders. Revenue from this transaction
was recognized at the time the Company had satisfied all of its significant
performance obligations.
INCOME TAXES - The domestic parent Company and its U.S. subsidiaries file
consolidated returns for U.S. federal and state income tax purposes. The
Singapore subsidiaries file income tax returns in Singapore based upon their
separate taxable income.
The Company elected to adopt Statement of Financial Accounting Standards
("SFAS") No. 109 effective January 1, 1993. SFAS 109 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the Company's 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 bases of
assets and liabilities using enacted tax rates in effect for the year(s) in
which the differences are expected to reverse. This requires that the Company
record a deferred tax asset related to the future income tax benefits associated
with tax loss and credit carryforwards, and certain temporary differences for
which tax benefits have not previously been recognized. Deferred tax assets
must be reduced by a valuation allowance when it is more likely than not that a
portion or all of the deferred tax asset will not be realized. In addition,
under SFAS 109, the tax benefit associated with the utilization of operating
loss carryforwards is included in the regular provision for income taxes.
FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's Singapore
subsidiaries are maintained in U.S. dollars and the U.S. dollar is considered to
be the functional currency of all consolidated subsidiaries. Transaction
gains/(losses) resulting from transactions denominated in foreign currencies
(primarily related to certain raw material purchases denominated in Japanese yen
and other costs of production and administration denominated in Singapore
dollars) are included in the results of operations for the period in which the
exchange rates change.
FORWARD FOREIGN CURRENCY CONTRACTS - Subject to bank financing and consent, the
Company enters into forward foreign currency contracts to minimize the short-
term impacts of exchange rate fluctuations related to certain raw material
purchases denominated in Japanese yen and other costs of production and
administration denominated in Singapore dollars. The cost of the contracts and
any resulting gains and losses on the contracts are included in the results of
operations in the period in which the exchange rates change.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash, accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair value because of the short maturity of these items. The carrying
amounts of the Company's short-term credit facilities and mortgage notes
approximate fair value because the interest rates on these instruments are
subject to change with market interest rates. As the majority of the Company's
long-term obligations were entered into during 1995 and mature in less than
three years, the Company believes that their carrying amounts approximate their
fair value.
The fair values of the Company's off balance-sheet instruments (forward foreign
currency contracts as discussed in Note 5) were estimated based on quotes
obtained from financial institutions' and would represent additional assets and
liabilities of $7.7 million if recorded at fair values as of December 31, 1995.
ENGINEERING AND PRODUCT DEVELOPMENT COST - Engineering and product development
costs are expensed as incurred.
STOCK SPLIT AND COMMON STOCK DIVIDEND - All share information set forth in these
financial statements has been retroactively adjusted to reflect a 1 for 31.89
reverse stock split of the Company's preferred and common stock declared by the
Company's Board of Directors on December 9, 1993 and a l for l.l765 reverse
stock split of the Company's preferred and common stock declared by the
Company's Board of Directors on February 16, 1994. On December 9, 1993, the
Company's Board of Directors also declared dividends of 1,038,962 shares of the
Company's common stock in satisfaction of the cumulative dividend requirements
on all outstanding shares of Series A and B Convertible Preferred Stock through
December 31, 1993, the date of issuance of the common stock dividend. Such
dividend has been included in outstanding shares of common stock at January 1,
1993.
F-8
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
HISTORICAL AND PRO FORMA (UNAUDITED) NET INCOME (LOSS) PER COMMON SHARE - Prior
to April 1994, the Company's historical capital structure was not indicative of
its prospective structure due to the conversion of all shares of convertible
preferred stock into common shares concurrent with the closing of the Company's
initial public offering in April 1994. Accordingly, historical net loss per
common share was not considered meaningful and was not presented for 1994 and
1993. Earning per share calculations presented in the financial statements are
computed on a pro forma basis for 1993 and 1994 and on a historical basis for
1995.
The calculation of the shares used in computing pro forma net income per share
for 1994 and 1993 includes the effect of the conversion of all shares of Series
A and B Convertible Preferred Stock into 1,774,808 shares of Common Stock in
connection with the Company's initial public offering as if they were converted
into common shares on January 1, 1993, and accordingly, net income used in
computing pro forma net loss per share has not been reduced by historical
preferred dividend requirements of $813,000 and $2,672,000 in 1994 and 1993,
respectively.
Computations of net loss per common share, on a proforma and historical basis,
are based on the weighted average number of common shares and common stock
equivalents outstanding. Common stock equivalents related to stock options and
warrants are determined using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 83, all common shares issued and stock options granted within one
year prior to the Company's initial public offering at prices below the initial
public offering price have been included in the calculation of the shares used
in computing pro forma net income (loss) per common share as if they were
outstanding for the period presented (using the treasury stock method). Stock
options and warrants are not included in the computations of pro forma and
historical net loss per common share as they would be anti-dilative. The common
stock dividends declared on December 9, 1993 which were issued on December 31,
1993 have been included in pro forma net income (loss) per share as if they
were outstanding for the entire period presented.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, including the
inventory obsolescence provision, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
to the current year presentation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial
Accounting Standards Board issued SFAS No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-Lived Assets to be Disposed Of". Under SFAS 121
the Company would assess the recoverability of certain long-term assets using a
projected gross cash flow analysis and record an impairment if such projected
gross cash flows were no longer estimated to be sufficient to recover such
assets. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. The Company has not adopted the new
pronouncement, however, its impact is not expected to be material to the
financial statements at December 31, 1995.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation." Under SFAS No. 123, companies have
the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans as prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." SFAS No. 123 is effective for financial statements for fiscal years
beginning after December 15, 1995. The Company has not made a determination as
to whether it will adopt the new fair value accounting rules. The Company has
not assessed the impact on net income and earnings per share of adopting the new
fair value accounting results.
NOTE 2 - OPERATING RESULTS, CAPITAL RESOURCES AND GOING CONCERN
During 1995, the Company incurred a net loss of approximately $1.4 million as a
result of a variety of factors, including the impact on the Company's Singapore
operations of fluctuations in foreign currency exchange rates, the write-down of
certain assets associated with one of the Company's subsidiaries, continued
operating losses at the Company's MPA subsidiary, costs associated with
establishing reserves for certain uncollectible receivables and the costs
associated with certain litigation. As of December 31, 1995, the Company had a
working capital deficiency of $4.9 million, which included $9.2 million of line
of credit borrowings that are due on demand. The Company has also embarked on a
significant business development effort involving the establishment of a
production facility in Singapore to produce product using certain licensed
technology (see Note 4 - International Business Machines Corporation). As of
December 31, 1995, expenditures associated with this business development effort
have totalled approximately $11.2 million.
F-9
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Certain other factors, including, but not limited to, the termination provisions
and production milestones specified in the technology license referred to above,
the termination provisions specified in the Company's agreements with The
Carborundum Company (see Note 4 - MPC (S) Pte. Ltd.), and the cross default
provisions specified in certain of the Company's borrowing arrangements (see
Note 8), also have the potential to have a significant effect on the Company's
business, financial condition, results of operations and cash flows. Any
material adverse developments associated with the above factors may affect the
Company to such an extent that it would be unable to continue as a going
concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. A number of factors, including the
Company's history of significant losses, the debt service costs associated with
the Company's high level of existing indebtedness and the significant business
development effort mentioned above raise substantial doubts about the Company's
ability to continue as a going concern. Although the Company anticipates that
the funding provided by the consummation of the Transpac Financing (see Note 17)
will be sufficient to fund its existing operations throughout 1996, the Company
anticipates that significant amounts (several million dollars in 1996 and tens
of millions of dollars through 1997) of additional debt and/or equity financing
beyond the funds raised through the Transpac Financing will be required to fund
the significant expenditures associated with the Company's business development
effort. The Company anticipates that it will seek additional financing through
subsequent sales of debt or equity securities or through bank or lessor
financing alternatives, if available, to finance the significant expenditures
associated with the Company's business development effort, including equipping
of the production facility in Singapore. Any significant increase in planned
capital expenditures or other costs or any decrease in anticipated sources of
financing could cause the Company to restrict its business development effort.
The Company currently has no binding commitments to provide the required
financing beyond the funding provided by the Transpac Financing and certain
other financing discussed in Note 17. There can be no assurances that any
additional financing will be available to the Company on acceptable terms, or at
all, when required by the Company. If adequate funds are not available, the
Company will be unable to execute its business development effort and may be
unable to continue as a going concern. Furthermore, as mentioned above, the
Company has $9.2 million of line of credit borrowings that are due on demand.
As the Company does not possess sufficient cash resources to repay these
obligations, the Company would be unable to repay these loans in the event such
demand was made by the Company's creditors.
