<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[_] Definitive Consent Solicitation Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Microelectronic Packaging, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] 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:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(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):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] 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:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
MICROELECTRONIC PACKAGING, INC.
9577 Chesapeake Drive
San Diego, California 92123
May 27, 1999
The Board of Directors ("Board") of Microelectronic Packaging, Inc. ("Company")
is soliciting your consent to: (1) approve the conversion of approximately
$27.56 million in debt owed to eight creditors into Series A Convertible
Preferred Stock of the Company and the amendment of one of the creditor's
warrants to purchase Common Stock; (2) approve the issuance of Series A
Convertible Preferred Stock issued in connection with the debt conversion to 11
employees including officers, a director of the Company and third parties in
exchange for their payment of a creditor claim; (3) approve various amendments
to the Company's 1993 Stock Option/Stock Issuance Plan to: (i) increase the
number of shares of Common Stock authorized for issuance over the term of such
plan by an additional 2,309,368 shares; (ii) amend the number of shares
available for issuance under such plan for each person participating in any one
calendar year to 2,000,000 shares; and (iii) amend the Automatic Option Grant
Program to increase the number of shares of Common Stock subject to automatic
option grants to be made to new and continuing non-employee Board members; (4)
approve the grant of options to purchase 3,758,003 shares of Common Stock to
Company employees, officers and directors pursuant to the amended 1993 Stock
Option/Stock Issuance Plan; and (5) approve the Certificate of Amendment of the
Amended and Restated Articles of Incorporation to authorize the issuance of the
Series A Convertible Preferred Stock to the creditors, employees, officers and
a director of the Company and third parties in connection with the debt
conversion. We ask that you return your written consent by ________, 1999.
The Board believes it is in the best interest of the Company and its
shareholders to approve Proposals 1-5. Before Proposals 1-5 can be effective,
the holders of a majority of the Company's outstanding stock must give their
written consent.
IT IS IMPERATIVE THAT WE RECEIVE YOUR CONSENT TO THE ATTACHED PROPOSALS AS SOON
AS POSSIBLE, BUT IN NO EVENT LATER THAN JUNE ___, 1999, BECAUSE YOUR BROKER
CANNOT CONSENT TO PROPOSALS 1-5 WITHOUT YOUR WRITTEN CONSENT.
The Board asks you to consent to Proposals 1-5. These consent solicitation
materials provide you with detailed information about the Proposals. In
addition, you may obtain information about the Company from documents we have
filed with the Securities and Exchange Commission. We encourage you to read
these consent solicitation materials carefully.
PLEASE COMPLETE, SIGN AND RETURN THE ACCOMPANYING CONSENT
CARD BY _________, 1999.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
CONSENT TO PROPOSALS 1-5 AS DESCRIBED IN THE ATTACHED
CONSENT SOLICITATION STATEMENT.
<PAGE>
CONSENT SOLICITATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION............................................ 1
Voting Rights............................................. 1
Summary of the Proposals.................................. 1
Solicitation of Written Consents.......................... 2
Revocability of Consents.................................. 3
Expense of Consent Solicitation........................... 4
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 4
PROPOSAL 1 - APPROVAL OF CONVERSION OF APPROXIMATELY
$27.56 MILLION IN DEBT OWED TO EIGHT CREDITORS INTO
SERIES A CONVERTIBLE PREFERRED STOCK OF THE COMPANY
AND THE AMENDMENT OF ONE OF THE CREDITOR'S WARRANTS TO
PURCHASE COMMON STOCK..................................... 6
Description of and Reasons for Proposal 1............ 6
Summary of Debt to be Converted...................... 8
Summary of Principal Terms of Debt Conversion and
Mutual Settlement and Release Agreement.......... 11
Prior Settlement Agreements Regarding Debt to
Creditors........................................... 14
Summary of Principal Terms of Series A Convertible
Preferred Stock.................................. 16
Registration Rights.................................. 18
Principal Terms of Transpac Warrant.................. 18
Opinion of Financial Advisor......................... 19
Vote Required and Recommendation for Approval........ 22
PROPOSAL 2 - APPROVAL OF THE ISSUANCE OF SERIES A
CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION
WITH THE DEBT CONVERSION TO 11 EMPLOYEES INCLUDING
OFFICERS, A DIRECTOR OF THE COMPANY AND THIRD PARTIES
IN EXCHANGE FOR THEIR PAYMENT OF A CREDITOR CLAIM......... 22
Description of and Reasons for Proposal 2............ 22
FI Financial Agreement with STMicroelectronics, Inc.. 23
Assignment of Portion of FI Financial's Interest in
STMicroelectronics, Inc.'s Debt to Employees,
Officers, a Director of the Company and Third
Parties.......................................... 23
Conditions to Purchase of Series A Convertible
Preferred Stock by Employees, Officers, a Director
and Third Parties................................ 24
Vote Required and Recommendation for Approval........ 24
</TABLE>
i
<PAGE>
Consent Solicitation Statement
Table of Contents (cont'd)
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROPOSAL 3 - APPROVAL OF VARIOUS AMENDMENTS TO THE
COMPANY'S 1993 STOCK OPTION/STOCK ISSUANCE PLAN AS
DESCRIBED HEREIN.......................................... 25
Description of and Reasons for Proposal 3............. 25
Plan Structure........................................ 25
Administration........................................ 26
Share Reserve......................................... 26
Eligibility........................................... 26
Valuation............................................. 26
Discretionary Option Grant Program.................... 26
Automatic Option Grant Program........................ 27
Stock Issuance Program................................ 27
Acceleration.......................................... 28
Financial Assistance.................................. 28
Special Tax Election.................................. 28
Amendment and Termination............................. 28
Federal Income Tax Consequences....................... 28
Accounting and Income Tax Treatment................... 29
Conditions to Approval of Amendments to 1993 Stock
Plan.............................................. 30
Vote Required and Recommendation for Approval......... 30
PROPOSAL 4 - APPROVAL OF GRANT OF OPTIONS TO PURCHASE
3,758,003 SHARES OF COMMON STOCK TO COMPANY
EMPLOYEES, OFFICERS AND DIRECTORS PURSUANT TO
AMENDED 1993 STOCK OPTION/STOCK ISSUANCE PLAN............. 30
Description of and Reasons for Proposal 4............. 30
Conditions to Issuance of Additional Options to
Employees, Officers and Directors................. 31
Vote Required and Recommendation for Approval......... 31
PROPOSAL 5 - APPROVAL OF CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION TO
AUTHORIZE THE ISSUANCE OF THE SERIES A CONVERTIBLE
PREFERRED STOCK TO THE CREDITORS, EMPLOYEES,
OFFICERS AND A DIRECTOR OF THE COMPANY AND THIRD
PARTIES IN CONNECTION WITH THE DEBT CONVERSION............ 32
Description of and Reasons for Proposal 5............. 32
Background............................................ 32
The Proposal.......................................... 32
Conditions to Approval of Amended and Restated
Articles of Incorporation......................... 33
Vote Required and Recommendation for Approval......... 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 33
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXECUTIVE COMPENSATION AND RELATED INFORMATION.................. 35
Summary of Cash and Certain Other Compensation............. 35
Option Grants in Last Fiscal Year.......................... 36
Aggregated Option Exercises and Fiscal Year-End Values..... 36
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions................ 37
Employment Contracts and Termination of Employment and
Change in Control Arrangements......................... 37
Board of Directors Report on Executive Compensation........ 38
ANNEX A RESOLUTION OF ACTIONS BY WRITTEN CONSENT................A-1
FINANCIAL INFORMATION...........................................F-1
</TABLE>
EXHIBITS
Exhibit A Form of Debt Conversion and Mutual Settlement and Release
Agreement
Exhibit B Form of Certificate of Amendment of Amended and Restated
Articles of Incorporation
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Transpac Warrant and Amendment No. 1
Exhibit E Form of Assignment Agreement
Exhibit F Form of IBM Proceeds Agreement
Exhibit G Letter Agreement between the Company, FI Financial LLC and
STMicroelectronics, Inc.
Exhibit H Form of L.H. Friend, Weinress, Frankson and Presson, Inc.
Opinion
iii
<PAGE>
MICROELECTRONIC PACKAGING, INC.
---------------------------------------
CONSENT SOLICITATION STATEMENT
FOR SHAREHOLDER ACTION BY WRITTEN CONSENT
-------------------------------------------
This Consent Solicitation Statement ("Consent Statement") has been prepared
by the management of Microelectronic Packaging, Inc. ("Company" or "MPI") and is
being furnished in connection with the solicitation by the Board of Directors of
the written consent of the Company's shareholders.
The Company intends to distribute this Consent Statement and the
accompanying materials to its Shareholders on or about ________, 1999. The
mailing address of the Company's principal executive offices is 9577 Chesapeake
Drive, San Diego, California 92123.
The Company is seeking Shareholder approval of Proposals 1-5. These
matters are described in detail in this Consent Statement.
Attached to the Consent Statement as Annex A is the Resolution of Actions
by Written Consent of Shareholders (the "Consent Resolution"). The procedure
for indicating approval of the proposals included in the Consent Resolution is
described in detail in this Consent Statement.
GENERAL INFORMATION
Voting Rights
The proposals being submitted for Shareholder approval are to be acted upon
by written consent, without a meeting, rather than by a vote held at a meeting.
The holders of the common stock of the Company ("Common Stock") are entitled to
consent or withhold their consent in writing regarding each of the proposals
being considered. Each outstanding share of Common Stock is entitled to one vote
for or against each proposal.
The written consent of a majority of the outstanding shares of Common Stock
is required to approve each of the respective proposals contained in the Consent
Resolution.
Summary of the Proposals
The Board of Directors has adopted a resolution which declares the
advisability of, and submits to the Shareholders for authorization and approval,
proposals to:
1. Approve the conversion of approximately $27.56 million in debt owed
to eight creditors into Series A Convertible Preferred Stock of the
Company and the amendment of one of the creditor's warrants to
purchase Common Stock;
2. Approve the issuance of Series A Convertible Preferred Stock issued
in connection with the debt conversion to 11 employees including
officers, a director of the Company and third parties in exchange
for their payment of a creditor claim;
1
<PAGE>
3. Approve various amendments to the Company's 1993 Stock Option/Stock
Issuance Plan to:
(i) increase the number of shares of Common Stock
authorized for issuance over the term of such plan by
an additional 2,309,368 shares;
(ii) amend the number of shares available for issuance
under such plan for each person participating in any
one calendar year to 2,000,000 shares; and
(iii) amend the Automatic Option Grant Program to increase
the number of shares of Common Stock subject to
automatic option grants to be made to new and
continuing non-employee Board members.
4. Approve the grant of options to purchase 3,758,003 shares of Common
Stock to Company employees, officers and directors pursuant to the
amended 1993 Stock Option/Stock Issuance Plan; and
5. Approve the Certificate of Amendment of the Amended and Restated
Articles of Incorporation to authorize the issuance of the Series A
Convertible Preferred Stock to the creditors, employees, officers,
a director of the Company and third parties in connection with the
debt conversion.
One or more of the proposals may be abandoned by the Board at any time
before the Certificate of Amendment of the Amended and Restated Articles of
Incorporation with the amendments contained in Proposal 5 is filed with the
California Secretary of State's office, if holders of a majority of the
outstanding Common Stock do not approve the proposal, or if for any reason the
Board deems it advisable to abandon a proposal.
Only holders of record of shares of the Company's Common Stock at the close
of business on June ___, 1999 ("Record Date") are entitled to execute the
Consent Resolution. At the close of business on the Record Date, there were
10,856,890 shares of Common Stock issued and outstanding held by approximately
138 holders of record. The holders of the Common Stock as of the Record Date
are referred to in this Consent Statement as the "Shareholders."
Solicitation of Written Consents
Under California law and under the Company's Bylaws, any action which may
be taken at any annual or special meeting of the Shareholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. The matters being considered
by the Shareholders are being submitted for action by written consent, rather
than by votes cast at a meeting. Attached to this Consent Statement as Annex A
is the text of the Consent Resolution being submitted for Shareholder adoption
by written consent. The Consent Resolution provides for the approval of each of
the proposals, each of which were summarized above and are more fully described
under the captions for each proposal below. In accordance with California law,
notice of shareholder approval of the respective proposals without a meeting by
less than unanimous written consent,
2
<PAGE>
shall be given to the Shareholders at least 10 days before the date the Consent
Resolution is effective. Consent Resolutions must be received by the Company on
or before ________, 1999.
Shareholders are requested to indicate approval of and consent to the
adoption of the proposals contained in the Consent Resolution, or disapproval
thereof, by executing the enclosed copy of the Consent Resolution and by
checking the boxes which correspond to the approval or disapproval of the
proposed action. Each proposal contained in the Consent Resolution may be
considered separately. Failure to check any of the boxes will, if the Consent
Resolution has been signed, constitute approval of and consent to the adoption
of all of the proposals contained in the Consent Resolution. Signing and
indicating approval or disapproval on the Consent Resolution will be deemed to
be the granting or denial of written consent to the adoption of each proposal
contained in the Consent Resolution.
Approving a proposal contained in the Consent Resolution and execution of
the Consent Resolution will constitute your approval of the proposal, as a
Shareholder of the Company. Shareholders who do not approve a proposal or
consent to the adoption of the Consent Resolution will nonetheless be bound by
the Consent Resolution if written consents representing a majority of the
outstanding shares of Common Stock are received by the Company approving the
proposal.
The Board requests that each Shareholder indicate their approval or
disapproval of each proposal listed in the Consent Resolution and execute and
date the Consent Resolution, indicate the number of Shares being voted, and
deliver the Consent Resolution to the Company via regular mail, e-mail, fax or
in person at the following address:
Microelectronic Packaging, Inc.
Attn: Denis Trafecanty, Senior Vice President and Chief
Financial Officer
9577 Chesapeake Drive
San Diego, CA 92123
Facsimile: (619) 292-7881
E-mail: [email protected]
A self-addressed stamped envelope is enclosed for your convenience in returning
the Consent Resolution. Each Shareholder is requested to indicate on the Consent
Resolution the number of shares which the Shareholder is voting. If the
Shareholder wishes to vote any shares not registered in his/her name, a written
consent of the registered Shareholder of record as of the Record Date must be
received by the Company. The Consent Resolution should be returned as soon as
possible for receipt no later than June ___, 1999.
Under applicable law, Shareholders who abstain from voting with respect to
any proposal, or who vote against any proposal to be considered in this Consent
Statement, do not have the right to an appraisal of their shares or any similar
dissenter's rights under applicable law.
Revocability of Consents
When the enclosed Consent Resolution is properly executed and returned, the
shares it represents will be voted in accordance with the directions noted
thereon, and if no directions are indicated, the shares it represents will be
voted in favor of each proposal. Any person providing a Consent Resolution in
the form accompanying this Consent Statement has the power to revoke it any time
prior to the time that written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary of the Company,
but not thereafter. It may be revoked by filing with the Secretary of the
3
<PAGE>
Company at the Company's principal executive office a writing revoking the
Consent Resolution. Such revocation shall be effective upon its receipt by the
Secretary of the Company.
Expense of Consent Solicitation
The Company will bear the entire cost of the solicitation of Shareholder
approval of the Consent Resolution, including the preparation, assembly,
printing and mailing of this Consent Statement, and any additional material
furnished to Shareholders. In addition, the Company may reimburse certain
persons for their cost of forwarding the solicitation material to Shareholders.
The solicitation of consents by mail may be supplemented by telephone, telegram
and/or personal solicitation by directors, officers or employees of the Company.
No additional compensation will be paid for any of such services. To assist in
the solicitation process, the Company has retained Beacon Hill Partners, Inc.
The fee for such services will be approximately $_____ plus reasonable expenses
incurred to distribute the solicitation materials.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company regarding
the ownership of the Company's Common Stock as of May 25, 1999 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 other
executive officers whose compensation for 1998 were each 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 Beneficially Owned/(1)/ Outstanding Beneficially Owned
- ------------------------------------ ----------------------- -------------------------------
<S> <C> <C>
Entities that may be deemed to be affiliated with
Transpac Capital Pte. Ltd./(2)/
6 Shenton Way
#2D-09 DBS Building, Tower Two
Singapore 068809..................................... 1,342,013 11.8%
Joost Tjaden/(3)/
c/o TBM Associates
3500 Oaklawn, #215
Dallas, Texas 75219.................................. 687,620 6.3%
Cabot Ceramics, Inc./(4)/
c/o Cabot Corporation
75 State Street
Boston, MA 02119-1806............................... 654,326 6.0%
Counterpoint Master LLC
1301 Avenue of the Americas
40th Floor
New York, NY 10019................................... 627,035 5.8%
Anthony J.A. Bryan/(5)/.............................. 183,333 1.7%
Frank Howland/(5)/................................... 145,000 1.3%
Waldemar Heeb/(5)/................................... 15,000 0.1%
Wong Lin Hong/(5)/................................... 15,069 0.1%
James Waring/(6)/.................................... -- --
Andrew K. Wrobel/(5)/
c/o Microelectronic Packaging, Inc.
9577 Chesapeake Drive
San Diego, California 92123......................... 600,000 5.2%
Denis J. Trafecanty/(5)/............................. 300,000 2.7%
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Timothy R. Sullivan/(5)/ 150,000 1.3%
All directors and executive officers
as a group (7 persons)............................... 1,408,402 11.4%
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Percentage beneficially owned
is based on a total of 10,856,890 shares of Common Stock issued and
outstanding as of April 15, 1999. Shares of Common Stock subject to options
or warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of April 15, 1999 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 public listed 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 ("TMF"),
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 and warrants for 500,000 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. TIH has direct beneficial ownership
of 334,069 shares and warrants for 198,500 shares of the Common Stock. TIH
shares the power to control the voting and disposition of such 334,069
shares of Common Stock and warrants for 198,500 shares with the beneficial
ownership of any shares of Common Stock and warrants for 198,500 shares with
the Manager. The Manager further holds warrants to purchase 201,500 shares
of Common Stock. 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 of the Common Stock and warrants for 54,500
shares. Regional shares the power to control the voting and disposition of
such 92,066 shares of Common Stock and warrants for 54,500 shares 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 of the Common Stock. TEF shares the power to
control the voting and disposition of such 197,285 shares of Common Stock
with the Manager. TEF disclaims beneficial ownership of any shares of
Common Stock held by any other Transpac entity. TVP has direct beneficial
ownership of 139,415 shares of 139,415 shares 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 of the Common Stock. NatSteel
has direct beneficial ownership of 75,547 shares of the Common Stock and
warrants for 45,500 shares. 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 partially obtained from a Schedule 13D filed with
the Securities and Exchange Commission on or about April 3, 1996. Mr. Wong
Lin Hong is Director and Executive Vice President of Transpac Capital Pte.
Ltd., and as such may be deemed to share voting and investment power with
respect to the Transpac entities' shares. Mr. Wong disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(3) Includes shares owned by TBM Associates, Inc. ("TBM"), an investment
management company in which Mr. Tjaden is a significant shareholder, and as
such may be deemed to share voting and investment power. TBM exercises
voting control over shares of MPI common stock held by Bostech Associates
(1,719 shares), Ion Associates (33,685 shares) and N.V. Bever Holding
(368,094 shares and a warrant to purchase 1,173 additional shares at an
exercise price of $5.63). Also includes shares held by Janivo Fonds (99,307
shares) and Van Doorne
5
<PAGE>
Group (99,285 shares), over which Mr. Tjaden exercises voting control. Mr.
Tjaden disclaims beneficial ownership of all such shares.
(4) 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) All shares in the form of stock options exercisable within 60 days of April
15, 1999.
(6) Mr. Waring is a nominee to the Board and is not currently a Director. Mr.
Waring's nomination to the Board is subject to completion of the debt
conversion described in Proposal 1 below. Such debt conversion is subject
to the completion of definitive agreements for all eight creditors and the
approval of the debt conversion by the Company's Shareholders.
PROPOSAL 1
APPROVAL OF CONVERSION OF APPROXIMATELY $27.56 MILLION IN DEBT OWED TO EIGHT
CREDITORS INTO SERIES A CONVERTIBLE PREFERRED STOCK OF THE COMPANY AND THE
AMENDMENT OF ONE OF THE CREDITOR'S WARRANTS TO PURCHASE COMMON STOCK.
Description of and Reasons for Proposal 1
As of March 31, 1999, the Company is in default on approximately $27.56
million in debt plus accrued interest related to the Company's discontinued
operations in Singapore. The entire amount including accrued interest is
currently due and payable. The Company does not have the ability to pay the
amounts due on this debt.
The $27.56 million in debt resulted from (i) the construction by MPM
Singapore Pte. Ltd. ("MPM"), an affiliate of the Company, of a multi-layer
ceramic operations plant in Singapore, which ceased operations prior to the
commencement of production; and (ii) the purchase in December, 1994 and
installation of additional equipment at Microelectronic Packaging (S) Pte., Ltd.
("MPS") which was used to provide pressed ceramic products to integrated circuit
manufacturers. As a result of what management believes was a slowdown in market
demand, this equipment was no longer required to satisfy its customers' reduced
requirements. In 1997, a receiver was appointed by the courts in Singapore to
liquidate MPM's and MPS' assets. The Company believes the principal reasons
which forced MPM to liquidate included changing market demand for multi-layer
ceramic products and the failure of a potential major customer to commit to any
product purchases. The Company also believes the principal reasons which forced
MPS to liquidate was a decline in the market for pressed ceramics, as much of
the additional equipment purchased by MPS represented excess capacity. Both of
these subsidiaries have been in receivership since 1997, the receiver has
completed the liquidation of MPM's assets and the receiver is in the process of
completing the liquidation of MPS' assets, and the proceeds were used to retire
a portion of MPM's and MPS debts. During 1998, the High Court of the Republic of
Singapore ordered the winding up of MPM.
The Company fully guaranteed the $27.56 million in debt incurred by MPM and
MPS to eight creditors in connection with the operations in Singapore
("Singapore Creditors"). During 1998, the Company signed Restructuring, Mutual
Release and Settlement Agreements ("Restructuring Agreements") with the
Singapore Creditors, which called for settlement payments of approximately $9.3
million in satisfaction of the then $27.1 million in debt owed. The $9.3 million
in settlement payments were generally due no later than May 1, 1999. During 1998
the Company explored various proposals to obtain additional financing to enable
it to satisfy the $9.3 million in settlement obligations. Since the
6
<PAGE>
Company was not able to obtain funding to pay this $9.3 million, the Company
renegotiated the terms and entered into non-binding letter agreements with all
of the Singapore Creditors (including a third party who agreed to purchase the
creditor position of one of the Singapore Creditors) which called for the
conversion of all debt and accrued interest obligations into shares of the
Company's to be authorized Series A Convertible Preferred Stock ("Debt
Conversion Transaction").
A summary of the principal terms of the Series A Convertible Preferred
Stock is set forth under the heading "Summary of Principal Terms of Series A
Convertible Preferred Stock" below. The letter agreements provided that the
proposed Debt Conversion Transaction was subject to the completion of definitive
agreements for all of the Singapore Creditors and the approval of the Debt
Conversion Transaction by the holders of a majority of the Company's Common
Stock.
The Company has prepared Debt Conversion and Mutual Settlement and Release
Agreements for each of the Singapore Creditors ("Conversion and Settlement
Agreements"), which respectively include, as applicable, the following exhibits:
Registration Rights Agreement; IBM Proceeds Agreement; Certificate of Amendment
of Amended and Restated Articles of Incorporation; and Amendment No. 1 to the
Warrants granted to Transpac. One of the Singapore Creditors,
STMicroelectronics, Inc. ("STM") did not agree to participate in the Debt
Conversion Transaction, and in lieu thereof, STM agreed to sell its creditor
position to FI Financial, LLC ("FI Financial") pursuant to the terms and
conditions of a written agreement that has been entered into between STM, FI
Financial and the Company ("STM/FI Financial Agreement"). FI Financial has
signed a non-binding letter agreement with the Company similar to those signed
by the other Singapore Creditors, and with respect to STM's creditor position
has agreed to enter into a Conversion and Settlement Agreement and participate
in the Debt Conversion Transaction upon the approval by the Shareholders of the
Debt Conversion Transaction, all as described in more detail in Proposal 2
below.
In addition to the STM/FI Financial Agreement, as of May 25, 1999, the
Company has received executed Conversion and Settlement Agreements from the
following creditors: Transpac Capital Pte. Ltd. and related investors; Texas
Instruments Singapore, Ltd.; Orix Leasing Singapore Ltd.; and NS Electronics
Bangkok, Ltd. The names of the Singapore Creditors and a summary of the current
debt amounts and transactions from which they resulted are summarized below.
The Company believes the Conversion and Settlement Agreements are very
advantageous for the Company and its Shareholders and will enable the Company to
continue its operations and avoid the adverse prospect of an immediate
bankruptcy filing. If the Company is unable to obtain the consent of the
Shareholders to the Debt Conversion Transaction, or if all of the Singapore
Creditors do not sign the Conversion and Settlement Agreements the Company will
likely be required to institute immediate bankruptcy proceedings.
The Board has approved the Debt Conversion Transaction and the related
agreements which include the Form of Debt Conversion and Mutual Release and
Settlement Agreement, Form of Certificate of Amendment of Amended and Restated
Articles of Incorporation, Form of Registration Rights Agreement, Form of
Transpac Warrant and Amendment No. 1 to the Warrants granted to Transpac, Form
of Assignment Agreement, Form of IBM Proceeds Agreement, Letter Agreement
between the Company, FI Financial LLC and STMicroelectronics, Inc. and Form of
L.H. Friend, Weinress, Frankson and Presson, Inc. Opinion, all as respectively
attached to this Consent Statement as Exhibits A, B, C, D, E, F, G and H
("Exhibits"). All statements contained in this Consent Statement with respect to
such documents are qualified in their entirety by references to those Exhibits.
The Company has also attached to this Consent Statement its Form 10-K
Annual Report for the fiscal year ended December 31, 1998 and its Form 10-Q
Quarterly Report for the quarter ended March
7
<PAGE>
31, 1999 as filed with the Securities and Exchange Commission, which reports are
included with the financial information beginning on page F-1 herein.
Summary of Debt to be Converted
During 1998, the Company signed Restructuring Agreements with each of the
Singapore Creditors, which called for settlement payments of approximately $8.3
million to satisfy the then approximately $27.1 million in debt obligations owed
to them if the $8.3 million was paid to the Singapore Creditors by May 1, 1999
and an additional $1.0 million paid to Transpac Capital Pte. Ltd. and related
investors by December 31, 1999. The Company was not able to obtain funding to
repay all or any part of the $8.3 million due on May 1, 1999 and renegotiated
the terms with each creditor. All of the Singapore Creditors other than STM
agreed to convert their debt and accrued interest into shares of the Company's
Series A Convertible Preferred Stock.
STM agreed to sell its creditor position to FI Financial in exchange for a
cash payment of $500,000 ("STM Payment"). FI Financial is owned by James T.
Waring, who has been nominated for election to the Board, subject to approval of
the Debt Conversion Transaction by the Shareholders. FI Financial has deposited
the STM Payment in escrow where it will remain pending the approval of the Debt
Conversion Transaction by the Shareholders. Upon such approval, the STM Payment
will be paid to STM, and FI Financial will enter into a Conversion and
Settlement Agreement and receive the right to acquire 1,322,647 shares of Series
A Convertible Preferred Stock, which is the number of shares STM would have
received if STM had agreed to the Debt Conversion Transaction and entered into a
Conversion and Settlement Agreement. FI Financial is entitled to assign its
rights thereunder to 11 employees including officers and a director of the
Company and four third parties, who have paid corresponding cash reimbursements
to FI Financial. Prior to the approval by the Shareholders of the Debt
Conversion Transaction, FI Financial will be entitled to and may assign further
interests under the STM/FI Financial Agreement to additional parties. In
addition, pursuant to the STM\FI Agreement, FI Financial will acquire ownership
of the Warrant held by STM to purchase 200,000 shares of the Company's Common
Stock for a purchase price of $1.00 per share ("STM Warrant"). As part of the
Debt Conversion Transaction, FI Financial has agreed to surrender the STM
Warrant to the Company without exercise, whereupon the STM Warrant will be
terminated and will not have any further force or effect.
As of March 31, 1999, which is the end of the Company's first quarter and
for which the Company has filed with the Securities and Exchange Commission its
most recent Form 10-Q Quarterly Report, the Company owed approximately $27.56
million to the Singapore Creditors, whose names are Transpac Capital Pte. Ltd.
and related investors; STMicroelectronics, Inc.; Texas Instruments Singapore,
Ltd.; Development Bank of Singapore; Motorola, Inc.; NS Electronics Bangkok
Ltd.; Samsung Corning Co., Ltd.; and Orix Leasing Singapore Ltd. All of the
principal and interest on these debts was due and payable by May 1, 1999 and is
now in default. The following is a brief summary of the material terms and
conditions of these debts. If Proposal 1 is approved by a majority of the
holders of the Company's Common Stock, all of the $27.56 million in debt will be
canceled and exchanged for the Series A Convertible Preferred Stock of the
Company.
Development Bank of Singapore ("DBS"). At March 31, 1999, the Company's
subsidiaries, MPM and MPS, had outstanding borrowings due to DBS in the
principal amount of $1,407,954 including accrued interest. The amount
outstanding results from the remaining balance of various borrowings made by MPM
and MPS under lines of credit, overdraft facilities and an accounts receivable
financing line of credit originally made in 1996. The $1,407,954 debt
represents the balance of the original debt remaining after the liquidation of
the assets of MPM and MPS by the receivers and the application of the proceeds
8
<PAGE>
from the sale of the assets. All of the assets of MPM and substantially all of
the assets of MPS have been liquidated by the receivers of MPM and MPS.
The remaining balances due to DBS are in default, are payable upon demand
and bear interest at the bank's prime rate plus 5%. All of these amounts are
guaranteed by the Company. In February 1999, the Company and DBS signed a non-
binding letter agreement which calls for conversion of all of the Company's
obligations into shares of Series A Convertible Preferred Stock.
Transpac Capital Pte. Ltd. and Related Investors. At March 31, 1999, MPM
had outstanding borrowings due to Transpac Capital Pte. Ltd. and related
investors (collectively, "Transpac") in the principal amount of $9.0 million,
plus accrued interest in the approximate amount of $2,356,633. On March 27,
1996, the Company and MPM completed a financing with Transpac pursuant to which
the Company issued 842,013 shares of its Common Stock to Transpac for a total
purchase price of $2.0 million, and MPM issued a convertible debenture to
Transpac in the principal amount of $9.0 million. The debenture has a term of
five years, bears interest at the rate of 8.5% per annum and is guaranteed by
the Company. The outstanding principal on the debenture is due and payable in
full at the end of the five-year term; however, from and after April 23, 1997,
the debenture is convertible at Transpac's option to shares of Common Stock of
MPM or Common Stock of the Company. The debenture was fully guaranteed by the
Company. Neither MPM nor the Company have ever made any payments under the
debenture. The debenture is currently in default and payable upon demand.
In early 1999, the Company and Transpac signed a non-binding letter
agreement which calls for the conversion of all of the Company's obligations to
Transpac into shares of Series A Convertible Preferred Stock. In addition,
Transpac has already signed a Conversion and Settlement Agreement.
NS Electronics Bangkok Ltd. ("NSEB"). At March 31, 1999, the Company had
outstanding a term note due to NSEB, a former customer of MPS with a principal
balance of $1,250,000 and approximately $455,633 of accrued interest. This note
is fully guaranteed by the Company and is secured by certain assets of the
Company. This note is currently in default and payable upon demand.
In 1995, the Company borrowed $1,500,000 from NSEB at an interest rate of
14% per annum. The Company has made no principal payments since September 1996.
The NSEB promissory note is secured by all of the Company's domestic equipment
and trade receivables that are not subject to liens or other encumbrances
existing prior to May 30, 1995. In March 1997, the Company entered into an
Amended Loan and Security Agreement and a Second Secured Promissory Note with
NSEB pursuant to which NSEB agreed to waive any breach of the covenants, terms
and conditions of the original Loan and Security Agreement and the original
Secured Promissory Note (both dated May 30, 1995) and agreed to a revised (and
extended) payment schedule. The interest rate on the outstanding balance,
however, was raised from 14% per annum to 18% per annum and the Company is
currently in default under the terms of the Second Secured Note. In February
1999, the Company and NSEB signed a non-binding letter agreement which calls for
the conversion of all of the Company's agreed obligations to NSEB into shares of
Series A Convertible Preferred Stock. In addition, NSEB has already signed a
Conversion and Settlement Agreement.
Texas Instruments Singapore, Ltd. ("TI"). At March 31, 1999, the Company's
subsidiary, MPS, had an outstanding promissory note due to TI, a former customer
of MPS. The principal balance due under the note is $3,500,000 and
approximately $247,783 of accrued interest was due and payable as of March 31,
1999. The note bears interest at the rate of $3.5% per annum. The note is
fully guaranteed by the Company and was secured by certain assets of MPS. The
note is currently in default and payable upon demand.
9
<PAGE>
In 1995, MPS borrowed $3,500,000 from TI at an interest rate of 7.25% per
annum. The Company entered into several amended loan agreements during 1997 and
1998; however, the Company was unable to meet the terms of those agreements. In
April 1999, the Company and TI signed a Conversion and Settlement Agreement.
STMicroelectronics, Inc. ("STM"). At March 31, 1999, the Company's
subsidiary, MPS, had outstanding a promissory note due to STM, a former customer
of MPS. The principal balance due under the note is $4,000,000 and
approximately $821,095 of accrued interest was due and payable as of March 31,
1999. The note is fully guaranteed by MPI and was secured by certain assets of
MPS. The note is currently in default and payable upon demand.
In 1995, MPS borrowed $4,000,000 from STM at an interest rate of 7.25% per
annum. MPS did not make any principal payments, and only made limited interest
payments. On April 14, 1999, STM and FI Financial entered into the STM/FI
Financial Agreement, pursuant to which STM agreed to assign its creditor
position to FI Financial in exchange for a cash payment of $500,000. The STM/FI
Financial Agreement is subject to the approval of the Debt Conversion
Transaction by the holders of a majority of the Company's Common Stock. In
connection therewith, FI Financial has entered into a non-binding letter
agreement with the Company which calls for the conversion of all of the
Company's obligations to STM into shares of Series A Convertible Preferred
Stock. Furthermore, upon approval of the Debt Conversion Transaction by the
holders of a majority of the Company's Common Stock, FI Financial agreed to
enter into a Conversion and Settlement Agreement and agreed to participate in
the Debt Conversion Transaction with respect to the entire creditor position of
STM. As part of FI Financial's participation in the Debt Conversion
Transaction, FI Financial will surrender the STM Warrant without exercise,
whereupon the STM Warrant will be terminated and will not have any further force
or effect.
Motorola, Inc. ("Motorola"). At March 31, 1999, the Company's subsidiary,
MPS, had outstanding a term note due to Motorola, a former customer of MPS. The
note bears interest at approximately 7% per annum. The principal balance on the
note is $2,208,000 and approximately $201,474 of accrued interest was due and
payable as of March 31, 1999. The note has been guaranteed by the Company and
is secured by certain assets of the Company and all shares of CTM Electronics,
Inc. ("CTM") and Microelectronic Packaging America, Inc. ("MPA"). The note is
currently in default and payable upon demand.
In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an interest rate of
7%. The loan was guaranteed by Motorola and was eventually paid in full by
Motorola. This obligation to Motorola is secured by all of the assets of MPI,
CTM and MPA not previously pledged to NSEB, as well as all capital stock of MPS,
CTM and MPA. In January 1999, the Company and Motorola signed a non-binding
letter agreement which calls for the conversion of all of the Company's
obligations to Motorola into shares of Series A Convertible Preferred Stock.
Samsung Corning Co., Ltd. ("Samsung"). In 1996, MPS borrowed $1,000,000
from DBS at the Singapore Interbank offer interest rate plus 1.5%, repayable in
twelve monthly installments beginning in November 1996. The loan had been fully
guaranteed by Samsung, and co-guaranteed by the Company. MPS made payments under
the note totaling approximately $417,000 during 1996 and 1997. The remaining
balance of approximately $583,000 plus interest was paid to DBS by Samsung after
DBS called upon the guarantee of Samsung. Samsung has requested that MPI
reimburse it for the amount paid under the guarantee. In March 1999, the
Company and Samsung signed a non-binding letter agreement which calls for the
conversion of all of the Company's obligations to Samsung into shares of Series
A Convertible Preferred Stock.
10
<PAGE>
Orix Leasing Singapore Ltd. ("Orix"). At March 31, 1999, the Company had
outstanding a deficiency balance from capital leases due to Orix totaling
$1,765,744. The amount outstanding is the remaining balance of various lease
borrowings made by MPM and MPS. This balance remains after the liquidation of
the leased assets of MPM and MPS by Orix and the application to these leases of
the resulting proceeds from the sale of these assets. The remaining amount
outstanding is represented by a note issued by the Company at an interest rate
of 7.25%. The note is currently in default and is payable upon demand.
In 1996 and earlier, MPM, and to a lesser extent MPS, borrowed
approximately $2,600,000 under capital leases from Orix. Both MPM and MPS
stopped making lease payments, and Orix foreclosed on the equipment and sold it
at an auction in 1997. The balance remaining after the liquidation of the
leased assets is guaranteed by the Company. In March 1999, the Company and Orix
signed the Conversion and Settlement Agreement.
Summary of Principal Terms of Debt Conversion and Mutual Settlement and Release
Agreement
The Conversion and Settlement Agreements generally provide that all of the
debts owed by the Company to the Singapore Creditors would be terminated and the
parties would release all of their respective rights and obligations under the
agreements relating to the original and related debts, and the parties would
further settle all other disputes of any kind that may or could exist between
the parties in exchange for the Series A Convertible Preferred Stock to be
issued in connection with the Debt Conversion Transaction. The Board has
approved the Debt Conversion Transaction and the Conversion and Settlement
Agreements. The following summary of the principal terms of the form of
Conversion and Settlement Agreement attached hereto as Exhibit A is qualified in
its entirety by reference to this exhibit which is representative of the
Conversion and Settlement Agreements for all of the Singapore Creditors except
that only Transpac and DBS will have an IBM Proceeds Agreement, and only
Transpac will have the Amendment No. 1 to the Warrant previously issued to
Transpac:
Summary of Termination Provisions
The Conversion and Settlement Agreements will remain in full force and
effect until the date Transpac and the related investors convert their debt into
Series A Convertible Preferred Stock, subject to the following termination
provisions:
(i) prior to June 30, 1999 no party has the right to terminate the
Conversion and Settlement Agreement;
(ii) as of and after the date Transpac and the related investors
convert their debt, no party has the right to terminate the Conversion and
Settlement Agreement;
(iii) after June 30, 1999, so long as Transpac has not converted its
debt into Series A Convertible Preferred Stock, Transpac has sole
discretion on behalf of the related investor group to cancel the Conversion
and Settlement Agreement by giving written notice to the Company; and
(iv) if a voluntary or involuntary case against the Company is
commenced under the United States Bankruptcy Code, or an assignment for the
benefit of creditors by the Company is made, the Conversion and Settlement
Agreement is terminated.