F-10
<PAGE>
MICROELECTRONIC PACKAGING, INC,
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
December 31, 1995 1994
- - - -------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable consist of:
Trade receivables $7,014,000 $7,593,000
Allowance for doubtful accounts (199,000) (136,000)
- - - -------------------------------------------------------------------------
$6,815,000 $7,457,000
=========================================================================
Inventories, net of obsolescence reserve
consist of:
Raw materials $3,304,000 $2,164,000
Work-in-progress 1,641,000 1,416,000
Finished goods 2,213,000 1,429,000
- - - -------------------------------------------------------------------------
$7,158,000 $5,009,000
=========================================================================
Other current assets consist of:
Production supplies $1,538,000 $1,420,000
Other receivables 1,434,000 426,000
Prepaid expenses and other 687,000 577,000
- - - -------------------------------------------------------------------------
$3,659,000 $2,423,000
=========================================================================
Property, plant and equipment consist of:
Machinery and equipment $25,355,000 $14,096,000
Leasehold improvements 1,780,000 1,969,000
Building 1,782,000 1,815,000
Furniture and fixtures 285,000 309,000
- - - -------------------------------------------------------------------------
29,202,000 18,189,000
Accumulated depreciation (12,259,000) (11,032,000)
- - - -------------------------------------------------------------------------
$16,943,000 $7,157,000
=========================================================================
Other non-current assets consist of:
Prepaid royalty $2,000,000 $2,000,000
Deferred facility start-up costs 1,920,000 248,000
Customer base, net of accumulated
amortization of $279,000 and $171,000 477,000 585,000
Deposits and other 532,000 1,410,000
- - - -------------------------------------------------------------------------
$4,929,000 $4,243,000
=========================================================================
Accrued liabilities consist of:
Accrued employee compensation $1,967,000 $1,153,000
Accrued royalty obligation --- 1,000,000
Other 2,571,000 779,000
- - - -------------------------------------------------------------------------
$4,538,000 $2,932,000
</TABLE>
F-11
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SIGNIFICANT AGREEMENTS
SAMSUNG CORNING - In 1987, the Company entered into several agreements with
Samsung Corning Co., Ltd., ("SSC") including a licensing arrangement under which
SSC agreed to pay royalties to the Company based on sales of product
incorporating the licensed technology. SSC's obligation to pay royalties to the
Company terminated in the first quarter of 1994. Royalty revenues paid by SSC
to the Company under this licensing arrangement were zero, $153,000 and $114,000
in 1995, 1994 and 1993, respectively.
In December 1994, the Company's MPS subsidiary entered into an agreement to
acquire certain production equipment, spare parts and production supplies from
SSC. In connection with the consummation of this transaction, MPS paid to SSC
in installments throughout 1995 a purchase price consideration totalling
$5,746,000. MPS paid an additional $434,000 in ancillary costs to certain third
parties. The funding for the foregoing transaction was obtained via a series of
term loans from certain of the Company's customers (see Note 8).
MPC (S) PTE. LTD. - In January 1993, the Company formed a wholly-owned Singapore
subsidiary (MPC) to manufacture microelectronic packaging for the Carborundum
Company ("Carborundum"), a producer of products incorporating Aluminum Nitride
("AIN") and other thermal management materials. In connection with the
formation of MPC, MPC entered into agreements to purchase certain raw materials
from Carborundum and agreed to sell a predetermined number of parts per year to
Carborundum at an agreed-upon price which will include the cost of the parts
sold plus a defined profit margin. Pursuant to the agreements, Carborundum will
share (but will continue to own) with MPC certain proprietary technical
knowledge related to the manufacture of AIN packaging. Carborundum was also
issued an option, expiring December 31, 1996, to purchase up to 75% (or up to
100%, expiring December 31, 1996, 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; provided that such option to purchase
up to 100% of the equity capitalization of MPC shall continue in effect for the
maximum period of time permitted by applicable law if Carborundum timely
exercises its 75% option, in full or in part) of the equity capitalization of
MPC for an agreed-upon price, as defined in the agreements. The manufacturing
and technology agreements between MPC and Carborundum expire on December 31,
1996, if not renewed by the parties, and commencing January 1, 1997, Carborundum
will have the right to unilaterally terminate the above agreements.
INNOVENTURE AGREEMENT - In July 1993, the Company entered into an agreement with
Innoventure (S) Pte. Ltd., a Singapore company ("Innoventure") whereby
Innoventure agreed to establish a manufacturing facility in Indonesia in order
to manufacture certain pressed ceramic packages on a sub-contract basis for
purchase solely by MPI. Pursuant to the agreement, Innoventure entered into a
commitment to finance the construction and operations of the facility, while MPI
agreed to grant to Innoventure a non-exclusive technology license, agreed to
lease certain production equipment to Innoventure, and committed to purchase the
entire output of the facility subject to certain terms and conditions that are
determined on an annual basis. The volume of MPI's future purchases from
Innoventure will also be determined on an ongoing basis by MPI based upon its
estimated sales requirements of pressed ceramic products. Partial processing of
pressed ceramic products commenced at the Innoventure facility in the second
quarter of 1995. Under the agreement, Innoventure will be entitled to the first
$4.5 million of profits to be generated by the manufacturing facility within
five years after project start-up. Thereafter, any profits are to be shared
equally by Innoventure and MPI. In addition, the agreement calls for the
Company to enter into a lease agreement covering the lease of certain
manufacturing equipment to Innoventure. The parties have yet to finalize the
terms of this leasing arrangement. In the interim, the Company moved certain of
its production equipment from its Singapore facility and certain of the
equipment purchased from SSC to the Innoventure facility. As of December 31,
1995, the net book value of such equipment was $2,849,000.
The Company purchases certain raw materials, equipment and production supplies
on behalf of Innoventure. As of December 31, 1995 Innoventure owed the Company
$1,434,000 related to the supply of such items. Such amount has been included
in other current assets in the consolidated balance sheet.
In December 1993, Innoventure paid the Company $500,000, representing the non-
refundable up-front license fee stipulated by the agreement. This license fee,
net of certain related costs, was deferred and is being recognized over a five
year period corresponding to the expected initial term of an underlying
subcontract manufacturing agreement.
INTERNATIONAL BUSINESS MACHINES CORPORATION - In August 1994, the Company
entered into a technology transfer and licensing agreement (the "IBM Agreement")
with International Business Machines Corporation ("IBM") pursuant to which the
Company was granted a license to specific technology developed by IBM for the
manufacture of multilayer ceramic products. Under the terms of the IBM
Agreement, the Company and its wholly-owned subsidiary, MPM, acquired a
nonexclusive, nontransferable right to use the licensed technology to
manufacture and sell certain specified products on a
F-12
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
worldwide basis. In exchange for the license, the Company paid an up-front non-
refundable royalty of $2,000,000, and is obligated to pay additional royalties
based on sales of products incorporating the licensed technology during the term
of the IBM Agreement, which shall remain in effect for a period of ten years
from the date of execution and thereafter from year to year unless terminated
by either party. The technology agreement also requires the Company to reach
certain specified production levels at specified dates. In the event the
Company fails to achieve these specified milestones, IBM has the right to
terminate the technology agreement. Commencing in August 1996, either party has
the right to terminate this agreement without cause upon six months prior
written notice.
In July 1995, the Company's Board of Directors had directed management to
undertake the sale of the Company's MPM subsidiary and certain other related
assets. In connection with this decision, the Company recorded a write down of
$1,000,000 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. At
that time, the Company had also classified the net assets to be sold from their
historic balance sheet classifications to separately identify them as assets
held for sale. In January 1996, the Company's Board of Directors elected to
continue the Company's development program associated with the IBM Technology.
In March 1996, as discussed in more detail at Note 17, the Company consummated a
transaction with outside investors which provided additional funds to continue
equipping the MPM production facility. Accordingly, the assets associated with
the MPM program are no longer classified as assets held for sale. The reserve
for exit costs established during the second quarter of 1995 was completely
utilized by the end of the year. The Company did not recognize any additional
exit costs beyond those recorded in the second quarter of 1995.
The IBM agreement also calls for IBM to rent certain production equipment to the
Company for the duration of the technology license. Minimum monthly rental
payments of approximately $19,000 commenced in September 1995. The agreement
provides for scheduled rental increases up to a maximum monthly rental of
approximately $80,000 in January 1997. In the event the technology license
agreement is terminated by either party, the rental arrangement terminates
automatically, and the production equipment must be returned to IBM.
Pursuant to an option agreement (the "IBM Option Agreement"), IBM was also
issued an option to purchase up to 51% of the capital stock of MPM, which option
is exercisable based upon certain events set forth in the IBM Option Agreement.
The term of the option, as well as the purchase price, are defined in the IBM
Option Agreement. The option was determined to have an immaterial value at the
time of issuance.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS - The
Company operates in one reportable business segment and primarily sells to a
limited number of semiconductor manufacturers and related suppliers which
results in concentrated credit risk with respect to the Company's accounts
receivable. The Company performs ongoing credit evaluations of its customers
but does not require collateral for credit purchases. The Company maintains
allowances for potential credit losses, and such losses have been within
management's expectations.
During 1995, four major customers (i.e. customers accounting for 10% or more of
total sales) accounted for 24%, 22%, 20% and 16% of the Company's total sales,
respectively. During 1994, four major customers accounted for 29%, 18%, 17% and
13% of the Company's total sales, respectively. During 1993, three major
customers accounted for 37%, 31% and 13% of the Company's total sales,
respectively. Amounts due from these customers comprised 75% and 81% of
accounts receivable at December 31, 1995 and 1994, respectively.
In March 1994, one of the Company's subsidiaries began purchasing a significant
portion of the components of its end product from its major customer.
The Company has a foreign exchange line of credit with the Development Bank of
Singapore ("DBS") under which it may enter into forward currency contracts of up
to S$30,000,000 (U.S. $21,216,000 at December 31, 1995) for contracts with a
maturity of up to twelve months. Advances under the line of credit are
guaranteed by MPI and secured by all the assets of MPS, including a second
mortgage on MPS's leasehold land and facility. Subject to bank financing and
consent, the Company enters into forward foreign currency contracts to
economically hedge foreign currency transactions on a continuing basis for
periods consistent with the underlying exposures, generally ranging from one-to-
nine months in duration. The Company does not engage in foreign currency
speculation; however, the Company's use of forward foreign currency contracts
does not qualify for hedge accounting treatment in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation". The
Company's objective in entering into forward contracts is to minimize on a
continuing basis the impact of foreign exchange rate movements on the Company's
operating results.
F-13
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994, the Company had approximately $7,681,000 and
$10,514,000, respectively, of forward foreign currency contracts outstanding,
denominated in Japanese yen and Singapore dollars. At contract maturity, the
Company makes net settlements of U.S. dollars for foreign currencies at forward
rates agreed to at the inception of the contracts. The Company's risk that
counterparties to these contracts may be unable to perform is minimized by the
Company's policy of limiting the counterparties to major financial institutions.