11
<PAGE>
Conditions to Debt Conversion
Before the debt conversion is completed, all of the following conditions
must be complied with:
(i) The completion of all of the Singapore Creditors conversions is
subject to the completion of signed agreements between the Company and each
of the Singapore Creditors upon terms and conditions which are not more
favorable to any one creditor than the other creditors. Specifically, the
effective price per share of the Series A Convertible Preferred Stock must
not be less than $1.02 per share, and the terms and conditions of the
settlement and release provisions for each of the Conversion and Settlement
Agreements may not be different in any material respect for any of the
Singapore Creditors.
(ii) The Board must approve the material terms and conditions of the
Conversion and Settlement Agreements for each of the Singapore Creditors.
(iii) The holders of a majority of the Common Stock of the Company
must approve the material terms and conditions of the Debt Conversion
Transaction.
(iv) The Certificate of Amendment of the Amended and Restated Articles
of Incorporation must be approved by the Board and holders of a majority of
the Common Stock of the Company.
(v) L.H. Friend, Weinress, Frankson and Presson, Inc. must have issued
the fairness opinion to the Company, which opinion must be satisfactory to
the Company.
Series A Convertible Preferred Stock to be Issued to Creditors
The Conversion and Settlement Agreement sets forth the number of shares of
Series A Convertible Preferred Stock of the Company each of the Singapore
Creditors will receive upon the closing of the Debt Conversion Transaction which
are set forth below:
Transpac Capital Pte. Ltd. Transpac and the related investor group will
receive 4,031,825 shares of Series A Convertible Preferred Stock of the Company.
This Series A Convertible Preferred Stock is initially convertible into
8,063,651 shares of Common Stock of the Company, subject to adjustment as
provided for in the Certificate of Amendment of the Amended and Restated
Articles of Incorporation ("Certificate of Amendment"). Assuming conversion
into Common Stock of all of the Series A Convertible Preferred Stock of Transpac
and of all other Singapore Creditors in the Debt Conversion Transaction as of
May 25, 1999 (which would represent 18,725,555 shares of Common Stock for the
Singapore Creditors as a group), and excluding Transpac and the related
investors current stock ownership as set forth in the table "Security Ownership
of Certain Beneficial Owners and Management" herein, Transpac and related the
investor group would own approximately 27.26% of the resulting total of
29,582,444 shares of outstanding Common Stock of the Company.
Development Bank of Singapore, Ltd. DBS will receive 1,154,311 shares of
Series A Convertible Preferred Stock of the Company. This Series A Convertible
Preferred Stock is initially convertible into 2,308,622 shares of Common Stock
of the Company, subject to adjustment as provided for in the Certificate of
Amendment. Assuming conversion into Common Stock of all of the Series A
Convertible Preferred Stock of DBS and of all other Singapore Creditors in the
Debt Conversion Transaction as of May 25, 1999 DBS would own approximately 7.80%
of the resulting total of 29,582,444 shares of outstanding Common Stock of the
Company.
12
<PAGE>
Motorola, Inc. Motorola will receive 869,932 shares of Series A
Convertible Preferred Stock of the Company. This Series A Convertible Preferred
Stock is initially convertible into 1,739,865 shares of Common Stock of the
Company, subject to adjustment as provided for in the Certificate of Amendment.
Assuming conversion into Common Stock of all of the Series A Convertible
Preferred Stock of Motorola and of all other Singapore Creditors in the Debt
Conversion Transaction as of May 25, 1999, Motorola would own approximately
5.88% of the resulting total of 29,582,444 shares of outstanding Common Stock of
the Company.
NS Electronics Bangkok, Ltd. NSEB will receive 271,176 shares of Series A
Convertible Preferred Stock of the Company. This Series A Convertible Preferred
Stock is initially convertible into 542,353 shares of Common Stock of the
Company, subject to adjustment as provided for in the Certificate of Amendment.
Assuming conversion into Common Stock of all of the Series A Convertible
Preferred Stock of NSEB and of all other Singapore Creditors in the Debt
Conversion Transaction as of May 25, 1999, NSEB would own approximately 1.83% of
the resulting total of 29,582,444 shares of outstanding Common Stock of the
Company.
STMicroelectronics, Inc. Assuming the Debt Conversion Transaction is
approved by the Shareholders, by virtue of the STM/FI Financial Agreement
wherein FI Financial agreed to purchase the creditor position of STM for a cash
payment of $500,000, FI Financial will own the creditor position of STM and has
agreed to convert that creditor position into 1,322,647 shares of Series A
Convertible Preferred Stock STM would have received if STM had participated in
the Debt Conversion Transaction ("FI Financial Shares"). Because FI Financial
has assigned portions of its interest under the STM/FI Financial Agreement to 11
employees including officers and a director and four other third parties, and
may assign some or all of FI Financial's remaining interest under the STM/FI
Financial Agreement to additional third parties (collectively "FI Financial
Assignees"), the FI Financial Assignees will each receive a pro-rata share of
the FI Financial Shares in proportion to their respective interests under the
STM/FI Financial Agreement. The FI Financial Shares are initially convertible
into 2,645,294 shares of Common Stock of the Company, subject to adjustment as
provided for in the Certificate of Amendment. Assuming conversion into Common
Stock of all of the FI Financial Shares and all of the Series A Convertible
Preferred Stock of all of the other Singapore Creditors in the Debt Conversion
Transaction as of May 25, 1999, FI Financial and/or the FI Financial Assignees
would own approximately 8.94% of the resulting total of 29,582,444 shares of
outstanding Common Stock of the Company. As explained in previous sections of
this Consent Statement, as part of the Debt Conversion Transaction, FI Financial
will surrender the STM Warrant without exercise, whereupon the STM Warrant will
be terminated and will not have any further force or effect.
Texas Instruments, Inc. TI will receive 1,056,026 shares of Series A
Convertible Preferred Stock of the Company. This Series A Convertible Preferred
Stock is initially convertible into 2,112,053 shares of Common Stock of the
Company, subject to adjustment as provided for in the Certificate of Amendment.
Assuming conversion into Common Stock of all of the Series A Convertible
Preferred Stock of TI and all of the other Singapore Creditors in the Debt
Conversion Transaction as of May 25, 1999, TI would own approximately 7.14% of
the resulting total of 29,582,444 shares of outstanding Common Stock of the
Company.
Samsung Corning Co., Ltd. Samsung will receive 183,275 shares of Series A
Convertible Preferred Stock of the Company. This Series A Convertible Preferred
Stock is initially convertible into 366,549 shares of Common Stock of the
Company, subject to adjustment as provided for in the Certificate of Amendment.
Assuming conversion into Common Stock of all of the Series A Convertible
Preferred Stock of Samsung and all of the other Singapore Creditors in the Debt
Conversion Transaction as of May
13
<PAGE>
25, 1999, Samsung would own approximately 1.24% of the resulting total of
29,582,444 shares of outstanding Common Stock of the Company.
Orix Leasing Singapore Ltd. Orix will receive 473,584 shares of Series A
Convertible Preferred Stock of the Company. This Series A Convertible Preferred
Stock is initially convertible into 947,169 shares of Common Stock of the
Company, subject to adjustment as provided for in the Certificate of Amendment.
Assuming conversion into Common Stock of all of the Series A Convertible
Preferred Stock of Orix and all of the other Singapore Creditors in the Debt
Conversion Transaction as of May 25, 1999, Orix would own approximately 3.20% of
the resulting total of 29,582,444 shares of the outstanding Common Stock of the
Company.
Change in Control
Assuming all of the Series A Convertible Preferred Stock of all of the
Singapore Creditors is converted into Common Stock of the Company in connection
with the Debt Conversion Transaction as of May 25, 1999, the Singapore Creditors
(including FI Financial as the holder of the creditor position of STM) would
collectively own approximately 63.29% of the resulting total of 29,582,444
outstanding shares of Common Stock of the Company. This percentage of Common
Stock could enable the Singapore Creditors (including FI Financial as the holder
of the creditor position of STM) to collectively exercise effective control over
the business and affairs of the Company. As of May 25, 1999, the Company has no
information which would lead it to believe that the Singapore Creditors intend
to act collectively on matters concerning the business and affairs of the
Company.
The existing Shareholders of the Company will suffer substantial dilution
to their respective share ownership positions of the Company if the Debt
Conversion Transaction and the other proposals described herein are approved by
the Shareholders. However, the Company strongly believes that approval of the
Debt Conversion Transaction is the only way to avoid an imminent bankruptcy
filing by the Company with the probable result that the Shareholders would not
receive anything for their Common Stock because of the $27.56 million in
Singapore Creditor claims.
Release Provisions of Debt Conversion Transaction
Once the Singapore Creditors (including FI Financial as the holder of the
creditor position of STM) convert their debt, the debt owed by the Company in
the aggregate amount of $27.56 million to the Singapore Creditors shall be
deemed to be converted into the respective number of shares of the Company's
Series A Convertible Preferred Stock set forth above. As of and after the date
of conversion, the Company's debts to the Singapore Creditors shall be canceled,
terminated and eliminated and the Company and the Singapore Creditors (including
FI Financial) shall release and discharge each other from any and all claims,
damages and causes of action relating to such debts. The releases do not apply
to fraud or wilful misconduct. Also, the releases do not extend to the
Conversion and Settlement Agreements, the Certificate of Amendment, the
Registration Rights Agreement or the Warrants issued to Transpac.
Prior Settlement Agreements Regarding Debt to Creditors
During 1998, the Company negotiated the Restructuring Agreements with the
Singapore Creditors, which generally provided that if certain sums of money were
paid to the Singapore Creditors by certain dates, the Company would only have to
pay a discounted percentage of the debts to each creditor to discharge and
settle the debts. These Restructuring Agreements called for settlement payments
of approximately $9.3 million to satisfy all debt obligations (approximately
$27.1 million at the time) if substantially all of the full amount was paid by
May 1, 1999. The Company was not able to pay the required amounts on the due
dates and negotiated new
14
<PAGE>
agreements with the Singapore Creditors, and the Conversion and Settlement
Agreements replace these prior agreements. A summary of the terms of each of the
prior Restructuring Agreements is provided below.
Development Bank of Singapore, Ltd. On July 10, 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with DBS ("DBS
Agreement"). The DBS Agreement provided that the obligations of MPS guaranteed
by the Company in the principal amount of $4.275 million for certain debt and
$2.134 million under a credit facility, less other certain amounts, would be
released and canceled upon the payment to DBS, within six calendar months of
July 10, 1998, of $1,177,397, and also the payment of certain percentages of any
net monetary proceeds from proposed litigation with IBM.
Transpac Capital Pte. Ltd. and Related Entities. On April 22, 1998, the
Company signed a Restructuring, Settlement and Mutual Release Agreement with
Transpac Capital Pte. Ltd. and related entities ("Transpac Agreement") whereby
the $9 million Transpac and the related investors had paid pursuant to a
Convertible Loan Agreement dated March 26, 1996, which was guaranteed by the
Company would be released and canceled upon certain payments and a stock
issuance. These payments were: (1) the Company issued to Transpac warrants to
purchase 500,000 shares of Common Stock at $1.00 per share; (2) within 6
calendar months of April 22, 1998, the Company would pay to the investors
$3,112,462; (3) within 30 days of receiving any money from a proposed lawsuit
against IBM, the Company would remit 30% of such proceeds to Transpac, net of
expenses; (4) the Company also guaranteed Transpac, as agent for the investors,
that it would receive certain additional amounts from the proposed IBM
litigation subject to certain conditions. The agreement that Transpac and the
related investors may receive certain monetary proceeds, if any, for a proposed
lawsuit against IBM ("IBM Proceeds Agreement") is also a part of Transpac's and
the related investors signed Conversion and Settlement Agreement. There can be
no assurance any such lawsuit will be filed, or if filed that it would result in
any monetary recovery for the Company. The IBM Proceeds Agreement is filed as
Exhibit F to the Consent Statement, and the description of its terms and
conditions is qualified in its entirety by Exhibit F. The joint release was
subject to the payment of the above amounts.
NS Electronics Bangkok Ltd. On July 9, 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with NSEB ("NSEB
Agreement"). The NSEB Agreement provided that the obligation of the Company in
the original amount of $1.5 million plus interest, and the related loan and
security agreements would be released and discharged upon the payment of
$227,062 within six calendar months of July 9, 1998 and also provided a release
of accounts receivable of $665,000 to MPS.
Texas Instruments Singapore, Ltd. On April 24, 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with TI ("TI Agreement").
The TI Agreement provided that the obligations of MPS guaranteed by the Company
in the principal amount of $3.5 million, plus interest, and the related loan and
security agreements would be released upon the payment by the Company to TI of
$1,077,147 within six calendar months of April 24, 1998, as long as there were
no proceedings for a voluntary or involuntary bankruptcy or an assignment for
the benefit of creditors. In such event, TI would release MPI and its
affiliates from the debt and MPI would release TI and its affiliates from any
claims, damages and causes of action relating to the loan documents.
CTM Electronics and Motorola, Inc. On July 1, 1998, the Company, CTM and
Motorola signed a Forbearance, Restructure and Mutual Release Agreement
("Motorola Agreement"). Pursuant to the Motorola Agreement, the Company
delivered to Motorola stock certificates representing all of the outstanding
stock of MPA, CTM and MPS and proxies to vote. Also, MPI and Citicorp signed a
Promissory Note pursuant to which Citicorp loaned $2,208,538 to Citibank N.A.
Motorola has paid all amounts due to Citicorp and the Company is obligated under
its indemnity to guarantee this amount. The note was amended four times between
July, 1997 and January, 1998. As of March 28, 1998, the amount owed was
$2,219,918 plus interest from that date. The Motorola Agreement provided that
if the Company paid its obligations within six months of July 1, 1998 $887,331
both parties would release each other as long as the payment was made timely and
no applicable bankruptcy proceeding had been commenced.
Samsung Corning Co., Ltd. On May 19, 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with Samsung ("Samsung
Agreement"). The Samsung Agreement
15
<PAGE>
provided that the $1 million loan plus interest, which was guaranteed by Samsung
and co-guaranteed by the Company, would be released and canceled upon the
payment of $150,000 within six calendar months of May 19, 1998. If such payment
was not made within six calendar months of May 19, 1998, the payment required
was $500,000. As long as there were no applicable proceedings for bankruptcy,
then both parties would provide joint releases against the other for claims
relating to the loan.
Orix Leasing Singapore Ltd. On April 14, 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with Orix ("Orix
Agreement"). The Orix Agreement provided that the obligations of the Company's
affiliates which were guaranteed by the Company in the amount of $1,610,187
under the guarantees and related agreements would be released upon the payment
of $483,056 within six calendar months of April 14, 1998, as long as there were
no proceedings for a voluntary or involuntary bankruptcy or an assignment for
the benefit of creditors. The Orix Agreement provided that upon timely payment
joint releases for both parties would be executed.
STMicroelectronics, Inc. In September 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement with STM ("STM
Agreement"). The STM Agreement required the Company to pay STM $1,137,044 by
May 1, 1999 to secure a joint release of all debts owed to STM, subject to the
condition there be no bankruptcy proceedings pending or initiated against the
Company.
Summary of Principal Terms of Series A Convertible Preferred Stock
The following is a summary of the rights, preferences and privileges of the
Series A Convertible Preferred Stock and is qualified in its entirety by the
Certificate of Amendment filed as Exhibit B to this Consent Statement.
Voting Rights
The holder of each share of Series A Convertible Preferred Stock has the
right to one vote for each share of Common Stock into which the Series A
Convertible Preferred Stock could be converted and shall have full voting rights
equal to the holders of the Common Stock.
In addition, as long as any shares of Series A Convertible Preferred Stock
are outstanding, the holders of the Series A Convertible Preferred Stock voting
as a separate series, with cumulative voting rights as among themselves, shall
be entitled to elect one director. The holders of the Series A Convertible
Preferred Stock and the Common Stock, voting together as a single class, shall
be entitled to elect the remaining directors of the Company.
Dividends
The Series A Convertible Preferred Stock is entitled to dividends of
$.0357 per share per annum out of assets legally available, when, as and if
declared by the Board. The dividends are cumulative and are payable prior to
the payment of any dividend or distribution on the Common Stock and participate
in any dividends payable on the Common Stock. Under applicable California law,
the Company must meet certain financial conditions before it can make any
distributions of dividends. As of May 15, 1999, the Company could not legally
make any distributions of cash dividends on the Series A Convertible Preferred
Stock. Upon the conversion of the Series A Convertible Preferred Stock, any
dividends payable with respect to the Series A Convertible Preferred Stock shall
be converted into that number of shares of Common Stock determined by dividing
the dividends payable by the conversion price.
16
<PAGE>
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the Series A Convertible Preferred Stock is entitled to receive at an amount per
share equal to $1.02 for each outstanding share of Series A Convertible
Preferred Stock, plus any declared but unpaid dividends before any distribution
to the holders of the Common Stock.
Redemption
To the extent it may lawfully do so, the Company is entitled, in the sole
discretion of the Board, to redeem all or any part of the outstanding shares of
Series A Convertible Preferred Stock, upon not less than 20 and not more than 30
days prior notice, for the original issue price of $1.02 plus the amount of all
declared but unpaid dividends. Any redemption for less than all of the
outstanding Series A Convertible Preferred Stock shall be allocated pro rata
among all the holders thereof. While any shares of the Series A Convertible
Preferred Stock is outstanding, the Company cannot redeem any shares of Common
Stock without the approval of a majority of the shares of Series A Convertible
Preferred Stock.
Conversion
Each share of Series A Convertible Preferred Stock is convertible at the
option of the holder at any time after the date of issuance and on or prior to
the fifth day before the redemption date into such number of fully-paid and
nonassessable shares of Common Stock as is determined by dividing the original
issue price of $1.02 by the conversion price of $0.51 per share, as adjusted.
Each share of Series A Convertible Preferred Stock is also automatically
converted into shares of Common Stock at the conversion price then in effect,
immediately upon the Company's receipt of the written consent of a majority of
the shares of Series A Convertible Preferred Stock outstanding. The conversion
price of the Series A Convertible Preferred Stock is subject to adjustment upon
the occurrence of certain events and includes accrued and unpaid dividends.
Protective Provisions
So long as any shares of Series A Convertible Preferred Stock are
outstanding, the Company will not, without first obtaining the approval of the
holders of at least two-thirds of the then outstanding Series A Convertible
Preferred Stock:
(i) sell all or substantially all of the assets or merge into or
consolidate with any corporation to effect any transaction or series of
related transactions in which more than 50% of the voting power of the
Company is disposed of;
(ii) alter or change the rights, preferences or privileges of the
Series A Convertible Preferred Stock;
(iii) increase or decrease the number of authorized shares of Series
A Convertible Preferred Stock;
(iv) authorize or issue any other equity security senior to or on a
par with the Series A Convertible Preferred Stock;
17
<PAGE>
(v) redeem, purchase or otherwise acquire any share or shares of the
capital stock of the Company, excluding the repurchase of Common Stock from
employees, officers, directors, consultants or persons performing services
pursuant to agreements providing for repurchase;
(vi) amend or otherwise modify the Articles of Incorporation to
change the rights, preferences or privileges of the Series A Convertible
Preferred Stock;
(vii) declare or pay any dividends on the Common Stock;
(viii) declare or pay any dividends on the Series A Convertible
Preferred Stock except for the fixed amount dividends;
(ix) take any other action with respect to which holders of the
Series A Convertible Preferred Stock are entitled to vote, as a separate
class; or
(x) reclassify any outstanding shares into shares having rights,
preferences or privileges senior to or a parity with the Series A
Convertible Preferred Stock.
Registration Rights
All of the eight creditors who are converting their debt into equity of the
Company have been granted registration rights pursuant to Registration Rights
Agreements which require the Company to register the underlying Common Stock
with the Securities and Exchange Commission ("SEC"). The following summary of
the applicable Registration Rights Agreements is qualified in its entirety by
reference to the Form of Registration Rights Agreement which is set forth at
Exhibit C to this Consent Statement.
The Company is required to use its best efforts to register the Common
Stock issuable upon conversion of the Series A Convertible Preferred Stock and
any Common Stock issuable as a dividend or distribution subject to certain
exceptions. The Company does not have to register the shares in the following
situations: (1) if the holders propose to sell securities at an aggregate price
of less than $1.5 million, provided the $1.5 million does not apply if the
holders represent in writing they intend to dispose of at least 2 million shares
of Common Stock of the Company; (2) within 120 days after the filing or
effective date of any other registration statement filed pursuant to the
Registration Rights Agreement; or (3) in any jurisdiction where the Company
would have to execute a general consent to service of process.
The Company is obligated to use its best efforts to file the registration
statement no later than six months from the date of Shareholder approval of the
Debt Conversion Transaction, to cause it to be effective within 45 days if it is
a Form S-3 Registration Statement ("S-3"), and if it is not an S-3, to be
effective within 90 days of the filing of another registration statement form.
The Company must keep the registration statement effective for one year after it
is declared effective by the SEC. The Company must pay all expenses of
registration except for underwriting discounts and commissions.
Principal Terms of Transpac Warrant
In connection with the Restructuring Agreement dated April 24, 1998 with
Transpac and the related investors, Transpac and the related investors received
a warrant to purchase 500,000 shares of Common Stock of the Company ("Warrant")
at an exercise price of $1.00 per share. The Warrant is exercisable on or after
April 24, 1998 and until April 24, 2003. The number of shares purchasable under
the Warrant is subject to adjustment upon certain events including stock splits,
subdivisions or contributions of shares. Beginning April 24, 1999, holders of at
least 50% of the shares of Common Stock issued or issuable
18
<PAGE>
pursuant to the Warrant ("Warrant Shares") can demand the Company file a
registration statement to register the Warrant Shares at the Company's expense.
The Company, however, does not have to register the Warrant Shares if the
holders sell the Warrant Shares for an aggregate price of less than $1.0
million; unless the holders sell at least 250,000 Warrant Shares.
Upon completion of the Debt Conversion Transaction, the Company will amend
the Warrant pursuant to the Conversion and Settlement Agreement with Transpac
and the related investors to reduce the exercise price to $.50. Therefore, in
addition to the 4,031,826 shares of Series A Convertible Preferred Stock which
Transpac and the related investors will receive assuming the Debt Conversion
Transaction is approved by the Shareholders, if Transpac elects to exercise the
entire Warrant it could acquire an additional 500,000 shares of Common Stock of
the Company. The Transpac Warrant and the amendment thereto are filed as Exhibit
D to the Consent Statement and the foregoing description of its terms and
conditions is qualified in its entirety by the Transpac Warrant at Exhibit D.
Opinion of Financial Advisor
At the meeting of the Microelectronic Packaging, Inc. ("MPI" or the
"Company") Board on April 28, 1999, L.H. Friend, Weinress, Frankson & Presson,
Inc. ("L.H. Friend") delivered its oral opinion, and later confirmed such
opinion in writing that, as of April 28, 1999, the terms of the conversion of
$27,556,801 of debt related to the Company's discontinued operations in
Singapore as of March 31, 1999 (the "Debt") into shares of the Company's Series
A Convertible Preferred Stock (the "Preferred Stock") pursuant to the Debt
Conversion and Mutual Settlement and Release Agreements (the "Agreements")
between the Company and Transpac Capital Pte. Ltd., Texas Instruments
Incorporated, Motorola, Inc., The Development Bank of Singapore Limited, FI
Financial LLC, ORIX Leasing Singapore Limited, NS Electronics Bangkok (1993)
Ltd. and Samsung Corning Co. Ltd. (the "Creditors") (collectively the
"Transaction"), were fair, from a financial point of view, to the Company's
shareholders. L.H. Friend did not materially participate in negotiations for
the terms of the Transaction. No limitations were placed by the senior
management of the Company with respect to the investigations made or the
procedures followed by L.H. Friend in preparing or rendering its opinion.
THE FULL TEXT OF THE OPINION OF L.H. FRIEND, WHICH SETS FORTH ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
AS EXHIBIT H TO THIS CONSENT STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
MPI SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY.
THE SUMMARY OF THE OPINION OF L.H. FRIEND SET FORTH IN THIS CONSENT STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. L.H.
FRIEND'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE TRANSACTION FROM A
FINANCIAL POINT OF VIEW TO THE SHAREHOLDERS OF THE COMPANY AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW TO VOTE
IN CONNECTION WITH THE CONSENT SOLICITATION.
In rendering its opinion, among other things, L.H. Friend: (i) reviewed the
Agreements between the Company and the Creditors; (ii) reviewed the draft
Certificate of Amendment of Amended and Restated Articles of Incorporation dated
April 29, 1999; (iii) reviewed the draft Registration Rights Agreements dated
April 29, 1999 between the Company and the Creditors; (iv) reviewed the draft
Transpac Warrant and Amendment No. 1 dated April 29, 1999; (v) reviewed the
Agreement of Assignment of Interest under Letter Agreement with
STMicroelectronics, Inc. between the employees and management of the Company and
FI Financial LLC, dated April 21, 1999; (vi) reviewed the draft IBM Proceeds
Agreement dated April 29, 1999; (vii) reviewed the Letter Agreement dated April
14, 1999 between FI Financial LLC and STMicroelectronics, Inc.; (viii) reviewed
the Company's Annual Report to Stockholders on Form 10-K
19
<PAGE>
for the fiscal years ended December 31, 1998, 1997 and 1996, and the Form 10-Q
for the quarter ended March 31, 1999; (ix) examined certain operating and
financial information and financial projections provided to L.H. Friend by the
Company's management; (x) reviewed the historical market prices and trading
volume of the Company's Common Stock; (xi) analyzed publicly available financial
and market data regarding certain companies in the electronic component
manufacturing industry and compared them to the Company's financial and market
data; (xii) conducted limited interviews with certain members of the Company's
management team; and (xiii) performed such other studies, analyses, inquires and
investigations as L.H. Friend deemed appropriate.
In rendering its opinion, L.H. Friend relied upon the accuracy and
completeness of all financial and other information that was supplied to L.H.
Friend and assumed that there has been no material change in the assets,
financial condition and business prospects of the Company since the date of the
most recent financial statements made available to L.H. Friend. With respect to
financial projections for the Company, L.H. Friend assumed that such projections
were reasonably prepared and reflect the best currently available estimates of
the future financial results and conditions of the Company.
The following is a summary of the analyses presented by L.H. Friend to the
MPI Board on April 28, 1999 in connection with the rendering of the opinion:
(i) Liquidation Analysis. L.H. Friend performed a Liquidation Analysis for
the Company. The Liquidation Analysis is based on the latest available book
value information provided by the Company's management with regards to assets
and liabilities of its Singapore subsidiaries ("Singapore Entities"), CTM
Electronics, Inc. ("CTM") and Corporate, San Diego ("MPI") (together, the
"Subsidiaries"). In the Liquidation Analysis, L.H. Friend reviewed each major
asset or liability category and assumed that, during a liquidation event, the
Company would receive full book value on all trade accounts receivable and
deposits, $500,000 on fixed assets and very minimal value for inventory and
other miscellaneous assets. L.H. Friend further assumed that the Company would
be liable for the full amount of its outstanding liabilities such as accounts
payable, accruals and debt of discontinued operations. L.H. Friend also assumed
the cost of liquidation to be $500,000. L.H. Friend calculated the Net
Liquidation Proceeds (Shortfall) for the Subsidiaries and for the combined
Company by subtracting the liquidation value of all outstanding liabilities from
the liquidation value of all assets. The Net Liquidation Proceeds (Shortfall)
for the Subsidiaries and for the combined Company are as follows: Singapore
Entities -($29,183,000), CTM - $1,015,000, MPI - ($4,488,000) and total combined
Company - ($33,156,000).
(ii) Stock Trading History. L.H. Friend examined the history of the
trading prices and volume of the Company's Common Stock for the period from
January 1, 1998 to April 28, 1999. The analysis indicated that during the
period from January 1, 1998 to April 28, 1999, the Company's Common Stock never
closed above $0.88 per share, which is significantly below the price per share
of Common Stock implied in the Transaction.
(iii) Comparison with Selected Companies. L.H. Friend reviewed and
compared selected historical stock market data and financial statistics for the
Company to the corresponding data and statistics of four publicly traded
companies in the electronic component manufacturing industry; including
Flextronics International Ltd. ("Flextronics"), Aeroflex Incorporated
("Aeroflex"), HEI Inc. ("HEI") and Irvine Sensors Corporation ("ISC") (together,
the "L.H. Friend Comparable Companies"). L.H. Friend also compared the Pro
Forma data and statistics of the Company, giving effect to the 18,725,554 shares
of the Company's Common Stock issuable under the Preferred Stock, to the
corresponding data and statistics of the L.H. Friend Comparable Companies (the
"Pro Forma Basis"). L.H. Friend examined certain publicly available financial
data and statistics of the L.H. Friend Comparable Companies and the Company,
including revenues, earnings before interest and taxes plus depreciation and
amortization
20
<PAGE>
("EBITDA"), earnings before interest and taxes ("EBIT"), net income, earnings
per share and the multiples of Total Enterprise Value (defined as the market
value of the common equity, plus total debt, less cash and equivalents) to
revenues, EBITDA and EBIT. In addition, L.H. Friend examined the Equity Value to
Net Income multiples ("P/E Multiple"). All of the multiple comparisons were
performed for the latest 12 months of reported results. The P/E Multiples were
analyzed for the latest 12 months of reported results as well as for publicly
available brokerage analysts' estimates of earnings per share for fiscal year
2000 for each company.
The indicated mean and median Total Enterprise Value multiple ranges for
the L.H. Friend Comparable Companies were 2.1 times and 1.5 times revenues, 13.9
times and 13.9 times EBITDA, and 21.3 and 21.3 times EBIT. The P/E Multiple
mean and median values for the L.H. Friend Comparable Companies were 35.2 times
and 35.2 times latest 12 months earnings per share and 19.8 and 15.0 times the
fiscal year 2000 earnings per share. L.H. Friend then compared these multiples
to Company's current multiples based upon actual Equity Value as of the date of
the opinion as well as multiples derived on the Pro Forma Basis. Total
Enterprise Value multiple ranges based on the Company's current stock price and
the Pro Forma Basis were 1.5 times and 2.2 times revenues, 26.3 times and 38.1
times EBITDA and 50.1 and 72.5 times EBIT, respectively. The P/E Multiples base
on current stock price and the Pro Forma Basis were 3.5 times and 58.8 times
earnings per share for Fiscal Year 1998.
With respect to the comparison with selected public companies, L.H. Friend
noted that the Company was trading at multiples of profitability, including
EBITDA, EBIT and earning per share, which were consistent with those of the L.H.
Friend Comparable Companies as of the date of this opinion. In addition, L.H.
Friend further noted that on the Pro Forma Basis, the same profitability
multiples at the share price implied by the Transaction were significantly
higher than those of the L.H. Friend Comparable Companies.
(iv) Discounted Cash Flow Analysis. L.H. Friend performed a Discounted
Cash Flow Analysis of the Company based on the projections provided by the
management. L.H. Friend calculated the present values of the estimated free
cash flows of the Company through the Fiscal Year ending December 31, 2003 and
the estimated terminal value of the Company at the end of such date. In
calculating the estimated terminal value, L.H. Friend utilized the mean and
median EBITDA multiples of 4.0 times, 5.0 times, 6.0 times and 7.0 times EBITDA
which were deemed reasonable by L.H. Friend for the purpose of this opinion. In
calculating the present values of the estimated free cash flows and estimated
terminal value, L.H. Friend assumed reasonable discount rates of 15.0%, 17.5%,
20.0% and 22.5%. The results from the Discounted Cash Flow Analysis implied a
present Equity Value of between $11.8 million and $22.6 million, or $0.40 and
$0.76 per share.
The summary of the L.H. Friend presentation set forth above does not
purport to be a complete description of the presentations made by L.H. Friend to
Company management or its Board of Directors. L.H. Friend notes its belief that
its analyses must be considered as a whole and that selecting portions of its
analyses, without considering all factors and analyses, could create a
misleading view of the process underlying its opinion. In its analyses, L.H.
Friend made certain assumptions with respect to industry performance, general
business and economic conditions, and other matters, many of which are beyond
the control of the Company. Any estimates contained therein are not necessarily
indicative of actual values, which may vary significantly. Estimates of the
relative financial values of the Company do not purport to be appraisals or
necessarily reflect the prices at which the Company may actually be sold.
L.H. Friend was selected by the Company's Board of Directors based on its
qualifications, experience, expertise and reputation. As part of its investment
banking business, L.H. Friend is regularly
21
<PAGE>
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other transactions.
Pursuant to a letter agreement dated December 8, 1998, the Company has paid
L.H. Friend a fee of $50,000 for rendering this opinion, and has agreed to
reimburse L.H. Friend for its reasonable expenses incurred in connection with
its engagement by the Company. The Company has also agreed to indemnify L.H.
Friend and its directors, officers, agents, employees, affiliates and
controlling persons against any losses, claims or liabilities to which L.H.
Friend becomes subject to in connection with its rendering of services, except
those that arise from L.H. Friend's gross negligence or willful misconduct.
Vote Required and Recommendation for Approval
The affirmative vote of a majority of the outstanding Common Stock is
required to approve the Debt Conversion Transaction. The Board of Directors
recommends the Shareholders vote FOR the approval of the Debt Conversion
Transaction. See also "Certain Relationships and Related Transactions" for a
discussion of any conflicts of interest that may have existed with respect to
certain members of the Board of Directors during the time the board negotiated
and approved the Debt Conversion Transaction.
If the Company is unable to obtain Shareholder approval of the Debt
Conversion Transaction at Proposal 1, it would result in a breach of one of the
principal conditions to the Singapore Creditors' obligations to complete the
Debt Conversion Transaction. The Conversion and Settlement Agreement contains a
number of conditions which must happen before the Singapore Creditors must close
and convert their debts, including that "...The material terms and conditions of
the Transpac Conversion and other creditor conversions shall have been approved
by MPI Shareholders, which approval shall be sought and obtained by MPI in
accordance with all applicable laws." The failure of the Shareholders to
approve the Debt Conversion Transaction would constitute a failure of a
condition precedent to the performance of the Singapore Creditors, who would not
be obligated to proceed under the current Conversion and Settlement Agreement.
In that case, it is very likely the Company would seek protection under
applicable bankruptcy laws.
PROPOSAL 2
APPROVAL OF THE ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK ISSUED IN
CONNECTION WITH THE DEBT CONVERSION TO 11 EMPLOYEES INCLUDING OFFICERS, A
DIRECTOR OF THE COMPANY AND THIRD PARTIES IN EXCHANGE FOR THEIR PAYMENT OF A
CREDITOR CLAIM.
Description of and Reasons for Proposal 2
As of March 31, 1999, the Company owed STM the principal amount of
$4,000,000 and approximately $821,095 of accrued interest pursuant to a term
note incurred in 1995 by MPS and guaranteed by the Company. In September 1998,
the Company signed a Restructuring, Settlement and Mutual Release Agreement
which required the Company to pay $1,137,044 to STM by May 1, 1999 in full
satisfaction of all obligations owed. The Company was unable to raise the
funding necessary to pay off the required amount by May 1, 1999 and attempted to
renegotiate the debt and have STM convert the $4,000,000 principal amount plus
accrued interest into the Series A Convertible Preferred Stock along with the
other Singapore Creditors. STM would not agree to a debt conversion and required
that a negotiated cash payment be made to eliminate their debt.
22
<PAGE>
The Company located an investor, FI Financial, which agreed to purchase
STM's creditor position for $500,000, subject to certain conditions described
herein. FI Financial also agreed to allow employees of the Company including a
director, officers and third parties to contribute toward the purchase of the
STM creditor claim and to receive a pro-rata share of the Series A Convertible
Preferred Stock that would otherwise be issued to STM in the Debt Conversion
Transaction. FI Financial may also assign some or all of its remaining interest
in the STM creditor position to additional third parties.
FI Financial Agreement with STMicroelectronics, Inc.
The Company negotiated with several parties during late 1998 and early
1999, and on April 14, 1999 STM signed the STM/FI Financial Agreement with FI
Financial, which is principally owned by James Waring, a nominee for director of
the Company, to assign its creditor position to FI Financial for $500,000. Mr.
Waring is also a member of the law firm of Ross, Dixon & Bell, outside lawyers
for the Company. Three members of Ross, Dixon & Bell have also agreed to
contribute payments to FI Financial in exchange for their pro-rata share of the
Series A Convertible Preferred Stock. Under the letter agreement, FI Financial
must pay out of an escrow account $500,000 to STM by June 30, 1999 in exchange
for a complete assignment of all of STM's rights, title, claims and interests
under the agreements which gave rise to the original $4.0 million principal
debt, plus accrued interest. The STM/FI Financial Agreement is filed as Exhibit
G to the Consent Statement, and the description of its terms and conditions is
qualified in its entirety by Exhibit G.
STM and FI Financial also agreed pursuant to another letter agreement with
the Company to the assignment of certain percentages of FI Financial's interest
in STM's debt to employees, officers and a director of the Company, and to
certain third parties.
Principal Conditions to FI Financial's Obligations
FI Financial's obligations to pay STM the $500,000 by June 30, 1999 under
the agreement with STM is subject to the following principal conditions:
(i) The Company has obtained Board of Director approval for the FI
Financial transactions and the other Singapore Creditor debt conversions,
and the issuance to FI Financial and its assigns of 1,322,647 shares of the
Company's Series A Convertible Preferred Stock.