The Company has not experienced any losses as a result of counterparty default.
NOTE 6 - NOTES RECEIVABLE - During 1995 and 1994, the Company loaned an
aggregate of $880,000 to Contact International Corporation ("CIC"), a
manufacturer of etched lead frames, in the form of short-and long-term notes
receivable. The notes receivable are secured by certain assets of CIC and bear
interest at the prime rate plus 2%. During the fourth quarter of 1994, CIC
defaulted on the above notes by failing to make required principal and interest
payments.
In August 1995, CIC filed a voluntary petition for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code. At this time, CIC has yet to file a
plan of reorganization. Accordingly, the Company is not able to predict the
date and timing of repayment, if any, of the notes receivable. During the
fourth quarter of 1995, the Company established an allowance for the estimated
losses associated with these notes receivable.
NOTE 7 - LINE OF CREDIT FACILITIES AND SHORT-TERM BORROWINGS - At December 31,
1995 and 1994, MPS had borrowings of $6,045,000 (S$8,548,000) and $5,464,000
(S$7,990,000), respectively, under a $6,719,000 (S$9,500,000) borrowing
arrangement with DBS. Borrowings under this arrangement, which is comprised of
a working capital line of credit facility and an overdraft facility, are due on
demand and are secured by substantially all of the assets of MPS, excluding
assets securing senior debt instruments as discussed in Note 8. Borrowings
under this arrangement are guaranteed by MPI. Outstanding borrowings under the
line of credit facility bear interest at the bank's prime lending rate plus 1/2%
(6.5% and 6.75% at December 31, 1995 and 1994). Outstanding borrowings under the
bank overdraft facility bear interest at the bank's prime lending rate plus
3/4%, (6.75% and 7.0% at December 31, 1995 and 1994). This loan agreement
significantly restricts the ability of MPS to transfer funds to MPI in the form
of dividends, loans, or otherwise and all such transfers of funds to MPI
required prior approval from the bank.
At December 31, 1995 and 1994, MPC had borrowings of $3,000 (S$4,000) and
$203,000 (S$298,000), respectively, under a $354,000 (S$500,000) borrowing
arrangement with DBS. Borrowings under this arrangement, which is comprised of
a working capital line of credit and an overdraft facility, are due on demand
and are secured by all of the assets of MPC. Borrowings under this arrangement
are guaranteed by both MPI and MPS. Outstanding borrowings under the line of
credit facility bear interest at the bank's prime lending rate plus 1/2% (6.5%
and 6.75% at December 31, 1995 and 1994). Outstanding borrowings under the bank
overdraft facility bear interest at the bank's prime lending rate plus 3/4%
(6.75% and 7.0% at December 31, 1995 and 1994).
In February 1995, MPM activated 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 will bear interest at the bank's prime
lending rate plus 2.5% (8.5% at December 31, 1995) and cannot remain outstanding
for more than 30 days. The facility does permit rolling over of existing
outstanding balances. This credit facility will mature in May 1996 unless
converted into a term loan at the election of DBS upon the Company's
satisfaction of certain criteria. This facility automatically terminates in the
event of the termination of the Company's technology transfer agreement with
IBM. At December 31, 1995, MPM had outstanding borrowings under this
arrangement of $3,197,000. Borrowings under this arrangement are secured by
substantially all of the assets of MPM.
Certain of the above obligations are payable in Singapore dollars and have been
translated at the exchange rate at December 31, 1995. Accordingly, actual
settlement amounts of such obligations are subject to variances caused by
changes in foreign exchange rates.
At December 31, 1995, MPS, MPC and MPM comprised $6,981,000 of total
consolidated net assets. Transfer of these assets to MPI was restricted under
the credit facilities discussed above. These and other restrictions effectively
prohibit MPI from paying dividends to its shareholders.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earnings levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt. The MPM and MPC agreements also
contain restrictive provisions. As of December 31, 1995, each of MPS, MPM and
MPC were in violation of the financial covenants set forth in their respective
loan agreements with DBS. Such violations were waived by DBS as of such date.
F-14
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 8 LONG-TERM DEBT
December 31, 1995 1994
- - - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term debt consists of:
Term notes to, or guaranteed by, certain customers,
payable in various quarterly installments
commencing in the second quarter of 1996, plus
interest at rates ranging from 7.0% to 14.0%,
secured by various assets including certain MPS
production equipment, all of the domestic assets of
MPI, MPA and CTM and all of the outstanding common
stock of MPA, MPS and CTM, maturing at various
dates commencing in 1998. $10,000,000 $ ---
Mortgage notes - due in January 2000 and January 2005,
payable in monthly installments of S$25,000 (U.S.$18,000)
plus interest, with interest at variable rates (currently
7.5%), secured by MPS building and improvements,
guaranteed by MPI. 1,424,000 1,551,000
Non interest bearing obligations payable in various quarterly
installments over the five year period ending December 1998,
discounted using an interest rate of 7.7% 394,000 590,000
Term notes - maturing in October 1997, payable in monthly
installments of $13,000,including interest at 12.2%,
secured by various MPA and CTM production equipment,
guaranteed by MPI. 207,000 322,000
Capital lease obligations, consisting of various machinery and
equipment financing agreements, payable in monthly installments
of $36,000, including interest at 4% to 6% 864,000 674,000
- - - ---------------------------------------------------------------------------------------------------
12,889,000 3,137,000
Current portion of long-term debt (3,316,000) (907,000)
- - - ---------------------------------------------------------------------------------------------------
$ 9,573,000 $2,230,000
===================================================================================================
</TABLE>
Annual principal payments are $3,316,000, $5,718,000, $2,502,000, $700,000 and
$167,000 in 1996 through 2000, respectively. Payments due thereafter are
$486,000. Certain of the above obligations are payable in Singapore dollars and
have been translated at the exchange rate at December 31, 1995. Accordingly,
actual settlement amounts of such obligations are subject to variances caused by
changes in foreign exchange rates.
MPA and CTM are prohibited from paying dividends to MPI under the provisions of
a term note which has been guaranteed by one of the Company's significant
customers.
MPI has provided guarantees of repayment for certain of the above obligations
with outstanding principal balances totalling $9,131,000 as of December 31,
1995.
In connection with a 1993 acquisition, the Company entered into installment
insurance agreements with two of the selling shareholders. Under the terms of
the agreements, the Company is obligated to maintain life insurance policies on
behalf of these selling shareholders for a period of three years. The Company
is also obligated to make further payments either directly to the individuals or
in the form of quarterly insurance premium payments under certain annuity
insurance policies through 1998. The Company's net obligations under these
installment insurance agreements have been discounted to their net present value
using an effective interest rate of 7.7%
During 1995, the Company borrowed an aggregate of $10,000,000 under credit
facilities with certain of its significant customers - an aggregate of
$9,000,000 was borrowed under various term notes payable to these customers
while an additional $1,000,000 was borrowed under a term note payable to a bank
which was guaranteed by another customer. Two
F-15
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
of the above term notes (outstanding principal of $5,000,000 as of December 31,
1995) contain provisions which would result in the acceleration of repayment in
the event of a default by the Company under any other credit arrangement.
The mortgage notes discussed above also contain similar provisions which would
result in an acceleration of repayment in the event of a default by MPS under
any other credit facility.
NOTE 9 - COMMITMENTS AND CONTINGENCIES - Following is a schedule by year of
estimated future minimum lease payments under capital and operating lease
agreements.
<TABLE>
<CAPTION>
Year ended Capital Operating
December 31, leases leases
- - - --------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 392,000 $ 2,718,000
1997 250,000 2,998,000
1998 172,000 1,875,000
1999 172,000 1,094,000
2000 16,000 1,085,000
Thereafter --- 5,902,000
- - - --------------------------------------------------------------------------------
Total minimum lease payments 1,002,000 $15,672,000
===========
Amount representing interest 138,000
----------
Present value of net minimum lease payments 864,000
Current portion 339,000
----------
Long-term portion $ 525,000
==========
- - - -------------------------------------------------------------------------------
</TABLE>
A significant portion of the above lease commitments are payable in Singapore
dollars and have been translated at the exchange rate at December 31, 1995.
Accordingly, actual settlement amounts of such commitments are subject to
variances caused by changes in foreign currency exchange rates.
Certain machinery and equipment are subject to leases which are classified as
capital leases for financial reporting purposes. At December 31, 1995 and 1994
$l,l35,000 ($604,000, net) and $1,671,000 ($1,118,000, net) of such leased
equipment are included in property, plant and equipment. Amortization expense
related to assets under capital leases was $243,000, $313,000 and $200,000, in
1995, 1994 and 1993, respectively.
The Company is also committed under noncancelable operating agreements for the
lease of buildings, machinery and equipment. Rent expense in 1995, 1994 and
1993 was approximately $1,128,000, $1,151,000 and $928,000, respectively.
Certain of the Company's shareholders have been granted certain registration
rights; the costs of any such offering, exclusive of any underwriting discount,
would be borne by the Company.
The Company previously shipped quantities of hazardous waste to a Whittier,
California, hazardous waste treatment facility for recycling. The owner of that
facility allegedly failed to recycle or dispose of the various wastes shipped to
the site and has now filed for bankruptcy. The Company is one of more than four
thousand generators, including numerous Fortune 500 corporations, identified by
the State of California as having responsibility for cleanup at the site, and it
is not ranked as one of the generators that has shipped a significant amount of
hazardous waste. In May 1995, the United States Environmental Protection Agency
("EPA") issued written notice that it considers the Company to be a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("CERCLA"). The EPA determined that there may be an
imminent and substantial endangerment to the public health, welfare, and
environment because of a release and/or threat of a release of hazardous
substances from the site located in Whittier, California. The notice requires
the Company to take immediate actions to contain and prevent any further release
of hazardous substances at the site. In response to the EPA notice, the Company
and approximately 100 of the other named generators provided the necessary
funding to effect the removal and destruction of the hazardous wastes stored at
this site. In addition, the Company and such generators have provided the
necessary funding to test the soil and ground water at this site, which testing
is currently ongoing. Although the cost
F-16
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
incurred by the Company to date of removing and destroying the hazardous waste
stored at this facility was not significant, this effort does not address the
cleanup of potential soil and/or ground-water contamination present at this
site. There can be no assurance, therefore, that the costs and expenses
associated with this action will not increase in the future to a level that
would have material adverse effect upon the Company's operations. Based upon
the Company's investigation to date, the Company does not believe that this
matter, if resolved adversely to the Company, would have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
The Company has also previously shipped small quantities of hazardous waste for
recycling to a San Diego hazardous waste treatment facility operated by a third
party operator ("Operator"). The owner of the property and the State of
California have filed suits against the Operator and two of its officers and the
owner of the property has obtained a mandatory injunction to compel the removal
of hazardous waste on site. If the Operator does not comply, it is possible
that the property owner or a government agency could also sue or bring
enforcement proceedings against approximately 100 hazardous waste generators,
including the Company, that shipped such wastes to the facility to pay for the
removal and to participate in site cleanup if any contamination is discovered.
Based upon the Company's investigation to date, the Company does not believe
that this matter, if resolved adversely to the Company, would have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
In February 1995, the Company was sued in the United States District Court for
the Southern District of California in two separate class actions alleging
various federal securities laws violations by the Company and certain of its
officers and directors. These two lawsuits were subsequently combined into one
consolidated class action. In November 1995, the Company reached an agreement
to settle the consolidated class action lawsuit in exchange for $950,000. The
proposed settlement required the Company to contribute $525,000, with the
remainder paid by the Company's insurance carrier. The proposed settlement is
subject to approval by the U.S. District Court for the Southern District of
California. The Company's results of operations for 1995 contain provision for
the anticipated costs of settlement of such litigation.
The Company is involved in various other claims arising in the ordinary course
of business; none of these other claims, in the opinion of management, is
expected to have a material adverse impact on the financial position, cash flows
or overall trends in the results of operations of the Company.
As of December 31, 1995, the Company had capital expenditure purchase
commitments outstanding of approximately $2.4 million.
NOTE 10 - INCOME TAXES - The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109 on a prospective basis, effective January 1, 1993.
SFAS 109 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 the SFAS 109 asset and liability
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year(s) in which the
differences are expected to reverse. Upon implementation of SFAS 109 in 1993,
the Company recorded a cumulative effect of a change in accounting principle of
$346,000, which represented the future tax benefits expected to be realized upon
utilization of the Company's Singapore tax loss carryforwards. The benefit of
these loss carryforwards was realized during 1993.
Income (loss) before income taxes comprises the following:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $(1,640,000) $(1,428,000) $(1,156,000)
Singapore operations 254,000 (1,511,000) 1,010,000
- - - --------------------------------------------------------------------------------
Total $(1,386,000) $(2,939,000) $ (146,000)
================================================================================
</TABLE>
F-17
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ --- $ --- $ ---
State --- --- ---
Singapore --- --- ---
- - - ----------------------------------------------------------------------------
$ --- $ --- $ ---
============================================================================
Deferred:
Federal $ --- $ --- $ ---
State --- --- ---
Singapore --- --- 346,000
- - - ----------------------------------------------------------------------------
Provision for income taxes $ --- $ --- $346,000
============================================================================
</TABLE>
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory Federal income tax rate to income before income taxes
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - ---------------------------------------------------------------------------
<S> <C> <C> <C>
Amounts computed at Federal
statutory rate $(485,000) $(1,029,000) $(51,000)
Taxes below the Federal rate
on undistributed foreign
earnings 20,000 125,000 (81,000)
Amortization of non-deductible
intangible assets 43,000 38,000 21,000
Non-deductible expenses 184,000 --- ---
Losses for which no current
benefits are available 223,000 859,000 427,000
Other items 15,000 7,000 30,000
- - - ---------------------------------------------------------------------------
Provision for income taxes $ --- $ --- $346,000
===========================================================================
</TABLE>
The components of deferred income taxes:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
- - - ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,827,000 $4,466,000
Tax credit carryforwards 435,000 406,000
Accrued liabilities and reserves 1,004,000 281,000
Unrealized foreign exchange loss 185,000 232,000
Deferred income 230,000 179,000
Book and tax depreciation differences --- 113,000
- - - ---------------------------------------------------------------------------
5,681,000 5,677,000
Deferred tax liabilities:
Book and tax depreciation differences (87,000) (208,000)
- - - ---------------------------------------------------------------------------
5,594,000 5,469,000
Valuation allowance (5,594,000) (5,469,000)
- - - ---------------------------------------------------------------------------
Deferred taxes $ --- $ ---
===========================================================================
</TABLE>
F-18
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995 and 1994, a 100% valuation allowance has been provided on
the total deferred income tax assets as they are not more likely than not to be
realized.
The Company has not recorded provisions for any United States income taxes in
1995, 1994 and 1993. During 1995, taxable income at the Company's domestic
operations was offset by the utilization of net operating loss carryforwards.
In 1994 and 1993, the domestic operations generated operating losses for both
Federal and state income tax purposes. At December 31, 1995, the Company had
Federal net operating loss carryforwards of approximately $11,256,000 for tax
reporting purposes. The net operating loss carryforwards for tax purposes
expire between 1999 and 2010.
As of December 31, 1995, the Company also has approximately $407,000 and $28,000
in Federal and state research and development credit carryforwards,
respectively. These credits expire between 1999 to 2007. Additionally, the
Company has approximately $31,000 of investment tax credits which expire in
2000. The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
During 1995 and 1993, taxable income at the Company's Singapore operations was
offset by the utilization of net operating loss and capital allowance
carryforwards. During 1994, the Company's Singapore operations generated
operating losses for both financial reporting and income tax purposes. At
December 31, 1995, the Company had capital allowance carryforwards of
approximately $2,414,000. The Company would forfeit its ability to utilize
these tax loss carryforwards in the event of a significant change in its
ownership as defined by the laws of Singapore as they relate to income taxes.
NOTE 11 - SHAREHOLDERS' EQUITY - In April 1994, the Company received net
proceeds of approximately $7.1 million in connection with the consummation of
the Company's initial public offering ("IPO") of 1,600,000 shares of common
stock. The Company used approximately $833,000 of the IPO proceeds to retire
the principal and accrued interest outstanding under various credit facilities.
In addition, the Company used approximately $1.2 million of the net proceeds to
pay offering costs associated with the IPO.
Concurrent with the closing of the Company's IPO discussed above, all the
outstanding shares of Series A and B Convertible Preferred Stock were converted
into 1,774,808 shares of common stock.
On December 9, 1993, the Company's Board of Directors declared dividends of
1,038,962 shares of the Company's common stock, which shares were issued on
December 31, 1993. Such dividends were issued in satisfaction of the cumulative
dividend requirements on all outstanding shares of Series A and B Convertible
Preferred Stock through December 31, 1993. Such dividends have been included in
outstanding shares of Common Stock at January 1, 1993.
NOTE 12 - EMPLOYEE BENEFIT PLAN - The Company maintains a defined contribution
retirement savings plan which covers substantially all full-time U.S. employees.
Participants may contribute a percentage of their salaries subject to statutory
annual limitations. The Company matches a percentage of the employee
contributions as specified in the plan agreement. Contributions by the Company
totalled $54,000, $42,000 and $31,000 in 1995, 1994 and 1993, respectively.
NOTE 13 - STOCK OPTION/STOCK ISSUANCE PLAN AND STOCK PURCHASE WARRANTS
Stock Option/Stock Issuance Plan - The Company maintains a stock option/stock
issuance plan under which incentive stock options may be granted to employees of
the Company and nonqualified stock options may be granted to consultants and
non-employee directors of the Company. Under the terms of the plan, non-
transferrable options may be granted for terms of up to 10 years and are
generally exercisable at the rate of 33% per year, although vesting terms are
determined at the discretion of the Board of Directors. Options may generally
be granted with an exercise price not less than the fair market value of the
common stock shares at the date of grant. A total of 390,632 shares of common
stock have been reserved for issuance under the plan. The plan expires in
December 2000.
F-19
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity for each of the three year ended December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
Number of Exercise price
shares per share
- - - ---------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1993 210,502 $1.31 - $34.14
Granted 72,073 1.31 - 5.00
Canceled (47,835) 1.31 - 3.75
- - - ---------------------------------------------------------------------
Outstanding at December 31, 1993 234,740 1.31 - 34.14
Granted 198,244 5.00
Exercised (21) 1.31
Canceled (46,844) 1.31 - 5.63
- - - ---------------------------------------------------------------------
Outstanding at December 31, 1994 386,119 1.31 - 34.14
Granted 187,921 1.75 - 2.44
Canceled (23,356) 1.31 - 34.14
- - - ---------------------------------------------------------------------
Outstanding at December 31, 1995 550,684 $1.31 - $ 5.125
=====================================================================
Exercisable at December 31, 1995 255,279 $1.31 - $ 5.125
=====================================================================
</TABLE>
During 1995, certain of the option grants were issued contingent upon receiving
subsequent shareholder approval of an increase in the number of shares available
for issuance under the stock option plan. The Company has not accrued
compensation for the stock price increase in 1995 as the amount is considered to
be immaterial.