(ii) STM has executed the Assignment Agreement with FI Financial and
delivered a signed copy to the escrow agent.
(iii) STM has delivered to the escrow agent the signed Warrant, a
settlement agreement and the original debt agreements.
In the event STM does not receive the $500,000 prior to June 30, 1999, the
escrow account and the terms and conditions of the FI Financial letter agreement
shall automatically terminate unless STM and FI Financial agree in writing to
extend the term.
Assignment of Portion of FI Financial's Interest in STMicroelectronics, Inc.'s
Debt to Employees, Officers and a Director of the Company and Third Parties
FI Financial agreed, pursuant to an Assignment of Interest Agreement in
April and May, 1999 to assign a percentage interest in its interest in STM's
debt to employees, officers and a director of the Company and other third
parties. The assignees can obtain a pro-rata interest in the Series A
Convertible Preferred Stock to be issued depending on their cash contributions.
23
<PAGE>
Pursuant to the assignment, the assignees agree to authorize FI Financial
to act as their agent in connection with the escrow account. The Assignment of
Interest Agreement is filed as Exhibit E to the Consent Statement, and the
description of its terms and conditions is qualified in its entirety by Exhibit
E.
To assist in enabling the Company to go forward with the Debt Conversion
Transaction and demonstrate their commitment to the Company's future, the
following employees, officers and a director and members of the Company's
outside business law firm have agreed to contribute the amounts and to receive
the number of shares of Series A Convertible Preferred Stock set forth below
opposite their names:
<TABLE>
<CAPTION>
Name Amount Relationship Number of Shares
---- ------ ------------ ----------------
<S> <C> <C> <C> <C>
1. Andrew Wrobel $ 15,000 Chairman, President and 39,679
Chief Executive Officer
2. Denis Trafecanty $ 35,000 Senior Vice President and 92,585
Chief Financial Officer
3. Pete Hudson $ 15,000 Vice President, Technology 39,679
4. Dudley Westlake $ 5,000 Vice President, Sales and Marketing 13,226
5. Tim Sullivan $ 5,000 Vice President and Controller 13,226
6. Dale Feine $ 5,000 Director, New Business Development 13,226
7. Craig Iwami $ 20,000 Director, Operations 52,906
8. Don Hayashigawa $ 5,000 Manager, Design and Test 13,226
9. Ha Tran $ 40,000 Production Manager 105,812
10. Billy Nguyen $ 15,000 Test Supervisor 39,679
11. Mimie Doetkott $ 5,000 Production Manager 13,226
12. Van Haynie $ 25,000 Partner, Ross, Dixon & Bell 66,132
13. Miller, Boyko & Bell
401(k) Plan, FBO
Van Tengberg $ 25,000 Partner, Ross, Dixon & Bell 66,132
14. Miller, Boyko & Bell
401(k) Plan, FBO
Fletcher Paddison $ 25,000 Partner, Ross, Dixon & Bell 66,132
======== =======
Total: $240,000 634,871 Shares
</TABLE>
The shares of Series A Convertible Preferred Stock issued to the parties
listed above also have the registration rights granted in the Registration
Rights Agreement, Exhibit C, which is discussed in Proposal 1 under the
heading "Registration Rights."
Conditions to Purchase of Series A Convertible Preferred Stock by Employees,
Officers, a Director of the Company and Third Parties
Before FI Financial will purchase STM's debt and before the employees,
officers, a director and the third parties will purchase any Series A
Convertible Preferred Stock from FI Financial in connection with this Proposal
2, the Shareholders must approve the Debt Conversion Transaction at Proposal 1.
In the event the Debt Conversion Transaction at Proposal 1 is not approved by
the Shareholders pursuant to this Consent Statement, the Company will very
likely seek protection under applicable bankruptcy laws.
Vote Required and Recommendation for Approval
The affirmative vote of a majority of the outstanding Common Stock is
required to approve the purchase of the Series A Convertible Preferred Stock
from FI Financial by the employees, officers, a director of the Company and
third parties. If such Shareholder approval is not obtained, FI Financial may
be unwilling to purchase the entire $500,000 creditor claim of STM, in which
event the Company may
24
<PAGE>
have to declare bankruptcy since it appears highly unlikely based on the
Company's past dealings with STM that STM would be willing to renegotiate the
debt owed.
The Board of Directors recommends the Shareholders vote FOR the approval of
Proposal 2. The Board believes that the employees', officers' and a director's
contribution of their own money toward the purchase of the STM creditor claim to
receive Series A Convertible Preferred Stock demonstrates a strong commitment to
the Company and is in the best interests of the Company. The Board also
believes that the purchase of such Series A Convertible Preferred Stock will
encourage such individuals to remain as employees of the Company.
PROPOSAL 3
APPROVAL OF VARIOUS AMENDMENTS TO THE COMPANY'S 1993 STOCK OPTION/STOCK ISSUANCE
PLAN AS DESCRIBED HEREIN.
Description of and Reasons for Proposal 3
On May 17, 1999, the Board of Directors approved, subject to Shareholder
approval, amendments to the Company's 1993 Stock Option/Stock Issuance Plan
("1993 Plan") to effect the following changes: (i) increase the maximum number
of shares of Common Stock authorized for issuance over the term of the 1993 Plan
from 4,690,632 to 7,000,000 shares; (ii) increase the maximum number of options,
stock appreciation rights and direct stock issuances to any one person per
calendar year to 2,000,000 shares of Common Stock from 500,000 shares of Common
Stock; and (iii) amend the Automatic Option Grant Program to increase the number
of shares of Common Stock for which option grants are to be made to each new
non-employee Board member from 15,000 to 40,000 shares and to increase the
number of shares for which option grants are to be made annually to each
continuing non-employee Board member from 10,000 to 30,000 shares.
The 1993 Plan was adopted by the Board of Directors on December 9, 1993 and
subsequently approved by the Company's Shareholders. The 1993 Plan is the
successor to the Company's 1988 Stock Option Plan (the "Predecessor Plan"). As
of May 25, 1999, options covering an aggregate of 2,178,853 shares of Common
Stock were outstanding under the 1993 Plan, no shares of Common Stock had been
issued under such plan, and 4,821,147 shares of Common Stock remained available
for future option grants and stock issuances, assuming Shareholder approval of
the increase to 7,000,000 shares of Common Stock underlying the 1993 Plan which
forms part of this Proposal.
The following is a summary of the principal features of the 1993 Plan,
including the amendments which will become effective upon Shareholder approval
of this Proposal 3. The summary, however, does not purport to be a complete
description of all the provisions of the 1993 Plan. Any Shareholder of the
Company who wishes to obtain a copy of the actual plan document may do so upon
written request to the Chief Financial Officer of the Company at the Company's
principal executive offices in San Diego, California.
Plan Structure
The 1993 Plan contains three separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) at an Automatic Option Grant Program
and (iii) a Stock Issuance Program. The principal features of these programs
are described below.
25
<PAGE>
Administration
As of March 31, 1999, the 1993 Plan is administered by the Board. The
Board, as Plan Administrator, has complete discretion (subject to the provisions
of the 1993 Plan) to authorize option grants and direct stock issuances under
the 1993 Plan. In addition, the Board may appoint a committee, comprising two
or more Board members, to act as Plan Administrator of the 1993 Plan with
respect to individuals other than officers and directors of the Company who are
subject to the short-swing profit trading restrictions of Section 16 of the
Securities Exchange Act of 1934. All grants under the Automatic Option Grant
Program are made in strict compliance with the provisions of that program and no
administrative discretion is exercised by the Plan Administrator with respect to
the grants made thereunder.
Share Reserve
A total of 7,000,000 shares of Common Stock (including the 2,309,368 shares
subject to approval under this Proposal) has been reserved for issuance over the
ten-year period of the 1993 Plan. Also proposed to be amended is the current
provision which provides that, in no event may any one participant in the 1993
Plan be granted stock options and direct stock issuances for more than 500,000
shares in the aggregate per calendar year. In the event any change is made to
the outstanding shares of Common Stock by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other change
in corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to the securities issuable (in the
aggregate and to each participant) under the 1993 Plan and to each outstanding
option.
Eligibility
Employees (including officers), non-employee Board members and consultants
and independent advisors of the Company and its parent and subsidiaries are
eligible to participate in the Discretionary Grant and Stock Issuance Programs
of the 1993 Plan. Only non-employee members of the Board are eligible to
participate in the Automatic Option Grant Program.
As of March 31, 1999, three executive officers, four non-employee Board
members and approximately 25 other employees were eligible to participate in the
1993 Plan.
Valuation
The fair market value per share on any relevant date under the 1993 Plan
will be the average of the highest bid and lowest ask trading price per share on
that date on the Nasdaq Electronic Bulletin Board, provided the Company timely
files all reports required under the Securities Exchange Act of 1934, as
amended. On March 31, 1999, the average of the highest bid and lowest ask
trading prices per share was $0.355.
Discretionary Option Grant Program
Options may be granted under the Discretionary Option Grant Program at an
exercise price per share not less than 85% of the fair market value per share of
Common Stock on the option grant date. No granted option will have a term in
excess of ten (10) years.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
during which
26
<PAGE>
such optionee's outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such discretion
may be exercised at any time while the options remain outstanding, whether
before or after the optionee's actual cessation of service.
The Plan Administrator is authorized to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) which have exercise prices in
excess of the then-current market price of the Common Stock and to issue
replacement options with an exercise price based on the market price of the
Common Stock at the time of the new grant. The Plan Administrator does not
intend to effect such a cancellation and regrant of outstanding options
immediately following this Consent Solicitation.
Automatic Option Grant Program
Under the amended provisions of the Automatic Option Grant Program, each
individual who is serving as a non-employee Board member and each individual who
was appointed by the Board each year as a new non-employee Board member on such
date, is granted on such date a non-statutory option to purchase 40,000 shares
of Common Stock. Each individual who first becomes a non-employee Board member,
whether through election by the Shareholders or appointment by the Board, will
automatically be granted, at the time of such initial election or appointment, a
non-statutory option to purchase 40,000 shares of Common Stock.
On the date of each Annual Meeting, each individual who is to continue to
serve as a non-employee Board member will automatically be granted a non-
statutory option to purchase 30,000 shares of Common Stock. There will be no
limit to the number of such 30,000-share option grants any one non-employee
Board member may receive over his or her period of Board service.
Each option will have at an exercise price per share equal to 100% of the
fair market value per share of Common Stock on the option grant date and a
maximum term of ten (10) years measured from the option grant date.
Each option will become vested for the option shares in four (4) equal
annual installments over the optionee's period of Board service, with the first
such installment to become vested upon the completion of one year of Board
service measured from the option grant date. The vesting of each automatic
option grant will immediately accelerate upon the optionee's death or permanent
disability or upon certain changes in the ownership or control of the Company.
Upon cessation of Board service, the non-employee Board member will have a
limited time to exercise his or her automatic options, but in no event may the
option be exercised after the expiration date of the option term. Any shares
not exercisable at the time of such cessation of Board service will terminate
and cease to be outstanding.
Stock Issuance Program
Shares may be sold under the Stock Issuance Program at a price per share
not less than 85% of the fair market value per share of Common Stock, payable in
cash or through a promissory note payable to the Company. Shares may also be
issued solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any unvested shares.
27
<PAGE>
Acceleration
In the event the Company is acquired by a merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. Any options assumed or replaced in connection with such
acquisition may, in the Plan Administrator's discretion, be subject to immediate
acceleration, and any unvested shares which do not vest at the time of such
acquisition may be subject to full and immediate vesting, in the event the
individual's service is subsequently terminated within a specified period
following the acquisition.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as at an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
Financial Assistance
The Plan Administrator may permit one or more participants to pay the
exercise price of outstanding options or the purchase price of shares under the
1993 Plan by delivering a promissory note payable in installments. The Plan
Administrator will determine the terms of any such promissory note. However, the
maximum amount of financing provided any participant may not exceed the cash
consideration payable for the issued shares plus all applicable taxes incurred
in connection with the acquisition of the shares. Any such promissory note may
be subject to forgiveness in whole or in part, at the discretion of the Plan
Administrator, over the participant's period of service.
Special Tax Election
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously-acquired shares of Common Stock
in payment of such tax liability.
Amendment and Termination
The Board may amend or modify the 1993 Plan in any or all respects
whatsoever subject to any required Shareholder approval. The Board may
terminate the 1993 Plan at any time, and the 1993 Plan will in all events
terminate on December 8, 2003.
Federal Income Tax Consequences
Option Grants
Options granted under the 1993 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of option differs as follows:
28
<PAGE>
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two years after the option grant date and more than one year after the
exercise date. If either of these holding periods is not satisfied, then a
disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of shares purchased under
incentive options.
Non-Statutory Options. No taxable income is recognized by at an optionee
upon the grant of a non-statutory option without a readily ascertainable fair
market value. The optionee will in general recognize ordinary income, in the
year in which the option is exercised, equal to the excess of the fair market
value of the purchased shares on the exercise date over the exercise price paid
for the shares, and the optionee will be required to satisfy the tax withholding
requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when the Company's repurchase right
lapses, at an amount equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses over (ii) the exercise price paid
for the shares. The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of the exercise
of the option at an amount equal to the excess of (i) the fair market value of
the purchased shares on the exercise date over (ii) the exercise price paid for
such share. If the Section 83(b) election is made, the optionee will not
recognize any additional income as and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised non-
statutory option. The deduction will in general be allowed for the taxable year
of the Company in which such ordinary income is recognized by the optionee.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1993 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Accounting and Income Tax Treatment
Deductibility of Executive Compensation. The Company anticipates that any
compensation deemed paid by it in connection with disqualifying dispositions of
incentive stock option shares or exercises of non-statutory options granted with
an exercise price equal to the fair market value of the option shares at the
time of grant will qualify as performance-based compensation for purposes of
Internal Revenue Code Section 162(m) and will not have to be taken into account
for purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
29
<PAGE>
Company. Accordingly, all compensation deemed paid with respect to those
options will remain deductible by the Company without limitation under Internal
Revenue Code Section 162(m).
Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
compensation expense to the Company's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the grant
or issue date. Such expense will be accruable by the Company over the period
that the option shares or issued shares are to vest. Option grants or stock
issuances made under the 1993 Plan with exercise or issue prices equal to 100%
of the fair market value of the Common Stock will not result in any charge to
the Company's earnings, but the Company must disclose, in footnotes to the
Company's financial statements, the impact those options would have upon the
Company's reported earnings where the value of those options are treated as a
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share.
Conditions to Approval of Amendments to 1993 Stock Plan
Before the amendments to the 1993 Stock Plan are effective, the
Shareholders must approve the Debt Conversion Transaction at Proposal 1 and the
purchase of the Series A Convertible Preferred Stock from FI Financial by the
Company's employees and management at Proposal 2. In the event Proposals 1 and
2 are not approved by the Shareholders, Proposal 3 will be withdrawn.
Vote Required and Recommendation for Approval
The affirmative vote of a majority of the outstanding Common Stock is
required to approve the amendments to the 1993 Plan. If such Shareholder
approval is not obtained, then only the original 2,511,779 shares of Common
Stock will be available for issuance under the 1993 Plan. In addition, if such
Shareholder approval is not obtained, then the current limitation of grants of
options and direct share issuances in any one year to one person of 500,000
shares will remain as well as the lesser number of shares to non-employee
directors upon appointment and each year thereafter. In that event, the current
management and employees will be unable to be granted options in excess of the
currently-authorized number.
The Board of Directors recommends the Shareholders vote FOR the approval of
the amendments to the 1993 Plan. The Board believes that it is in the best
interests of the Company to continue to have a comprehensive equity incentive
program for the Company which will provide a meaningful opportunity for
officers, employees and non-employee Board members to acquire a substantial
proprietary interest in the Company and thereby encourage such individuals to
remain in the Company's service and more closely align their interests with
those of the Shareholders.
PROPOSAL 4
APPROVAL OF GRANT OF OPTIONS TO PURCHASE 3,758,003 SHARES OF COMMON STOCK TO
COMPANY EMPLOYEES, OFFICERS AND DIRECTORS PURSUANT TO AMENDED 1993 STOCK
OPTION/STOCK ISSUANCE PLAN.
Description of and Reasons for Proposal 4
On May 17, 1999, the Board of Directors approved, subject to Shareholder
approval, the grant of options to purchase a total of 3,758,003 shares of Common
Stock to approximately 33 employees, officers and directors under the 1993 Stock
Plan as it is proposed to be amended in Proposal 3 herein.
30
<PAGE>
Among other conditions, the grant of the options to these employees, officers
and a director is subject to Shareholder approval of the amendments to the 1993
Stock Plan as discussed in Proposal 3 above.
The reason for the grant of the additional options to the employees,
officers and directors is to encourage them to remain in the employ of the
Company if the Debt Conversion Transaction is approved because of the
substantial dilution in their share ownership which will result from the Debt
Conversion Transaction. As of May 25, 1999 and before the Debt Conversion
Transaction, the Company had 10,856,890 shares of Common Stock outstanding. If
the Debt Conversion Transaction is approved, and assuming conversion of the
Series A Convertible Preferred Stock to Common Stock, there will be
approximately 29,582,444 shares of Common Stock outstanding, or approximately
2.72 times the number of previously-outstanding shares.
Accordingly, the employees, officers and directors of the Company who have
continued to work with the Company, notwithstanding that it has faced
bankruptcy, will be subject to substantial dilution of their stock ownership.
Management believes that valuable employees may leave the Company if their
options are not adjusted as set forth in this Proposal 4. To enable the
employees, officers and directors to maintain their percentage interest in the
Company after the Debt Conversion Transaction, each of the 33 employees,
officers and directors who has been issued options will be issued an option to
acquire Common Stock of the Company in an amount equal to 2.72 times the number
of currently-outstanding shares subject to options. The options will be granted
to the employees, officers and directors in accordance with the terms and
conditions of the amended 1993 Plan. Based on the 1,913,853 shares of Common
Stock which underlie options granted to employees, options to purchase an
additional 3,758,003 shares of Common Stock will be issued to the employees if
Proposal 4 is approved.
Conditions to Issuance of Additional Options to Employees, Officers and
Directors
Before the grant of the options to purchase 3,758,003 shares of Common
Stock to the 33 employees, officers and directors is effective, the Shareholders
must approve the Debt Conversion Transaction at Proposal 1 and it must be
completed, and the Shareholders must also approve Proposal 2 and the amendments
to the 1993 Stock Plan as discussed in Proposal 3. In the event the Debt
Conversion Transaction at Proposals 1 and 2 is not approved by the Shareholders
pursuant to this Consent Statement, the grant of additional options to purchase
3,758,003 shares of Common Stock to the employees, officers and directors as set
forth in this Proposal 4 will be withdrawn.
Vote Required and Recommendation for Approval
The affirmative vote of a majority of the outstanding Common Stock is
required to approve the grant of options to purchase an additional 3,758,003
shares of Common Stock under the 1993 Plan to the 33 employees, officers and
directors of the Company. If such Shareholder approval is not obtained, then
only the original 2,511,779 shares of Common Stock available for issuance under
the 1993 Plan before the proposed increase described in Proposal 3 will be
available to be granted to the employees, officers and directors. In that
event, the current management and employees will be substantially diluted by the
shares of Common Stock which could be converted in connection with the Debt
Conversion Transaction, which management believes is very likely to result in
the loss of valuable employees.
The Board of Directors recommends the Shareholders vote FOR the approval of
the amendments to the 1993 Plan. The Board believes that it is in the best
interests of the Company to continue to have a comprehensive equity incentive
program for the Company which will provide a meaningful opportunity for
officers, employees and non-employee Board members to acquire a substantial
proprietary interest in
31
<PAGE>
the Company and thereby encourage such individuals to remain in the Company's
service and more closely align their interests with those of the Shareholders.
PROPOSAL 5
APPROVAL OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO AUTHORIZE THE ISSUANCE OF THE SERIES A CONVERTIBLE PREFERRED
STOCK TO THE CREDITORS, EMPLOYEES, AND A DIRECTOR OF THE COMPANY AND THIRD
PARTIES IN CONNECTION WITH THE DEBT CONVERSION.
Description of and Reasons for Proposal 5
The Articles of Incorporation currently authorize the Company to issue up
to 50,000,000 shares of Common Stock and up to 10,000,000 shares of Preferred
Stock. The Debt Conversion Transaction requires the authorization of the Series
A Convertible Preferred Stock to be issued to the creditors in accordance with
the Conversion and Settlement Agreement. This amendment to the Articles of
Incorporation creates the Series A Convertible Preferred Stock to be issued to
the creditors with the rights, preferences and privileges required by the
creditors. The Proposal would cause 9,362,777 authorized shares of Preferred
Stock to be designated as Series A Convertible Preferred Stock.
The holders of shares of the Series A Convertible Preferred Stock would be
entitled to voting rights, preferential dividends, preferences on liquidation
and conversion rights as described in Proposal 1 under the heading "Summary of
Principal Terms of Series A Convertible Preferred Stock" and as fully set forth
in Exhibit B. In addition the Series A Convertible Preferred Stock is
subject to redemption as provided in Exhibit B. The Company is limited by
the proposed amendment of the Articles of Incorporation in its authority to sell
substantially all of the assets of the Company, enter into any merger or
consolidation, alter the rights of Series A Convertible Preferred Stock holders,
issue additional stock with priority over or equal preference to the Series A
Convertible Preferred Stock holders, or undertake certain other transaction, all
as specifically described in Exhibit B.
Background
The Company currently has 60,000,000 authorized shares of stock, consisting
of 50,000,000 shares of Common Stock, no par value and 10,000,000 shares of
undesignated preferred stock. The proposed amendment of the Articles of
Incorporation ("Proposal") would create a new class of 9,362,777 shares of
preferred stock, no par value designated "Series A Convertible Preferred Stock."
Assuming Proposal 5 is approved by the Shareholders, the 10,000,000 shares of
undesignated preferred stock which is currently authorized will be eliminated.
Series A Convertible Preferred Stock will be senior as to dividends and upon
liquidation, dissolution or winding up to the Common Stock.
The holders of Series A Convertible Preferred Stock will have voting rights
equal to one vote for each share of Common Stock into which such Series A
Convertible Preferred Stock could then be converted. Each share of Series A
Convertible Preferred Stock is initially convertible into two (2) shares of
Common Stock. However, the conversion ratio is subject to adjustment under
specified circumstances.
The Proposal
The Company's Certificate of Incorporation shall be amended as set forth in
Exhibit B, which has the effect of amending in full and restating Article III
of the Amended and Restated Articles of Incorporation of the Company.
32
<PAGE>
The full text of Article III as proposed to be amended is attached as
Exhibit B to this Consent Statement.
A Certificate of Amendment reflecting the foregoing amendments shall be
filed with the Secretary of State of the State of California after the adoption
of the Proposal by Shareholders.
Conditions to Approval of Amended and Restated Articles of Incorporation
Before the Certificate of Amendment of the Amended and Restated Articles of
Incorporation is effective, the Shareholders must approve Proposal 1, the Debt
Conversion Transaction, and Proposal 2, the purchase of the Series A Convertible
Preferred Stock from FI Financial by the employees, officers and a director of
the Company. In the event Proposals 1 and 2 are not approved by the
Shareholders, Proposal 5 will be withdrawn and the Company will likely seek
protection under applicable bankruptcy laws.
Vote Required and Recommendation for Approval
The affirmative vote of a majority of the outstanding Common Stock is
required to approve the Certificate of Amended and Restated Articles of
Incorporation authorizing the issuance of the Series A Convertible Preferred
Stock. If Shareholder approval is not obtained, the Company will be unable to
complete the Debt Conversion Transaction and will likely be forced to declare
bankruptcy since the Company believes it is highly unlikely the Singapore
Creditors will proceed without Shareholder approval.
The Board of Directors recommends the Shareholders vote FOR the approval of
the Certificate of Amendment of the Amended and Restated Articles of
Incorporation. The Board believes that the issuance of the Series A Convertible
Preferred Stock to the Sinagpore Creditors in exchange for such debts is in the
best interests of the Company and the only viable way to avoid bankruptcy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1996, the Company entered into an agreement for consulting
services with G&L Investments ("G&L") which established a consulting
relationship with, among others, Lewis Solomon (former Chairman of the Board of
Directors) and Gary Stein (a former Director). In exchange for consulting
services, G&L, through an affiliate, received $15,000 plus reasonable expenses
for each month that G&L provided services to the Company. On July 14, 1998, the
Company notified G&L that their agreement for consulting services was
terminated.
In November 1996, the Company also entered into an agreement for consulting
services with The Watley Group, LLC ("Watley") which employed Mr. Anthony Bryan
(a Director), among others, pursuant to which Watley received $15,000 plus
reasonable expenses for each month that it provided services to the Company. On
January 16, 1998, the Company notified Watley that their agreement for
consulting services was terminated.
The Company has entered into an indemnification agreement with each of its
directors.
The Company and certain of its Shareholders entered into a registration
rights agreement pursuant to which entities that may be deemed affiliated with
greater than a five percent Shareholder were granted certain registration
rights. Such agreement provides for indemnification by the Company for such
persons.
33
<PAGE>
In March 1996, pursuant to a subscription agreement, the Company
consummated the sale and issuance of 842,013 shares of Common Stock (the
"Transpac Shares") to Transpac at the purchase price of $2.37526 per share, for
a total purchase price of $2,000,000 (the "Transpac Financing"). Transpac has
board observer rights and the right to appoint a representative of Transpac to
the Company's Board of Directors. Such right was exercised in August 1998 with
the appointment of Mr. Wong to the Board of Directors of the Company. Mr. Wong
is also a director and Executive Vice President of Transpac.
In connection with the Company's subsidiaries in Singapore, which ceased
operations in 1997, the Company fully guaranteed certain debt obligations.
During 1998, the Company signed Restructuring Agreements with each of the
Singapore Creditors, which called for settlement payments of approximately $9.3
million to satisfy all debt obligations. This included an agreement with
Transpac which requires the Company to pay to Transpac $3.1 million by May 1,
1999, issue warrants to purchase 500,000 shares of the Company's Common Stock at
$1.00 per share, and other provisions. Under the terms of the agreements, the
indebtedness due to Transpac returns to the full $11.357 million if the payment
of $3.1 million is not made by May 1, 1999. Because the Company has not been
able to obtain funding to satisfy the settlement payment obligations, the
Company renegotiated the terms and has executed a Conversion and Settlement
Agreement with Transpac which calls for the conversion of all debt and accrued
interest obligations into shares of the Company's Series A Convertible Preferred
Stock, each share of which will be convertible into two shares of the Company's
Common Stock. Such Series A Convertible Preferred Stock is ultimately
convertible into 8,063,651 shares of the Company's Common Stock. The Conversion
and Settlement Agreement further stipulates that the warrants issued to Transpac
to purchase 500,000 shares of the Company's Common Stock at $1.00 per share be
amended to reduce the exercise price to $0.50 per share.
The Debt Conversion Transaction is subject to the completion of definitive
agreements for all of the Singapore Creditors and the approval of the Debt
Conversion Transaction by a majority of the outstanding Common Stock of the
Company.
The Company entered into the STM/FI Financial Agreement on April 14, 1999
with STM and FI Financial. Mr. Waring, a nominee to the Company's Board of
Directors, is an officer of FI Financial. Under the terms of the STM/FI
Financial Agreement, STM, a creditor of the Company, assigned its rights to a
series of agreements with the Company to FI Financial. FI Financial, for
consideration paid to STM of $500,000, will receive shares of the Company's
Series A Convertible Preferred Stock, which shares would be convertible into
2,645,294 shares of the Company's Common Stock. The STM/FI Financial Agreement
provides that the funds to be paid to STM are held in escrow until the
completion of definitive agreements for all of the Singapore Creditors and the
approval of the Debt Conversion Transaction by a majority of the outstanding
Common Stock of the Company. The issuance of the Series A Convertible Preferred
Stock is also subject to the same conditions.
FI Financial subsequently entered into a series of Assignment of Interest
agreements with a group of employees, officers, and a director of the Company
and other parties, whereby these parties have collectively agreed to pay to FI
Financial a total of $240,000 toward the purchase of the STM creditor claim in
exchange for the right to receive a pro-rata portion of the Company's Series A
Convertible Preferred Stock to be received by FI Financial. Under the terms of
the Assignment of Interest agreements, this group of parties would receive
shares of the Company's Series A Convertible Preferred Stock, which would be
convertible into 1,269,741 shares of the Company's Common Stock.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, between the Company and
its officers, directors, principal Shareholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
34
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation earned, for services rendered in all capacities to the Company and
its subsidiaries, for the fiscal years ended December 31, 1998, 1997 and 1996,
by all persons who served as the Company's Chief Executive Officer during 1998,
and each of the other four (4) most highly compensated executive officers of the
Company who earned more than $100,000 in compensation for the 1998 fiscal year
(hereafter referred to as "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
Other Restricted Securities LTIP All Other
Name and Salary Bonus Annual Stock Underlying Payouts Comp.
Principal Position Year ($) ($) Comp./(1)/($) Award(s)($) Options (#) ($) ($)/(2)/
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew K. Wrobel/(3)/ 1998 220,898 133,980 --- --- --- --- 3,015
Chairman, President and 1997 46,664 25,000 --- --- 600,000 --- 99
Chief Executive Officer 1996 --- --- --- --- --- --- ---
Denis J. Trafecanty/(4)/ 1998 158,154 80,000 46,723/(5)/ --- --- --- 11,858
Senior Vice President 1997 149,414 35,000 28,798/(5)/ --- 300,000/(6)/ --- 5,102
and Chief Financial 1996 37,736 --- --- --- 50,000 --- ---
Officer
Timothy R. Sullivan/(7)/ 1998 117,335 59,583 --- --- --- --- 4,559
Vice President and 1997 97,741 20,000 --- --- 150,000 --- 21,612/(7)/
Controller 1996 --- --- --- --- --- --- ---
Pete H. Hudson, Ph.D./(8)/ 1998 98,414 52,708 --- --- 75,000 --- 2,230
Vice President of 1997 --- --- --- --- --- --- ---
Technology 1996 --- --- --- --- --- --- ---
Dale Feine/(9)/ 1998 99,200 7,000 --- --- --- --- 3,984
Director of New 1997 107,800 25,000 --- --- 125,000 --- 4,481
Business Development 1996 --- --- --- --- --- --- ---
</TABLE>
____________
(1) Other Annual Compensation for all other employees listed in the table is
less than $50,000 and 10% of the total of annual salary and bonus for such
individual.
(2) All other compensation if comprised of (i) matching contributions made by
the Company on behalf of the Named Executive Officer to its Section 401 (k)
Plan and (ii) annual premiums paid for group term life insurance policies.
Under such policies, the Named Executive Officer may designate the
beneficiary of the insurance proceeds payable upon death. The amounts of
the Company's matching contribution to its Section 401 (k) Plan and the
life insurance premiums are set forth below:
35
<PAGE>
<TABLE>
<CAPTION>
Matching 401(k) Life Insurance
Contribution ($) Premium ($)
--------------------------------------
<S> <C> <C> <C>
Andrew K. Wrobel.......... 1998 ---- 3,015
1997 ---- 99
Denis J. Trafecanty....... 1998 4,748 7,110
1997 4,360 742
Timothy R. Sullivan....... 1998 3,594 965
1997 1,650 112
Pete H. Hudson, Ph.D. .... 1998 1,652 578
1997 ---- ----
Dale Feine................ 1998 3,372 612
1997 3,744 737
</TABLE>
(3) Mr. Wrobel was appointed as Chairman of the Board of Directors in January
1999. Mr. Wrobel was appointed President and Chief Executive Officer of
the Company in October 1997.
(4) Mr. Trafecanty was appointed as Chief Financial Officer of the Company in
August 1996.
(5) The Company provided a car allowance to Mr. Trafecanty of $6,000 for each
of the 1998 and 1997, living expenses totaling $9,291 and $10,926 for 1998
and 1997 respectively, and reimbursed Mr. Trafecanty for the income tax
impact of these and other benefits, which totaled $18,637 and $8,147 for
1998 and 1997 respectively.
(6) Includes options for 50,000 shares granted on August 21, 1997 in exchange
for the cancellation of an option for 50,000 shares originally granted on
August 26, 1996 with an exercise price $4.00 per share.
(7) Mr. Sullivan was appointed as Vice President and Controller of the Company
in March 1997. The Company paid Mr. Sullivan $19,850 in connection with
consulting services rendered to the Company during January and February
1997. These fees are included in the caption All Other Compensation.
(8) Dr. Hudson became and employee of the Company on February 2, 1998.
(9) Mr. Feine became an employee of the Company of January 3, 1997.
Option Grants in Last Fiscal Year
There were no stock option grants made to the company's Chief
Executive Officer or any of the other Named Executive Officers during the
fiscal year ended December 31, 1998. No stock appreciation rights were
granted or exercised during such fiscal year.
Aggregated Option Exercise and Fiscal Year-End Values
No options were exercised by the Company's Chief Executive Officer or
the other Named Executive Officers during the fiscal year ended December
31, 1998. The following table sets forth information concerning option
holdings for such fiscal year with respect to the Company's Chief Executive
Officer and each of the other Named Executive Officers. The fair market
value of the Common Stock as the December 31, 1998 fiscal year-end was
$0.15 per share, based on the average of the highest bid and lowest ask
price as quoted on the OTC Bulletin Board. No stock appreciation rights
were exercised or outstanding during such fiscal year.
36
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End (#) at Fiscal Year-End($)
--------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrew K. Wrobel.......... 233,334 366,666 ----- -----
Denis J. Trafecanty....... 147,500 152,500 ----- -----
Timothy R. Sullivan....... 75,000 75,000 ----- -----
</TABLE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company does not have a compensation committee, and the Board of
Directors currently performs the functions of a compensation committee. No
current executive officer of the Company has ever served as a member of the
board of directors or compensation committee of any other entity that has or has
had one or more executive officers serving as a member of the company's Board of
Directors. Mr. Wong is a director of the Company and Executive Vice President
of Transpac. Transpac has entered into a Conversion and Settlement Agreement
with the Company which calls for the conversion of all of its debts and accrued
interest obligations to the Company into shares of the Company's Series A
Convertible Preferred Stock, each share of which will be convertible into two
shares of the Company's Common Stock. Such Series A Convertible Preferred Stock
is ultimately convertible in 8,063,651 shares of the Company's Common Stock. The
Debt Conversion Transaction is subject to the completion of definitive
agreements for all of the Singapore Creditors and the approval of the Debt
Conversion Transaction by a majority of the holders of the Company's Common
Stock.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Employment Agreement with Andrew K. Wrobel. Effective October 6, 1997, the
Company entered into a one (1)-year employment agreement ("Agreement") with
Andrew K. Wrobel. The terms of this Agreement shall automatically be extended,
unless not less than one (1) year prior to the expiration date the Company shall
have given written notice to Mr. Wrobel that the term of this Agreement shall
terminate on the expiration date; or Mr. Wrobel, not less than thirty (30) days
prior to the expiration date, elects to terminate this Agreement by delivering
written notice of such desire to terminate to the Company. Under the terms of
this Agreement, Mr. Wrobel is entitled to a base salary of not less than
$220,000 per year, plus a minimum increase of six (6) percent of his base salary
on each anniversary of the agreement. Mr. Wrobel is also entitled to receive a
bonus equal to sixty percent (60%) of his then existing base salary, payable
quarterly pro-rata upon the Company's achievement of the performance criteria
set forth in the business plan to be prepared by Mr. Wrobel for the Company and
approved by the Board. The Agreement also guaranteed Mr. Wrobel a stock option
for 500,000 shares of the Company's Common Stock at the fair market value on the
date of the Agreement ($0.43 per share). The options will become exercisable on
an accelerated basis in the event of any acquisition of the Company by merger or
asset sale, unless the options are assumed by the acquiring entity. Mr. Wrobel
participates in all of the Company's employee benefit plans. In the event of
his termination other than for cause, Mr. Wrobel is entitled to full
acceleration of his options and a severance payment equal to one (1) year of his
then current salary within five (5) business days of his termination plus twelve
(12) months additional coverage under the Company's health, medical and dental
plans.
Change in Control Arrangements. The Board of Directors has the authority
as Plan Administrator of the 1993 Plan to provide for the accelerated vesting of
the shares of the Common Stock subject to outstanding options held by the Chief
Executive Officer and the Company's other executive officers under
37
<PAGE>
that plan in the event their employment were to be terminated (whether
involuntarily or through a forced resignation) following an acquisition of the
Company by merger or asset sale. In connection with a hostile change in control
of the Company effected through a successful tender offer for more than 50% of
the Company's outstanding voting stock or through a proxy contest for the
election of Board members, the Plan Administrator has the discretionary
authority to provide for automatic acceleration of outstanding options under the
Discretionary Option Grant Program of the 1993 Plan and the automatic vesting of
outstanding shares under the Stock Issuance Program.
Board of Directors Report on Executive Compensation
For the 1998 fiscal year, the Board of Directors was responsible for
establishing the base salary and incentive cash bonus programs for the Company's
executive officers and other key employees and administering certain other
compensation programs for such individuals, subject in each instance to review
and final approval by the full Board. The Board of Directors also had the
exclusive responsibility during such year for the administration of the
Company's 1993 Plan under which grants may be made to executive officers and
other key employees.
General Compensation Policy. The fundamental policy of the Board of
Directors is to provide the Company's executive officers and other key employees
with compensation opportunities based upon their contribution to the financial
success of the Company and their personal performance. It is the Board of
Directors's objective to have a substantial portion of each officer's
compensation contingent upon the Company's performance as well as upon his own
level of performance. Accordingly, the compensation package for each executive
officer and key employee is comprised of three elements: (i) base salary which
reflects individual performance, (ii) annual variable performance award payable
in cash and tied to the Company's achievement of financial performance targets,
and (iii) long-term stock-based incentive award which strengthen the mutuality
of the interest between the executive officers and the Company's Shareholders.
As an executive officer's level of responsibility increases, it is the intent of
the Board of Directors to have a greater portion of his total compensation be
dependent upon Company performance and stock price appreciation rather than base
salary.
Factors. For Andrew K. Wrobel, the Board of Directors followed the terms
of his employment agreement with the Company in determining his compensation for
1998. That agreement specifies the compensation, subject to Board adjustment,
that was paid to Mr. Wrobel during 1998. Several of the more important factors
which the Board of Directors considered in establishing the components of the
compensation packages for executive officers who do not have an employment
agreement with the Company for the 1998 fiscal year are summarized below.