Stock Purchase Warrants - The Company issued 17,693 Common stock purchase
warrants at an exercise price of $5.63 per share in August 1993. These warrants
expire in August 1998. In connection with its IPO (see Note 11), the Company
issued 160,000 common stock purchase warrants to its underwriter at an exercise
price of $6.50. These warrants which were exercisable upon issuance expire in
April 1999. No stock purchase warrants have been exercised in any of the three
years ended December 31, 1995.
NOTE 14 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS - Cash paid for
interest during 1995, 1994 and 1993 totaled $1,034,000, $542,000 and $457,000,
respectively. Cash paid for income taxes during 1995, 1994 and 1993 totaled
$3,000, $4,000 and $9,000, respectively.
In June 1993, the Company purchased all of the common stock of CTM in an
acquisition accounted for by the purchase method of accounting. In connection
with this acquisition, the Company acquired net identifiable assets of $350,000
and intangible assets of $756,000 by entering into certain non-interest bearing
obligations with a net present value of approximately $1,061,000 (see Note 8).
The excess of the purchase price over the fair value of net identifiable assets
acquired represents the fair value of an acquired customer base ($756,000) which
is being amortized over seven years. The operating results of CTM have been
included in the Company's results of operations from the date of acquisition
(June 1, 1993). MPI's consolidated pro forma revenues, net loss and net loss
per common share for 1993 (assuming this acquisition had occurred on January 1,
1993) are $35,565,000, $182,000 and $0.06 (Pro forma results of operations do
not purport to be indicative of what could have occurred had the acquisition
been made as of January 1, 1993).
In February 1993, the Company acquired the remaining equity interest in Furnace
Technology (S) Pte. Ltd in exchange for $86,000, which approximated the net book
value of the interest acquired.
F-20
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States $ 15,181,000 $ 10,398,000 $ 4,819,000
Singapore 42,815,000 31,890,000 29,872,000
- - - --------------------------------------------------------------------------------
Net sales as reported in
the accompanying consolidated
statement of operations $ 57,996,000 $ 42,288,000 $34,691,000
================================================================================
Income (loss) from operations:
United States $ (1,513,000) $ (1,750,000) $(1,114,000)
Singapore 2,065,000 (388,000) 1,157,000
- - - --------------------------------------------------------------------------------
Income (loss) from operations
as reported in the accompanying
consolidated statement of
operations $ 552,000 $ (2,138,000) $ 43,000
================================================================================
December 31, 1995 1994
- - - --------------------------------------------------------------------------------
Identifiable assets:
United States $ 7,209,000 $ 8,655,000
Singapore and Indonesia $ 35,218,000 18,980,000
- - - --------------------------------------------------------------------------------
Total assets as reported in the
accompanying consolidated
balance sheet $ 42,427,000 $27,635,000
================================================================================
Identifiable liabilities:
United States $ 5,414,000 $ 4,044,000
Singapore 29,597,000 14,789,000
- - - --------------------------------------------------------------------------------
Total liabilities as reported
in the accompanying consolidated
balance sheet $ 35,011,000 $18,833,000
================================================================================
</TABLE>
NOTE 16 - RELATED PARTY TRANSACTIONS - In exchange for marketing advisory and
strategic planning services, the Company paid $80,000 and $120,000 in 1994 and
1993, respectively to an entity which is affiliated with one of the Company's
Board members.
NOTE 17 - SUBSEQUENT EVENTS - In March 1996, the Company and MPM consummated a
financing (the "Transpac Financing") with Transpac Capital Pte. Ltd. and various
investors ( collectively "Transpac") in which the Company issued 842,013 shares
of its Common Stock to Transpac for the aggregate purchase price of $2,000,000
and MPM issued a debenture (the "Debenture") to Transpac in the principal amount
of $9.0 million. The Debenture has a term of five years and bears interest at
the rate of 8.5% per annum. Accrued and unpaid interest is due and payable in
annual installments at the end of each year of the term of the Debenture. The
principal outstanding under the Debenture will be due and payable in full at the
end of the five year term, however, from and after April 23, 1997 and through
the term of the Debenture, the Debenture will be convertible at Transpac's
option into the number of shares of MPM Common Stock that is equivalent to up to
45% of MPM's outstanding capitalization at the time of conversion, or upon
receipt of shareholder approval, into the number of shares of MPI stock that
when combined with the shares discussed above, will not exceed 49% of the
Company's outstanding common stock at the time of any such conversion.
The Company's MPS subsidiary borrowed $1.0 million subsequent to December 31,
1995 under a credit facility bearing interest at 7%. MPS also entered into a
terms sheet with a bank lender for a $1.0 million credit facility bearing
interest at 7.5% (the Singapore interbank offered rate plus 1.5%).
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENTS SCHEDULES
The audit referred to in our report dated March 12, 1996, except for Note 2
paragraph 3 and Note 17 paragraph 1 which are as of April 4, 1996 relating to
the consolidated financial statements of Microelectronic Packaging, Inc., which
is contained in Item 8 of this Form 10-K included the audit of the 1995
consolidated financial statement schedules listed in the accompanying index.
These 1995 financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based upon our audits.
In our opinion, such 1995 consolidated financial statement schedules present
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statement schedules have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations, has a working capital deficiency as of
December 31, 1995, and has an accumulated deficiency as of December 31, 1995.
In addition the Company has embarked on a significant business development
effort which will require significant amounts of additional debt and/or equity
financing beyond the funds raised through the Transpac financing (Note 17).
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statement schedules do not
include any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Costa Mesa, California
March 12, 1996
F-22
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING, INC.
CONDENSED BALANCE SHEET
SCHEDULE 1
<TABLE>
<CAPTION>
December 31, 1995 1994
- - - ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 587,000 $ 28,000
Other current assets 256,000 182,000
- - - ---------------------------------------------------------------------------
Total current assets 843,000 210,000
Investments in and net advances to/(from)
subsidiaries 7,544,000 8,086,000
Prepaid royalty 2,000,000 2,000,000
Other non-current assets 109,000 1,027,000
- - - ---------------------------------------------------------------------------
$ 10,496,000 $ 11,323,000
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 614,000 $ 1,314,000
Deferred revenue 572,000 617,000
Current portion of long-term debt 372,000 203,000
- - - ---------------------------------------------------------------------------
Total current liabilities 1,558,000 2,134,000
- - - ---------------------------------------------------------------------------
Long-term debt 1,522,000 387,000
Commitments and contingent liabilities (Note 6)
Shareholders' equity:
Common stock 34,326,000 34,326,000
Accumulated deficit (26,910,000) (25,524,000)
- - - ---------------------------------------------------------------------------
7,416,000 8,802,000
- - - ---------------------------------------------------------------------------
$ 10,496,000 $ 11,323,000
===========================================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-23
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING, INC.
CONDENSED STATEMENT OF OPERATIONS
SCHEDULE 1
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ --- $ 1,173,000 $ ---
Management fees from subsidiary 720,000 720,000 360,000
- - - ----------------------------------------------------------------------------
Total revenues 720,000 1,893,000 360,000
Expenses:
Cost of goods sold --- 1,070,000 ---
Selling, general and administrative 3,752,000 1,874,000 546,000
- - - ----------------------------------------------------------------------------
3,752,000 2,944,000 546,000
Other income (expense);
Equity in earnings (losses) of
unconsolidated subsidiaries 1,351,000 (2,201,000) (26,000)
Royalty revenue --- 153,000 114,000
Other, net 295,000 160,000 (48,000)
- - - ----------------------------------------------------------------------------
1,646,000 (1,888,000) 40,000
- - - ----------------------------------------------------------------------------
Net loss $ (1,386,000) $(2,939,000) $(146,000)
============================================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-24
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING, INC.
CONDENSED STATEMENT OF CASH FLOWS
SCHEDULE I
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided (used) by operating activities $(2,602,000) $(1,167,000) $204,000
Cash flows from investing activities:
Acquisition of fixed assets (5,000) (11,000) ---
Payments for acquisition, net of cash received --- --- (64,000)
Advances under notes receivable (30,000) (940,000) ---
- - - ---------------------------------------------------------------------------------------------
Net cash used by investing activities (35,000) (951,000) (64,000)
- - - ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Intercompany advances (repayments) 1,891,000 (3,349,000) (163,000)
Borrowing (repayments) under convertible
promissory notes to shareholders --- (462,000) 462,000
Borrowing under long-term debt 1,500,000 --- ---
Repayments under long-term debt (195,000) (172,000) (317,000)
Issuance of common stock --- 5,906,000 ---
- - - ---------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,196,000 1,923,000 (18,000)
- - - ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash 559,000 (195,000) 122,000
Cash at beginning of year 28,000 223,000 101,000
- - - ---------------------------------------------------------------------------------------------
Cash at end of year $ 587,000 $ 28,000 $ 223,000
=============================================================================================
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
F-25
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OF MICROELECTRONIC PACAKGING, INC.
SCHEDULE 1
NOTE 1 - STATEMENT OF ACCOUNTING POLICY
Statement of accounting policy - The accompanying condensed financial statements
have been prepared by Microelectronic Packaging, Inc. ("MPI") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations. It is therefore
suggested that these condensed financial statements be read in conjunction with
the Consolidated Financial Statements and notes thereto.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
NOTE 2 - CAPITAL RESOURCES - MPI has limited revenues (comprised primarily of
management fees received from MPS, as discussed below) to fund its operations
and must rely on cash on hand, cash generated by its subsidiaries, borrowings,
and certain proprietary technology in order to fund future operations.
The various loan agreements of MPI's individual subsidiaries significantly
restrict their ability to transfer cash to MPI in the form of dividends, loans,
or otherwise. During 1995, 1994 and 1993, MPI received management fees from MPS
in the amount of $720,000, $720,000 and $360,000, respectively (such amounts are
included as revenues in the accompanying Condensed Financial Statements, but
have been eliminated in the Consolidated Financial Statements).
Absent outside debt or equity financing and excluding significant expenditures
required for certain of MPI's major project and professional fees, management
currently anticipates that cash on hand and anticipated cash flows from
operations will be adequate to fund its operations in the ordinary course of
business through 1996. Without additional financing, MPI may be unable to
continue as a going concern (see Note 2 to the Consolidated Financial
Statements).
NOTE 3 - INVESTMENTS - MPI accounts for its investments in majority-owned
subsidiaries using the equity method. Under the equity method, investment are
carried at cost adjusted for MPI's proportionate share of the subsidiaries'
undistributed earnings of losses.
Investment in and net advances to/(from) subsidiaries comprise the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
- - - --------------------------------------------------------------------------
<S> <C> <C>
MPS common ownership interest, net advances $7,207,000 $3,465,000
MPA common ownership interest, net advances (696,000) 2,332,000
CTM common ownership interest, net advances 1,951,000 1,527,000
MPC common ownership interest, net advances 35,000 741,000
MPM common ownership interest, net advances (953,000) 21,000
- - - --------------------------------------------------------------------------
$7,544,000 $8,086,000
==========================================================================
</TABLE>
F-26
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OF MICROELECTRONIC PACKAGING, INC.
SCHEDULE 1
NOTE 4 - NOTES RECEIVABLE - See Note 6 to Notes to Consolidated Financial
Statements.
NOTE 5- PREPAID ROYALTIES - Under the terms of its technology transfer and
licensing agreement with International Business Machines Corporation ("IBM")
(see Note 4 to the Consolidated Financial Statements), the Company paid an up-
front minimum royalty of $2,000,000. This up-front royalty has been included in
other non-current assets, and will be charged to earnings in accordance with the
terms of the royalty provisions of the IBM agreement. The Company assesses the
recoverability of its prepaid royalties and its intangible assets using a
projected gross cash flow analysis and would record an impairment of the assets
if the projected gross cash flows are no longer estimated to be sufficient to
recover such assets.
NOTE 6 - COMMITMENTS - Commitments and contingent liabilities are described in
Note 9 to the Consolidated Financial Statements.
NOTE 7 - LONG-TERM DEBT
December 31, 1995 1994
- - - --------------------------------------------------------------------------------
Long-term debt consists of:
Term note payable in quarterly installments of $250,000
commencing in September 1996, plus interest at 14%,
secured by various assets of MPA and CTM $1,500,000 $ ---
Non interest bearing obligations incurred in the CTM
acquisition, payable in various quarterly install-
ments over the five year period ending December 1998,
which have been discounted to their net present value
using an effective interest rate of 7.7% 394,000 590,000
- - - --------------------------------------------------------------------------------
1,894,000 590,000
Current portion of long-term debt (372,000) (203,000)
- - - --------------------------------------------------------------------------------
$1,522,000 $ 387,000
================================================================================
Annual principal repayments are $373,000, $1,127,000, and $394,000 in 1996
through 1998, respectively. In addition, MPI has guaranteed payment of certain
obligations of certain of its subsidiaries - see Notes 5, 7 and 8 to Notes to
Consolidated Financial Statements.
NOTE 8 - SUBSEQUENT EVENT - See Note 17 to Notes to Consolidated Financial
Statements.
F-27
<PAGE>
MICROELECTRONIC PACKAGING, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
SCHEDULE II
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged
beginning costs and to other Balance at
of period expenses accounts Deductions end of period
- - - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993 $275,000 $(164,000) $ 111,000
Year ended December 31, 1994 $111,000 $ 25,000 $ 136,000
Year ended December 31, 1995 $136,000 $ 77,000 $ (14,000) $ 199,000
Inventory valuation reserves:
Year ended December 31, 1993 $181,000 $ 98,000 $219,000(1) $(116,000) $ 382,000
Year ended December 31, 1994 $382,000 $310,000 $ (29,000) $ 663,000
Year ended December 31, 1995 $663,000 $460,000 $ (93,000) $1,030,000
Other valuation reserves (2):
Year ended December 31, 1994 $157,000 $ 157,000
Year ended December 31, 1995 $157,000 $916,000 $ (90,000) $ 983,000
</TABLE>
(1) Added in connection with the 1993 CTM purchase (see note 14 to Consolidated
Financial Statements).
(2) Pertains to other receivables.
F-28
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash
$11,807,000 $ 2,923,000
Accounts receivable, net 9,250,000 6,815,000
Inventories 7,093,000 7,158,000
Other current assets 4,363,000 3,659,000
-------------- ------------
Total current assets 32,513,000 20,555,000
Property, plant and equipment, net 17,797,000 16,943,000
Deferred facility start-up costs 3,110,000 1,920,000
Other non-current assets 2,872,000 3,009,000
-------------- ------------
$56,292,000 $42,427,000
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings, due on demand $ 9,981,000 $ 9,245,000
Accounts payable 8,789,000 7,767,000
Accrued liabilities 4,292,000 4,538,000
Deferred revenue 621,000 572,000
Current portion of long-term debt 4,826,000 3,316,000
-------------- ------------
Total current liabilities 28,509,000 25,438,000
Long-term debt 17,882,000 9,573,000
Commitments and contingencies (Note 6)
Total shareholders' equity 9,901,000 7,416,000
-------------- ------------
$56,292,000 $42,427,000
============== ============
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1996 1995
----------- -----------
<S> <C> <C>
Net Sales:
Product sales $17,217,000 $12,696,000
Other sales 234,000
----------- -----------
17,451,000 12,696,000
Cost of goods sold:
Product sales 14,239,000 11,148,000
Other sales 215,000
----------- -----------
14,454,000 11,148,000
----------- -----------
Gross profit 2,997,000 1,548,000
Selling, general and administrative 1,444,000 1,472,000
Engineering and product development 613,000 481,000
----------- -----------
Income (loss) from operations 940,000 (405,000)
Other income (expense):
Foreign exchange gain (loss) 130,000 (369,000)
Interest expense (458,000) (177,000)
Other income, net 53,000 391,000
----------- -----------
Income (loss) before income taxes 665,000 (560,000)
Income taxes 100,000 -
----------- -----------
Net income (loss) $ 565,000 $ (560,000)
=========== ===========
Net income (loss) per common share $ 0.12 $ (0.12)
=========== ===========
Weighted average shares used
in per share calculation 4,903,000 4,660,000
=========== ===========
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 565,000 $ (560,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 671,000 629,000
Unrealized (gain) loss on borrowings denominated
in foreign currrency (9,000) 250,000
Realized (gain) loss on forward foreign currency contracts 557,000 (200,000)
Changes in assets and liabilities:
Accounts receivable (2,435,000) (894,000)
Inventories 65,000 32,000
Other current assets (705,000) (317,000)
Deferred facility start-up costs and other non-current assets (1,088,000) (396,000)
Accounts payable, accrued liabilities and deferred revenue 827,000 2,526,000
------------- -------------
Net cash (used) provided by operating activitites (1,552,000) 1,070,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (1,491,000) (2,043,000)
Realized gain (loss) from forward foreign currency contracts (557,000) 200,000
------------- -------------
Net cash used in investing activities (2,048,000) (1,843,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facilities 10,853,000 9,618,000
Repayments under line of credit facilities (10,110,000) (7,633,000)
Borrowings under long-term debt 10,000,000
Principal payments on long-term debt (179,000) (267,000)
Issuance of common stock 1,920,000
------------- -------------
Net cash provided by financing activities 12,484,000 1,718,000
------------- -------------
NET INCREASE IN CASH 8,884,000 945,000
CASH AT BEGINNING OF PERIOD 2,923,000 1,346,000
------------- -------------
CASH AT END OF PERIOD $11,807,000 $ 2,291,000
============= =============
</TABLE>
5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Accumulated
Shares Amount Deficit Total
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 4,660,093 $ 34,326,000 $ (26,910,000) $ 7,416,000
Issuance of common stock 842,058 1,911,000 1,911,000
Stock options exercised 6,662 9,000 9,000
Net income 565,000 565,000
------------ ------------ -------------- --------------
Balance at March 31, 1996 5,508,813 $ 36,246,000 $ (26,345,000) $ 9,901,000
============ ============ ============== ==============
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related
notes for the three month periods ended March 31, 1996 and 1995 are unaudited
but include all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of
financial position and results of operations of the Company for the interim
periods. The results of operations for the three month period ended March
31, 1996 are not necessarily indicative of the operating results to be
expected for the full fiscal year. The information included in this report
should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto and the other information, including
risk factors, set forth for the year ended December 31, 1995 in the Company's
Annual Report on Form 10-K. Readers of this Quarterly Report on Form 10-Q
are strongly encouraged to review the Company's Annual Report on Form 10-K.
Copies are available from the Chief Executive Officer of the Company at 9350
Trade Place, San Diego, California 92126.
2. INVENTORIES
Inventories, net of obsolescence reserves, consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $3,717,000 $3,304,000
Work in progress 1,863,000 1,641,000
Finished goods 1,513,000 2,213,000
---------- ----------
$7,093,000 $7,158,000
========== ==========
</TABLE>
3. NET INCOME (LOSS) PER SHARE
The computation of primary net income (loss) per share is based upon the
weighted average number of outstanding common shares during the period, plus,
when their effect is dilutive, common stock equivalents from the exercise of
stock options and warrants (using the treasury stock method). Where
dilutive, the computation of fully diluted earnings per share would include
the effects of the issuance of a minority interest in the Company's MPM
subsidiary (the "MPM Option") upon the conversion of the convertible
debenture issued by MPM in March 1996 (see Note 4). Fully diluted earnings
per share has not been presented as the effect of this conversion would be
antidilutive.