Additional factors were also taken into account and the Board of Directors may,
in its discretion, apply entirely different factors, particularly different
measures of financial performance, in setting executive compensation for the
future fiscal years.
Base Salary. The base salary for each officer who does not have employment
agreement with the Company is determined on the basis of the following factors:
experience, personal performance and internal comparability considerations. The
weight given to each of these factors differs from individual to individual, as
the Board of Directors deems appropriate.
Annual Incentive Compensation. Annual bonuses are earned by each executive
officer primarily on the basis of the Company's achievement of certain corporate
financial performance targets established for each fiscal year combined with the
individual performance of such individual.
Long-Term Incentive Compensation. Long-term incentives are provided
through stock option grants. The grants are designed to align the interests of
each executive officer with those of the
38
<PAGE>
Shareholders and provide each individual with a significant incentive to manage
the Company from the perspective of an owner with an equity stake in the
business. Each grant allows the individual to acquire shares of the Common Stock
at a fixed price per share (the market price on the grant date) over a specified
period of time (up to ten years). Each option generally becomes exercisable in
installments over a two and one-half (2 1/2) or three (3)-year period,
contingent upon the executive officer's continued employment with the Company or
a subsidiary. Accordingly, the option will provide a return to the executive
officer only if the executive officer remains employed by the Company during the
vesting period, and then only if the market price of the underlying shares
appreciates over the option term.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term, and the individual's personal
performance in recent periods. The Board of Directors also takes into account
the number of vested and unvested options held by the executive officer in order
to maintain an appropriate level of equity incentive for that individual.
However, the Board of Directors does not adhere to any specific guidelines as to
the relative option holdings of the Company's executive officers. In 1998, no
Named Executives received an option grant. Such options are described in the
Summary Compensation Table, in the column entitled "Long Term Compensation
Awards--Securities Underlying Options" and in the "Option Grants in Last Fiscal
Year" table.
CEO Compensation. In setting the compensation payable to the Company's
Chief Executive Officer, Mr. Wrobel, the Board of Directors followed the terms
of the employment agreement that was previously negotiated between Mr. Wrobel
and the Company and subsequently executed. In accordance with the terms of his
employment agreement, Mr. Wrobel received a base salary of $220,898 in 1998.
A cash bonus was earned by Mr. Wrobel for the 1998 fiscal year of $133,980
and on October 6, 1997, Mr. Wrobel was granted an option to purchase 500,000
shares of Common Stock (see "Employment Contracts and Termination of Employment
and Change in Control Arrangements--Employment Agreement with Andrew K. Wrobel")
to make a portion of his total compensation contingent on increased value for
the Company's Shareholders; the option will have no value unless there is
appreciation in the value of the Company's Common Stock over the option term.
On November 4, 1997, Mr. Wrobel received an option to purchase an additional
100,000 shares of Common Stock.
Compliance with Internal Revenue Code Section 162(m). As a result of
Section 162(m) of the Internal Revenue Code, the Company will not be allowed a
federal income tax deduction for compensation paid to certain executive
officers, to the extent that compensation exceeds $1 million per officer in any
fiscal year. This limitation applies to all compensation paid to the covered
executive officers, which is not considered to be performance-based.
Compensation that does qualify as performance-based compensation will not have
to be taken into account for purposes of this limitation. Non-performance based
compensation paid to the Company's executive officers for the 1997 fiscal year
did not exceed the $1 million limit per officer, and the Board of Directors does
not anticipate that the non-performance based cash compensation to be paid to
the Company's executive officers for fiscal 1999 will exceed that limit. In
addition, option grants and other awards made under the 1993 Plan prior to
January 1, 1998 were structured so that any compensation deemed paid to an
executive officer in connection with those awards will qualify as performance-
based compensation which will not be subject to the $1 million limitation.
However, any compensation deemed paid by the Company in connection with
transactions relating to options or other awards granted during the 1999 fiscal
year will have to be taken into account for purposes of the $1 million
limitation. Because it is very unlikely that the compensation payable to any of
the Company's executive officers in the foreseeable future will approach the $1
million limit, the Board of
39
<PAGE>
Directors has decided at this time not to take any action to limit or
restructure the elements of compensation payable to the Company's executive
officers. The Board of Directors will reconsider this decision should the
individual compensation of any executive officer ever approach the $1 million
level.
Dated as of April 20, 1999
Mr. Anthony J.A. Bryan
Mr. Wong Lin Hong
Mr. Andrew Wrobel
Mr. Waldemar Heeb
Mr. Frank L. Howland
The Board of Directors report on executive compensation is not deemed filed with
the Securities and Exchange Commission and is not incorporated by reference to
any filing of the Company under the Securities Act of 1933, as amended or the
Securities Exchange Act of 1934, whether made before or after the date of the
Consent Statement and irrespective of any general incorporation language in any
such filing.
THE BOARD OF DIRECTORS
DATED MAY __, 1999
40
<PAGE>
ANNEX A
RESOLUTION OF ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
OF
MICROELECTRONIC PACKAGING, INC.
WHEREAS, pursuant to the California Corporations Code, the Bylaws of
this corporation and the attached Consent Solicitation Statement which is
incorporated by this reference, it is deemed desirable and in the best interests
of this corporation that the following actions be taken by the Shareholders of
this corporation pursuant to this Written Consent:
NOW, THEREFORE, BE IT RESOLVED that the undersigned Shareholders of
this corporation hereby consent to, approve and adopt the following:
1. RESOLVED, the Shareholders approve the conversion of
approximately $27.56 million in debt owed to eight creditors into Series A
Convertible Preferred Stock of the Company and the amendment of one of the
creditor's warrants to purchase Common Stock.
[_] FOR [_] AGAINST [_] ABSTAIN
2. RESOLVED, the Shareholders approve the issuance of Series A
Convertible Preferred Stock issued in connection with the debt conversion to 11
employees including officers, a director of the Company and third parties in
exchange for their payment of a creditor claim.
[_] FOR [_] AGAINST [_] ABSTAIN
3. RESOLVED, the Shareholders approve various amendments to the
Company's 1993 Stock Option/Stock Issuance Plan to:
(i) increase the number of shares of Common Stock authorized
for issuance over the term of such plan by an additional
2,309,368 shares;
(ii) amend the number of shares available for issuance under
such plan for each person participating in any one
calendar year to 2,000,000 shares; and
(iii) amend the Automatic Option Grant Program to increase the
number of shares of Common Stock subject to automatic
option grants to be made to new and continuing non-
employee Board members.
[_] FOR [_] AGAINST [_] ABSTAIN
4. RESOLVED, the Shareholders approve the grant of options to
purchase 3,758,003 shares of Common Stock to Company employees,
officers and directors pursuant to the amended 1993 Stock
Option/Stock Issuance Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
A-1
<PAGE>
5. RESOLVED, the Shareholders approve the Certificate of Amendment
of the Amended and Restated Articles of Incorporation to authorize the issuance
of the Series A Convertible Preferred Stock to the creditors, employees,
officers, a director of the Company and third parties in connection with the
debt conversion.
[_] FOR [_] AGAINST [_] ABSTAIN
RESOLVED FURTHER, that the officers of this corporation are, and each
acting alone is, hereby authorized to do and perform any and all such acts,
including execution of any and all documents and certificates, as said officers
shall deem necessary or advisable, to carry out the purposes of the foregoing
resolutions.
RESOLVED FURTHER, that any actions taken by such officers prior to the
date of the foregoing resolutions adopted hereby that are within the authority
conferred thereby are hereby ratified, confirmed and approved as the acts and
deeds of this corporation.
This Written Consent shall be filed in the Minute Book of this
corporation and become a part of the records of this corporation.
THIS WRITTEN CONSENT, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE,
THIS WRITTEN CONSENT WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5.
DATED: _______________________________________
_______________________________________
Signature
_______________________________________
Signature if Held Jointly
_______________________________________
Number of Shares
Please sign exactly as your name appears on your stock certificate. When
shares are held by joint tenants, both should sign. When signing as an attorney,
executor, administrator, trustee or guardian, please give full title as such. If
the shares are owned by a corporation, sign in the full corporate name by the
President or other authorized officer. If the shares are owned by a Partnership,
sign in the name of the Partnership name by an authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE WRITTEN CONSENT PROMPTLY USING THE
ENCLOSED ENVELOPE OR FAX YOUR CONSENT TO DENIS TRAFECANTY AT MICROELECTRONIC
PACKAGING, INC., (619) 292-7881, OR E-MAIL TO THE COMPANY AT [email protected].
A-2
<PAGE>
FINANCIAL INFORMATION OF
MICROELECTRONIC PACKAGING INC.
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Introduction.......................................................................... F-2
Pro Forma Unaudited Condensed Consolidated Balance Sheet as of March 31, 1999......... F-3
Pro Forma Unaudited Condensed Consolidated Statement of Operations for the Three
Month Period Ended March 31, 1999 and the Fiscal Year Ended December 31, 1998...... F-4
Notes to Pro Forma Unaudited Consolidated Financial Statements........................ F-4
Financial Statements and Supplementary Data:
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998............. F-6
Quarterly Report on Form 10-Q for the Three Month Period Ended March 31, 1999...... F-33
</TABLE>
F-1
<PAGE>
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based upon the historical
consolidated financial statements of the Company.
The historical financial information included in the Pro Forma Financial
Statements represents the financial position and operations of the Company as
previously reported by the Company in its Annual Report on Form 10-K for the
year ended December 31, 1998 and its Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999. The Pro Forma Financial Statements
reflect the effect of issuing 9,362,777 shares of Series A Preferred Stock in
exchange for cancellation of debt and accrued interest totaling $27,557,000 as
of March 31, 1999, and the recording of the gain on the forgiveness of such debt
and certain related transactions. The pro forma unaudited condensed consolidated
statements of operations for the year ended December 31, 1998 and for the three
months ended March 31, 1999 give effect to this transaction as if it were
consummated on January 1, 1998 and January 1, 1999, respectively. The pro forma
unaudited condensed consolidated balance sheet as of March 31, 1999 gives effect
to this transaction as if it were consummated on March 31, 1999. The pro forma
adjustments are described more fully in the accompanying notes.
The Pro Forma Financial Statements are presented for informational purposes
only and do no purport to be indicative of the results of operations that
actually would have been achieved had such transactions been consummated on the
date or for the periods indicated and do not purport to be indicative of the
results of operations for any future period. The Pro Forma Financial Statements
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999.
F-2
<PAGE>
MICROELECTRONIC PACKAGING, INC.
PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
Amounts in Thousands
------------------------------------------------
Proforma After
Adjustments Adjustment
Historical (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 129 $ --- $ 129
Accounts receivable, net 1,130 --- 1,130
Inventories 2,742 --- 2,742
Other current assets 166 --- 166
- ----------------------------------------------------------------------------------------------
Total current assets 4,167 --- 4,167
Property, plant and equipment, net 1,654 --- 1,654
Other non-current assets 144 --- 144
- ----------------------------------------------------------------------------------------------
$ 5,965 $ --- $ 5,965
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 19 --- 19
Accounts payable 3,932 --- 3,932
Accrued liabilities 669 238/(1)(2)(3)/ 907
Debt and accrued interest of discontinued
operations, in default, due on demand 27,557 (27,557)/(1)/ ---
- ----------------------------------------------------------------------------------------------
Total current liabilities 32,177 (27,319) 4,858
Long-term debt, less current portion 45 --- 45
Commitments and Contingencies
Shareholders' Equity (Deficit)
Series A Preferred Stock --- 9,450/(1)/ 9,450
Common stock, no par value 40,162 121/(4)/ 40,283
Accumulated deficit (66,419) 17,748 (48,671)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (26,257) 27,319 1,062
- ----------------------------------------------------------------------------------------------
$ 5,965 --- 5,965
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes for an explanation of the Proforma Adjustments.
F-3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in Thousands
Three Months Ended March 31, 1999 Year Ended December 31, 1998
---------------------------------------------------------------------------------------------------
Proforma After Proforma After
Adjustments Adjustment Adjustments Adjustment
Historical (Unaudited) (Unaudited) Historical (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 1,743 --- $ 1,743 $ 19,271 --- $ 19,271
Cost of goods sold 1,584 --- 1,584 14,714 --- 14,714
Gross profit 159 --- 159 4,557 --- 4,557
Selling, general and 546 --- 546 2,915 --- 2,915
administrative
Engineering and product
development 191 --- 191 1,060 --- 1,060
-------------------------------------------------------------------------------------------------------
Income (loss) from
operations (578) --- (578) 582 --- 582
Other income (expense)
Interest (expense), net (506) 502/(2)/ (4) (18) --- (18)
Other income, net --- --- --- 179 17/(2)/ 196
-------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations (1,084) 502 (582) 743 17 760
Provision for income taxes --- --- --- 18 --- 18
Estimated gain on disposal
of discontinued operations --- --- --- 3,961 --- 3,961
-------------------------------------------------------------------------------------------------------
Income (loss) before (1,084) 502 (582) 4,686 17 4,703
extraordinary item
Extraordinary item - gain on
debt forgiveness --- $17,246/(1)(2)(3)(4)/ 17,246 --- 17,235/(1)(2)(3)(4)/ 17,235
-------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,084) $17,748 $ 16,664 $ 4,686 17,252 $ 21,938
Pro forma preferred stock
dividends (84) (84) (334) (334)
-------------------------------------------------------------------------------------------------------
Pro forma net income (loss)
available to common
shareholders $ (1,084) $17,664 $ 16,580 $ 4,686 16,918 $ 21,604
=======================================================================================================
Earnings per common share:
Income (loss) from
continuing operations $ (0.10) $ (0.06) $ 0.07 $ 0.04
Discontinued operations 0.36 0.37
Extraordinary item 1.59 1.58
-------------------------------------------------------------------------------------------------------
Net Income $ (0.10) $ 1.53 $ 0.43 $ 2.00
=======================================================================================================
Weighted average shares
outstanding 10,857,000 10,857,000 10,818,000 10,818,000
=======================================================================================================
Earnings per common share-
assuming dilution
Income (loss) from
continuing operations $ (0.10) $ (0.06) $ 0.07 $ 0.01
Discontinued operations 0.36 0.13
Extraordinary item 1.59 1.58
-------------------------------------------------------------------------------------------------------
Net Income $ (0.10) $ 1.53 $ 0.43 $ 0.72
=======================================================================================================
Weighted average shares
outstainding 10,857,000 10,857,000 10,968,000 30,035,000
=======================================================================================================
</TABLE>
F-4
<PAGE>
Notes to Proforma Adjustments.
1. Reflects the issuance of 9,362,777 shares of Series A Convertible Preferred
Stock in exchange for the cancellation of debt and accrued interest totaling
$27,557 as of March 31, 1999, net of estimated expenses of issuance of such
Preferred Stock of $100.
2. To reverse interest expense recorded for debt to be forgiven in exchange for
the issuance of Series A Convertible Preferred Stock.
3. Reflects the gain on forgiveness of such debt, totaling $17,246 and $17,235
for the three months ended March 31, 1999 and December 31, 1998,
respectively, net of income taxes of $154 and $148, respectively.
4. Reflects the cost of issuing stock options to non-employee directors, and
repricing a warrant for 500,000 shares of Common Stock to one of the debt
holders as part of their debt forgiveness, and the corresponding increase in
common stock value.
F-5
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
-----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to _____________________
Commission file number: 0-23562
MICROELECTRONIC PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
California 94-3142624
---------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
9577 Chesapeake Drive, San Diego, California 92123
--------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (619) 292-7000
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, no
par value.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 26, 1999 was approximately $3,691,000 (based upon
the closing price for shares of the Registrant's Common Stock as quoted by the
OTC Bulletin Board for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 26, 1999, 10,856,890 shares of the Registrant's Common Stock, no
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S
----------------------------------------------------------------------------
ANNUAL MEETING TO BE FILED WITH THE SEC ON OR BEFORE APRIL 30, 1999,
--------------------------------------------------------------------
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT
----------------------------------------------------------
ON FORM 10-K.
-------------
F-6
<PAGE>
PART I
------
ITEM 1. BUSINESS
The following Business section contains forward-looking statements which
involve substantial risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report on Form 10-K.
Microelectronic Packaging, Inc. ("MPI") and its wholly-owned subsidiaries
(collectively, the "Company") provide electronic manufacturing services (EMS)
including surface mount, chip-on-board and mixed assembly microelectronic
design, manufacturing, and testing capabilities. To support the requirements of
electronic systems and integrated circuit manufacturers ("IC" or "semiconductor"
manufacturers) the Company offers both turnkey manufacturing and kitted
subassembly services featuring value added interconnect design and test
capabilities in addition to contract assembly. MPI was incorporated in
California in 1984. Headquartered in San Diego, California, with on-site
manufacturing facilities, the Company designs, develops, manufactures, markets
and sells to customers in the commercial, medical, military/aerospace,
wireless/telecommunications, automatic test equipment and other electronics-
related industries.
MPI is a holding company with CTM Electronics, Inc. ("CTM") a California
corporation, the primary operating unit. The Company's other US subsidiary,
Microelectronic Packaging America ("MPA") is inactive. The Company's focus has
been to expand its surface mount and chip-on board contract assembly business in
San Diego. The Company has expanded its manufacturing capabilities and relocated
to a larger facility that resulted in a doubling of production space. A new
management team has been recruited and the Company has repositioned itself to
more effectively serve what it believes is the large and growing contract
assembly market to capitalize on the trends for electronic companies to
outsource manufacturing.
The Company's Singapore subsidiaries are in various stages of liquidation
and are not consolidated in the Company's financial statements beginning in
1998. They are as follows: Microelectronic Packaging (S) Pte., Ltd. ("MPS"), MPC
(S) Pte., Ltd. ("MPC"), Furnace Technology ("FT"), MPM (S) Pte., Ltd. ("MPM")
and Microelectronic Packaging Asia Pte. Ltd. ("MP Asia"). MPS and MPM are
currently being managed by a receiver and are in receivership. MPC ceased
operations during 1997 and is in liquidation. FT is in liquidation. MP Asia was
formed in 1997, has had no operating activities, and is being liquidated. The
Company has not employed any persons in Singapore since July 1997.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Future Operating Results -- Repayment of Debt
Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on
MPI -- Certain Obligations of MPS High Leverage."
INDUSTRY OVERVIEW
The Company believes that the electronic manufacturing services market is a
very large and growing market. General industry trends for companies of all
sizes are to outsource manufacturing and this, in the opinion of management, is
resulting in growth rates for contract assembly being significantly higher than
the growth rates for the electronic industries themselves. In recent years,
advances in interconnection technology has allowed semiconductor companies and
systems designers to increase the speed and complexity and reduce the size,
power and prices of their products. Until recently, interconnection technology
has not been considered a limiting factor in systems design and development.
However, emerging electronic products in all market segments including
wireless/telecommunication, medical, consumer, semiconductor related automatic
test equipment and
F-7
<PAGE>
military aerospace telecommunications equipment require designs that the Company
believes cannot always be done with conventional interconnection technology
offered by internal manufacturing operations or traditional through-hole/surface
mount contract assemblers.
The increased reliance by IC and systems designers on interconnection
solutions has created a new challenge and opportunity for the electronic
packaging and interconnection industry to develop products that can effectively
respond to customers' new requirements. Today's IC and system designers work
together with interconnection designers and manufacturers in the early stages of
product development. These products must accommodate constant reductions in
size, increases in speed and complexity and the ability to handle the increased
heat generated by more powerful systems.
Today's conventional electronic systems are comprised of printed circuit
boards ("PCBs") and single chip packages. The size, weight and speed of the
electronic system is a function of the size, weight and performance of the fully
assembled PCB. The PCB and the IC packages generally account for the majority
of the size, weight and the limitations on speed of the system. Efforts to
develop smaller, lighter and faster electronic assemblies have recently focused
on improvements in IC packaging and interconnection technology.
Manufacturers in the interconnection industry are evaluating technologies
to support market driven requirements for reduced size and increased
performance. Improvements in semiconductor and electronic interconnection
technologies enable this continued reduction in size and cost with increasing
performance for electronic systems.
The convergence of market forces that include a general trend to outsource
contract manufacturing at the same time that microelectronic technologies are
replacing traditional through-hole/surface mount assembly technologies has
created what the Company believes to be substantial business opportunities for
those companies positioned to take advantage of these market trends.
THE MPI SOLUTION
The Company has expanded its focus in 1998 by offering products and
services in direct response to both what it believes is the growing trend to
outsource manufacturing and also the offering of design services that provide
added value in terms of addressing smaller size, higher performance, improved
thermal characteristics, plus lower materials and assembly costs. The Company
differentiates itself from much larger competitors by offering "mixed assembly"
services utilizing both surface mount and chip-on board electronic assembly.
Chip-on-board (COB). The Company provides single or multi chip assembly
services that mount IC die directly to laminate or ceramic substrates with
passive components. The Company has historically derived the majority of its
revenue from these activities. These services are offered to both the
semiconductor integrated circuit suppliers (IC) and electronic systems
companies. The Company designs and manufactures these assemblies that replace
entire PCBs which are designed to reduce overall system size and increase
performance. The Company also designs and manufactures multi-chip-modules (MCM)
to interconnect multiple ICs, which the Company encloses in an advanced IC
package. The advanced IC package with the enclosed MCM is then mounted onto a
PCB. All of the Company's MCM products are designed to provide its customers
with increased speed and performance and decreased size and weight.
Surface Mount Technology (SMT). The Company provides SMT assembly including
design for manufacturability that assists the Company's customers to better
utilize their internal resources.
Ball Grid Array (BGA), Flip chip, Chip Scale Packaging (CSP). The Company
has acquired a license from Motorola to supply BGA packages and is developing
capabilities for flip chip, CSP and other microelectronic packaging technologies
based upon market demand.
F-8
<PAGE>
TURNKEY CONTRACT MANUFACTURING AND DESIGN SERVICES
The Company offers complete Turnkey design, assembly and test services as a
total solution for outsourced manufacturing. The Company believes these services
provide customers with a cost-effective alternative to existing product design
processes from internal operations or competitors of the company. To facilitate
awareness of the company's manufacturing services. QuickTurn Turnkey
manufacturing(TM) and QTM(TM) were established as unregistered trademarks.
CUSTOMERS, APPLICATIONS AND MARKETS
The Company believes the serviceable markets for the Company's services are
extremely broad as the electronic content of nearly everything that is
manufactured increases. Highly visible markets include
wireless/telecommunications, medical, commercial/consumer, computer, automated
test equipment (ATE), military/aerospace, and instrumentation. In 1998 the
Company increased its investment in Sales and Marketing with the goal of
expanding its customer base and participating in markets not previously served
such as wireless, medical and automotive markets. The Company doubled the number
of customers in 1998 from 5 to 12 and is focused on reducing its dependence on
its largest customer, Schlumberger. There can be no assurance the Company will
be successful in reducing its dependence on Schlumberger. Sales to Schlumberger
accounted for 87%, 89% and 76% of the Company's net sales in 1998, 1997 and 1996
respectively. The majority of the Company's 1998 third and fourth quarter's
sales were repair of Schlumberger's products rather than the manufacture of new
products. This repair work continued into 1999. The Company furnishes chip-on-
board multi chip modules (MCM) to this customer for automated test equipment
usage. The Company's primary geographical market is North America for COB and
SMT products. In 1998 95% of the Company's sales were to customers in North
America. During 1998, 1997 and 1996 the Company had foreign net sales of $0,
$90,000 and $1,785,000, respectively. In 1998, the Company began supplying to
National Semiconductor in Singapore and Japan. Also in 1998, the Company
launched a sales effort in Europe.
The Company currently sells its services through a combination of its own
direct sales for selected key accounts and use of independent sales
representatives located in 18 field sales offices in North America and Europe.
The Company can provide engineering, design and technical support to its sales
staff and potential customers.
LICENSE AND OTHER SIGNIFICANT AGREEMENTS
The Company seeks to obtain licenses to technologies that complement and
expand the current technologies that the Company owns. These agreements, along
with certain other significant agreements of the Company, are discussed below.
Motorola. In July 1998, the Company signed an agreement with Motorola for
Ball Grid Array (BGA) and flip chip interconnect technologies. The company views
this as a significant technology license that has already been instrumental in
securing business from a new customer. The Company believes general industry
chip packaging trends show substantial growth for BGA and flip chip packaging
that replaces throughhole, PQFP and other forms of IC packaging.
Schlumberger. In January 1998, the Company signed an agreement with
Schlumberger. Pursuant to the terms of the agreement, MPI supplies MCM products
to Schlumberger. The agreement includes warranty provisions, protection for raw
materials purchased by MPI against production demand forecasts supplied by
Schlumberger but subsequently changed, and pricing provisions. After March 31,
1998, there is no commitment from Schlumberger to purchase from the Company any
amount or a minimum amount of MCM products. The pricing provisions of the
agreement provide for periodic review of the selling prices of the Company's
products. Such reviews can be requested by either the Company or Schlumberger.
In 1998, the Company agreed to several pricing reviews and anticipates further
declines in unit selling prices of selected products provided by the Company to
Schlumberger. The agreement expires in October 2000. See "Liquidity and Capital
Resources Reliance on Schlumberger-Legal Proceedings."
International Business Machines Corporation. In August 1994, the Company
entered into a multilayer technology transfer and licensing agreement with IBM
(the "IBM Agreement") pursuant to which the Company was granted a license to
specific technology developed by IBM for the manufacture of
F-9
<PAGE>
multilayer ceramic products. Under the terms of the IBM Agreement, the Company
and MPM acquired a nonexclusive, nontransferable right to use the licensed
technology to manufacture and sell certain specified products on a worldwide
basis. In exchange for the license, the Company paid an up-front non-refundable
royalty of $2,000,000, and was obligated to pay additional royalties based on
sales of products incorporating the licensed technology during the term of the
IBM Agreement, which was to 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. Commencing in August 1996, the IBM Agreement was to be terminable by
either party without cause upon six months prior written notice.
In March 1997, the Company ceased its multilayer ceramic operations prior
to the commencement of production and a Receiver appointed by the courts began
the liquidation of MPM's assets. Changing market demand for multilayer ceramic
products and IBM's unwillingness to renegotiate the terms of the IBM Agreement
or to commit to purchasing multilayer ceramic products from the Company were the
principal reasons that the Company decided to liquidate MPM. All of MPM's
Singapore employees have been terminated. MPM has been in receivership since
March 1997, as defined under the laws of Singapore. The receiver for MPM has
completed the liquidation of all of the MPM assets, and the proceeds therefrom
have been used to retire a portion of MPM's debts. During 1998, the High Court
of the Republic of Singapore ordered the Winding up of MPM Singapore Pte. Ltd.
("MPM"), a wholly owned subsidiary of the Company. As a result of this
decision, MPM cannot continue as an operating business, and it cannot be allowed
to dispose of its assets or incur further liabilities. In addition, the Company
does not have any control over the management of MPM. This function is
undertaken by the Receiver and Manager appointed by DBS Bank.
Asian Creditor Loan Agreements Guaranteed by MPI. In connection with the
Company's subsidiaries in Singapore, which ceased operations in 1997, the
Company fully guaranteed the debt obligations listed below. During 1998, the
Company signed agreements with each of these creditors, which called for
settlement payments of approximately $9.3 million to satisfy all debt
obligations.
Because the Company has not been able to obtain funding to satisfy the
settlement payment obligations, which are all due on May 1, 1999, the Company
renegotiated the terms and, has recently entered into non-binding letter
agreements with all eight creditors which call for the conversion of all debt
and accrued interest obligations into shares of the Company's Series A Preferred
Stock (See "Liquidity and Capital Resources" for general description of Series A
Preferred Stock), each share of which will be convertible into two shares of MPI
Common Stock. For the aggregate debt of $27,055,000, which is all the
Discontinued Operations debt, the Company has agreed to convert this debt into
shares of Series A Preferred Stock which is immediately convertible into shares
of MPI Common Stock.
This debt conversion into equity is subject to the completion of definitive
agreements for all eight creditors and the approval of the debt conversion to
equity by a majority of the Company's shareholders.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Future Operating
Results -- Future Capital Needs; Need for Additional Financing -- Repayment of
Debt Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on
MPI -- High Leverage -- Status as a Going Concern."
F-10
<PAGE>
Transpac. On March 27, 1996, the Company and MPM consummated a financing
with Transpac Capital Pte. Ltd. and other related investors (collectively,
"Transpac") pursuant to 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 and is guaranteed by MPI. 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 shares of Common Stock of MPM or Common
Stock of MPI. The Company has not made any payments under the Debenture. In
February 1999, the Company and Transpac signed a non-binding letter agreement
which calls for the conversion of all the Company's obligations into shares of
Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by
MPI" in this section.
STMicroelectronics, Inc. In 1995, MPS borrowed $4,000,000 from
STMicroelectronics ("ST") at an interest rate of 7.25% per annum. MPS did not
make any principal payments, and only made limited interest payments. The note
was fully guaranteed by MPI. In September 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement which requires the
Company to pay $1,137,044 by May 1, 1999 as full satisfaction of all obligations
to STMicroelectronics. And, on April 14, 1999, ST signed a Letter of Intent with
a group of outside investors ("Investor") to assign its creditor position for
undisclosed consideration. This Letter of Intent is subject to the Company
obtaining approval of the debt conversion to equity by a majority of the
Company's shareholders. In anticipation that this assignment will be completed,
the Investor has signed a non-binding letter agreement which calls for the
conversion of all the Company's obligations to ST into shares of Series A
Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this
section.
Texas Instruments ("TI"). In 1995, MPS borrowed $3,500,000 from TI at an
interest rate of 7.25% per annum. The note is fully guaranteed by MPI. The
Company entered into several amended loan agreements during 1997 and 1998;
however, the Company was unable to meet the terms of those agreements. In
January 1999, the Company and TI signed a non-binding letter agreement which
calls for the conversion of all of the Company's obligations into shares of
Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by
MPI" in this section.
Development Bank of Singapore ("DBS Bank"). In 1997 and prior, MPS, MPM
and MPC made various borrowings from DBS Bank under lines of credit, overdraft
facilities and accounts receivable financing. Substantially all of the assets
of MPS and MPM have been liquidated by the Receivers and Managers, and the
proceeds from those liquidations were used to reduce the balances owed to DBS
Bank. MPC has paid its loan to DBS Bank and is in voluntary liquidation.
The remaining balances due to DBS Bank are in default, are payable upon
demand, and bear interest at the banks prime rate plus 5%. All of these amounts
are guaranteed by MPI. In February 1999, the Company and DBS Bank signed a non-
binding letter agreement which calls for conversion of all of the Company's
obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan
Agreements Guaranteed by MPI" in this section.
Motorola, Inc. In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an
interest rate of 7%. The loan was guaranteed by Motorola and was eventually paid
in full by Motorola. This obligation to Motorola is secured by all of the assets
of MPI, CTM and MPA not previously pledged to NSEB, as well as all capital stock
of MPS, CTM and MPA. In January 1999, the Company and Motorola signed a non-
binding letter agreement which calls for the conversion of all the Company's
obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan
Agreements Guaranteed by MPI" in this section.
F-11
<PAGE>
ORIX Leasing ("ORIX"). In 1996 and earlier, MPM, and to a lesser extent
MPS, borrowed approximately $2,600,000 under capital leases from ORIX. Both MPM
and MPS stopped making lease payments, and ORIX foreclosed on the equipment and
sold it at an auction in 1997. The balance remaining after the liquidation of
the leased assets is guaranteed by the Company. In January 1999, the Company
and ORIX signed a non-binding letter agreement which calls for the conversion of
all the Company's obligations into shares of Series A Preferred Stock. See
"Asian Creditor Loan Agreements Guaranteed by MPI" in this section.
NS Electronics ("NSEB"). In 1995, MPI borrowed $1,500,000 from NSEB at an
interest rate of 14% per annum. The Company has made no principal payments
since September 1996 and the loan is in default. The NSEB note is secured by
all of MPI's domestic equipment and trade receivables that are not subject to
liens or other encumbrances existing prior to May 30, 1995. In March 1997, the
Company entered into an Amended Loan and Security Agreement and a Second Secured
Promissory Note with NSEB pursuant to which NSEB agreed to waive any breach of
the covenants, terms and conditions of the original Loan and Security Agreement
and the original Secured Promissory Note (both dated May 30, 1995) and agreed to
a revised (and extended) payment schedule. The interest rate on the outstanding
balance, however, was raised from 14% per annum to 18% per annum and MPI is
currently in default under the terms of the Second Secured Note. In February
1999, the Company and NSEB signed a non-binding letter agreement which calls for
the conversion of all of the Company's agreed obligations into shares of Series
A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in
this section.
Samsung Corning Co., Ltd ("Samsung"). In 1996, MPS borrowed $1,000,000
from DBS Bank at the Singapore Interbank offer interest rate plus 1.5%,
repayable in twelve monthly installments beginning in November 1996. The loan
had been fully guaranteed by Samsung, and co-guaranteed by MPI. MPS made
payments under the note totaling approximately $417,000 during 1996 and 1997.
The remaining balance of approximately $583,000 plus interest, was paid to DBS
by Samsung Corning after DBS has called upon the guarantee of Samsung. Samsung
has requested that MPI reimburse it for the amount paid under the guarantee. In
March 1999, the Company and Samsung agreed to a non-binding settlement of all of
the Company's obligations into shares of Series A Preferred Stock. See "Asian
Creditor Loan Agreements Guaranteed by MPI" in this section.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company provides design, assembly and test services and features
engineering and product development as a differentiating service over its
competitors. In 1998, the Company added the position of Vice President of
Technology and increased its expenditures for engineering and product
development. The Company works closely with its customers to develop expertise
in new electronic assembly and packaging technologies based upon market demand.
Primary focus in 1998 was on process engineering for chip-on-board and surface
mount technologies including ball grid array and "flip chip" interconnect
processes. In addition, the Company invested in flexible substrate and low
temperature cofired ceramic substrate packaging technology, projected to be of
increased demand in 1999 for commercial and wireless products. The Company also
uses outside services for x-ray, surface analysis and ultrasonic imaging, as
well as specialized design such as ASIC design, to supplement its internal
capabilities. Engineering and product development expenditures were
approximately $1,060,000, $760,000 and $666,000 in 1998, 1997 and 1996,
respectively.
MANUFACTURING, SUPPLIERS AND TOTAL QUALITY PROGRAM
The Company believes that its ability to manufacture its products in a
timely and cost effective manner at the highest quality level is essential in
order to be competitive in its markets and achieve its growth objectives. The
Company's manufacturing facilities in San Diego, California include design and
prototype facilities and a production capability. The Company intends to support
high volume requirements for its MCM products partially through offshore
subcontract manufacturing and assembly agreements.
F-12
<PAGE>
The Company believes that total quality management is a vital component of
customer satisfaction and internal productivity. The Company maintains a system
of quality control and documentation with respect to each of its manufacturing
processes.
The Company maintains a supplier quality program that includes
qualification, performance measurement and corrective action requirements. The
Company chooses its suppliers based on quality, delivery, service and price.
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
particular, MCMs that are provided to Schlumberger contain components which are
provided solely by Schlumberger to the Company on a consignment basis. Under
the Company's current arrangement with Schlumberger, the Company would be unable
to supply Schlumberger with MCMs if Schlumberger were to cease supplying the
Company with such components. In such event, the Company's ability to continue
as a going concern would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Future Operating Results and -- Sole or Limited Sources of Supply."
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. To date,
compliance with such regulations has not had a material adverse effect on the
Company's capital expenditures or results of operations. The Company is
currently a party to certain ongoing environmental matters. See "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Future Operating Results and -- Environmental
Regulations."
BACKLOG
In the first quarter of 1998, the Company experienced a "bubble" in demand
from its primary customer, Schlumberger, resulting in a backlog. As of December
31, 1997, the Company's backlog was $11.3 million. During 1998, there was a
substantial drop in demand for ATE equipment caused by a very weak semiconductor
market. As of December 31, 1998, the Company has a backlog of approximately $1.5
million. Because the Company generally ships products within 60 to 120 days of
receipt of the order, and because of possible changes in delivery schedules,
cancellations or rescheduling of orders and potential delays in product
shipments, the Company's backlog at any particular date is not representative of
actual sales for any succeeding period.
COMPETITION
The top ten competitors in the electronic manufacturing services ("EMS")
market represented an aggregate annualized revenue of $17.5B in 1997 with
projected growth in 1998 to exceed 20% (sources: Manufacturing Market Insider
and Technology Forecasters, Inc., respectively). These global companies are
primarily focused on services the needs of the very large international
electronics companies that do not require chip-on-board thus MPI does not
believe these large companies are direct competition. The Company strives to
differentiate itself from other EMS competitors by focusing on flexibility and
customer service based upon concurrent engineering to provide design expertise
to meet physical size, thermal management, and solve performance issues that may
be beyond the internal capabilities of the customer resources.
In 1998, MPI's primary customer (Schlumberger) developed second sources for
the products previously provided exclusively by MPI. As a result the Company
faces intense competition for the Schlumberger business from Natel Engineering
and VLSI Packaging. In response, the Company launched programs aimed at quality
improvement, manufacturing cycle time reduction, and cost reduction and believes
that it provides equal or superior services that should enable the Company
remain as a qualified supplier to this key customer.
Since the Company believes there is such a large market (estimated to be as
large as $95B), there are a large number of companies that are potential
competitors of the Company. These include Flextronics, AVEX, Maxtek,
F-13
<PAGE>
Aeroflex, HEI, SCI, and others. There are also "off shore" competitors such as
AMKOR in Korea and Tong Tshing in Taiwan. For any particular customer, small
local companies offer potential competition. Halcyon, a very small privately
held company, became a competitor as a second source in 1998. See "Management's
Discussion and Analysis -- Future Operating Results -- Highly Competitive
Industry; Significant Price Competition."
INTELLECTUAL PROPERTY RIGHTS
The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees,
rather than on patents, trademarks and other intellectual property rights.
Nevertheless, the Company has a policy of seeking patents as appropriate on
inventions resulting from its ongoing engineering and product development
activities. In addition, the Company has acquired intellectual property rights
through business acquisitions and technology licenses. The Company owns five
United States patents. The Company has permitted two of these to lapse through
non-payment of renewal fees. The other three expire beginning in February 2002
through July 2010. In addition, the Company owns three foreign patents, which
expire beginning in May 1999 through March 2009, and eleven foreign patent
applications are currently pending. The Company owns one registered United
States trademark. The Company continuously seeks to protect its intellectual
property through proper documentation and protective marketing of designs and
concepts.