In the event the shareholders of MPI approve the convertibility of the
Transpac Debenture (see Note 4) into shares of MPI common stock (the "MPI
Option"), the computation of fully diluted earnings per share will include
the effects of the more dilutive conversion of either the MPI Option or the
MPM Option.
4. THE TRANSPAC FINANCING
In March 1996, the Company and MPM consummated a financing (the "Transpac
Financing") with Transpac Capital Pte. Ltd. and certain other affiliated
investors (collectively, "Transpac") in which the Company issued 842,013
shares of its Common Stock to Transpac for the aggregate purchase price of
$2,000,000 and MPM issued a debenture (the "Debenture") to Transpac in the
principal amount of $9.0 million. The Debenture, repayment of which has been
guaranteed by MPI, has a term of five years and bears interest at the rate of
8.5% per annum. Accrued and unpaid interest is
7
<PAGE>
Notes to Condensed Consolidated Financial Statements
- - - --------------------------------------------------------------------------------
due and payable in annual installments at the end of each year of the term of
the Debenture. The principal outstanding under the Debenture will be due and
payable in full at the end of the five-year term; however, from and after
April 23, 1997, and through the term of the Debenture, the Debenture will be
convertible at Transpac's option into the number of shares of MPM capital
stock that is equivalent to up to 45% of MPM's outstanding capitalization at
the time of conversion, or upon receipt of MPI shareholder approval, into the
number of shares of MPI capital stock that, when combined with the shares
discussed above, will not exceed 49% of the Company's outstanding
capitalization at the time of any such conversion.
5. OTHER FINANCING TRANSACTIONS
During the first quarter of 1996, the Company's MPS subsidiary borrowed $1.0
million under a credit facility bearing interest at 7%. MPS also entered
into a term sheet with the Development Bank of Singapore ("DBS") for a $1.0
million credit facility bearing interest at 7.5% (the Singapore interbank
offered rate plus 1.5%).
6. COMMITMENTS AND CONTINGENCIES
The Company previously shipped quantities of hazardous waste to a Whittier,
California, hazardous waste treatment facility for recycling. The owner of
that facility allegedly failed to recycle or dispose of the various wastes
shipped to the site and has now filed for bankruptcy. The Company is one of
more than four thousand generators, including numerous Fortune 500
corporations, identified by the State of California as having responsibility
for cleanup at the site, and it is not ranked as one of the generators that
has shipped a significant amount of hazardous waste. On May 15, 1995, the
United States Environmental Protection Agency ("EPA") issued written notice
that it considers the Company to be a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"). EPA has determined that there may be an imminent and substantial
endangerment to the public health, welfare, and environment because of a
release and/or threat of a release of hazardous substances from the site
located in Whittier, California. The notice requires the Company to take
immediate actions to contain and prevent any further release of hazardous
substances at the site. In response to the EPA notice, the Company and
approximately 100 of the other named generators provided the necessary
funding to effect the removal and destruction of the hazardous wastes stored
at this site. In addition, the Company and such generators have provided the
necessary funding to test the soil and ground-water at this site, which
testing is currently ongoing. Although the cost incurred by the Company to
date of removing and destroying the hazardous waste stored at this facility
was not significant, this effort does not address the cleanup of any
potential soil and/or ground-water contamination present at this site. There
can be no assurance, therefore, that the costs and expenses associated with
this action will not increase in the future to a level that would have a
material adverse effect upon the Company's business, financial condition,
results of operations or cash flows. Based upon the Company's investigation
to date, the Company does not believe that this matter, if resolved adversely
to the Company, would have a material adverse effect upon the Company's
financial position, results of operations or cash flows.
The Company has also previously shipped small quantities of hazardous waste
for recycling to a San Diego hazardous waste treatment facility operated by a
third party operator ("Operator"). The owner of the property and the State of
California have filed suits against the Operator and two of its officers and
the owner of the property has obtained a mandatory injunction to compel the
removal of hazardous waste on site. If the Operator does not comply, it is
possible that the property owner or a government agency could also sue or
bring enforcement proceedings against approximately 100 hazardous waste
generators, including the Company, that shipped such wastes to the facility
to pay for the removal and to participate in site cleanup if any
contamination is discovered. Based upon the Company's limited investigation
to date, the Company does not believe that this matter, if resolved
8
<PAGE>
Notes to Condensed Consolidated Financial Statements
- - - --------------------------------------------------------------------------------
adversely to the Company, would have a material adverse effect upon the
Company's business, financial condition, results of operations or cash flows.
In November 1995, the Company reached an agreement to settle a consolidated
class action lawsuit in exchange for $950,000. The proposed settlement
required the Company to contribute $525,000, with the remainder paid by the
Company's insurance carrier. The proposed settlement is subject to final
approval by the U.S. District Court for the Southern District of California.
The Company provided for the anticipated costs of settlement of such
litigation during 1995.
The Company is involved in various claims arising in the ordinary course of
business; none of these claims, in the opinion of management, is expected to
have a material adverse impact on the financial condition, cash flows or
overall trends in the results of operations of the Company. The ultimate
resolution of certain of these claims, however, could have a potentially
material adverse effect on the Company's results of operations in the
individual period in which the claim is resolved.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES. Net sales for the first quarter of 1996 were $17.5 million,
representing an increase of $4,755,000, or 37.5%, over the first quarter of
1995. Such increase in sales is primarily attributable to increases in revenues
from sales of pressed ceramics products at the Company's Microelectronic
Packaging (S) Pte. Ltd. ("MPS") subsidiary, and a $3.2 million increase in
revenues from the sales of MCM products at the Company's CTM Electronics, Inc.
("CTM") subsidiary. The increase in sales of pressed ceramic products reflects
both an increase in units sold and, to a lesser extent, a general price increase
implemented by MPS in the second quarter of 1995. The increase in revenue from
the sale of MCMs was due primarily to an increase in units sold. Net sales for
the first quarter of 1996 also reflects the inclusion of revenues derived under
an equipment and technology transfer agreement with a third party. Such revenues
have been included in other sales in the condensed Consolidated Statement of
Operations.
COST OF GOODS SOLD. Cost of goods sold was $14.5 million in the first quarter
of 1996, representing an increase of $3,306,000, or 29.7%, over the comparable
period of 1995. Such increase was primarily attributable to increased sales
during this period. Cost of goods sold as a percentage of net sales was 82.8% in
the first quarter of 1996, compared with 87.8% for the corresponding period of
1995. During 1996, gross margin from sales in percentage terms has increased
over the comparable period of 1995 as the impact of improved pricing at MPS and
improved overhead absorption at MPS and CTM due to improved shipping volumes
have offset increases in the costs of certain of the Company's raw materials and
increases in certain fixed costs at MPS.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $1,444,000 in the first quarter of 1996, representing a decrease
of $28,000, or 1.9%, from the comparable period of 1995. Such decrease primarily
reflects reduced legal and other professional expenses, which more than
compensated for the increase in sales commissions at CTM as a result of the
increase in sales of MCM products. The Company currently anticipates that
selling, general and administrative expenses may increase in absolute dollars
during 1996.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering and product development
expenses were $613,000 in the first quarter of 1996, representing an increase of
$132,000 or 27.4%, over the comparable period of 1995. Such increase reflects
primarily an increase in personnel costs and expenditures on materials used in
product development. The Company currently anticipates that engineering and
product development costs will increase in absolute dollars in the future as it
continues to develop products such as low-temperature cofired multilayer
ceramics for use in the production of MCMs and products incorporating thick film
technology.
FOREIGN EXCHANGE GAIN (LOSS). As discussed in more detail below, the Company's
operating results are subject to the impact of fluctuations in the relative
values of certain currencies. During the first quarter of 1996, the Company
reported net foreign exchange gains of $130,000, as compared to net foreign
exchange losses of $369,000 reported during the comparable period of 1995. The
appreciation of the value of the US dollar relative to the Japanese yen during
1996 had the effect of decreasing the cost of certain raw materials as well as
reducing the carrying value of certain of the Company's obligations and was
primarily responsible for the gains recognized during this period. The loss
recognized during 1995 was primarily attributable to the declining value of the
US dollar compared to both the yen and the Singapore dollar during that period.
Fluctuations in foreign exchange rates have had a significant impact on the
Company's results of operations. Certain of the Company's raw material purchases
and other costs of production and administration are denominated in Japanese yen
and Singapore dollars while all of the Company's sales
10
<PAGE>
are denominated in US dollars. Consequently, a change in exchange rates between
the US dollar and the Japanese yen or the Singapore dollar can affect the
Company's cost of goods sold or its selling, general and administrative
expenses, resulting in gains or losses that are included in the Company's
results of operations. Exchange rate fluctuations also impact the carrying value
of certain of the Company's obligations, resulting in foreign currency
transaction gains or losses that are likewise included in the Company's results
of operations. Fluctuations in exchange rates also subject the Company to gains
or losses on its outstanding forward foreign currency contracts. For financial
reporting purposes, the gain or loss arising from exchange rate fluctuations
between the transaction date for a transaction denominated in a foreign currency
and that transaction's settlement date, or reporting date for transactions which
have not settled, is characterized as a foreign exchange gain or loss, as is the
gain or loss suffered on outstanding forward foreign currency contracts.