The Company views trademarks as an element of a marketing strategy to
increase awareness for the Company's services. The first marketing trademark
adopted is "QuickTurn Turnkey Manufacturing" and "QTM". These are being used as
unregistered trademarks at this time and therefore the Company does not have
certain presumptive legal rights granted by a federal trademark registration.
The Company will continue to seek opportunities to differentiate itself with the
use of trademarks.
There can be no assurance that any of the Company's issued patents will
provide it with competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the Company's
products or design around the patents issued to the Company. In addition, the
Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
EMPLOYEES
As of December 31, 1998, the Company had a total of 98 employees, including
71 engaged in manufacturing, 10 in engineering and product development, and 17
in sales, marketing and administration (including its executive officers). All
of the Company's employees are located in the United States. None of the
Company's employees are represented by a labor union, and the Company has not
experienced any work stoppages. The Company considers its employee relations to
be good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company's executive officers and key employees, and their ages as of
March 23, 1999, are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Andrew K. Wrobel 47 Chairman of the Board, President and Chief Executive Officer
Denis J. Trafecanty 56 Senior Vice President and Chief Financial Officer and Secretary
Timothy R. Sullivan 42 Vice President and Controller
Dudley E. Westlake 53 Vice President, Sales and Marketing
Pete Hudson, Ph.D. 58 Vice President, Technology
Craig Iwami 36 Director of Operations
</TABLE>
F-14
<PAGE>
Andrew K. Wrobel, age 47, has served as the Chairman, President and Chief
Executive Officer of the Company since January 1999. Prior to that, Mr. Wrobel
was President, Chief Executive Officer and Director of the Company since October
1997. From 1988 to 1997, Mr. Wrobel served as Chairman, President and Chief
Executive Officer of GIGATEK Memory Systems, Inc., a manufacturer of computer
disk drives. Prior to 1988, Mr. Wrobel was Vice President of Technology for
Carlisle Memory Products Group and Vice President of Engineering for Data
Electronics, and held various management positions in Marketing and Engineering
at Texas Instruments and BASF. Mr. Wrobel holds a Masters degree from the
Massachusetts Institute of Technology.
Denis J. Trafecanty, age 56, joined the Company in August 1996 as its Vice
President and Chief Financial Officer and Secretary. In March 1997, he was
promoted to Senior Vice President, Chief Financial Officer and Secretary. Prior
to joining the Company, Mr. Trafecanty was the Vice President and Chief
Financial Officer for Tandon Magnetics/Tandon USA, a manufacturer and
distributor of personal computers and a distributor of computer hard disk
drives, from September 1995 to August 1996. From December 1984 to August 1995,
he was Vice President and Chief Financial Officer for Tandon Corporation
(renamed TSL Holdings, Inc. in 1993), a manufacturer and distributor of personal
computers and peripheral equipment. Mr. Trafecanty holds a B.A. degree in
Accounting from Loyola-Marymount University.
Timothy R. Sullivan, age 42, has served as Vice President and Controller of
the Company since March 1997. Prior to joining the Company and since 1995, Mr.
Sullivan was Chief Financial Officer of InteleTravel International, a wholesale
provider of consumer travel-related products. From 1987 to 1995, Mr. Sullivan
was Chief Financial Officer of Uni-Vite, Inc., a distributor of consumer
products. Mr. Sullivan holds a B.S. degree in business administration from
University of Southern California.
Craig Iwami, age 36, joined the Company in May, 1998 as Manufacturing
Engineering Manager. In September, 1998 he was promoted to Director of
Operations. Prior to joining the Company, Mr. Iwami served as Department
Manager at the Microelectronics Circuits Division of Raytheon Defense Systems,
formerly known as Hughes Aircraft Company, from June, 1987 to May, 1998. Mr.
Iwami received B.S. degree in engineering at California State University Long
Beach.
Pete H. Hudson, Ph.D., age 58, joined the Company in February, 1998 as Vice
President of Technology. Prior to joining the Company, Dr. Hudson held various
management positions in Manufacturing, Engineering and Assembly at Hughes
Aircraft Corporation from June, 1984 to January, 1998. Dr. Hudson holds a Ph.D.
in Electrical Engineering from Stanford University, B.S. and M.S. degrees in
Electrical Engineering from University of Arizona.
Dudley E. Westlake, age 53, joined the Company in April, 1998 as Vice
President of Sales and Marketing. Prior to joining the company, Mr. Westlake was
President and CEO of MSR Development Corporation since 1994. He previously
served as Director of Marketing at Iomega Corporation from 1991 to 1994 and has
prior sales and marketing experience with Rockwell International Semiconductor
Division. Mr. Westlake holds an MBA and a B.S. in Engineering from California
State Polytechnic University, Pomona, California.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in San Diego, California.
This leased facility totals approximately 25,000 square feet and is used for
corporate administration, design, engineering, manufacturing and sales
operations. The lease on this facility expires in November 2002 and the Company
F-15
<PAGE>
has an option to renew for five years at the then fair market rent. The
Company pays approximately $18,000 per month with respect to this facility.
ITEM 3. LEGAL PROCEEDINGS
In May 1995, the United States Environmental Protection Agency ("EPA")
issued written notice to all known generators of hazardous waste shipped to a
Whittier, California treatment facility. The EPA notice indicated that these
generators (including the Company) were potentially the responsible parties
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"). The notice requires all of the generators of this waste 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. At present, the Company believes its percentage of responsibility for
this site is less than one half of one percent; and that percentage is expected
to decrease substantially as additional generators are determined. In addition,
the Company and such generators have provided certain funding to test the soil
and groundwater 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 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.
The Company 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 facility and the State of
California have filed suits against the Operator and two of its officers and the
owner of the facility 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 on its
limited investigation to date, the Company is unable to determine whether this
matter, if resolved adversely to the Company, would have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. However, the Company has received no further communication
regarding this site since 1994.
The possibility exists that the Asian creditors (See "License and Other
Significant Agreements") may file or threaten lawsuits against MPI and its
subsidiaries for the respective various defaults and violations of certain
agreements including debt obligations entered into by MPI and its various
subsidiaries. If such creditors choose to enforce their claims and are
successful in doing so, the Company may be forced to seek protection under
Chapter 7 or 11 of Title 11 the United States Code.
The Company's MPM and MPS subsidiaries are currently in receivership and
liquidation in Singapore. The Company's MPC subsidiary is also currently in
liquidation in Singapore.
Two of the Company's former directors, Lewis Solomon and Gary Stein
("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New
York against the Company and its major customer, Schlumberger. This filing was
made one day after Gary Stein resigned from the Company's Board of Directors.
Lewis Solomon previously resigned in August 1998 from the Company's Board of
Directors. In the complaint, Plaintiffs have charged that the Company failed to
pay them for alleged consulting services, expense reimbursements and other forms
of compensation aggregating $101,250. Further, Plaintiffs allege that they were
wrongfully terminated, thereby preventing them from exercising stock options,
and that the Company interfered with the Plaintiffs prospective economic
relationships and business advantages as
F-16
<PAGE>
consultants and directors of public corporations. The total of other alleged
damages claimed by Plaintiffs are $5.5 million plus additional damages to be
determined at trial. The Company believes that the Plaintiffs' claims are
without merit and will vigorously oppose these allegations. In addition, the
Company has made substantial counterclaims against Plaintiffs for damages of
$829,020, attorneys fees and additional damages to be proven at trial. In the
counterclaim, the Company alleged that Mr. Solomon and Mr. Stein, as directors,
voted to approve an agreement between themselves and the Company which would
compensate them as consultants in addition to director fees that Mr. Solomon and
Mr. Stein were then being paid, which agreement was not approved by a majority
of disinterested directors in accordance with California Corporations Code
310(a). In addition, the counterclaim alleges Mr. Solomon and Mr. Stein voted
themselves various options in violation of the same Code, and that the agreement
was not signed by a Company officer with requisite authority to approve such an
agreement. And finally,the counterclaim alleges that in approving the agreement,
Mr. Solomon and Mr. Stein breached their fiduciary duties and they did not
provide any services of material benefit to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
F-17
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock was traded on the Nasdaq National Market under
the symbol MPIX from April 21, 1994 until March 12, 1997. On March 13, 1997,
the Company was delisted from the Nasdaq National Market; subsequently, the
Company's Common Stock has been quoted on the OTC Bulletin Board. The following
table sets forth the range of high and low per share bid information, as
reported on the Nasdaq National Market (through March 12, 1997) and the OTC
Bulletin Board (from March 12, 1997) for each quarter for the last two years
through December 31, 1998. These over-the-counter quotations reflect inter-
dealer prices, without retail mark-up, mark-down, or commission and may
necessarily represent actual transactions. On March 24, 1999, the average of
the highest and lowest trading price per share was $0.33. On March 24, 1999,
the Company had 138 holders of record of its Common Stock and 10,856,890 shares
outstanding.
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 1997 $1.250 $0.280
June 30, 1997 $0.406 $0.156
September 30, 1997 $0.500 $0.156
December 31, 1997 $0.820 $0.360
March 31, 1998 $0.730 $0.520
June 30, 1998 $0.930 $0.370
September 30, 1998 $0.480 $0.140
December 31, 1998 $0.350 $0.110
During the past year, the Company did not declare or pay any cash dividends
on its Common Stock. The Company currently plans to retain all of its earnings
to support the development and expansion of its business and has no present
intention of paying any dividends on the Common Stock in the foreseeable future.
The Company is prohibited by certain agreements from paying cash dividends. MPS
is a party to a line of credit facility with DBS that requires MPS to obtain the
consent of DBS prior to declaring dividends, repaying creditors or transferring
funds to MPI. In addition, an agreement relating to the guarantee by Motorola
of a bank loan to MPS grants Motorola the right to prohibit payment of dividends
on the stock of MPI, CTM and MPA. The Transpac agreements also contain similar
restrictions.
In connection with the Company's efforts to restructure its debt
obligations in 1998, warrants to purchase 500,000 shares of the Company's Common
Stock at an exercise price of $1.00 per share were issued to Transpac, and
warrants to purchase 200,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share were issued to STMicroelectronics. The Company relied
upon the exemption provided by Section 4(2) of the Securities Act for the
issuance of these warrants.
F-18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- --------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales (4).................................... $19,271 $ 28,522 $ 19,044 $ 15,181 $10,445
Cost of goods sold............................... 14,714 23,352 15,774 11,980 9,512
------- -------- --------- -------- -------
Gross profit..................................... 4,557 5,170 3,270 3,201 933
Selling, general and administrative.............. 2,915 4,204 4,353 4,524 3,042
Engineering and product development.............. 1,060 760 666 565 406
------- -------- --------- -------- -------
Income (loss) from operations.................... 582 206 (1,749) (1,888) (2,515)
Other income (expense):
Interest expense.............................. (18) (37) (787) (69) (90)
Royalty revenue............................... -- -- -- 153
Other income.................................. 179 120 10 66 235
------- -------- --------- -------- -------
Income (loss) from continuing operations
before income taxes.............................. 743 289 (2,526) (1,891) (2,217)
Provision for income taxes 18 -- -- -- --
Discontinued operations.......................... 3,961 (11,785) (39,316) 505 (722)
Net income (loss) (1)(3)......................... $ 4,686 $(11,496) $ (41,842) $ (1,386) (2,939)
======= ======== ========= ======== =======
Net income (loss) per common share:(2)
Historical.................................... $ 0.07 $0.03 $ (0.46) $ (0.41) --
Pro forma before change in accounting --
principle (unaudited)......................... -- -- -- (0.53)
Discontinued operations....................... 0.36 (1.14) (7.22) 0.11 (0.17)
------- -------- --------- -------- -------
Net profit (loss)............................. $ 0.43 $ (1.11) $ (7.68) $ (0.30) $ (0.70)
======= ======== ========= ======== =======
Shares used in pro forma per share calculation... 10,818 10,361 5,445 4,660 4,174
======= ======== ========= ======== =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficiency)..................... $(27,120) $ (41,657) $ (30,015) $ (4,883) $ (368)
Total assets..................................... 6,885 9,911 24,894 42,427 27,635
Current liabilities.............................. 32,028 50,074 50,726 25,438 16,603
Long-term debt, less current portion............. 49 69 4,782 9,573 2,230
Accumulated deficit (65,335) (80,248) (68,752) (26,910) (25,524)
Total shareholders' equity (deficit)............. (25,192) (40,232) (30,614) 7,416 8,802
</TABLE>
_________
(1) See discussion of effects of income taxes in Note 9 to Notes to
Consolidated Financial Statements.
(2) Historical net income (loss) per share has been omitted for 1994 since it
is not considered meaningful due to the automatic conversion of all of the
Company's outstanding shares of Preferred Stock into shares of Common Stock
upon the closing of the Company's initial public offering in April 1994.
The calculation of the number of shares used in computing pro forma net
income per share in 1994 includes the effect of the conversion of all
Series A and B Preferred Stock into 1,774,808 shares of Common Stock upon
the closing of the Company's initial public offering as if such Preferred
Stock had been converted into Common Stock on January 1, 1994.
(3) See discussion of discontinued operations in Notes 14 and 15 to Notes to
Consolidated Financial Statements.
(4) 1998 net sales were higher when compared to a pro forma net sales for 1997.
See Note 5 of Notes to Consolidated Financial Statements for a proper
comparison of net sales for the years 1995 through 1998.
F-19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data of the Company expressed as a percentage of net sales for the
periods indicated:
YEAR ENDED DECEMBER 31,
1998 1997 1996
------ ------ -------
Net sales........................................ 100.0% 100.0% 100.0%
Cost of goods sold............................... 76.4 81.9 82.8
Gross profit..................................... 23.6 18.1 17.2
Selling, general and administrative.............. 15.1 14.7 22.9
Engineering and product development.............. 5.5 2.7 3.5
Income (loss) from operations.................... 3.0 0.7 (9.2)
Other income (expense):
Interest expense............................... (0.1) (0.1) (4.1)
Other income................................... 0.9 0.4 0.0
Income (loss) from continuing operations......... 3.8 1.0 (13.3)
Income (loss) from discontinued operations..... 20.5 (41.3) (206.4)
Net income (loss)................................ 24.3 (40.3) (219.7)
YEARS ENDED 1998, 1997 AND 1996
Net sales. For the year ended December 31, 1998 ("1998"), net sales were
$19,271,000, representing a decrease of $9,251,000 or 32% from net sales of
$28,522,000 for the year ended December 31, 1997 ("1997"). Sales for 1997
increased by 50% from $19,044,000 for the year ended December 31, 1996 ("1996").
The Company's CTM subsidiary has purchased certain chips ("die") used in the
assembly of multichip modules sold to the Company's principal customer from that
same customer (see Note 5 of Notes to Consolidated Financial Statements).
Effective July 25, 1997, this customer notified the Company that it will no
longer sell die to the Company and instead is providing the die on consignment.
This change has resulted in a reduction in selling prices for products sold to
this customer. After removing the effect of the change to consignment basis,
revenues on a comparative basis increased from $17,896,000 for 1997, an increase
of $1,375,000 or 7%. This increase is the result of increased unit sales to the
Company's principal customer offset by decreased average selling price per unit.
The average unit selling price of sales to the Company's principal customer
decreased by 26% from 1997 to 1998 due to product mix changes and downward
competitive pressure on selling prices.
The increase in net sales from 1996 to 1997 is primarily due to increased
unit sales to the Company's principal customer, partially offset by lower
average selling prices, a reduction of revenue of $2,100,000 from the closure of
the Company's former MPA subsidiary, as well as the reduction of $1,694,000 in
revenues derived under an equipment and technology transfer agreement.
F-20
<PAGE>
Net sales to the Company's principal customer comprised 87%, 89% and 76% of
net revenues for 1998, 1997 and 1996.
Cost of goods sold. For 1998, cost of goods sold were $14,714,000,
representing a decrease of $8,638,000 or 37% from cost of goods sold for 1997.
Cost of goods sold for 1997 increased by $7,578,000 or 48% over cost of goods
sold for 1996. The decrease in cost of goods sold for 1998 over 1997 is the
result of a decrease in the average per unit cost of units sold to the Company's
principal customer. The decrease in average per unit cost resulted from CTM's
principal customer deciding, effective July 25, 1997, to provide certain die on
consignment, rather than selling them to the Company (see Note 5 to the
Consolidated Financial Statements). This change in the provision of die to the
Company has resulted in a decrease of approximately one half as compared to the
previous cost of such unit before the change to consignment. If the cost of die
were to be excluded from cost of goods sold for 1997, then cost of goods sold
for 1998 on a comparative basis increased by $2,304,000 from $12,410,000 for
1997. While costs to manufacture declined somewhat in 1998 due to lower
material costs and shorter process manufacturing times, selling prices to the
Company's principal customer were lowered more than this decline in costs. This
lowering of average selling prices had the effect of therefore increasing the
cost of sales percentage to a percentage higher in 1998 than in 1997. This
increase in percentage cost of goods sold was partially mitigated by increased
activities which utilize little direct material in the manufacture of the
particular product.
The increase in cost of goods sold for 1997 as compared to 1996 is the
result of an increase of $10,136,000 for cost of multi-chip module products sold
at CTM, comprised primarily of increased unit sales to the Company's principal
customer. This was offset by a reduction at MPA due to the sale and closure of
the MPA operation in September 1996. Additionally, cost of goods sold for
"other sales" decreased by $1,480,000 from 1996 to 1997 due to the completion in
1997 of an equipment and technology transfer agreement.
Gross profit. Gross profit for 1998 was $4,557,000, a decrease of $613,000
or 12% from 1997. Gross profit for 1997 increased by $1,900,000 or 58% over
gross profit of $3,270,000 in 1996. Gross profit for 1998 represents 24% of net
sales, as compared to 18% for 1997 and 17% for 1996. If the effect of the
change to customer-supplied material as described above in Net Sales had been
made effective as of the beginning of each year and the sales to, and attendant
cost of, the customer-supplied material was eliminated from the period, then
gross profit as a percentage of sales would have been 29% in 1997 and 30% in
1996. Upon comparing 1997 gross profit as a percentage of sales without
customer-supplied material, to 1998 gross profit, the decrease is primarily the
result of lower average selling prices per unit of sales to the Company's
principal customer. This was partially offset by decreases in costs of material
and shorter process manufacturing times.
The increase in gross profit for 1997 as compared to 1996 is principally
the result of the increase in the Company's sales for that same period. The
increase in gross profit when expressed as a percentage of sales for 1997 as
compared to 1996 is primarily due to the efficiencies of higher sales volumes
and improved overhead absorption at CTM as well as differing product mix.
Selling, General and Administrative. Selling, general and administrative
expenses were $2,915,000 for 1998, a decrease of $1,289,000 or 31% as compared
to 1997. Selling, general administrative expenses were $4,204,000 for 1997, a
decrease of $149,000 or 3% as compared to 1996. The decreases in expenses for
both years are primarily the result of the Company's reduction of the additional
legal and consulting fees which had been incurred in connection with the
restructuring of the Company's U.S. operations and the winding up of its
Singapore operations.
Engineering and Product Development. Engineering and product development
expenses were $1,060,000 for 1998, an increase of $300,000 or 40% as compared to
1997. Engineering and product
F-21
<PAGE>
development expenses were $760,000 in 1997, an increase of $94,000 or 14% as
compared to 1996. The increases for both years result primarily from the
increase in the engineering staff employed by the Company, which is part of the
Company's commitment to improvement in quality and processes in its
manufacturing facility.
Interest expense. Interest expense totaled $18,000 for 1998, a decrease of
$19,000 or 51% from 1997. Interest expense was $37,000 for 1997, a decrease of
$750,000 or 95% from 1996. Interest expense for 1997 and 1996 included interest
on the $2.8 million of convertible debentures issued by the Company in October
1996. These debentures were converted into common shares of the Company by the
end of February 1997, thus no such interest was incurred in 1998 and only
incurred for two months of 1997. Interest on customer loans that are related to
the discontinued operations in Singapore have been included in the Discontinued
Operations section of the Consolidated Statements of Operations.
Other income. Other income was $179,000 for 1998, an increase of $59,000 or
49% from 1997. Other income was $120,000 in 1997, an increase of $110,000 or
111% as compared to 1996. Other income for 1998 and 1997 consists primarily of
the settlement of a note receivable which had been previously written-off.
Effects of income taxes. The Company believes that it has sufficient
losses to offset any taxable income that was generated during 1998. However,
the Company's use of these losses may result in alternative minimum taxes for
Federal income tax purposes. As a result, the Company has recorded a small
provision for income taxes for 1998. During 1997, taxable income at the
Company's domestic and foreign operations was offset by the utilization of net
operating loss and other carryforwards. During 1996, the Company's operations
generating operating losses for both financial reporting and income tax purposes
and no tax was due.
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.
Discontinued operations. The net operating results of the activities of
MPM, MPS, MPC and Furnace Tech ("FT") for 1997 and 1996 have been included as
income or loss from discontinued operations on the Consolidated Statements of
Operations. Amounts recorded as estimated losses on disposal of assets of the
discontinued operations reflect management's best estimates of the amounts
expected to be realized on the sale of the assets associated with these
discontinued operations and the expenses to be incurred through the disposal
date. Such expenses include $3.5 million of interest expense relating to the
indebtedness of the discontinued operations through the expected completion of
the liquidation process for those debts guaranteed by MPI, which was anticipated
to be December 31, 1998. Such interest expense was recorded as of June 30,
1997. Since such indebtedness has not been repaid or restructured by the
beginning of the first quarter of 1999, the Company will again begin recording
interest expense on that outstanding indebtedness. Interest of approximately
$563,000 would be accrued beginning in the first quarter of 1999 and would
continue until the indebtedness is repaid or restructured.
Beginning in 1998, the Company has discontinued the consolidation of the
assets and liabilities of MPM, MPS, MPC and FT. Those liabilities and accrued
interest guaranteed by MPI have continued to be included in the Consolidated
Balance Sheets of the Company. The effect of the deconsolidation of these
entities was to reduce current liabilities and improve shareholders' deficit by
$10.2 million as of June 30, 1998.
During 1998, the High Court of the Republic of Singapore ordered the
Winding up of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the
Company. As a result of this decision, MPM cannot
F-22
<PAGE>
continue as an operating business, and it cannot be allowed to dispose of its
assets or incur further liabilities. In addition, the Company does not have any
control over the management of MPM. This function is undertaken by the Receiver
and Manager appointed by DBS Bank.
In September 1997, the High Court of the Republic of Singapore ordered the
Winding Up of "Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly
owned subsidiary of the Company. As with MPM, MPS cannot continue as an
operating business, and the Company does not have any control over the
management of MPS. This function is undertaken by the Receiver and Manager
appointed by DBS Bank.
Due to the circumstances as described in the previous two paragraphs,
management, effective for 1998, will not consolidate MPS and MPM, into the
consolidated financial statements for MPI and subsidiaries. For MPM, the
decision was based upon the Singapore High Court's decision to Wind Up this
company. For MPS, the Singapore High Court had already ordered the Winding Up in
September 1997, however, due to the material amount of assets remaining to be
liquidated and also due to requests made by MPS' Receiver and Manager for the
Company to assist them in the realization and disposal of MPS' remaining assets,
Management elected to consolidate until there was a clearer determination of the
control of the subsidiary and realization of its assets. In November 1998,
Management was informed of the sale of the two buildings owned by MPS. In
addition, it became more evident during 1998 that any remaining realization of
accounts receivable on the books of MPS was highly questionable. Accordingly the
decision was made to not consolidate MPM and MPS.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and 1997, the Company financed its operations from operating
cash flow. In 1996, the Company financed its operations through a combination of
bank and other borrowings, equipment lease financings and certain other debt and
equity financings. During 1998, operating activities of continuing operations
provided $304,000. Investing activities, consisting principally of sales of
assets of discontinued operations, provided $2,201,000, and financing activities
used $3,321,000 during 1998. At December 31, 1998, the Company had a working
capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000. The
Company had outstanding at December 31, 1998 approximately $27,055,000 of debt
from its discontinued operations, which debt has been guaranteed by MPI, the
parent company, and this debt is in default and due on demand.
During 1998, the Company had no significant additions of liquidity from
outside the Company. During 1996, the Company completed two financings. The
Company completed in March 1996 an equity financing of $2,000,000 with Transpac
and also issued to Transpac $9,000,000 of convertible debentures. The Company
completed in October 1996 an additional $2,800,000 financing by issuing a series
of convertible debentures to various investors. The Company's sole source of
liquidity at December 31, 1998 consisted of $469,000 of cash from operations.
The Company has no borrowing arrangements available to it.
The Company is currently in default on substantially all of its debt
obligations which are classified as "discontinued operations" in the
Consolidated Balance Sheet. It is currently attempting to convert these debt
obligations into the Company's equity. There can be no assurance that the
Company will be successful in converting these debt obligations to equity or, if
converted, that the conversion will be on favorable terms and conditions.
In connection with the Company's subsidiaries in Singapore, which ceased
operations in 1997, the Company fully guaranteed the debt obligations listed
below. These obligations are classified as "Discontinued Operations" in the
accompanying financial statements for MPI and its consolidated subsidiaries.
F-23
<PAGE>
During 1998, the Company signed agreements with each of these creditors,
which called for settlement payments of approximately $9.3 million to satisfy
all debt obligations if the amount is paid by May 1, 1999. Because the Company
has not been able to obtain funding to satisfy the settlement payment
obligations which are all due on May 1, 1999, the Company renegotiated the terms
and has recently entered into non-binding letter agreements with all eight
creditors which call for the conversion of all debt and accrued interest
obligations into shares of the Company's Series A Preferred Stock, each share of
which is convertible into two shares of MPI Common Stock. For the aggregate debt
of $27,055,000, which is all the Discontinued Operations debt, the Company has
agreed to convert this debt into shares of Series A Preferred Stock which is
immediately convertible into shares of MPI Common Stock.
This debt conversion into equity is subject to the completion of definitive
agreements for all eight creditors and the approval of the debt conversion to
equity by a majority of the Company's shareholders.
The Series A Preferred Stock contemplated to be used by the Company in
connection with this debt-for-equity exchange will be convertible immediately
into MPI Common Stock. Other proposed features will be a 3.5% per annum
cumulative dividend rate, senior privileges over Common Stock, liquidation
preferences, registration rights and protective provisions.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Future Operating Results Future Capital Needs; Need for
Additional Financing Repayment of Debt Obligations by MPM and MPS Adverse
Impact of MPM and MPS Liquidations on MPI High Leverage Status as a Going
Concern."
At December 31, 1998, the Company's subsidiaries' MPM and MPS had
outstanding borrowings due to DBS totaling $1,364,000. The amount outstanding
is the remaining balance of various borrowings made by MPM and MPS under lines
of credit, overdraft facilities, and an accounts receivable financing line of
credit. This balance remains after the liquidation of assets of MPM and MPS by
the receivers and the application to these debts of the resulting proceeds from
those assets of those entities. All assets of MPM and substantially all assets
of MPS have been liquidated by the receivers of MPM and MPS. The receiver for
MPS is attempting to collect approximately $2,400,000 payable by a former
customer of MPS. The amount has been unpaid since June 1997 and has been fully
reserved for by MPS. If the receiver is successful in collecting all or a
portion of this receivable, the proceeds will be used to retire these
borrowings. These amounts are currently in default, payable upon demand, and
bear interest at the bank's prime rate plus 5%, which is equal to the rate of
XXXX% as of December 31, 1998. All of these amounts are secured by the
remaining assets of MPM and MPS and are guaranteed by MPI.
At December 31, 1997, the Company's subsidiary MPM had borrowings of
$9,000,000 under the Transpac debentures (see Note 6 to Consolidated Financial
Statements). The debentures bear interest at the rate of 8.5%. As of December
31, 1998, approximately $2,165,000 of accrued interest was due and payable under
the Transpac debentures. The debenture has been fully guaranteed by MPI. The
debentures are currently in default and payable upon demand.
At December 31, 1998, the Company had outstanding a term note due to NS
Electronics, a former customer of MPS, a discontinued Singapore operation. The
note bears interest at 18% per annum. The
F-24
<PAGE>
balance due under the note is $1,250,000 and approximately $399,000 of accrued
interest was also due and payable as of December 31, 1998. The note has been
fully guaranteed by MPI and is secured by certain assets of the Company. The
note is currently in default and payable upon demand.
At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to TI, a former customer of MPS. The note bears interest at the rate
of 3.5% per annum. The balance due under the note is $3,521,000 and
approximately $195,000 of accrued interest was due and payable as of December
31, 1998. The note has been fully guaranteed by MPI. The note is currently in
default and payable upon demand.
At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to STMicroelectronics (formerly SGS-Thomson Microelectronics), a former
customer of MPS. The note bears interest at the rate of 7.25% per annum. The
balance due under the note is $4,000,000 and approximately $703,000 of accrued
interest was due and payable as of December 31, 1998. The note has been fully
guaranteed by MPI and is secured by certain assets of the Company. The note is
currently in default and payable upon demand.
At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to Motorola, a former customer of MPS. The note bears interest at
approximately 7% per annum. The balance due under the note is $2,208,000 and
approximately $164,000 of accrued interest was due and payable as of December
31, 1998. The note has been guaranteed by MPI and is secured by certain assets
of the Company as well as all shares of CTM and MPA. The note is currently in
default and payable upon demand.
At December 31, 1997, the Company's subsidiary MPS had outstanding an
amount due to Samsung Corning. Samsung Corning had guaranteed a $1,000,000 loan
from DBS to MPS. The remaining balance due to DBS under the loan, approximately
$583,000, was paid by Samsung Corning to DBS in December 1997. The Company has
accordingly recorded the $583,000 as a liability to Samsung Corning, as well as
$101,000 of accrued and unpaid interest as of December 31, 1998.
At December 31, 1998, the Company had outstanding a deficiency balance from
capital leases due to ORIX Leasing totaling $1,610,000. The amount outstanding
is the remaining balance of various lease borrowings made by MPM and MPS. This
balance remains after the liquidation of the leased assets of MPM by ORIX
Leasing and the application to these leases of the resulting proceeds from those
assets of those entities. The remaining amount outstanding is represented by a
note issued by MPI at an interest rate of 7.25%. The note is currently in
default and is payable upon demand.
The Company also has various capitalized leases for equipment utilized in
the US operations, with a total balance of approximately $69,000 at December 31,
1998. These lease obligations are being serviced currently by CTM.
The Company's inventories declined by $1,157,000 or 27% at 1998 as compared
to 1997. This decline is due to the lower sales volume in 1998 as compared to
1997, and the corresponding lower need to have inventory on hand to support
sales volume. Accounts payable also declined, by $3,405,000 or 45% as compared
to 1997, again due to lower sales volume.
The Company previously purchased raw materials from its principal customer,
Schlumberger. As of July 25, 1997, the material was supplied by the customer on
consignment. As of December 31, 1998, the Company owes to that customer
approximately $2,900,000 from purchases previously made before the change to
consignment. The Company is making periodic payments to Schlumberger under an
informal repayment plan.
FUTURE OPERATIONS
Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's 1998, 1997, 1996 and 1995 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. Absent outside debt or equity financing, and
excluding significant expenditures required for the Company's major projects and
assuming the Company is successful in restructuring its debt,
F-25
<PAGE>
the Company currently anticipates that cash on hand and anticipated cash flow
from operations may be adequate to fund its operations in the ordinary course
throughout 1999. Any significant increase in planned capital expenditures or
other costs or any decrease in or elimination of anticipated sources of revenue
or the inability of the Company to restructure its debt could cause the Company
to restrict its business and product development efforts. There can be no
assurance that the Company will be successful in restructuring its debt on
acceptable terms, or at all. If adequate revenues are not available, the Company
will be unable to execute its business development efforts and may be unable to
continue as a going concern. There can be no assurance that the Company's future
consolidated financial statements will not include another going concern
explanatory paragraph if the Company is unable to restructure its debt and
maintain profitability. The factors leading to and the existence of the
explanatory paragraph will have a material adverse effect on the Company's
ability to obtain additional financing. See "Future Capital Needs; Need for
Additional Financing -- Liquidity and Capital Resources -- Consolidated
Financial Statements."
Risk of Bankruptcy. If the Company is not able to restructure its debt to
the eight creditors referenced above, the Company will need to be reorganized
under Chapter 11 of Title 11 of the United States Code or liquidated under
Chapter 7 of Title 11 of the United States Code. There can be no assurance that
if the Company decides to reorganize under the applicable laws of the United
States that such reorganizational efforts would be successful or that
shareholders would receive any distribution on account of their ownership of
shares of the Company's stock. Similarly, there can be no assurances that if
the Company decides to liquidate under the applicable laws of the United States
that such liquidation would result in the shareholders receiving any
distribution on account of their ownership of shares of the Company's stock. In
fact, if the Company were to be reorganized or liquidated under the applicable
laws of the United States, the bankruptcy laws would require (with limited
exceptions) that the creditors of the Company be paid before any distribution is
made to the shareholders.
Future Capital Needs; Need for Additional Financing. The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the market, requirements to
restructure and retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's research and development efforts, the Company's operating
results and the status of competitive products. If the Company is successful in
restructuring its debt obligations, absent debt or equity financing and
excluding significant expenditures required for the Company's major projects,
the Company anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations through 1999. There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations. In addition, the Company may require
substantial additional financing to fund its operations in the ordinary course,
particularly if the Company is unable to restructure its debt obligations.
Furthermore, the Company may require additional financing to fund the
acquisition of selected assets needed in its production facilities. 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.
The Company is in breach of substantially all of its debt obligations and
is in default under each of such agreements. If the Company cannot reach an
agreement with its creditors to repay its obligations, the Company will not be
able to continue as a going concern. The Company's high level of outstanding
indebtedness and the numerous restrictive covenants set forth in the agreements
covering this indebtedness and its default position prohibit the Company from
obtaining additional bank lines of credit and from raising funds through the
issuance of debt or other securities without the prior consent of DBS and
Transpac. The Company is currently in default on its guarantee and loan
obligations to DBS as a result of the Company's liquidation of the assets of MPM
and MPS. These liquidations have also resulted in the Company's default under a
number of other agreements, and certain creditors have informed the Company they
intend to accelerate outstanding payments due to them under various credit
agreements because of such defaults. There
F-26
<PAGE>
can be no assurance that other creditors of the Company will not also choose to
accelerate the Company's debt obligations and the Company will not able to repay
such accelerated obligations as they become due and immediately payable. If
either a sufficient number of creditors or any of the substantial creditors
choose to accelerate payments or to place MPI or one or more of its subsidiaries
under judicial reorganization, the Company may be forced to seek protection
under Chapter 11 of Title 11 of the United States Code. If the Company were to
seek additional financing, such additional financing may not be available to the
Company on acceptable terms, or at all. If additional funds are raised by
issuing equity or convertible securities, further dilution to the existing
shareholders will result. Since adequate funds are not currently available, the
Company has been required to delay, scale back or eliminate programs which could
continue to have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. In addition, the Company has been
forced to delay, downsize or eliminate other research and development,
manufacturing, construction or transitioning programs or alliances or obtain
funds through arrangements with third parties pursuant to which the Company has
been forced to relinquish rights to certain of its technologies or to other
assets that the Company would not otherwise relinquish. The delay, scaling back
or elimination of any such programs or the relinquishment of any such rights
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Status as a Going Concern",
"Future Capital Needs; Need for Additional Financing" and "Liquidity and Capital
Resources".
Future Operating Results. The Company's operating results have fluctuated
significantly in the past and will continue to fluctuate significantly in the
future depending upon a variety of factors, including corporate and debt
restructurings, creditor relationships, conversions of significant amounts of
debt into a significant amount of equity, downward pressure in gross margins,
losses due to low shipping volume, delayed market acceptance, if any, of new and
enhanced versions of the Company's products, delays, cancellations or
reschedulings of orders, delays in product development, defects in products,
integration of acquired businesses, political and economic instability, natural
disasters, outbreaks of hostilities, variations in manufacturing yields, changes
in manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
personal computer industries. In addition, operating results will fluctuate
significantly based upon several other factors, including the Company's ability
to retain present management and to attract new customers, changes in pricing by
the Company, its competitors, subcontractors, customers or suppliers, and
fluctuations in manufacturing yields. The absence of significant backlog for an
extended period of time will also limit the Company's ability to plan production
and inventory levels, which could lead to substantial fluctuations in operating
results. Accordingly, the failure to receive anticipated orders or delays in
shipments due, for example, to unanticipated shipment reschedulings or defects
or to cancellations by customers, or to unexpected manufacturing problems may
cause net sales in a particular quarter to fall significantly below the
Company's expectations, which would materially adversely affect the Company's
operating results for such quarter. The impact of these and other factors on the
Company's net sales and operating results in any future period cannot be
forecasted with certainty. In addition, the significant fixed overhead costs at
the Company's facilities, the need for continued expenditures for research and
development, capital equipment and other commitments of the Company, among other
factors, will make it difficult for the Company to reduce its expenses in a
particular period if the Company's sales goals for such period are not met. A
large portion of the Company's operating expenses are fixed and are difficult to
reduce or modify should revenues not meet the Company's expectations, thus
magnifying the material adverse impact of any such revenue shortfall.
Accordingly, there can be no assurance that the Company will not incur losses in
the future or that such losses will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Repayment of Debt Obligations by MPM and MPS. As of December 31, 1998, MPM
and MPS had combined outstanding borrowings of approximately $27,000,000. Most
of the assets of MPM and MPS
F-27
<PAGE>
have been liquidated by receivers appointed by DBS. The Company currently
anticipates that the remaining proceeds from the liquidation of assets will be
insufficient to fully repay its outstanding debt. Since the borrowings have been
guaranteed by MPI, the Company is currently attempting to negotiate a conversion
of the remaining indebtedness to MPI equity. The failure of the Company to
complete this conversion on favorable terms would materially adversely affect
the Company's financial condition and the ability of the Company to continue as
a going concern.
Certain Secured Obligations of MPS. In connection with an MPS borrowing
from Citibank N.A., Motorola guaranteed (and subsequently satisfied MPS'
obligation) of $2.2 million in borrowings from Citibank N.A. Under the terms of
the agreement relating to Motorola's guarantee, MPI granted Motorola a security
interest in all of the issued and outstanding capital stock of MPS, CTM and MPA.
While in default, Motorola may have the right to vote and give consents with
respect to all of the issued and outstanding capital of MPS, CTM and MPA . As a
result, during the continuation of any such event of default, MPI may be unable
to control at the shareholder level the direction of the subsidiaries that
generate substantially all of the Company's revenues and hold substantially all
of the Company's assets. Any such loss of control would have a material adverse
effect on the Company's business, prospects, financial condition, results of
operations and status as an ongoing concern and could force the Company to seek
protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code
or similar bankruptcy laws of Singapore. The other Asian debt agreements contain
numerous restrictions and events of default that have been triggered by the
aforementioned actions and would, if they became effective and operative,
materially adversely affect the Company's business, prospects, results of
operations, condition and status as an ongoing concern and could force the
Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the
United States Code or similar bankruptcy laws of Singapore.
In January 1999, the Company and Motorola signed a non-binding letter
agreement which calls for the conversion of all the Company's obligations into
MPI's equity subject to certain conditions. See "License and Other Significant
Agreements." There can be no assurance that the Company will be successful in
its efforts to reduce this non-binding agreement reached with Motorola to a
binding written agreement.
High Leverage. The Company is highly leveraged and has substantial debt
service requirements. The Company has $32,077,000 in liabilities as of December
31, 1998. On December 31, 1998, the Company had a total shareholders' deficit of
approximately $25,192,000. Based on current operations, the Company cannot
service the existing debt. The Company's ability to meet its debt service
requirements will be dependent upon the Company's future performance, which will
be subject to financial, business and other factors affecting the operation of
the Company, many of which are beyond its control and on the willingness of the
Company's creditors to participate in restructuring the Company's debt to MPI
equity. 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. See
"Liquidity and Capital Resources".
Highly Competitive Industry; Significant Price Competition. The electronic
interconnection technology industry is intensely competitive. The Company
experiences intense competition worldwide from a number of manufacturers,
including Maxtek Components Corporation, Natel Engineering, VLSI Packaging,
Raytheon Electronic Systems, Hewlett-Packard Company, Advanced Packaging
Technology of America and MicroModule Systems, all of which have substantially
greater financial resources and production, marketing and other capabilities
than the Company with which to develop, manufacture, market and sell their
products. The 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
F-28
<PAGE>
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. 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.
Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted
for 87% of the Company's net sales in 1998 and is expected to continue to
account for a significant part of the Company's net sales. Under the agreement
between Schlumberger and the Company entered into in January 1998, the Company
is obligated to provide Schlumberger with its requirements for MCM product.
Given the Company's anticipated continued reliance on its MCM business as a
percentage of overall net sales, the failure to meet Schlumberger's requirements
will materially adversely affect the Company's ability to continue as an ongoing
concern. In addition, under the terms of the agreement, Schlumberger is
entitled to request repricing of the Company's products. Schlumberger has
requested repricing on several occasions in the past. Such repricing in the
future may result in the Company being unable to produce the products made for
Schlumberger with an adequate operating profit, and the Company may be unable to
compete with the prices of other vendors who supply the same or similar products
to Schlumberger. The failure to satisfy the terms of the agreement, or the
failure of the Company to achieve an operating profit under the contract, would
have a material adverse impact on the Company's business, financial condition,
and results of operation.
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. 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 MCMs,
could materially adversely affect the Company's business, financial condition
and results of operations. The supply agreements with certain of the Company's
customers do not obligate them to purchase products from the Company. The
Company's ability to increase its sales in the future will also depend in part
upon its ability to obtain orders from new customers. There can be no assurance
that the Company's sales will increase in the future or that the Company will be
able to retain existing customers or to attract new ones. Failure to develop
new customer relationships could materially adversely affect each such
subsidiary's results of operations and would materially adversely affect the
Company's business, financial condition and results of operations.
Dependence on Semiconductor and Personal Computer Industries. 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 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. 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 Company's net sales and results of operations will not be materially
adversely affected if downturns or slowdowns in the semiconductor, personal
computer industry or other industries utilizing the Company's products continue
or again occur in the future.
F-29
<PAGE>
Technological Change; Importance of Timely Product Introduction;
Uncertainty of Market Acceptance and Emerging Markets. The markets for the
Company's products are subject to technological change and new product
introductions and enhancements. Customers in the Company's markets require
products embodying increasingly advanced electronics interconnection technology.
Accordingly, the Company must anticipate changes in technology and define,
develop and manufacture or acquire new products that meet its customers' needs
on a timely basis. A general decline in the technology industry, which began in
1997, had a significant impact on the Company's sales in the third and fourth
quarter of 1998. The Company anticipates that technological changes could cause
the Company's net sales to decline in the future. There can be no assurance that
the Company will be able to identify, develop, manufacture, market, support or
acquire new products successfully, that any such new products will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes. If the Company is unable for technological or other
reasons to develop products in a timely manner in response to changes in
technology, the Company's business, financial condition and results of
operations will be materially adversely affected. There can be no assurance that
the Company will not encounter technical or other difficulties that could in the
future delay the introduction of new products or product enhancements. In
addition, new product introductions by the Company's competitors could cause a
decline in sales or loss of market acceptance of the Company's products, which
could materially adversely affect the Company's business, financial condition
and results of operations. Even if the Company develops and introduces new
products, such products must gain market acceptance and significant sales in
order for the Company to achieve its growth objectives. Furthermore, it is
essential that the Company develop business relationships with and supply
products to customers whose end-user products achieve and sustain market
penetration. There can be no assurance that the Company's products will achieve
widespread market acceptance or that the Company will successfully develop such
customer relationships. Failure by the Company to develop products that gain
widespread market acceptance and significant sales or to develop relationships
with customers whose end-user products achieve and sustain market penetration
will materially adversely affect the Company's business, financial condition and
results of operations. The Company's financial performance will depend in
significant part on the continued development of new and emerging markets such
as the market for MCMs. The Company is unable to predict with any certainty any
growth rate and potential size of emerging markets. Accordingly, there can be no
assurance that emerging markets targeted by the Company, such as the market for
MCMs, will develop or that the Company's products will achieve market acceptance
in such markets. The failure of emerging markets targeted by the Company to
develop or the failure by the Company's products to achieve acceptance in such
markets could materially adversely affect the Company's business, financial
condition and results of operations.
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. There are a limited number of qualified suppliers
of laminate substrates and die which are of critical importance to the
production of the Company's MCM products. In the manufacturing process, the
Company also utilizes consigned materials supplied by certain of its customers.
The Company's reliance on sole or a limited group of suppliers and certain
customers for consigned materials involves several risks, including a potential
inability to obtain an adequate supply of required materials and reduced control
over the price, timely delivery, and quality of raw materials. There can be no
assurance that problems with respect to yield and quality of such materials and
timeliness of deliveries will not continue to occur. Disruption or termination
of these sources could delay shipments of the Company's products and could have
a material adverse effect on the Company's business, financial condition and
operating results. Such delays could also damage relationships with current and
prospective customers, including customers that supply consigned materials.
Product Quality and Reliability; Need to Increase Production. The
Company's customers establish demanding and time-consuming specifications for
quality and reliability that must be met by the Company's products. From initial
customer contact to actual qualification for production, which may take as long
as three years, the Company typically expends significant resources. Although
the Company has generally met its customers' quality and reliability product
specifications, the Company has in the past experienced and is currently
experiencing difficulties in meeting some of these standards. Although the
Company has addressed
F-30
<PAGE>
past concerns and has resolved a number of quality and reliability problems,
there can be no assurance that such problems will not continue or recur in the
future. If such problems did continue or recur, the Company could experience
delays in shipments, increased costs, delays in or cancellation of orders and
product returns, any of which would have a material adverse effect on the
Company's business, financial condition or results of operations. 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. The Company expects
its operating expenses to continue to increase. If orders received by the
Company do not result in sales or if the Company is unable to sustain net sales
at anticipated levels, the Company's operating results will be materially
adversely affected until operating expenses can be reduced. The Company's
expansion will also continue to cause a significant strain on the Company's
management, financial and other resources. If the Company is to grow, it must
expand its accounting and other internal management systems, and 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.
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
F-31
<PAGE>
of such liabilities could materially adversely affect the Company's business,
financial condition or results of operations. The Company has been notified by
the United States Environmental Protection Agency 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. See "Legal Proceedings."
Growth Strategy Through Acquisitions. As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition of comparable or
complementary businesses or technologies. The implementation of this strategy
will depend on many factors, including the availability of acquisitions at
attractive prices and the ability of the Company to make acquisitions, the
integration of acquired businesses into existing operations, the expansion of
the Company's customer base and the availability of required capital.
Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
Dependence on Key Personnel. The Company's financial performance depends
in part upon its ability to attract and retain qualified management, technical,
and sales and support personnel for its operations. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his current position or
the Company's inability to attract and retain skilled employees, as needed,
could materially adversely affect the Company's business, financial condition
and results of operations.
Nasdaq National Market Listing Requirements. The Company was delisted
from the Nasdaq National Market on March 13, 1997, at which date the Company's
Common Stock began trading on the OTC Electronic Bulletin Board. The Company
may in the future be subject to continuing requirements to be listed on the OTC
Electronic Bulletin Board. There can be no assurance that the Company could
continue to meet such requirements. The price and liquidity of the Common Stock
may be materially adversely affected if the Company is unable to meet such
requirements in the future. There can be no assurance that the Company will be
able to requalify for listing on the Nasdaq National Market.
Disclosures Relating to Low Priced Stocks; Restrictions on Resale of Low Price
Stocks and on Broker-Deal Sale; Possible Adverse Effect of "Penny Stock" Rules
on Liquidity for the Company's Securities. Since the Company's securities were
delisted from the NASDAQ SmallCap Market and the Company has net tangible assets
of less than $2,000,000, transactions in the Company's securities are subject to
Rule 15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or
$300,000 together with their spouses). For transactions covered by this Rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
the sale. Consequently, this Rule may affect the ability of broker-dealers to
sell the Company's securities, and may affect the ability of purchasers in this
offering to sell any of the securities acquired hereby in the secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-NASDAQ equity security of a small company that has a market
price (as therein defined) less than $5.00 per share, or with an exercise price
of less than $5.00 per share subject to certain exceptions, and which is not
traded on any exchange or quoted on NASDAQ. For any transaction by
broker-dealers involving a penny stock (unless exempt), the rules require
delivery, prior to a transaction in a penny stock, of a risk disclosure document
relating to the penny stock market. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in an account and information on the limited market in penny stocks.
Volatility of Stock Price. The Company believes that factors such as the
conversion of the Company's Asian debt to Series A Preferred Stock at a
significant dilution to current shareholders (See " Liquidity and Capital
Resources"), announcements of developments related to the Company's business,
fluctuations in the Company's financial results, general conditions or
developments in the semiconductor and personal computer industry and the general
economy, sales of the Company's Common Stock into the marketplace, the ability
of the Company to sell its stock on an exchange or over-the-counter, an outbreak
of hostilities, natural disasters, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Company's relationships with its customers and suppliers, or a shortfall or
changes in revenue, gross margins or earnings or other financial results which
are different 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
F-32
<PAGE>
Company's Common Stock will not continue to experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.
Recurring net operating losses. The Company's decision to discontinue its
multilayer ceramic operations was the primary factor contributing to its 1996
net loss of $41,842,000. The decision by the principal secured creditors of the
Company's pressed ceramic operations to liquidate that operation's assets was
the primary factor contributing to the 1997 net loss of $11,496,000, as well as
additional loss provisions made in 1997 relating to the discontinuance of the
multilayer ceramic operations. At December 31, 1998, the Company had a working
capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000.
The Company had outstanding at December 31, 1997 approximately $27,055,000 of
debt from its discontinued operations, which debt has been guaranteed by MPI,
the parent company, and most of which debt is in default and due on demand.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry and in other industries concerning
the potential effects associated with such compliance. Although the Company
currently offers products that are designed to be Year 2000 compliant, there can
be no assurance that the Company's products and the software products used by
the Company contain all necessary date code changes. As of December 31, 1998,
the Company has partially completed an analysis of its readiness for compliance
with the Year 2000 change. Its assessment of its manufacturing systems and
company products reveals that no known Year 2000 issues currently exist either
in the products, their raw materials, or their relationship as components to
larger systems produced by its customers; its financial systems software is
currently being upgraded to a newer replacement system which will be complete in
early 1999, and which system is Year 2000 compliant; documentation systems that
currently use fixed dating are Year 2000 compliant, while those that require
revision dating are currently under review; and approximately 50% of the
Company's computing hardware systems have been upgraded to be Year 2000
compliant. The Company's costs to become Year 2000 compliant as of December 31,
1998 have been $235,000 for computer software and $48,000 for computer hardware.
The Company has not yet completed its analysis of its readiness for
compliance with the Year 2000 change. Based upon the partial analysis described
above, the Company believes its exposure to Year 2000 risks is limited because
the majority of the Company's recordkeeping systems are new and compliant and
have been installed within the last eighteen months. The Company utilizes no
custom-programmed "legacy" software or hardware systems known to need Year 2000
upgrading or conversion. The Company believes it should be fully compliant with
its Year 2000 issues by the end of the second quarter of 1999 when it believes
it will have completed due diligence of its internal systems and supplier
compliance requirements, as well as completed the remaining 50% of its computing
hardware upgrades needed. However, there can be no assurance that conditions or
events may occur during the course of the completion of this analysis which will
have an adverse impact on the Company's readiness for compliance with the Year
2000 change.
The Company believes that the purchasing patterns of customers and
potential customers and the performance of vendors may be affected by Year 2000
issues in a variety of ways. Many companies are expending significant resources
to correct or patch their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by the Company or the inability to render services or
provide supplies to the Company. Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products, and disruption of
supply patterns. Additionally, Year 2000 issues could cause a significant
number of companies, including current Company customers and vendors, to spend
significant resources upgrading their internal systems, and as a result consider
switching to
F-33
<PAGE>
other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments.
The Company has outstanding indebtedness at December 31, 1998 to DBS
denominated in Singapore dollars of approximately Singapore $737,000 (US
equivalent $445,000). All of the Company's other indebtedness is denominated in
US dollars, and all other Singapore-based assets have been liquidated by the
receiver of MPM and MPS and used to retire outstanding indebtedness.
Accordingly, the Company believes its exposure to foreign currency rate
movements is extremely limited.
ITEM 8. FINANCIAL STATEMENTS
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
F-34
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and employees is
included under the caption "Executive Officers" in Part I of the Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"Certain Transactions" in the Registrant's Proxy Statement for the 1999 Annual
Meeting of Shareholders and is incorporated herein by reference.
F-35
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Index to Consolidated Financial Statements.
FORM 10K
Page Number
-----------
Report of Independent Certified Public Accountants.......... F-1
Consolidated Balance Sheets as of
December 31, 1998 and 1997................................ F-2
Consolidated Statements of Operations
for the three-year period ended
December 31, 1998......................................... F-3
Consolidated Statements of Cash Flows for
the three-year period ended
December 31, 1998......................................... F-4
Consolidated Statements of Shareholders'
Equity (Deficit) for the three-year period
ended December 31, 1998................................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. Consolidated Financial Statement Schedules.
The following financial statement schedules of Microelectronic Packaging,
Inc. and its subsidiaries are included in this annual report on Form 10-K.
FORM 10K
Page Number
-----------
Report of Independent Certified Public Accountants on
Financial Statement Schedules............................. F-27
Schedule II -- Valuation and Qualifying Accounts and
Reserves..................................... F-28
Schedules other than those listed above have been omitted since they are either
not required, are not applicable, or the required information is shown in the
financial statements or related notes.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
December 31, 1998.
(c) Exhibits
F-36
<PAGE>
The following exhibits are referenced or included in this report.
Exhibit Description
- ------- -----------
3.1(13) Amended and Restated Articles of Incorporation of the Company filed
March 23, 1998.
3.2(1) Amended and Restated Bylaws of the Company.
4.1(1) Specimen Certificate of Common Stock.
4.2(1) Form of Warrant to purchase 160,000 shares of Common Stock of the
Company issued by the Company to Thomas James Associates, Inc.
entered into upon the closing of the offering made pursuant to the
Company's Registration Statement on Form S-1.
4.3(1) Form of Warrant to Purchase Common Stock dated August 31, 1993 issued
by the Company to certain investors.
4.4(13) Warrants issued to The Seidler Companies dated November 3, 1997.
4.5(13) Warrants issued to H.J. Meyers & Company, Inc. dated November 19,
1997.
10.1(1) Second Amended and Restated Registration Rights Agreement, Waiver
Agreement and Conversion Agreement entered into among the Company and
certain investors named therein.
10.2(1) Letter Agreement for General Banking Facilities dated October 9, 1993
between Microelectronic Packaging (S) Pte. Ltd., a Singapore company
("MPS"), and Development Bank of Singapore, as revised by Letter
Agreement dated November 19, 1993.
10.3(1) Guaranty dated August 24, 1990 between the Company and Development
Bank of Singapore, as confirmed by Letter of Confirmation dated April
29, 1992.
10.4(1) Term Loan between MPS and Development Bank of Singapore.
10.5(1) Mortgages dated August 16, 1989 among MPS, DBS Finance Limited, a
Singapore company, and Development Bank of Singapore.
10.6(1) Escrow Agreement dated October 11, 1993 between the Company and
Innoventure (S) Pte. Ltd., a Singapore company.
10.7(1) Collaborative Manufacturing Agreement dated July 29, 1993 between the
Company and Innoventure (S) Pte. Ltd., a Singapore company.
10.8(1) Lease Agreement dated February 6, 1991 between Microelectronic
Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
Corporation for the industrial premises at 31 Tuas Avenue 8, Jurong
Town, Singapore, as renewed by a Lease Renewal Letter dated August
26, 1993.
10.9(1) Lease Agreement dated February 11, 1993 between Microelectronic
Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
Corporation for a portion of the premises at 1003 Bukit Merah
Central, Singapore.
10.10(1) Lease Agreement dated November 21, 1984 between Microelectronic
Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
Corporation for the premises at 28 Tuss, Jurong Town, Singapore.
10.11(1) Form of Indemnification Agreement between the Company and each of its
officers and directors.
10.12(1) Letter Agreement dated December 21, 1993, by and between the Company
and Samsung.
10.13(1) Letter Agreement, dated December 16, 1993, by and between the Company
and Samsung.
10.14(1) Consent to Certain Corporate Actions dated February 11, 1994 between
the Company and Development Bank of Singapore.
10.15(1) Consent to Certain Corporate Actions dated April 12, 1994 between the
Company and Development Bank of Singapore.
10.16(3) Letter Agreement, dated May 27, 1994, by and between the Company and
Development Bank of Singapore.
10.17(3)+ Purchase Option Agreement dated August 4, 1994 by and between
International Business Machines ("IBM") and the Company.
F-37
<PAGE>
10.18(3)+ Multilayer Technology Transfer and Licensing Agreement, dated August
4, 1994, by and between the Company and IBM.
10.19(3) Tenancy Agreement relating to Private Lot A14698 at 9 Tuas Basin Link
between Jurong Town Corporation and MPM Singapore Pte. Ltd. dated
November 18, 1994.
10.20(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot
A14698(A) at 5 Tuas Basin Link, Jurong Industrial Estate, Singapore
2263 from Jurong Town Corporation dated December 2, 1994.
10.21(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot
A14698(B) at 7 Tuas Basin Link, Jurong Industrial Estate, Singapore
2263 from Jurong Town Corporation dated January 26, 1995.
10.22(3) Offer Letter from DBS Bank of Term Loan/Short Term Advances
Facilities dated December 15, 1994.
10.23(3) Sale and Purchase Agreement for CERDIP Manufacturing Equipment and
Alumina Powder Equipment between the Company and Samsung Corning
Company, Ltd., dated December 19, 1994.
10.24(3) Letter dated March 31, 1995 from Development Bank of Singapore.
10.25(4) Loan and Security Agreement, dated May 16, 1995, between the Company,
MPS and Texas Instruments.
10.26(4) Loan and Security Agreement, dated May 30, 1995, between the Company,
and NSEB.
10.27(4) Supply Guarantee and Preferred Allocation Agreement dated August 17,
1995 between Registrant, MPS and SGS-Thomson Microelectronics Pte.
Ltd. (the "Supply Guarantee").
10.28(4) Agreement Relating to Guarantee among Registrant, MPA, CTM, MPS and
Motorola.
10.29(4) Supplemental Agreement to the Supply Guarantee dated October 19,
1995.
10.30(4) $1,000,000 Term Loan Financing between Citibank N.A. and MPS.
10.31(7) Subscription Agreement by and among MPI, Transpac Capital Pte. Ltd.,
Transpac Industrial Holdings Ltd., Regional Investment Company Ltd.
and Natsteel Equity III Pte Ltd.
10.32(7) Convertible Loan Agreement by and among MPI, MPM, Transpac Capital
Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment
Company Ltd. and Natsteel Equity III Pte Ltd.
10.33(7) Guarantee issued by MPI.
10.34(5) Form of Offshore Securities Subscription Agreement dated October 22,
1996 by and among MPI, Purchaser and Loselle Greenawalt Kaplan Blair
& Adler.
10.35(5) Form of 8% Convertible Debenture issued to the Purchasers.
10.36(5) Form of Common Stock Purchase Warrant dated October 22, 1995 issued
by MPI to Dusseldorf Securities Limited.
10.37(6) Form of Amendment to 8% Convertible Debenture.
10.38(8) Amended Loan and Security Agreement dated January 2, 1997 by and
between NS Electronics Bangkok (1993) Ltd. and Microelectronic
Packaging, Inc.
10.39(8) Second Secured Promissory Note dated January 2, 1997 by and between
NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging,
Inc.
10.40(8) Amended Loan and Security Agreement dated February 16, 1997 by and
between Texas Instruments Singapore (Pte) Limited and Microelectronic
Packaging (S) Pte. Ltd.
10.41(8) Consulting Agreement dated November 21, 1996, as amended, by and
between the Company and The Watley Group, LLC.
10.42(8) Consulting Agreement dated November 21, 1996, as amended, by and
between the Company and G&L Investments.
10.43(10) Loan and Security Agreement dated May 13, 1997, between the Company
and Texas Instruments (Pte) Limited.
10.44(10) Promissory Note dated May 13, 1997, between the Company and Citicorp
USA, Inc.
10.45(10) Amendment (to Promissory Note) dated July 11, 1997, between the
Company and Citicorp USA, Inc.
10.46(11) Building lease dated September 2, 1997.
10.47(11) Employment agreement with Andrew K. Wrobel, dated October 6, 1997.
10.48(11) Amendment dated September 9, 1997 to Promissory Note issued by
Microelectronic Packaging, Inc. in favor of Citicorp USA.
F-38
<PAGE>
10.49(11) Agreement dated October 8, 1997 between ORIX Leasing and
Microelectronic Packaging, Inc.
10.50(13) Amendment dated December 8, 1997 to Promissory Note issued by
Microelectronic Packaging, Inc. in favor of Citicorp USA.
10.51(13) Amendment dated January 30, 1998 to Promissory Note issued by
Microelectronic Packaging, Inc. in favor of Citicorp USA.
10.52(13)+ Agreement among Schlumberger Technologies, Inc. ATE Division and
Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective
January 5, 1998.
10.53(14) Restructuring, Settlement and Mutual Release Agreement between ORIX
Leasing Singapore Limited and the Company dated April 14, 1998.
10.54(14) Restructuring, Settlement and Mutual Release Agreement between Texas
Instruments Singapore (Pte.) Ltd. and the Company dated April 24,
1998.
10.55(14) Restructuring, Settlement and Mutual Release Agreement between
Samsung-Corning Co., Ltd. and the Company dated May 19, 1998.
10.56(14) Restructuring, Settlement and Mutual Release Agreement between
Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd.,
Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd.,
and the Company dated April 22, 1998.
10.57(14) Forbearance, Restructure and Mutual Release Agreement between
Motorola, Inc. and the Company dated July 1, 1998.
10.58(14) Restructuring, Settlement and Mutual Release Agreement between NS
Electronics Bangkok (1993) Ltd. and the Company dated May 29, 1998.
10.59(14) Restructuring, Settlement and Mutual Release Agreement between the
Development Bank of Singapore Limited and the Company dated July 10,
1998.
10.60(14) Form of Warrant to Purchase Common Stock dated April 24, 1998 issued
to Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd.,
Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd.
10.61(15) Restructuring, Settlement and Mutual Release Agreement between
STMicroelectronics, Inc. and the Company dated September 24, 1998.
10.62(15) Amendment to Restructuring, Settlement and Mutual Release Agreement
between Texas Instruments Singapore (Pte.) Ltd. and the Company dated
August 11, 1998.
10.63(15) Amendment to Restructuring, Settlement and Mutual Release Agreement
between Transpac Capital Pte. Ltd., Transpac Industrial Holdings
Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte.
Ltd., and the Company dated September 1, 1998.
10.64(15) Amendment to Restructuring, Settlement and Mutual Release Agreement
between ORIX Leasing Singapore Limited and the Company dated August
11, 1998 .
10.65(15) Amendment to Forbearance, Restructure and Mutual Release Agreement
between Motorola, Inc. and the Company dated November 5, 1998.
10.66 Amendment to Restructuring, Settlement and Mutual Release Agreement
between The Development Bank of Singapore Limited and the Company
dated November 24, 1998.
10.67 Amendment to the Restructuring, Settlement and Mutual Release
Agreement between Samsung Corning Co. Ltd. And the Company dated
November 18, 1998.
10.68 Nonbinding Letter Agreement between The Development Bank of Singapore
Limited and the Company dated January 19, 1999.
10.69 Nonbinding Letter Agreement between Motorola Inc. and the Company
dated January 19, 1999.
F-39
<PAGE>
10.70 Nonbinding Letter Agreement between NS Electronics Bangkok Ltd.and
the Company dated January 20, 1999.
10.71 Nonbinding Letter Agreement between ORIX Leasing Singapore Ltd. and
the Company dated January 19, 1999.
10.72 Nonbinding Letter Agreement between Texas Instruments Incorporated
and the Company dated January 19, 1999.
10.73 Nonbinding Letter Agreement between Transpac Capital Pte. Ltd. and
the Company dated January 25, 1999.
10.74 Immunity from Suit Agreement between Motorola, Inc. and the Company
dated July 21, 1998.
21.1(3) Subsidiaries of the Company.
24.1 Power of Attorney (see page 38).
27.1 Financial Data Schedule 1998
27.2 Financial Data Schedule 1997
27.3 Financial Data Schedule - 1996
99.1(12) Amended 1993 Stock Option/Stock Issuance Plan dated April 10, 1997
and filed in the state of California on March 23, 1998.
99.2(2) Form of Notice of Grant of Stock Option and Stock Option Agreement.
99.3(2) Addendum to Stock Option Agreement (Special Tax Elections).
99.4(2) Addendum to Stock Option Agreement (Financial Assistance).
99.5(2) Form of Notice of Grant of Stock Option with Stock Option Agreement
(Non-Employee Director Automatic Grant).
99.6(2) Form of Stock Issuance Agreement.
99.7(1) Form of Director Automatic Option Grant Agreement.
- ---------------------
(1) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-72890) declared effective
by the Securities and Exchange Commission on April 21, 1994.
(2) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-8 (File No. 33-78452) filed with the
Securities and Exchange Commission on April 29, 1994.
(3) Incorporated by reference from an exhibit filed with the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
April 17, 1995 as amended.
(4) Incorporated by reference from an exhibit filed with the Company's Annual
Report on Form 10-K for the 1995 fiscal year filed with the Securities and
Exchange Commission.
(5) Incorporated by reference from an exhibit filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 28, 1996.
(6) Incorporated by reference from an exhibit filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 15, 1997.
(7) Incorporated by reference from an exhibit filed with the Company's current
report on Form 8-K dated March 27, 1996 and filed with the Securities and
Exchange Commission on April 5, 1996.
(8) Incorporated by reference from an exhibit filed with the Company's Annual
Report on Form 10-K for the 1996 fiscal year filed with the Securities and
Exchange Commission on April 15, 1997, as amended.
(9) Not used.
(10) Incorporated by reference from an exhibit filed with the Company's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 1997.
(11) Incorporated by reference from an exhibit filed with the Company's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 12, 1997.
(12) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on February 25, 1998.
(13) Incorporated by reference from an exhibit filed with the Company's Annual
Report on Form 10-K for the 1997 fiscal year filed with the Securities and
Exchange Commission.
F-40
<PAGE>
(14) Incorporated by reference from an exhibit filed with the Company's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 1998.
(15) Incorporated by reference from an exhibit filed with the Company's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 14, 1998.
+ Confidential Treatment has been granted for the deleted portions of this
document.
F-41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 14, 1999.
MICROELECTRONIC PACKAGING, INC.
Date: April 14, 1999 By: /s/ Andrew K. Wrobel
----------------------
Andrew K. Wrobel
Chairman, President and Chief Executive
Officer, Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew K. Wrobel and Denis J. Trafecanty, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 14, 1999 By: /s/ ANDREW K. WROBEL
---------------------
Andrew K. Wrobel
Chairman of the Board of Directors
of the Company
President and Chief Executive Officer,
Director
Date: April 14, 1999 By: /s/ DENIS J. TRAFECANTY
------------------------
Denis J. Trafecanty
Senior Vice President, Chief Financial
Officer and Secretary
Date: April 14, 1999 By: /s/ ANTHONY J. A. BRYAN
------------------------
Anthony J. A. Bryan
Director of the Company
Date: April 14, 1999 By: /s/ FRANK L. HOWLAND
---------------------
Frank L. Howland
Director of the Company
Date: April 14, 1999 By: /s/ WALDEMAR HEEB
------------------
Waldemar Heeb
Director of the Company
F-42
<PAGE>
Date: April 14, 1999 By: /s/ WONG LIN HONG
------------------
Wong Lin Hong
Director of the Company
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Microelectronic Packaging, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of Microelectronic
Packaging, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1998. 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 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 audits provide 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, 1998 and 1997 and the results of its operations
and its cash flows for the years ended December 31, 1998, 1997 and 1996 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 a working capital deficiency
of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31,
1998, is in default of most of it's loan agreements, is economically dependent
on a single customer, has three foreign subsidiaries in receivership and/or
liquidation under Singapore law, has various claims and lawsuits filed against
the Company and it's subsidiaries and may be forced to seek protection for the
Company and certain subsidiaries under United States bankruptcy law. 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 described in
Note 2. Continuation of the Company is dependent on the Company's ability to
negotiate arrangements with its lenders, raise sufficient capital, achieve
sufficient cash flow to meet its debt obligations and profitability. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1999 except for
Note 14, paragraph 14, which
is as of April 14, 1999.
F-44
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 469,000 $ 1,296,000
Accounts receivable, net 1,306,000 2,504,000
Inventories 3,073,000 4,230,000
Other current assets 60,000 387,000
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,908,000 8,417,000
- -------------------------------------------------------------------------------
Property, plant and equipment, net 1,806,000 1,212,000
Other non-current assets 171,000 282,000
- -------------------------------------------------------------------------------
$ 6,885,000 $ 9,911,000
===============================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt $ 20,000 $ 22,000
Accounts payable 4,045,000 7,450,000
Accrued liabilities 908,000 1,711,000
Deferred revenue -- 265,000
Debt and accrued interest of discontinued
operations, in default, due on demand 27,055,000 30,344,000
Current liabilities of discontinued operations,
net -- 10,282,000
TOTAL CURRENT LIABILITIES 32,028,000 50,074,000
- -------------------------------------------------------------------------------
Long-term debt, less current portion 49,000 69,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding 10,856,890 at 1998 and
10,793,279 at 1997 40,143,000 40,016,000
Accumulated deficit (65,335,000) (80,248,000)
- -------------------------------------------------------------------------------
(25,192,000) (40,232,000)
$ 6,885,000 $ 9,911,000
===============================================================================
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Product sales $ 19,271,000 $ 28,432,000 $ 17,259,000
Other sales -- 90,000 1,785,000
- ------------------------------------------------------------------------------------------------------------------
19,271,000 28,522,000 19,044,000
- ------------------------------------------------------------------------------------------------------------------
Cost of goods sold
Product sales 14,714,000 23,309,000 14,251,000
Other sales -- 43,000 1,523,000
- ------------------------------------------------------------------------------------------------------------------
14,714,000 23,352,000 15,774,000
- ------------------------------------------------------------------------------------------------------------------
Gross profit 4,557,000 5,170,000 3,270,000
Selling, general and administrative 2,915,000 4,204,000 4,353,000
Engineering and product development 1,060,000 760,000 666,000
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 582,000 206,000 (1,749,000)
Other income (expense):
Interest expense (18,000) (37,000) (787,000)
Other income, net 179,000 120,000 10,000
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 743,000 289,000 (2,526,000)
Provision for income taxes 18,000 -- --
Net income (loss) from continuing operations before
provision for income taxes 725,000 289,000 (2,526,000)
Discontinued operations:
Loss from operations, including a
1996 provision of $6,163,000 for impairment of
long-lived assets -- (4,523,000) (10,060,000)
Estimated gain (loss) on disposal of discontinued
operations, including provision of $3,500,000 in
1997 and $1,580,000 in 1996 for operating losses
through disposal date 3,961,000 (7,262,000) (29,256,000)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,686,000 $ (11,496,000) $ (41,842,000)
===================================================================================================================
Earnings per common share:
Income (loss) from continuing operations $ 0.07 $ 0.03 $ (0.46)
Discontinued operations 0.36 (1.14) (7.22)
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 0.43 $ (1.11) $ (7.68)
Weighted average number of shares outstanding 10,818,000 10,361,000 5,445,000
==================================================================================================================
Earnings per common share assuming dilution:
Income (loss) from continuing operations $ 0.07 $ 0.03 $ (0.46)
Discontinued operations 0.36 (1.09) (7.22)
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.43 $ (1.06) $ (7.68)
Weighted average number of shares outstanding 10,968,000 10,886,000 5,445,000
==================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-46
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,686,000 $ (11,496,000) $ (41,842,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 527,000 324,000 2,607,000
Discontinued operations (3,345,000) 11,874,000 39,405,000
Provision for revaluation of long-lived assets -- -- 6,163,000
Non-employee stock-based compensation 114,000 177,000 332,000
Discount on conversion of debentures -- -- 700,000
(Gain) Loss on sale of fixed assets (11,000) 8,000 12,000
Realized benefit forward foreign currency contracts -- -- (292,000)
Changes in assets and liabilities, net of effects of
discontinuance in 1997 and 1996:
Accounts receivable 1,199,000 (1,066,000) 966,000
Inventories 1,157,000 375,000 (3,354,000)
Other current assets 327,000 (242,000) 1,731,000
Other non-current assets 111,000 108,000 1,303,000
Accounts payable, accrued liabilities and deferred revenue (4,472,000) 1,033,000 3,641,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities of:
Continuing operations 293,000 1,095,000 11,372,000
Discontinued operations -- 3,200,000 (15,529,000)
Net cash provided (used) by operating activities 293,000 4,295,000 (4,157,000)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of fixed assets
Continuing operations (1,102,000) (973,000) (1,284,000)
Discontinued operations -- -- (8,852,000)
Proceeds from sale of fixed assets
Continuing operations 14,000 49,000 310,000
Discontinued operations 3,289,000 2,805,000 --
Realized benefit from forward foreign currency contracts -- -- 292,000
Net cash provided (used) by investing activities 2,201,000 1,881,000 (9,534,000)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term notes payable
Continuing operations -- -- (847,000)
Discontinued operations -- (6,500,000) 101,000
Borrowings under long-term debt and promissory notes
Continuing operations -- 109,000 5,128,000
Discontinued operations -- -- 9,000,000
Principal payments on long-term debt and promissory notes
Continuing operations (45,000) (386,000) (1,200,000)
Discontinued operations (3,289,000) (1,057,000) (340,000)
Issuance of common stock, net 13,000 -- 1,880,000
Net cash provided (used) by financing activities (3,321,000) (7,834,000) 13,722,000
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (827,000) (1,658,000) 31,000
Cash at beginning of year 1,296,000 2,954,000 2,923,000
Cash at end of year $ 469,000 $ 1,296,000 $ 2,954,000
===================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-47
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Accumulated
Shares Amount Deficit Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE,
January 1, 1996 4,660,093 34,326,000 (26,910,000) 7,416,000
Common stock issued 2,331,400 3,480,000 -- 3,480,000
Non-employee stock compensation -- 332,000 -- 332,000
Net loss -- -- (41,842,000) (41,842,000)
- -----------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 6,991,493 38,138,000 (68,752,000) (30,614,000)
Common stock issued 3,801,786 1,701,000 -- 1,701,000
Non-employee stock compensation -- 177,000 -- 177,000
Net loss -- -- (11,496,000) (11,496,000)
- -----------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 10,793,279 40,016,000 (80,248,000) (40,232,000)
Common stock issued 63,611 13,000 -- 13,000
Non-employee stock compensation -- 114,000 -- 114,000
De-consolidation of Discontinued -- -- 10,227,000 10,227,000
subsidiaries
Net income -- -- 4,686,000 4,686,000
Balance,
December 31, 1998 10,856,890 $ 40,143,000 $ (65,335,000) $ (25,192,000)
=================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-48
<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 an electronic
interconnect solutions company with design, manufacturing and sales services to
support the requirements of electronic systems companies. The Company develops,
manufactures, markets and sells multichip modules ("MCMs") and, until July 1997
pressed ceramic packages, to customers in the integrated circuit,
telecommunications, 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, CTM Electronics, Inc. ("CTM")
and Microelectronic Packaging America, Inc. ("MPA") which is dormant. For years
prior to 1998, the consolidated financial statements also included
Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is in receivership
(including its wholly-owned subsidiary Furnace Technology (S) Pte. Ltd.) which
was dissolved in 1998, MPC (S) Pte. Ltd. ("MPC") which is in voluntary
liquidation and MPM (S) Pte. Ltd. ("MPM") which is in receivership. 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. A substantial portion of the Company's
December 31, 1998 inventory (approximately $2.3 million) was purchased for the
Company's primary customer. See Note 4. Under terms of an agreement dated
January 5, 1998 between the Company and the customer the Company has been and
continues to be required to maintain certain inventory levels as defined by the
agreement. The agreement stipulates that the cost of such inventory will be paid
to the Company should the customer terminate the business relationship. Terms of
the agreement have been used in determining the carrying value of the Company's
December 31, 1998 inventory. The customer can terminate the agreement with 120
days notice, the agreement is not enforceable should the Company file
bankruptcy, and notice expires in October 2000.