In an effort to minimize the impact of foreign exchange rate movements on the
Company's operating results, and subject to financing from and the consent of
the Development Bank of Singapore ("DBS"), the Company enters into forward
foreign currency contracts to hedge foreign currency transactions such as
purchases of raw materials denominated in Japanese yen. The terms of the forward
contracts involve the exchange of US dollars for either Japanese yen or
Singapore dollars at a future date, with maturities generally ranging from one
to several months from the execution date of the forward contract. At contract
maturity, the Company makes net settlements of US dollars for foreign currencies
at forward rates that were agreed to at the execution date of the forward
contracts. The Company utilizes its S$30,000,000 (US$21,260,000 at March 31,
1996) foreign exchange line of credit with DBS to finance the purchase of
forward foreign currency contracts with maturities of up to 12 months. Advances
under this line of credit are guaranteed by MPI and are secured by all of the
assets of MPS, including a second mortgage on MPS's leasehold land and
buildings. The Company's ability to utilize this line is subject to significant
limitations imposed by DBS. Another factor which restricts the Company's hedging
activities is the available borrowing capacity of the foreign exchange line of
credit. In addition, the Company generally enters into forward contracts only
when it anticipates future weakening of the US dollar relative to either the
Singapore dollar or Japanese yen. As a result of these and other factors, the
Company's hedging measures have been and may continue to be severely limited in
their effectiveness.
The Company's operating results have been and will continue to be affected by
any fluctuations in the value of the US dollar relative to either the Japanese
yen or the Singapore dollar. Any future weakening of the US dollar relative to
either the Singapore dollar or the Japanese yen will have a material adverse
effect upon the Company's business, financial condition and results of
operations. To attempt to mitigate the effects of any such weakening in the
value of the US dollar, the Company will attempt to qualify non-Japanese sources
of key materials, and accelerate the relocation of its pressed ceramic products
manufacturing operations to Indonesia from Singapore. There can be no assurance
that such measures can or will be taken or financed to a sufficient degree such
that they will offset the impact of a weaker US dollar on the Company's
operating results.
INTEREST EXPENSE. Interest expense was $458,000 in the first quarter of 1996,
representing an increase of $281,000 over the comparable period of 1995. Such
increase was primarily due to additional borrowings by the Company under its
borrowing arrangements with DBS Bank (see Liquidity and Capital Resources). The
Company currently anticipates that interest expense will continue to increase in
absolute dollars during 1996 due to the increase in Company borrowings.
OTHER INCOME (EXPENSE). Other income was $53,000 in the first quarter of 1996 as
compared to other income of $391,000 for the comparable period of 1995. The
majority of other income arising in 1995 reflects the receipt during the first
quarter of a $375,000 payment from an insurance policy covering product losses
incurred in 1988 due to the contamination of products during the manufacturing
process.
EFFECTS OF INCOME TAXES. The Company's effective tax rate was 15.0% for the
first quarter of 1996. The income tax expense recorded by the Company during
this period was primarily attributable to taxable income generated by the
Company's domestic operations. The taxable income generated by the
11
<PAGE>
Company's foreign operations during this time period was offset through the
utilization of capital allowance carryforwards. No income tax expense was
recorded in the comparable period of 1995 as the Company's foreign and domestic
operations generated net operating losses for both financial reporting and
income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES. During the first quarter of 1996, the Company
financed its operations through a combination of cash flows from its operating
units and certain other borrowings and equity financings. As discussed in Note 4
to the Condensed Consolidated Financial Statements, the Company consummated an
equity financing of $2,000,000 with Transpac and the Company's MPM subsidiary
raised an additional $9,000,000 through the issuance of a debenture to Transpac
in March 1996. The Company's principal sources of liquidity as of March 31,
1996, consisted of $11,807,000 of cash, and certain limited available borrowing
capacity with DBS. However, the $9.0 million raised by MPM is not available for
use in other portions of the Company's business.
MPS, the Company's principal operating subsidiary, has a S$9,500,000
(US$6,732,000) 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 March 31, 1996, MPS had outstanding borrowings under this
arrangement of $6,611,000.
MPC has a S$500,000 (US$354,000) borrowing arrangement with DBS, guaranteed by
both MPI and MPS, consisting of a working capital line and an overdraft
facility. Borrowings under this arrangement are also due on demand and are
secured by all of the assets of MPC. Borrowings under the working capital line
of credit facility and the overdraft facility bear interest at the Singapore
prime rate plus 1/2% and plus 3/4% respectively. At March 31, 1996, MPC had
outstanding borrowings under this arrangement of $173,000.
MPM has a $3,500,000 borrowing facility with DBS which is guaranteed by both MPI
and MPS. This facility consists of a $3.2 million short-term advance facility
and a $300,000 import/export bills facility. Advances under this credit facility
are secured by substantially all of the assets of MPM and bear interest at the
bank's prime lending rate plus 2.5% and cannot remain outstanding for more than
30 days. The facility does permit rolling over of existing outstanding balances.
This credit facility will mature in May 1996 unless converted into a term loan
at the election of DBS upon the Company's satisfaction of certain criteria. This
facility automatically terminates in the event of the termination of the
Company's technology transfer agreement with IBM. At March 31, 1996, MPM had
outstanding borrowings under this arrangement of $3,197,000.
The MPS borrowing agreement includes affirmative and negative covenants with
respect to MPS, including the maintenance of certain financial statement ratios,
balances, earnings levels and limitations on payment of dividends, transfers of
funds and incurrence of additional debt. The MPM agreement also contains certain
restrictive provisions. As of March 31, 1996, MPS was in violation of certain
covenants set forth in its agreement with DBS. Such violations have been waived
by DBS as of such date.
At March 31, 1996, the Company also had borrowings of $9,000,000 under the
convertible debenture discussed above, $11.0 million under notes payable to
various customers bearing interest at rates ranging from 7.0% to 14.0%,
$1,381,000 under mortgage notes bearing interest at rates of 7.5%, $182,000
under term loans bearing interest at 12.2%, and $781,000 under capital lease
obligations, consisting of various machinery and equipment financing agreements,
bearing interest at 4% to 6%. Borrowings under the above arrangements are
secured by substantially all of the assets of the Company. The Company also
incurred certain noninterest bearing obligations in connection with an
acquisition that have been discounted to their net present value of $364,000 at
March 31, 1996.
12
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
- - - --------------------------------------------------------------------------------
Since the execution of the Company's technology licensing agreement with the
International Business Machines Corporation (the "IBM Agreement"), expenditures
associated with the establishment by MPM of a production facility in Singapore
to manufacture products incorporating such licensed technology have totalled
approximately $10,100,000. 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 and capital
resources. In addition to the $2.0 million payment, the Company has significant
continuing obligations under the IBM Agreement. Under the IBM Agreement, the
Company is also required to attain certain production milestones at specified
dates. If the Company fails to achieve these specified milestones in a timely
manner, the IBM Agreement is terminable by IBM. In addition, commencing in
August 1996, the IBM Agreement is terminable by either party without cause upon
six months prior written notice. Although the Company currently believes that
with adequate financing it can achieve the production milestones set forth in
the IBM Agreement, there can be no assurance that the Company will be able to
achieve such milestones on a timely basis, or at all. Furthermore, there can be
no assurance that IBM will not terminate the IBM Agreement after August 1996. If
the Company does not timely achieve the production milestones under the IBM
Agreement, the Company could lose its rights to the technology licensed to the
Company by IBM under such agreement. If IBM terminates the IBM Agreement after
August 1996, the Company would lose its right to such technology. The loss of
such rights would have a material adverse impact on the Company's future
revenues and on the Company's future.
The Company is in the process of seeking additional financing, but other than
credit facilities discussed above, had no legally binding commitments or
arrangements for such financing as of March 31, 1996, other than the term sheet
entered into with a bank lender in March 1996 for a $1.0 million term facility
and there can be no assurance that any additional financing will be available to
the Company on acceptable terms, or at all, when required by the Company.
13
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS, MAY 29, 1996
MICROELECTRONIC PACKAGING, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MICROELECTRONIC
PACKAGING, INC.
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of the Special Meeting of Shareholders to be held May 29, 1996 and the
Proxy Statement and appoints Timothy da Silva and Wilmer R. Bottoms and each
of them, the Proxy of the undersigned, with full power of substitution, to
vote all shares of Common Stock of Microelectronic Packaging, Inc. (the
"Company") which the undersigned is entitled to vote, either on his or her own
behalf or on behalf of any entity or entities, at the Special Meeting of
Shareholders of the Company to be held at 9350 Trade Place, San Diego,
California 92126 on May 29, 1996 at 9:00 a.m. (the "Special Meeting"), and at
any adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat. The shares
represented by this Proxy shall be voted in the manner set forth on the
reverse side.
(PLEASE SIGN ON REVERSE SIDE)
<PAGE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR AGAINST ABSTAIN
1. To approve the convertibility of a debenture (the "Debenture") issued by MPM
(S) Pte., Ltd., a wholly-owned subsidiary of the Company, to a group of related
investors, into shares of the Company's Common Stock.
FOR AGAINST ABSTAIN
2. To approve an amendment to the Company's Amended and Restated Articles of
Incorporation to increase the authorized shares of Common Stock from
10,000,000 shares to 15,000,000 shares, which amendment is necessary in part
to effect an increase in the number of shares of Common Stock that may be
necessary to provide for the convertibility of the Debenture submitted for
approval pursuant to Proposal One.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS. THIS PROXY, WHEN
PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ABOVE. THIS PROXY WILL BE VOTED
FOR THE PROPOSALS IF NO SPECIFICATION IS MADE. THIS PROXY WILL ALSO BE VOTED AT
THE DISCRETION OF THE PROXY HOLDER ON SUCH MATTERS OTHER THAN THE TWO SPECIFIC
PROPOSALS AS MAY COME BEFORE THE MEETING.
Please print the name(s) appearing on each share certificate(s) over which you
have voting authority: _________________________________________________________
(PRINT NAME(S) ON CERTIFICATE(S))
SIGNATURE(S) ______________ ______________________
DATE
NOTE: Please sign exactly as
name appears hereon.
Joint owners should each
sign. When signing as
attorney, executor, ad-
ministrator, trustee or
guardian, please give
full title as such.