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
five 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.
IMPAIRMENT OF LONG-LIVED ASSETS - As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 prescribes that an impairment loss is recognized in the event that
facts and circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset. Impairment is recorded based on an estimate of
future discounted cash flows. Adoption of SFAS No. 121 did not have a material
impact on the Company's financial statements.
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 records an
impairment of such assets when the projected gross cash flows are no longer
estimated to be sufficient to recover such assets.
DEFERRED FACILITY START-UP COSTS - The Company has incurred 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 consisted of direct incremental employee and employee related costs
and pre-operating rent for new facilities which were included in other non-
current assets at December 31, 1995. These costs, which totaled $8,921,000,
were expensed in 1996 as a result of the discontinuance of the multilayer
ceramics operations.
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
F-49
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
estimated useful lives of 7 years. In 1996, the Company determined that the
purchased technology is of no further benefit to the Company, and wrote-off the
remaining net book value in 1996.
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 1997 and 1996 include 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. Revenues from these transactions
were 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 income tax purposes. For California
income tax purposes, the domestic parent company files on a unitary basis with
all subsidiaries.
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. 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 are to 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.
STOCK-BASED COMPENSATION - The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost is recognized
for its employee stock option plans, unless the exercise price of options
granted is less than fair market value on the date of grant. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (see Note 12).
FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's formerly
consolidated Singapore subsidiaries were 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's formerly consolidated Singapore subsidiaries entered 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
F-50
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 are classified as current liabilities (due on demand, due
to defaults under debt covenants), the Company believes that their carrying
amounts approximate their fair value.
ENGINEERING AND PRODUCT DEVELOPMENT COST - Engineering and product development
costs are expensed as incurred.
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.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is calculated pursuant to
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number of
shares outstanding during the period. Diluted earnings (loss) per share reflects
the potential dilution of securities that could share in the earnings of the
Company.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
to the current year presentation.
NOTE 2 - OPERATING RESULTS, CAPITAL RESOURCES AND GOING CONCERN
The Company's decision to discontinue its remaining operations in Singapore,
which produced pressed ceramic packages and aluminum nitride components, was the
primary cause of the 1997 net loss of $11.5 million. The discontinuation of
these operations resulted in a reduction in the carrying amount of inventories
by $2.3 million, production consumables by $0.8 million and property, plant and
equipment by $0.8 million and the accrual of interest expense through the
anticipated completion of the liquidation process of $3.5 million. Other
factors contributing to the Company's 1997 loss was the operating loss of $4.1
million generated by the Company's Singapore operations (primarily the MPS
pressed ceramics operations) from the beginning of 1997 up until the time they
were discontinued in July 1997, and the Company incurring significant overhead
expenses in the US in connection with the restructuring of the Company's
operations.
The Company's decision to discontinue its multilayer ceramics operations was the
leading cause of the 1996 net loss of $41.8 million. The discontinuation of
this operation resulted in the write-off of $8.9 million of pre-production
costs, $2.0 million of prepaid royalties, a reduction in the carrying amount of
property, plant and equipment by $14.9 million, the accrual of certain
miscellaneous costs of $1.9 million, and the accrual of estimated losses to be
incurred through the disposal date totaling $1.6 million. Other factors
contributing to the Company's 1996 loss were: (1) a $6.2 million reduction in
the carrying amount of pressed ceramic equipment at the MPS facility in
Singapore and in Indonesia, and a $1.6 million allowance against MPS's
receivable for inventory advanced to the Company's joint venture partner in
Indonesia and (2) a significant decline in sales of pressed ceramic products by
MPS, due to an industry-wide over-supply of pressed ceramic products.
A receiver was appointed to handle the liquidation of the pressed ceramics
operations on July 10, 1997, and on March 18, 1997, a receiver was appointed to
handle the liquidation of the multilayer ceramics operations. Certain other
factors, including, but not limited to, the majority of the Company's debt which
is currently in default, cross default provisions specified in most of the
Company's borrowing arrangements, various claims and lawsuits filed against the
Company and its subsidiaries, dependence on primarily one customer who is also
the Company's major vendor, the high debt service costs of the Company, and the
Company's scarcity of working
F-51
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
capital have the potential to have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
The accompanying financial statements have been prepared assuming the Company
(MPI along with its only operating subsidiary - CTM) will continue as a going
concern. A number of factors, including the Company's history of significant
losses, the debt service costs associated with the Company's high level of
existing indebtedness, the Company's reliance on one customer, the need to
restructure debt which is currently in default, various claims and lawsuits, and
the Company's Singapore operations in receivership and liquidation raise
substantial doubts about the Company's ability to continue as a going concern.
As of December 31, 1998, the Company has an accumulated deficiency of $65.3
million and a working capital deficiency of $27.1 million, which includes $27.1
million of debt of discontinued operations, due on demand. The Company does not
possess sufficient cash resources to repay these obligations, and the Company
would be unable to repay these loans in the event that such demand was made by
the Company's creditors (see Note 15).
Because the Company has not been able to obtain funding to satisfy the
settlement payment obligations, the Company renegotiated the terms and, has
recently entered into non-binding letter agreements with all eight creditors
which call for the conversion of all debt and accrued interest obligations into
the Company's equity. For the aggregate debt of $27,055,000, which is all the
Discontinued Operations debt, the Company has agreed to convert this debt into
equity (see Note 14).
The conversion to equity is subject to the agreement of STMicroelectronics to
sign a document similar to the other signed non-binding letter agreements,
completion of definitive agreements for all eight creditors, and approval of
such conversion by a majority of the Company's shareholders.
The Company does not have the financial resources to meet its obligations or
guarantees for all of its debt obligations, and thus is in default on all of
these obligations. (See Note 7.) The Company is currently negotiating with
these lenders about a possible restructuring of these debt obligations. If the
Company is unsuccessful in its negotiations, the Company would not be able to
repay the amounts outstanding under these obligations. This failure would
materially adversely affect the Company's financial condition and ability to
continue as a going concern, and could, as is the case with other debt defaults
and failure to repay, require that the Company seek bankruptcy protection under
Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its
U.S. subsidiaries.
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31, 1998 1997
- ----------------------------------------------------------------------------
Accounts receivable consist of:
Trade receivables.............................. $ 1,541,000 $ 2,739,000
Allowance for doubtful accounts................ (235,000) (235,000)
----------- -----------
$ 1,306,000 $ 2,504,000
=========== ===========
Inventories consist of:
Raw materials.................................. $ 2,203,000 $ 2,689,000
Work-in-progress............................... 1,531,000 1,654,000
Finished goods................................. 38,000 131,000
Obsolescence reserve........................... (699,000) (244,000)
----------- -----------
$ 3,073,000 $ 4,230,000
=========== ===========
Property, plant and equipment consist of:
Machinery and equipment........................ $ 2,564,000 $ 1,757,000
Leasehold improvements......................... 568,000 263,000
Furniture and fixtures......................... 47,000 41,000
----------- -----------
3,179,000 2,061,000
Accumulated depreciation........................ (1,373,000) (849,000)
----------- -----------
$ 1,806,000 $ 1,212,000
=========== ===========
Accrued liabilities consist of:
Accrued employee compensation.................. $ 443,000 $ 406,000
Other.......................................... 465,000 1,305,000
----------- -----------
$ 908,000 $ 1,711,000
=========== ===========
F-52
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Significant Agreements
SCHLUMBERGER TECHNOLOGIES, INC. ATE DIVISION - In January 1998, the Company
signed an agreement with Schlumberger Technologies, Inc. The agreement
delineated the terms pursuant to which MPI supplies products to Schlumberger.
The agreement includes warranty provisions, protection for raw materials
purchased by MPI against production demand forecasts supplied by Schlumberger
but subsequently changed, and pricing provisions. The agreement expires in
October 2000.
Effective July 26, 1997, Schlumberger informed the Company that it would no
longer sell die to the Company, but instead would provide the die on
consignment. The die supplied by Schlumberger is used in the assembly of MCMs
sold to Schlumberger. This change to providing die on consignment has had the
effect of reducing sales revenue and corresponding cost of sales to Schlumberger
by approximately 60%, although the change has no impact on the units sold by the
Company to Schlumberger.
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 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, the IBM Agreement was terminable by
either party without cause upon six months prior written notice. In March 1997,
the Board of Directors of the Company decided to discontinue the multilayer
ceramics operations. Changing market demand for multilayer ceramic products and
IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit
to purchasing multilayer ceramic products from the Company were the main reasons
that the Board decided to discontinue the multilayer ceramics operations. All
Singapore employees working on the multilayer ceramics operations have since
been terminated. MPM is currently being managed by a Receiver and is in
liquidation, as defined under the laws of Singapore. The Company has assisted
the Receiver and Manager for MPM in selling off all of the remaining tangible
assets of MPM. The proceeds from the sale of MPM's assets have been used to
retire a portion of MPM's debts (the proceeds are not sufficient to retire all
outstanding MPM debt). The Company anticipates that the liquidation of MPM will
be completed by the end of 1999.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS
The Company operates in one reportable business segment with three product lines
within that 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
F-53
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 1998, 1997 and 1996, the Company had only one major customer (customers
accounting for 10% or more of total sales), which accounted for 87%, 89% and
76%, respectively, of the Company's total sales. Amounts due from this customer
comprised 90% and 81% of accounts receivable at December 31, 1998 and 1997,
respectively.
The Company's CTM Electronics, Inc. subsidiary has purchased certain chips
("die") used in the assembly of multichip modules ("MCM's") sold to the
Company's significant customer from that same customer. Effective July 25,
1997, this customer notified the Company that it will no longer sell die to the
Company and instead is providing the die on consignment. The unaudited pro forma
presentation below gives effect to this change in operations on selected line
items from the Company's Consolidated Statements of Operations for each of the
two years in the period ended December 31, 1997, as if this change had been put
into effect on January 1, 1996.
<TABLE>
<CAPTION>
=================================================================================================
Historical Pro Forma
Year Ended Pro Forma Year Ended
December 31, 1997 Adjustments December 31, 1997
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 28,522,000 $ (10,626,000) (1) $ 17,896,000
Cost of goods sold 23,352,000 (10,942,000) (2) 12,410,000
Gross profit 5,170,000 316,000 5,486,000
Net income (loss) $ (11,496,000) 316,000 $ (11,180,000)
=================================================================================================
Net income (loss) per
common share $ (1.06) $ -- $ (1.06)
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================================
Historical Pro Forma
Year Ended Pro Forma Year Ended
December 31, 1996 Adjustments December 31, 1996
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 19,044,000 $ (8,266,000) (1) $ 10,778,000
Cost of goods sold 15,774,000 (8,304,000) (2) 7,470,000
Gross profit 3,270,000 38,000 3,308,000
Net income (loss) $(41,842,000) 38,000 $ (41,804,000)
=================================================================================================
Net income (loss) per
common share $ (7.68) $ -- $ (7.68)
=================================================================================================
</TABLE>
(1) The cost of the die to be provided on consignment will be removed from the
selling price of the MCMs. The amount of the 2% prompt payment discount
offered to the customer, which is included in revenues, will be reduced by
the lower selling prices for these MCMs.
(2) The cost of the die to be provided on consignment will be removed from the
cost of goods sold, corresponding to the reduction in selling prices of
the MCM's.
Until July 1997, the Company had a foreign exchange line of credit with the
Development Bank of Singapore ("DBS") under which it could enter into forward
currency contracts of up to S$30,000,000 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
F-54
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
assets of MPS, including a second mortgage on MPS's leasehold land and facility.
Subject to bank financing and consent, the Company had entered 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 previous 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 was to minimize on a continuing basis the impact of foreign exchange
rate movements on the Company's operating results. This line of credit was
terminated on July 9, 1997 when DBS appointed a Receiver and Manager for MPS.
NOTE 6 - DEBT AND ACCRUED INTEREST OF DISCONTINUED OPERATIONS, IN DEFAULT, DUE
ON DEMAND
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
Debt of discontinued operations, in default, due on demand
consists of:
<S> <C> <C>
Line of credit facilities and short-term borrowings of discontinued
operations, which are currently in default and included in "Debt of
discontinued operations, in default, due on demand," bear interest
at the bank's prime rate plus 5% (total 13.75% at December 31, 1998)
while in default, secured by substantially all of the assets of MPS,
and is guaranteed by MPI. Net of assets held as collateral of $138,000
for 1998 and $1,868,000 for 1997. $ 109,000 $ 770,000
Line of credit facilities and short-term borrowings of discontinued
operations, which are currently in default and accordingly included
in "Debt of discontinued operations, in default, due on demand,"
secured by substantially all of the assets of MPM, guaranteed by MPI.
Net of assets held as collateral of $236,000 for 1998 and $71,000 for 1997. 881,000 1,246,000
8.5% debentures, related to discontinued operations, which are currently
in default and thus, due on demand and accordingly included in the
caption "Debt of discontinued operations, in default, due on demand",
interest is due annually, principal due in March 2001, guaranteed by MPI 9,000,000 9,000,000
Term notes to, or guaranteed by, certain customers of discontinued
operations, which are currently in default and included in "Debt of
discontinued operations, in default, due on demand," bearing interest at
rates ranging from 3.5% to 18.0%, payable in quarterly installments
commencing in March 1997, principal due in quarterly installments over a
four-year term commencing in March 1998, secured by various assets
including certain MPS production equipment, guaranteed by MPI 4,771,000 4,771,000
Term notes to, or guaranteed by, certain customers of discontinued
operations, which are currently in default and accordingly included in
"Debt of discontinued operations, in default, due on demand," originally
payable in various quarterly installments commencing in the second
quarter of 1996, plus interest at rates ranging from 6.7% to 8.75%,
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 6,792,000 6,583,000
</TABLE>
F-55
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage notes of discontinued operations due January 2000 and January
2005, which are currently in default and accordingly included in "Debt of
discontinued operations, in default, due on demand" for 1997, payable in
monthly installments of S$22,000 (U.S. $14,000) plus interest, with
interest at variable rates (13.75% at December 31, 1997), secured by MPS
buildings and improvements, guaranteed by MPI -- 1,081,000
Note payable resulting from the deficiency balance of capital leases of
discontinued operations, which are currently in default and accordingly
included in "Debt of discontinued operations, in default, due on demand,"
bears interest at 7.25% and is guaranteed by MPI 1,610,000 1,601,000
Capital lease obligations of discontinued operations, which are currently
in default and accordingly included in "Debt of discontinued operations,
in default, due on demand" consisting of various machinery and equipment
financing agreements, payable in monthly installments of $10,000, including
interest at rates ranging from 4% to 6% -- 160,000
Equipment leases 1998 balance matures in January 2000 and July 2002,
payable in monthly installments of $4,000, including interest at rates
ranging from 21.6% to 25.9%, secured by various CTM production equipment
and guaranteed by MPI 69,000 91,000
---------- -----------
23,232,000 25,303,000
Current portion of long-term debt (20,000) (22,000)
Accrued interest 3,892,000 5,132,000
Long-term debt, less current portion (49,000) (69,000)
----------- -----------
Debt of discontinued operations, in default, due on demand $27,055,000 $30,344,000
=========== ===========
</TABLE>
Certain of the above obligations are payable in Singapore dollars and the
balances have been translated at an exchange rate of U.S.$1.00 = S$1.66 at
December 31, 1998 and U.S. $1.00 = S$1.6825 at December 31, 1997. Accordingly,
actual settlement amounts of such obligations are subject to variances caused by
changes in foreign exchange rates.
The Company does not have the financial resources to meet its obligations or
guarantees for most all of the above obligations, and thus is in default on all
of these obligations (except for the equipment leases). As a result, these
obligations are due on demand and have been classified as current liabilities
within the caption "Debt of discontinued operations, due on demand." The
Company is currently negotiating with these lenders to discuss a possible
restructuring of these debt obligations. If the Company is unsuccessful in its
negotiations, the Company would not be able to repay the amounts outstanding
under these obligations. This failure would materially adversely affect the
Company's financial condition and ability to continue as a going concern, and
could, as is the case with other debt defaults and failure to repay, require
that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of
Title 11 of the United States Code for MPI and its U.S. subsidiaries.
Scheduled maturities of principal balances are $20,000, $16,000, $20,000,
$13,000 and $0 in 1999 through 2003, respectively. However, the company is
currently in default under almost all of its debt agreements and accordingly,
$27,055,000 is currently due on demand.
MPI is directly liable, or is contingently liable based on guarantees of
repayment provided, for effectively all of the above obligations.
F-56
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In October 1996, the Company issued $2.8 million in 8% convertible debentures to
a group of offshore investors (collectively "Purchasers"). As of February 20,
1997, holders of the remaining $1.9 million of debentures had elected to
convert, resulting in the issuance of an additional 3,801,787 shares (see Note
10).
NOTE 7 - 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>
1999 $33,000 $ 611,000
2000 25,000 601,000
2001 25,000 607,000
2002 14,000 575,000
2003 -- 360,000
Thereafter -- 1,600,000
- --------------------------------------------------------------------------
Total minimum lease payments 97,000 $4,354,000
==========
Amount representing interest 28,000
- --------------------------------------------------------------------------
Present value of net minimum lease payments 69,000
Current portion 20,000
- --------------------------------------------------------------------------
Long-term portion $49,000
==========================================================================
</TABLE>
The Company entered into an agreement in 1998 whereby the Company obtained the
use of a piece of test equipment and technical support for such equipment from
the supplier. The agreement provides for minimum annual payments of $360,000
through 2007, plus the possible acceleration of payments if the Company obtains
new customers with projects that require the use of the equipment and technical
support of the equipment supplier. The Company has included its commitment under
the agreement in the previous table as an operating lease.
Certain machinery and equipment are subject to leases which are classified as
capital leases for financial reporting purposes. At December 31, 1998 and 1997
$155,000 ($97,000 net) and $155,000 ($128,000 net), respectively, of such leased
equipment are included in property, plant and equipment. Amortization expense
related to assets under capital leases, for continuing operations was $31,000,
$83,000 and $58,000 in 1998, 1997 and 1996, respectively.
The Company is also committed under noncancelable operating agreements for the
lease of buildings, machinery and equipment. Rent expense for continuing
operations in 1998, 1997 and 1996 was approximately $261,000, $336,000 and
$364,000 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.
In May 1995, the United States Environmental Protection Agency ("EPA") issued
written notice to all known generators of hazardous waste shipped to a
Whittier, California treatment facility that it considers these generators
(including 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 notice requires all of the generators of this waste 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. At present, the
Company's percentage of responsibility for this site is less than one half of
one percent; and that percentage is expected to decrease substantially as
additional generators are determined. 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
F-57
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 is not able to determine whether
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 is not able to
determine whether 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. However, the Company has received no further
communication regarding this site since 1994.
Numerous creditors have filed or threatened lawsuits against MPI and its
subsidiaries for various defaults and violations of certain agreements entered
into by MPI and its various subsidiaries. As a result of DBS Bank's decision to
enforce its claims, MPM and MPS are in liquidation and receivership,
respectively in Singapore. Should MPI be unable to restructure its debt
obligations incurred through guarantees of MPM's and MPS's debts, MPI may be
forced to seek protection under Chapter 7 or 11 of Title 11 the United States
Code.
On April 10, 1997, DBS sent to MPS a written demand for payment of the
outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS
imposed the default interest rate (an additional 3% interest rate) on the
outstanding debt, which has been accrued through the expected completion of the
liquidation process.
Two of the Company's former directors, Lewis Solomon and Gary Stein
("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New
York against the Company and its major customer, Schlumberger. This filing was
made one day after Gary Stein resigned from the Company's Board of Directors.
Lewis Solomon previously resigned in August 1998 from the Company's Board of
Directors. In the complaint, Plaintiffs have charged that the Company failed to
pay them for alleged consulting services, expense reimbursements and other forms
of compensation aggregating $101,250. Further, Plaintiffs allege that they were
wrongfully terminated, thereby preventing them from exercising stock options,
and that the Company interfered with the Plaintiffs prospective economic
relationships and business advantages as consultants and directors of public
corporations. The total of other alleged damages claimed by Plaintiffs are $5.5
million plus additional damages to be determined at trial. The Company believes
that the Plaintiffs' claims are without merit and will vigorously oppose these
allegations. In addition, the Company has made substantial counter claims
against Plaintiffs for damages of $829,020, attorneys fees and additional
damages to be proven at trial. In the counterclaim, the Company alleged that Mr.
Solomon and Mr. Stein, as directors, voted to approve an agreement between
themselves and the Company which would compensate them as consultants in
addition to director fees that Mr. Solomon and Mr. Stein were then being paid,
which agreement was not approved by a majority of disinterested directors in
accordance with California Corporations Code 310(a). In addition, the
counterclaim alleges Mr. Solomon and Mr. Stein voted themselves various options
in violation of the same Code, and that the agreement was not signed by a
Company officer with requisite authority to approve such an agreement. And
finally, the counterclaim alleges that in approving the agreement, Mr. Solomon
and Mr. Stein breached their fiduciary duties and they did not provide any
services of material benefit to the Company.
Because the lawsuit is at such an early stage, it is impossible to estimate the
damages, if any, the Company may be required to pay the Plaintiffs.
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.
F-58
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under 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.
Net income (loss) is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $ 725,000 $ 289,000 $ (2,526,000)
Singapore operations 3,961,000 (11,785,000) (39,316,000)
- ----------------------------------------------------------------------
Total $4,686,000 $(11,496,000) $(41,842,000)
======================================================================
</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:
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Amounts computed at Federal statutory
rate $ 1,593,000 $ (3,909,000) $(14,295,000)
Foreign losses with no benefit 3,121,000 10,910,000
Taxes below the Federal rate
on undistributed foreign earnings 831,000 2,829,000
Alternative minimum taxes due 12,000
Realization of previously deferred tax
benefits (1,369,000)
Amortization of non-deductible intangible
assets 37,000 37,000 38,000
Non-deductible expenses 7,000 6,000 247,000
Losses for which no current benefits are
available -- -- 271,000
Utilization of NOL carryforward (262,000) (86,000) --
- -------------------------------------------------------------------------------
Provision for income taxes $ 18,000 $ -- $ --
===============================================================================
F-59
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes:
Year ended December 31, 1998 1997
Deferred tax assets:
Net operating loss carryforwards $ 3,724,000 $ 3,951,000
Accrued liabilities and reserves 652,000 2,804,000
Tax credit carryforwards 635,000 499,000
Deferred income -- 106,000
Book and tax depreciation differences 95,000 92,000
- --------------------------------------------------------------------------------
5,106,000 7,452,000
Valuation allowance (5,106,000) (7,452,000)
- --------------------------------------------------------------------------------
Deferred taxes $ -- $ --
================================================================================
At December 31, 1998 and 1997, 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
1997 and 1996. At December 31, 1998, the Company had Federal net operating loss
carryforwards of approximately $10,531,000 for Federal tax reporting purposes
and approximately $2,450,000 for California tax purposes. The net operating
loss carryforwards for tax purposes expire between 2000 and 2011.
As of December 31, 1998, the Company also has approximately $500,000 and
$135,000 in Federal and state research and development credit carryforwards,
respectively. These credits expire between 2000 to 2012. Additionally, the
Company has approximately $31,000 of investment tax credits which expire in
2001. 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 1997 and 1996, the Company's Singapore operations generated operating
losses for both financial reporting and income tax purposes.
NOTE 9 - SHAREHOLDERS' EQUITY
In October 1996, the Company issued $2.8 million in 8% convertible debentures.
As of December 31, 1996, holders of $900,000 of these debentures had elected to
convert, under the terms of the debentures, into 1,306,996 shares of common
stock. As of February 20, 1997, holders of the remaining $1.9 million of
debentures had elected to convert, resulting in the issuance of an additional
3,801,786 shares.
During 1998, employees exercised options to purchase 63,611 shares of the
Company's common stock.
In order to permit the Company to issue additional options to employees, the
Shareholders approved an amendment to the Company's 1993 Stock Option/Stock
Issuance Plan, which reserved an additional 4 million shares for the plan (see
Note 12) on August 21, 1997.
As of March 10, 1998, shareholders approved an amendment to the Company's
Amended and Restated Articles of Incorporation to increase the authorized shares
of Common Stock from 15 million shares to 50 million shares and to add 10
million shares of undesignated preferred stock, pursuant to a written consent
solicitation.
The Company is prohibited by certain agreements from paying cash dividends. MPS
is a party to a line of credit facility with a bank that requires MPS to obtain
the consent of DBS prior to declaring dividends, repaying creditors or
transferring funds to MPI. In addition, an agreement relating to the guarantee
of Motorola of a bank loan to MPS grants Motorola the right to prohibit payment
of dividends on the stock of MPI, CTM and MPA. The Transpac agreements also
contain similar restrictions.
F-60
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement savings plan which is
intended to qualify under section 401(k) of the Internal Revenue Code. The Plan
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 totaled $70,000, $48,000 and
$65,000 in 1998, 1997 and 1996, respectively.
NOTE 11 - 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,
nontransferable 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 are generally
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 4,690,632 shares of common stock
have been reserved for issuance under the plan. The plan expires in December
2000.
On August 21, 1997, the Company cancelled and regranted substantially all
existing options (other than options granted pursuant to the Automatic Option
Grant Program). Based in part upon the delisting of the Company's Common Stock
from the Nasdaq National Market, the financial condition of the Company, the
stock price and the necessity of retaining its employees, the Company believes
that this program would be in the best interests of the shareholders. As such,
the Board of Directors and the Stock Option Plan Administration Committee
cancelled and regranted substantially all options outstanding under the
Discretionary Option Grant Program of the Plan (and granted additional options
to persons who have received options under the Automatic Option Grant Program)
with an exercise price in excess of the fair market value of the Common Stock of
the Company as traded on the OTC Bulletin Board on the Grant Date. Pursuant to
such program, each such outstanding option was cancelled and a new replacement
option granted for the same number of shares, with an exercise price of $0.19875
(the fair market value of the Common Stock on the new grant date).
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for this plan. Under APB Opinion 25,
when the exercise price of options granted under the Company's plan is equal to
the market price of the underlying stock on the date of grant, no compensation
cost is recognized.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if such compensation
cost for the Company's stock option and issuance plans had been determined in
accordance with the fair value based method prescribed in SFAS 123. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: 0% dividend
yield; expected volatility of 75%, 19 - 23% and 16%, risk free interest rates of
5.39 - 5.75%, 5.25% - 6.22% and 6.10%; and expected lives of 3 to 6 years
(determined on an option-by-option basis).
Under the accounting provisions of SFAS 123, the Company's net income (loss) per
share would have been increased to the pro forma amounts indicated below:
F-61
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
Net loss:
<S> <C> <C> <C>
As reported................................... $4,686,000 $(11,496,000) $(41,842,000)
Proforma...................................... 4,650,000 (11,583,000) (41,858,000)
Earnings per common share:
As reported................................... 0.43 (1.11) (7.68)
Proforma...................................... 0.43 (1.12) (7.69)
Earnings per common share assuming dilution:
As reported................................... 0.43 (1.06) (7.68)
Proforma...................................... 0.42 (1.07) (7.69)
</TABLE>
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
SHARES AVERAGE Shares Average Shares Average
(000) EXERCISE PRICE (000) Exercise Price (000) Exercise Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,870 $0.36 1,547 $2.22 550 $2.62
Granted 578 0.54 4,264 0.32 1,117 2.03
Exercised (64) 0.20 -- -- (61) 1.35
Forfeited (1,960) 0.28 (1,941) 1.75 (59) 3.28
Outstanding at end of year 2,425 0.48 3,870 0.36 1,547 2.22
Options exercisable at year-end 1,066 0.41 1,202 0.37 867 2.14
Weighted-average fair value of
options granted during the year $ 0.27 $ 0.10 $ 0.53
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------
Number Weighted-Average Weighted-Average Number Weighted-
Range of Exercise Outstanding at Remaining Exercise Price Exercisable at Average
Prices 12/31/98 Contractual Life 12/31/98 Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.20 to $ 0.26 504,720 8.6 years $0.20 258,587 $0.20
$ 0.42 to $ 0.51 1,605,333 8.9 $0.47 775,001 $0.49
$ 0.58 to $ 0.63 259,000 9.2 $0.61 -0- $ --
$ 1.75 to $ 1.91 45,900 7.9 $1.90 23,175 $1.90
$ 4.19 to $ 5.13 9,900 5.6 $5.04 9,450 $5.08
============== =============
$ 0.20 to $ 5.13 2,424,853 1,066,213
============== =============
</TABLE>
STOCK PURCHASE WARRANTS - On November 19, 1997, the Company entered into an
Investment Banking Agreement for a term of two years. Pursuant to the
Investment Banking Agreement, the Company is to receive business development
services including the review of the Company's managerial and financial
requirements, review of the Company's budgets and business plans, analysis of
alternative methods by which the Company can raise capital and certain other
related services in exchange for the issuance of 1,000,000 common stock purchase
warrants. This warrant has a term of five years, an exercise price of $1.00 per
share, and has certain registration rights. The fair market value of the
Company's Common Stock on the grant date was $0.625. The exercise of the
warrant was contingent on shareholder approval of an increase in the number of
authorized shares necessary to provide a sufficient number of shares underlying
the warrant. Shareholders subsequently granted such
F-62
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
approval effective March 10, 1998. The Company issued 50,000 common stock
purchase warrants at an exercise price of $1.00 per share in November 1997,
pursuant to an agreement whereby the Company will receive investment consulting
services for a period of two years. The warrants become exercisable over the
first two years of the agreement and expire in November 2002. Both agreements
were cancelled for nonperformance during 1998 and the warrants lapsed without
exercise.
In connection with the issuance of $2.8 million of convertible debentures on
October 23, 1996 (see Note 7) the Company issued 75,421 common stock purchase
warrants to the lead investor at an exercise price of $0.55 (the average
conversion price of the debentures). These warrants, which were exercisable 45
days after issuance, expired on October 23, 1997. In connection with its IPO
(see Note 10), 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. The Company issued 17,693
common stock purchase warrants at an exercise price of $5.63 per share in August
1993. These warrants expired in August 1998.
No stock purchase warrants have been exercised during the three years ended
December 31, 1998.
NOTE 12 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Cash paid for interest during 1998, 1997 and 1996 totaled $18,000, $688,000 and
$1,731,000 respectively. In 1996, the Company entered into capital lease
obligations to acquire property, plant and equipment totaling $1,784,000. As
discussed in Notes 7 and 10, holders of $1,900,000 of convertible debentures had
elected to convert their debentures into 3,801,856 shares of common stock, as of
December 31, 1997.
NOTE 13 - RELATED PARTY TRANSACTIONS
In exchange for management, marketing, advisory, strategic planning and
technical services, the Company paid $249,000 and $626,000 in 1998 and 1997 to
the Company's present or former Board Members or entities which are affiliated
with three of the Company's Board members. The Company has $67,000 accrued and
unpaid to Board Members at December 31, 1998.
NOTE 14 - DISCONTINUED OPERATIONS
On July 10, 1997, The Development Bank of Singapore Limited, one of the
Company's and its subsidiaries largest creditors ("DBS"), appointed a Receiver
and Manager to liquidate the assets of Microelectronic Packaging (S) Pte. Ltd.
("MPS"), which is a wholly owned subsidiary of the Company which manufactured
primarily pressed ceramics products. DBS exercised its option to appoint a
Receiver and Manger under the terms of a Deed of Debenture dated November 27,
1984 (as amended) between DBS and MPS. The Company anticipates that the
Receiver and Manager will complete the liquidation of MPS in 1999. The Company
has guaranteed all of MPS's obligations to DBS These loans are included in the
caption "Debt and accrued interest of discontinued operations, due on demand" in
the Consolidated Balance Sheet. The Company has guaranteed the repayment of
such shortfall. The Company recorded the effect of the receivership as of June
30, 1997, and the results of operations of MPS have been classified as "Loss
from discontinued operations" on the Consolidated Statement of Operations. As a
result of the appointment of a Receiver and Manager, MPS is no longer able to
manufacture its pressed ceramic products and has ceased generating revenue since
July 10, 1997.
During 1998, the Company (as guarantor) reached written agreements with all six
of MPS' secured creditors. For five of those creditors (see separate discussion
regarding the settlement of the DBS Bank loans below), the Company agreed to
make payments aggregating $3,565,062 as full satisfaction of the total of all
obligations to these creditors. The payments to these creditors are due on
May 1, 1999. In addition, for one of these creditors, the Company issued
immediately exercisable warrants for the purchase of 200,000 shares of the
Company's common stock at an exercise price of $1.00 per share in full
satisfaction of the debt. The Company has reached further agreements with five
of the six MPS creditors. The Company has signed letter agreements which call
for the conversion of all amounts due to these five creditors into shares of
Series A Preferred Stock. These conversion agreements are
F-63
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
subject to agreement of the final creditor to conversion, reduction of the
letter agreement into definitive agreements, as well as approval by a majority
of the Company's shareholders.
The Company has also evaluated the net realizable value of the assets of its MPS
subsidiary. The effect of this is to reduce the carrying value of certain
assets by $6.4 million in 1997 and $6.2 million in 1996. These charges are
included on the Consolidated Statement of Operations in the caption "Estimated
gain (loss) on disposal of discontinued operations."
In 1998, the Company revised its estimate of the amount it will ultimately owe
under debt obligations originating in Singapore. In November 1998, Management
was informed of the sale of the two buildings owned by MPS, and such buildings
were sold in excess of their book value. The net proceeds from these sales were
utilized to retire a portion of Singapore debt obligations. The revised estimate
of the amount ultimately owed under these debt obligations resulted in recording
a gain on the estimated disposal of discontinued operations of $3,512,000 for
the year ended December 31, 1998. This gain is included on the Consolidated
Statement of Operations in the caption "Estimated gain (loss) on disposal of
discontinued operations."
On March 18, 1997, a Receiver was appointed to handle the liquidation of the
multilayer ceramics operations of MPM (S) Pte. Ltd. As of December 31, 1998,
essentially all of the assets of MPM had been sold. Final resolution of the
remaining liabilities will come only after the liquidation of MPS, since MPS has
guaranteed the DBS bank loan and the equipment leases entered into by MPM. The
portion of these liabilities remaining after any reduction available from the
sale of MPS and MPM assets will then be transferred to MPI, as MPI also
guaranteed these loans and leases.
As of April 14, 1998, the Company (as guarantor) reached an agreement with MPM's
lessor for the, payment of $483,056 as full satisfaction of the balance
remaining after the sale of the leased equipment; this payment is due May 1,
1999. The Company has reached further agreement with the lessor wherein the
lessor would convert the amount due to it into shares of Series A Preferred
Stock. This conversion agreement is subject to agreement of the final MPS
creditor to conversion, reduction of the letter agreement into definitive
agreements, as well as approval of a majority of the Company's shareholders.
The holders of the debentures issued to Transpac and related parties still
retain $9.0 million of debt securities issued by MPM which are guaranteed by the
Company. The Company and MPM are in default thereunder. On April 22, 1998, the
Company (as guarantor) reached an agreement with Transpac for the payment of
$3,112,463 as full satisfaction of the total of all obligations to Transpac;
this payment is due on May 1, 1999. In addition, immediately exercisable
warrants for the purchase of 500,000 shares of the Company's common stock at an
exercise price of $1.00 per share were issued to Transpac, and the Company
agreed to a payment of 30% of any monetary proceeds from the settlement of a
specific claim, and the Company guaranteed a minimum proceeds of $1,000,000 on
or prior to December 31, 1999. The Company has reached further agreement with
Transpac wherein Transpac would convert the amount due to it into shares of
Series A Preferred Stock. This conversion agreement is subject to agreement of
the final MPS creditor to conversion, reduction of the letter agreement into
definitive agreements, as well as approval of a majority of the Company's
shareholders.
As indicated previously, both MPS and MPM are indebted to DBS, and the Company
has guaranteed those obligations. As of July 20, 1998, the Company (as
guarantor) reached an agreement with DBS for the payment of $1,177,397 as full
satisfaction of all obligations to DBS; this payment is due on May 1, 1999. In
addition, the Company agreed to a payment of 5% of any monetary proceeds from
the settlement of a specific claim, and there were further considerations given
to DBS that are not considered material by the Company. The Company has reached
further agreement with the lessor wherein the lessor would convert the amount
due to it into shares of Series A Preferred Stock. This conversion agreement is
subject to agreement of the final MPS creditor to conversion, reduction of the
letter agreement into definitive agreements, as well as approval of a majority
of the Company's shareholders.
The Company's MPC subsidiary was informed in April 1997 that Carborundum
Corporation ("Carborundum"), its sole customer, was immediately cancelling the
manufacturing and related agreements with MPC as a result of Carborundum's sale
of its assets to a third party.
On April 5, 1997, a fire at the Company's MPC facility caused damage to the
building and certain equipment. The Company is insured against the fire, and
has fully settled the claim with the Company's insurance carrier.
F-64
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has closed the MPC operation and has terminated all of its MPC
employees. The Company has recorded the effect of the closure of this business
as of June 30, 1997, and the results of operations of MPC have been classified
as "Loss from discontinued operations" in the Consolidated Statement of
Operations.
Discontinued operations include management's best estimates of the amounts
expected to be realized on the sale of its assets associated with theses
discontinued operations and the expenses to be incurred through the disposal
date. The amounts the Company will ultimately realize and incur could differ
materially in the near term from the amounts assumed in arriving at the loss on
disposal of the discontinued operation. Management anticipates that the foreign
operations will be fully dissolved in 1999. However, Management cannot predict
how long it may take the High Court of the Republic of Singapore to complete the
Winding Up of these companies.
All debt obligations originating in Singapore have been classified to the
caption "Debt and accrued interest of discontinued operations, in default, due
on demand."
"Current liabilities of discontinued operations, net" included in the
Consolidated Balance Sheets at December 31, 1997 consists of accounts payable
and accrued liabilities. Consistent with the 1997 presentation, all guaranteed
debt obligations have been reclassified to the caption "Debt and accrued
interest of discontinued operations, due on demand" and are included in the
discussion at Note 6.
On April 14, 1999, the final MPS creditor, which had not previously signed a
letter agreement calling for the conversion into shares of Series A Preferred
Stock, signed a Letter of Intent with a group of outside investors ("Investor")
to assign its creditor position for undisclosed consideration. This Letter of
Intent is subject to the Company obtaining approval of the debt conversion to
equity by a majority of the Company's shareholders. In anticipation that this
assignment will be completed, the Investor has signed a non-binding letter
agreement which calls for the conversion of all the Company's obligations to
this final MPS creditor into shares of Series A Preferred Stock.
NOTE 15 - DECONSOLIDATION OF CURRENT LIABILITIES OF DISCONTINUED OPERATIONS,
NET TO SHAREHOLDERS' DEFICIT
During 1998, the High Court of the Republic of Singapore ordered the Winding up
of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the Company.
As a result of this decision, MPM cannot continue as an operating business, and
it cannot be allowed to dispose of its assets or incur further liabilities. In
addition, the Company does not have any control over the management of MPM.
This function is undertaken by the Receiver and Manager appointed by DBS Bank.
In September 1997, the High Court of the Republic of Singapore ordered the
Winding up of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly
owned subsidiary of the Company. As with MPM, MPS cannot continue as an
operating business, and the Company does not have any control over the
management of MPS. This function is undertaken by the Receiver and Manager
appointed by DBS Bank.
The Company has been informed by DBS and the Receiver and Manager for MPM and
MPS that there will not be any funds remaining (after the liquidation of assets)
to satisfy any claims of unsecured creditors for MPM and MPS.
Due the circumstances as described above, management, effective for 1998, has
not consolidated MPM and MPS, into the consolidated financial statements for MPI
and subsidiaries. For MPM, the decision was based upon the Singapore High
Court's decision to Wind Up in September 1997, however, due to the material
amount of assets remaining to be liquidated and also due to requests made by
MPS' Receiver and Manager for the
F-65
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company to assist them in the realization and disposal of MPS' remaining assets,
Management elected to consolidate until there was a clearer determination of the
control of the subsidiary and realization of its assets. In November 1998,
Management was informed of the sale of the two buildings owned by MPS. In
addition, it became more evident during 1998 that any remaining realization of
accounts receivable on the books of MPS was highly questionable. Accordingly the
decision was made to not consolidate MPM and MPS.
In 1998, the Company revised its estimate of the amount it will ultimately owe
under debt obligations originating in Singapore. Revision of the estimate arose
primarily from the sale of two buildings in Singapore. In November 1998,
Management was informed of the sale of the two buildings owned by MPS, and such
buildings were sold in excess of their book value. The net proceeds from these
sales were utilized to retire a portion of Singapore debt obligations. The
revised estimate of the amount ultimately owed under these debt obligations
resulted in recording a gain on the estimated disposal of discontinued
operations of $3,916,000 for the year ended December 31, 1998. This gain is
included on the Consolidated Statement of Operations in the caption "Estimated
gain (loss) on disposal of discontinued operations."
The effect of this decision was to reduce the Current Liabilities of
Discontinued Operations, net and improve the Shareholders' Deficit by $10.2
million as of December 31, 1998.
NOTE 16 - GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States $19,271,000 $28,522,000 $19,044,000
Singapore -- -- --
- -----------------------------------------------------------------------------------------------
Net sales as reported in the
accompanying consolidated statements of operations $19,271,000 $28,522,000 $19,044,000
===============================================================================================
Net income (loss) from operations:
United States $ 725,000 $ 289,000 $(2,526,000)
Singapore -- -- --
- -----------------------------------------------------------------------------------------------
Income (loss) from operations as reported in the
accompanying consolidated statements of operations $ 725,000 $ 289,000 $(2,526,000)
===============================================================================================
</TABLE>
December 31, 1998 1997
- ------------------------------------------------------------------------------
Identifiable assets:
United States $ 6,885,000 $ 9,911,000
Singapore and Indonesia --
- ------------------------------------------------------------------------------
Total assets as reported in the
accompanying consolidated balance sheets $ 6,885,000 $ 9,911,000
==============================================================================
Identifiable liabilities:
United States $ 5,022,000 $ 9,517,000
Singapore 27,055,000 40,626,000
- ------------------------------------------------------------------------------
Total liabilities as reported in the
accompanying consolidated balance sheets $32,077,000 $ 50,143,000
==============================================================================
F-66
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Net income from continuing operations $725,000
BASIC EPS
Income available to common stockholders 725,000 10,817,695 $0.07
=======
Effect of Dilutive Securities
Stock Options -- 150,542
Warrants -- --
-------- -----------
DILUTED EPS
Income available to common
stockholders + assumed conversions $725,000 10,968,237 $0.07
======== ========== =======
</TABLE>
Options to purchase 1,920,133 shares and warrants to purchase 660,000 shares of
common stock at prices ranging from $0.42 to $6.50 were outstanding during 1998,
but were not included in the computation of diluted EPS because the options' and
warrants' exercise prices were greater than the average market price of the
common shares. The options and warrants, which expire between April 1999 and
July 2008 were still outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------------
<S> <C> <C> <C>
Net income from continuing operations $289,000
BASIC EPS
Income available to common stockholders 289,000 10,360,841 $0.04
=======
Effect of Dilutive Securities
Stock Options -- 525,478
Warrants -- --
-------- ----------
DILUTED EPS
Income available to common
stockholders + assumed conversions $289,000 10,886,319 $0.03
======== ========== =======
</TABLE>
Options and warrants to purchase shares of common stock were outstanding during
the second half of 1997 but were not included in the computation of diluted EPS
because the options' and warrants' exercise prices were greater than the average
market price of the common shares.
F-67
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------------
<S> <C> <C> <C>
Net loss from continuing operations $ (2,526,000)
BASIC EPS
Income available to common stockholders (2,526,000) 5,445,380 $(0.46)
=========
Effect of Dilutive Securities
Stock Options -- --
Warrants -- --
------------ -----------
DILUTED EPS
Income available to common
stockholders + assumed conversions $ (2,526,000) 5,445,380 $(0.46)
============= =========== =========
</TABLE>
Options and warrants to purchase shares of common stock which were outstanding
during the second half of 1996 were not included in the computation of diluted
EPS because the options' and warrants' effect on EPS would be anti-dilutive.
NOTE 18 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998, the Company recorded certain non-recurring
adjustments, the most significant of which was a change in the estimated amount
payable to secured creditors relating to the Company's discontinued operations
(see Note 14). This change in the amount due to secured creditors was primarily
due to the sale of the two buildings owned by MPS which resulted in a net
reduction in debt incurred by discontinued operations (guaranteed by the
Company) and a gain on disposal of discontinued operations, totaling $3.5
million. After the effect of this reduction in debt of discontinued operations,
the Company owes approximately $27.1 million at December 31, 1998 of debt and
accrued interest, which amount is classified as "Debt and accrued interest of
discontinued operations, in default, due on demand" in the Consolidated Balance
Sheet.
F-68
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENTS SCHEDULES
Board of Directors
Microelectronic Packaging, Inc.
San Diego, California
The audits referred to in our report dated March 11, 1999, except for Note 14,
paragraph 15, which is as of April 14, 1999, 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 financial statement schedule
listed in the accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
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 a working capital deficiency
of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31,
1998, is in default of most of it's loan agreements, is economically dependent
on a single customer, has three foreign subsidiaries in receivership and/or
liquidation under Singapore law, has various claims and lawsuits filed against
the Company and it's subsidiaries and may be forced to seek protection for the
Company and certain subsidiaries under United States bankruptcy law. 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 described in
Note 2. Continuation of the Company is dependent on the Company's ability to
negotiate arrangements with its lenders, raise sufficient capital, achieve
sufficient cash flow to meet its debt obligations and profitability. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1999 except for Note 14,
paragraph 14, which is as of
April 14, 1999.
F-69
<PAGE>
MICROELECTRONIC PACKAGING, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
SCHEDULE II
<TABLE>
<CAPTION>
Additions
Balance At Charged To Transfers to
Beginning Of Costs And Discontinued Balance At End
Period Expenses Operations Deductions Of Period
-----------------------------------------------------------------------------------
Allowance For Doubtful
Accounts for the Year Ended:
<S> <C> <C> <C> <C> <C>
December 31, 1996 $ 199,000 $ 99,000 $ $ $ 298,000
December 31, 1997 298,000 -- -- (63,000) 235,000
December 31, 1998 235,000 -- -- -- 235,000
Inventory Valuation Reserves for
the Year Ended:
December 31, 1996 $ 1,030,000 $ 606,000 $ -- $ (312,000) $ 1,324,000
December 31, 1997 1,324,000 49,000 (909,000) (220,000) 244,000
December 31, 1998 244,000 455,000 -- -- 699,000
Other Valuation Reserves (1)
for the Year Ended:
December 31, 1996 $ 983,000 $1,817,000 $ -- $ -- $ 2,800,000
December 31, 1997 2,800,000 -- (2,526,000) -- 274,000
December 31, 1998 274,000 -- -- (200,000) 74,000
Property, Plant And Equipment -
Continuing Operations
for the Year Ended:
December 31, 1997 $ 6,163,000 $ -- (6,163,000) $ -- $ --
December 31, 1998 -- -- -- -- --
Property, Plant And Equipment -
Discontinued Operations
for the Year Ended:
December 31, 1997 $14,943,000 $ 755,000 $ 6,163,000 $ -- $21,861,000
December 31, 1998 21,861,000 -- -- (21,861,000) --
</TABLE>
(1) Pertains To Other Receivables, Including Innoventure Receivable for 1996.
F-70
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
----------------------------
COMMISSION FILE NUMBER 0-23562
---------------------
MICROELECTRONIC PACKAGING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3142624
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9577 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
- -------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 292-7000
---------------------
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
At May 10, 1999, there were outstanding 10,856,890 shares of the
----------
Registrant's Common Stock, no par value per share.
================================================================================
F-71
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 129,000 $ 469,000
Accounts receivable, net 1,130,000 1,306,000
Inventories 2,742,000 3,073,000
Other current assets 166,000 60,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,167,000 4,908,000
Property, plant and equipment, net 1,654,000 1,806,000
Other non-current assets 144,000 171,000
====================================================================================================================
$ 5,965,000 $ 6,885,000
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 19,000 $ 20,000
Accounts payable 3,932,000 4,045,000
Accrued liabilities 669,000 908,000
Debt and accrued interest of discontinued operations,
in default, due on demand 27,557,000 27,055,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 32,177,000 32,028,000
Long-term debt, less current portion 45,000 49,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, no par value 40,162,000 40,143,000
Accumulated deficit (66,419,000) (65,335,000)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (26,257,000) (25,192,000)
- --------------------------------------------------------------------------------------------------------------------
$ 5,965,000 $ 6,885,000
====================================================================================================================
</TABLE>
F-72
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,743,000 $ 7,334,000
Cost of goods sold 1,584,000 5,381,000
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 159,000 1,953,000
Selling, general and administrative 546,000 776,000
Engineering and product development 191,000 272,000
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (578,000) 905,000
Other income (expense):
Interest (expense), net (506,000) (3,000)
Other income, net -- 70,000
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes (1,084,000) 972,000
Provision for income taxes -- (18,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,084,000) $ 954,000
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.10) $ 0.09
======================================================================================================================
======================================================================================================================
Net income (loss) per common share - assuming dilution $ (0.10) $ 0.08
======================================================================================================================
</TABLE>
F-73
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES OF:
Continuing operations $ (331,000) $ 195,000
Discontinued operations (23,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (331,000) 172,000
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (4,000) (546,000)
Proceeds from the sale of fixed assets 13,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (4,000) (533,000)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt
and promissory notes (5,000) (3,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (5,000) (3,000)
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (340,000) (364,000)
CASH AT BEGINNING OF PERIOD 469,000 1,296,000
- ----------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 129,000 $ 932,000
======================================================================================================================
</TABLE>
F-74
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------------------------------
Shares Amount Deficit Total
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 10,856,890 $40,143,000 $(65,335,000) $(25,192,000)
Non-employee stock-based
compensation 19,000 19,000
Net (loss) (1,084,000) (1,084,000)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 10,856,890 $40,162,000 $(66,419,000) $(26,257,000)
============================================================================================================================
</TABLE>
F-75
<PAGE>
MICROELECTRONIC PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related
notes as of March 31, 1999 and for the three month period ended March 31,
1999 and 1998 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 period. Certain prior year
amounts have been reclassified to conform to the current year presentation.
The results of operations for the three month period ended March 31, 1999
is 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, 1998 in the Company's
Annual Report on Form 10-K. Readers of this Quarterly Report on Form 10-Q
are strongly encouraged to review the Company's Annual Report on Form 10-K.
Copies are available from the Chief Financial Officer of the Company at
9577 Chesapeake Drive, San Diego, California 92123.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999 December 31, 1998
---------------------------- ----------------------------
(UNAUDITED)
<S> <C> <C>
Raw materials ................................. $ 2,276,000 $ 2,203,000
Work-in-progress .............................. 1,194,000 1,531,000
Finished goods ................................ 1,000 38,000
Obsolescence reserve .......................... (729,000) (699,000)
---------------------------- ----------------------------
$ 2,742,000 $ 3,073,000
============================ ============================
</TABLE>
3. EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three
months ended March 31, 1999, since the Company's operations have generated
operating losses for both financial reporting and income tax purposes. 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 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.
F-76
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ---------
<S> <C> <C> <C>
Loss from continuing operations $(1,084,000)
BASIC EPS
Loss available to common shareholders $ (0.10)
$(1,084,000) 10,856,890
========
</TABLE>
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive
due to losses incurred by the Company.
<TABLE>
<CAPTION>
For the three months ended March 31, 1998
---------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- --------------- -----------------
<S> <C> <C> <C>
Income from continuing operations $ 954,000
BASIC EPS
Income available to common shareholders 954,000 10,793,279 $ 0.09
=================
Effect of dilutive securities:
Stock options -- 1,740,282
Warrants -- --
----------------- ---------------
DILUTED EPS
Income available to common shareholders
+ assumed conversions $ 954,000 12,533,561 $ 0.08
================= =============== =================
</TABLE>
Options to purchase 275,800 shares and warrants to purchase 1,227,693
shares of common stock at prices ranging from $0.63 to $6.50 were
outstanding during the first quarter of 1998, but were not included in
the computation of diluted EPS because the options' and warrants'
exercise prices were greater than the average market price of the common
shares for the quarter then ended.
F-77
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
The Company entered into a lease for new manufacturing facilities and
corporate offices. Commencing September 1, 1997, and extends to October 31,
2002. Minimum monthly rental payments of $16,000 began on November 1, 1997,
with scheduled annual increases of 6% to 7% per year beginning November 1,
1998. The Company also entered into an agreement in 1998 whereby the
Company obtained the use of a piece of test equipment and technical support
for such equipment from a supplier. The agreement calls for minimum annual
payments of $360,000 through 2007, plus the possible acceleration of
payments if the Company obtains new customers with projects that require
the use of the equipment and technical support of the equipment supplier.
6. ASIAN CREDITOR LOAN AGREEMENTS GUARANTEED BY MPI
With respect to the Company's subsidiaries in Singapore, all of which
ceased operations in 1997 ("Singapore Subsidiaries"), the Company
guaranteed certain debt obligations of the Singapore Subsidiaries
("Guaranty Obligations"). During 1998, the Company entered into settlement
agreements ("Settlement Agreements") with each of the eight creditors of
the Singapore Subsidiaries to whom the Company had a liability under the
Guaranty Obligations ("Singapore Subsidiary Creditors"), pursuant to which
the Company and the Singapore Subsidiary Creditors agreed that the Company
would be released from all of its liabilities under the Guaranty
Obligations in exchange for cash settlement payments in the aggregate
amount of approximately $9.3 million ("Settlement Payments"). The Company
was obligated to pay the entire amount of the Settlement Payments on or
about May 1, 1999 ("Settlement Due Date").
After entering into the Settlement Agreements, the Company determined that
it would not have the ability to pay any portion of the Settlement Payments
by the Settlement Due Date. Therefore, the Company and the Singapore
Subsidiary Creditors negotiated new terms for the settlement of the
Guaranty Obligations, which new settlement terms are set forth in non-
binding letter agreements entered into between the Company and each of the
eight Singapore Subsidiary Creditors during the first quarter of 1999
("Letter Agreements"). The Letter Agreements provide that the entire amount
of the Guaranty Obligations would be converted into shares of the Company's
Series A Preferred Stock ("Debt to Equity Conversion"). Each share of
Series A Preferred Stock would be convertible into two shares of the
Company's Common Stock, have a 3.5% per annum cumulative dividend,
liquidation preferences, registration rights, and certain other rights,
preferences and privileges senior to the Company's Common Stock. Upon the
effective date of the Debt to Equity Conversion, the entire amount that
would be shown on the Company's accompanying financial statements as "Debt
and accrued interest of discontinued operations, in default, due on demand
("Discontinued Operations Debt"), the aggregate amount of which is
$27,557,000 as of March 31, 1999, would be converted into shares of the
Company's Series A Preferred Stock. Upon such conversion, the Discontinued
Operations Debt would be reduced to zero.
The Letter Agreements call for the Company and the Singapore Subsidiary
Creditors to enter into definitive agreements with respect to the Debt to
Equity Conversion ("Conversion Agreements"). The Company has entered into
Conversion Agreements with three of the eight Singapore Subsidiary
Creditors. In addition, the Company has entered into an agreement with an
additional Singapore Subsidiary Creditor, pursuant to which all of the
rights of such creditor under the Guaranty Obligations will be assigned to
one or more third parties (some of whom are employees of the Company). All
of such third parties have agreed, upon such assignment, to enter into
Conversion Agreements and participate in the Debt to Equity Conversion on
the same terms and conditions as the other Singapore Subsidiary Creditors
("Creditor Assignment"). The Creditor Assignment will become effective upon
the approval of the Debt to Equity Conversion by the Company's
shareholders. Thus, after taking into account the three Conversion
Agreements and the Assignment Agreement that have already been entered
into, the Company only needs to enter into Conversion Agreements, which may
not be more favorable to any one creditor than the other creditors, with
all of the remaining four of the Singapore Subsidiary Creditors and obtain
shareholder approval and a fairness opinion. As soon as that has been
accomplished, which the Company believes should be accomplished during the
second quarter of 1999, the Company will take steps to obtain shareholder
approval of the Debt to Equity Conversion. In the event the Company is
successful in obtaining shareholder approval of the Debt to Equity
Conversion, the Discontinued Operations Debt will be eliminated in its
entirety and the Company will no longer have any liabilities under the
Guaranty Obligations. In addition, if the Company is successful in
completing the Debt to Equity Conversion, the equity interests of the
Company's existing shareholders will be substantially diluted and the
Singapore Subsidiary Creditors, assuming conversion of all their Series A
Preferred Stock on the closing of the Debt to Equity Conversion, would own
a majority of the outstanding common stock of the company.
7. GOING CONCERN
The Company's accompanying financial statements have been prepared assuming
the Company (along with its only operating subsidiary, CTM) 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 Guaranty
Obligations and the Company's other debt obligations, and the current
uncertainty regarding whether the Company will successfully complete the
Debt to Equity Conversion, raise substantial doubts about the Company's
ability to continue as a going concern. As of March 31, 1999, the Company
has an accumulated deficit of $66.4 million and a working capital
deficiency of $28.0 million, which includes $27.6 million of liabilities
under the Guaranty Obligations. In the event the Company is not successful
in completing the Debt to Equity Conversion, and any of the Singapore
Subsidiary Creditors demand that the Company pay any portion of the
Settlement Payments or any of the Company's liabilities under the Guaranty
Obligations, the Company would be unable to do so. If the Company fails to
complete the Debt to Equity Conversion, material adverse impacts will occur
with respect to the Company's financial condition and ability to continue
as a going concern. Furthermore, such failure is likely to require the
Company and its U.S. subsidiaries to seek bankruptcy protection under
Chapter 11 or Chapter 7 of Title 11 of the United States Code.
F-78
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUIDTED)
- --------------------------------------------------------------------------------
8. FORWARD LOOKING STATEMENTS
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
effects of debt restructuring.
F-79
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
NET SALES
For the three months ended March 31, 1999, net sales were $1,743,000 as compared
to net sales of $7,334,000 for the first quarter of 1998, resulting in decreased
sales of $5,591,000 or 76%. The decrease in net sales is primarily the result of
decreased shipments to the Company's largest customer. Sales to this one
customer comprised 85% and 77% of total net sales for the first quarters of 1999
and 1998, respectively. Sales to this customer declined from $6,465,000 for the
first quarter of 1998 to $1,490,000 for the first quarter of 1999, a decrease of
$4,975,000 or 77%. Units shipped to this customer declined by 35%, reflecting
lower demand from the customer in the first quarter of 1999 as compared to the
first quarter of 1998. Revenue in terms of dollars declined by greater than
revenue in terms of units because of a significant shift in product mix in the
first quarter of 1999. Approximately one-half of sales to the Company's
principal customer in 1999 were comprised of the repair and upgrade of
multi-chip modules (MCMs). This repair activity generates only one-fourth of the
dollar revenue as compared to the dollar revenue of newly-built MCMs, thereby
causing a decline in revenue dollars greater than the decline in revenue units.
Such repair activities comprised only 5% of sales for the first quarter of 1998.
COST OF GOODS SOLD
For the three months ended March 31, 1999, the cost of goods sold was $1,584,000
as compared to $5,381,000 for the first quarter of 1998, a decrease of 3,797,000
or 71%. The decrease in cost of goods sold is partially due to a 32% decline in
MCM units shipped from 1998 to 1999. The decrease in units shipped was
exacerbated by a 63% decrease in the average selling price of a unit shipped in
1999 as compared to the corresponding quarter of 1998. The primary reason for
the decrease in average cost per unit sold results from the change in product
mix described above.
GROSS PROFIT
Gross profit was $159,000 (9% of net sales) for the first quarter of 1999 as
compared to $1,953,000 (27% of net sales) for the first quarter of 1998. The
decrease in gross profit is attributable to the decrease in sales and the result
of the change in product mix, as discussed above.
F-80
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $546,000 for the first quarter
of 1999, representing a decrease of $230,000 or 30% from the first quarter of
1998. The decrease is primarily the result of a reduction of additional
consulting fees which had been incurred by the Company.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were $191,000 for the first quarter
of 1999, representing a decrease of $81,000 or 30% from the corresponding
quarter of 1998. The decrease is primarily comprised of decreased use of outside
consultants in 1999 as compared to 1998.
INTEREST EXPENSE
Interest expense was $506,000 for the first quarter of 1999, representing an
increase of $503,000 from the corresponding quarter of 1998. The Company had
previously recorded at June 30, 1997 estimated interest on the Guaranty
obligations through December 31, 1998, as part of the estimated loss on its
discontinued operations. Since the Guaranty Obligations have not yet been paid,
the Company initiated the accrual of interest thereon in the first quarter of
1999. The Company has accrued but not paid this interest. No provision for
interest expense was necessary in the first quarter of 1998 as the Company had
accrued interest expense at June 30, 1997 as part of its discontinued
operations. See Note 6 to the accompanying Condensed Consolidated Financial
Statements for an explanation of how the Company intends to eliminate the
Guaranty Obligations and the associated interest expense.
OTHER INCOME
Other income was nil for the first quarter of 1999, as compared to $70,000 for
the first quarter of 1998. Other income for 1998 was comprised of the
amortization of deferred revenue which was reclassified to discontinued
operations at December 31, 1998, and collection of a previous year tax item,
which did not occur in 1999.
EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three
months ended March 31, 1999, since the Company's operations have generated
operating losses for both financial reporting and income tax purposes. 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.
F-81
<PAGE>
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code, and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, the Company financed its
operations from operating cash flow. During this period, operating activities of
continuing operations used $331,000. Investing activities, consisting
principally of the acquisition of fixed assets of continuing operations, used
$4,000. At March 31, 1999, the Company had a working capital deficiency of
$28,011,000 and an accumulated deficit of $66,419,000. At March 31, 1999, the
Company had outstanding approximately $27,557,000 of principal and accrued
interest under the Guaranty Obligations.
The Company's sources of liquidity at March 31, 1999 consisted of inventories of
$2,742,000, trade accounts receivable of $1,130,000 and its cash balance of
$129,000. The Company has no borrowing arrangements available to it.
As indicated in Note 6, to the Condensed Consolidated Financial Statements, the
Company has renegotiated its settlement of the Guaranty Obligations pursuant to
which settlement all liabilities and accrued interest under the Guaranty
Obligations, would be converted into 9,362,777 shares of the Company's Series A
Preferred Stock. If the Conversion Agreements are not all finalized, or if the
Company's shareholders do not approve the Debt to Equity Conversion, the entire
liability of $27,557,000 under the Guaranty Obligations, which is currently in
default, will be immediately due and payable.
FUTURE OPERATING RESULTS
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 1998, 1997, 1996 and 1995 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. Absent outside debt or equity financing, and
excluding significant expenditures required for the Company's major projects and
assuming the Company is successful in restructuring its liability under the
Guaranty Obligations, the Company currently anticipates that cash on hand and
anticipated cash flow from operations may be adequate to fund its operations in
the ordinary course throughout 1999. Any significant increase in planned capital
expenditures or other costs or any decrease in or elimination of anticipated
sources of revenue or the inability of the Company to restructure its liability
under the Guaranty Obligations could cause the Company to restrict its business
and product development efforts. There can be no assurance that the Company will
be successful in restructuring its liability under the Guaranty Obligations. If
adequate revenues are not available, the Company will be unable to execute its
business development efforts 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
F-82
<PAGE>
going concern explanatory paragraph if the Company is unable to restructure its
liability under the Guaranty Obligations and become profitable. The factors
leading to and the existence of the explanatory paragraph will have a material
adverse effect on the Company's ability to obtain additional financing.
Risk of Bankruptcy. If the Company is not able to restructure its liabilities
under the Guaranty Obligations, the Company will need to be reorganized under
Chapter 11 of Title 11 of the United States Code or liquidated under Chapter 7
of Title 11 of the United States Code. There can be no assurance that if the
Company decides to reorganize under the applicable laws of the United States
that such reorganizational efforts would be successful or that shareholders
would receive any distribution on account of their ownership of shares of the
Company's stock. Similarly, there can be no assurances that if the Company
decides to liquidate under the applicable laws of the United States that such
liquidation would result in the shareholders receiving any distribution on
account of their ownership of shares of the Company's stock. In fact, if the
Company were to be reorganized or liquidated under the applicable laws of the
United States, the bankruptcy laws would require (with limited exceptions) that
the creditors of the Company be paid before any distribution is made to the
shareholders.
Certain Obligations of MPS. In connection with Microelectronic Packaging (S)
Pte. Ltd. ("MPS") borrowing from Citibank N.A., Motorola guaranteed (and
subsequently satisfied MPS' obligation) of $2.2 million in borrowings from
Citibank N.A. Under the terms of the agreement relating to Motorola's guarantee,
MPI granted Motorola a security interest in all of the issued and outstanding
capital stock of MPS, CTM Electronics, Inc. ("CTM") and Microelectronic
Packaging America ("MPA"). While in default, Motorola may have the right to
vote and give consents with respect to all of the issued and outstanding capital
of MPS, CTM and MPA . As a result, during the continuation of any such event of
default, MPI may be unable to control at the shareholder level the direction of
the subsidiaries that generate substantially all of the Company's revenues and
hold substantially all of the Company's assets. Any such loss of control would
have a material adverse effect on the Company's business, prospects, financial
condition, results of operations and status as an ongoing concern and could
force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11
of the United States Code or similar bankruptcy laws of Singapore. The other
Asian debt agreements contain numerous restrictions and events of default that
have been triggered by the aforementioned actions and would, if they became
effective and operative, materially adversely affect the Company's business,
prospects, results of operations, condition and status as an ongoing concern and
could force the Company to seek protection under Chapter 7 or Chapter 11 of
Title 11 of the United States Code or similar bankruptcy laws of Singapore.
In January 1999, the Company and Motorola signed a non-binding letter agreement
which calls for the conversion of all the Company's liabilities to Motorola
under the Guaranty Obligations into shares of the Company's Series A Preferred
Stock as explained in Note 6 to the accompanying Condensed Consolidated
Financial Statements. There can be no assurance that the Company will be
successful in its efforts to reduce this non-binding agreement reached with
Motorola to a binding Conversion Agreement.
Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for 85%
of the Company's net sales in the first quarter of 1999 and is expected to
continue to account for most of the Company's net sales. Under the agreement
between Schlumberger and the Company entered into in January 1998, the Company
is obligated to provide Schlumberger with its
F-83
<PAGE>
requirements for MCM product. Given the Company's anticipated continued reliance
on its MCM business as a large percentage of overall net sales, the failure to
meet Schlumberger's requirements will materially adversely affect the Company's
ability to continue as a going concern. In addition, under the terms of the
agreement, Schlumberer is entitled to request repricing of the Company's
products. Schlumberger has requested repricing on several occasions in the past.
Such repricing in the future may result in the Company being unable to produce
the products made for Schlumberger with an adequate operating profit, and the
Company may be unable to compete with the prices of other vendors who supply the
same or similar products to Schlumberger. The failure to satisfy the terms of
the agreement, or the failure of the Company to achieve an operating profit
under the contract, would have a material adverse impact on the Company's
business, financial condition, and results of operation.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry and in other industries concerning the potential effects
associated with such compliance. Although the Company currently offers products
that are designed to be Year 2000 compliant, there can be no assurance that the
Company's products and the software products used by the Company contain all
necessary date code changes. As of March 31, 1999, the Company has partially
completed an analysis of its readiness for compliance with the Year 2000 change.
Its assessment of its manufacturing systems and company products reveals that no
known Year 2000 issues currently exist either in the products, their raw
materials, or their relationship as components to larger systems produced by its
customers; its financial systems software is currently being upgraded to a newer
replacement system which will be complete in 1999, and which system is Year 2000
compliant; documentation systems that currently use fixed dating are Year 2000
compliant, while those that require revision dating are currently under review;
and approximately 50% of the Company's computing hardware systems have been
upgraded to be Year 2000 compliant. The Company's costs to become Year 2000
compliant as of March 31, 1999 have been $235,000 for computer software and
$48,000 for computer hardware.
The Company has not yet completed its analysis of its readiness for compliance
with the Year 2000 change. Based upon the partial analysis described above, the
Company believes its exposure to Year 2000 risks is limited because the majority
of the Company's recordkeeping systems are new and compliant and have been
installed within the last eighteen months. The Company utilizes no
custom-programmed "legacy" software or hardware systems known to need Year 2000
upgrading or conversion. The Company believes it should be fully compliant with
its Year 2000 issues by the end of the second quarter of 1999 when it believes
it will have completed due diligence of its internal systems and supplier
compliance requirements, as well as completed the remaining 50% of its computing
hardware upgrades needed. However, there can be no assurance that conditions or
events may occur during the course of the completion of this analysis which will
have an adverse impact on the Company's readiness for compliance with the Year
2000 change. In addition, the Company cannot be certain that its suppliers,
service providers and customers will be Year 2000 compliant. The failure of
these companies to be fully
F-84
<PAGE>
compliant could create critical cash shortages to the Company due to the
inability of customers to send payments to the Company. In addition, any product
shortages from suppliers, or service shutdowns from the Company's utility or
communications providers could potentially shut down the Company's manufacturing
operations, thereby causing a material adverse impact on the Company's
operations and liquidity.
The Company believes that the purchasing patterns of customers and potential
customers and the performance of vendors may be affected by Year 2000 issues in
a variety of ways. Many companies are expending significant resources to correct
or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such as
those offered by the Company or the inability to render services or provide
supplies to the Company. Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products, and disruption of
supply patterns. Additionally, Year 2000 issues could cause a significant number
of companies, including current Company customers and vendors, to spend
significant resources upgrading their internal systems, and as a result consider
switching to other systems or suppliers. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments.
The Company has outstanding indebtedness at March 31, 1999 to DBS denominated in
Singapore dollars of approximately Singapore $737,000 (U.S. equivalent
$445,000). All of the Company's other indebtedness is denominated in U.S.
dollars, and all other Singapore-based assets have been liquidated by the
receiver of MPM or MPS and used to retire outstanding indebtedness. Accordingly,
the Company believes its exposure to foreign currency rate movements is limited.
F-85
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
F-86
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K.
None.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------------------------------------------------
10.75 Debt Conversion and Mutual Settlement and Release
Agreement between Texas Instruments Incorporated and
the Company dated April 27, 1999.
10.76 Debt Conversion and Mutual Settlement and Release
Agreement between ORIX Leasing and the Company dated
April 16, 1999.
10.77 Debt Conversion and Mutual Settlement and Release
Agreement between Transpac Capital and the Company
dated April 29, 1999.
10.78 Form of Assignment of Interest Under Letter Agreement
With STMicroelectronics, Inc. between FI Financial,
LLC and various parties dated April 21, 1999.
10.79 Letter Agreement between STMicroelectronics, Inc.,
FI Financial LLC and the Company dated
April 14, 1999
10.80 Letter of Intent Agreement between FI Financial LLC
and the Company dated April 15, 1999.
27.1 Financial Data Schedule
F-87
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Registrant)
Date: May 14, 1999 By: /s/ Denis J. Trafecanty
----------------------------- ----------------------------------
Denis J. Trafecanty
Senior Vice President,
Chief Financial Officer and Secretary
F-88
<PAGE>
EXHIBIT "A"
DEBT CONVERSION
AND
MUTUAL SETTLEMENT AND RELEASE AGREEMENT
THIS DEBT CONVERSION AND MUTUAL SETTLEMENT AND RELEASE AGREEMENT
("Conversion Agreement") is entered into at San Diego, California, effective as
of April 29, 1999 ("Effective Date"), between Microelectronic Packaging, Inc.
("MPI"), on behalf of itself and its predecessors, successors, former and
current subsidiaries, affiliates, shareholders, directors, officers, agents,
attorneys, representatives, insurers, employees and assigns (collectively with
MPI the "MPI Group"); and Transpac Capital Pte Ltd ("Transpac Capital"),
Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional Investment
Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd ("Natsteel
Equity"), and their respective predecessors, successors, former and current
subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys,
representatives, insurers, employees and assigns (collectively the "Investor
Group").
WITNESSETH:
WHEREAS, MPI (as "Holding Company"); MPM Singapore Pte Ltd (as
"Company"), a wholly owned subsidiary of MPI that is in liquidation ("MPM"); the
Investor Group (as "Investors"); and Transpac Capital (as "Agent"); are parties
to an agreement entitled Convertible Loan Agreement dated March 25, 1996 ("Loan
Agreement").
WHEREAS, in connection with the Loan Agreement, MPI (as "Guarantor")
entered into a guaranty dated March 26, 1996, pursuant to which MPI guaranteed
the payment obligations of MPM pursuant to the Loan Agreement ("Guaranty").
WHEREAS, in connection with the Loan Agreement, MPI (as "Company") and
the Investor Group (as "Investors") entered into a Subscription Agreement dated
March 25, 1996, pursuant to which MPI sold and issued to the Investor Group the
aggregate number of Eight Hundred Forty Two Thousand and Thirteen (842,013)
shares of MPI's common stock for an aggregate purchase price of Two Million
Dollars ($2,000,000.00), which would be equal to a price per share of Two Point
Three Seven Five Two Six Zero Two Dollars ($2.3752602) per share ("Subscription
Agreement").
WHEREAS, MPM has not been able to comply with its payment obligations
under the Loan Agreement, is in default thereunder, and is in liquidation.
WHEREAS, in an effort to restructure and settle all of MPI's
obligations under the Loan Agreement and the Guaranty, MPI and the Investor
Group entered into a Restructuring, Settlement and Mutual Release Agreement
dated April 22, 1998, pursuant to which MPI agreed to make certain payments and
issue certain warrants to the Investor Group, in exchange for the agreement of
the Investor Group to reduce the amount of MPI's obligations under the Loan
Agreement and the Guaranty ("Restructuring Agreement"). Contingent upon MPI's
performance of its obligations under the Restructuring Agreement, the
Restructuring Agreement provided that
<PAGE>
all obligations of MPI under the Loan Agreement and Guaranty would be deemed
settled and the Investor Group would release MPI from any further obligations
with respect thereto.
WHEREAS, MPI is not able to comply with its payment obligations under
the Restructuring Agreement.
WHEREAS, the MPI Group with respect to the Investor Group, and the
Investor Group with respect to the MPI Group, desire to finally settle all of
their respective rights and obligations under the Loan Agreement, the Guaranty,
the Restructuring Agreement and all amendments thereto, and all other related
agreements (collectively the "Former Agreements"), terminate and release all of
their respective rights and obligations under the Former Agreements, and settle
all other disputes of any kind that may or could exist between the MPI Group and
the Investor Group with respect to the Former Agreements, all upon the terms and
conditions set forth in this Conversion Agreement.
NOW THEREFORE, in consideration of the mutual agreements contained
herein and for other good and sufficient consideration, the receipt and
sufficiency of which is hereby acknowledged, MPI and the Investor Group agree as
follows:
1. Defined Terms. In addition to those terms that may be defined
-------------
elsewhere in this Conversion Agreement, the following terms shall have the
meanings defined in this Section 1.
1.1 "Conversion Date" means the date upon which the Transpac
Conversion occurs pursuant to the terms and conditions hereof.
1.2 "Performance Date" means June 30, 1999.
1.3 "Series A Preferred Stock" means the Series A Preferred
Stock of MPI, the rights, preferences privileges and restrictions of which are
set forth in the Certificate of Amendment to the Amended and Restated Articles
of Incorporation of MPI, in the form attached hereto as Exhibit "A" and
incorporated herein by reference.
1.4 "Transpac Conversion" means the conversion of indebtedness
in the amount of principal and interest owed by MPM and guaranteed by MPI in the
aggregate to the Investor Group, accrued as of December 31, 1997 (which is the
entire amount MPI and the Investor Group have agreed is due and payable pursuant
to the Loan Agreement and the Guaranty), into Four Million Thirty One Thousand
Eight Hundred and Twenty Six (4,031,826) shares of Series A Preferred Stock.
1.5 "DBS Bank Conversion" means the conversion of indebtedness
in the amount of principal and interest owed by MPM and Microelectronic
Packaging (S) Pte. Ltd. and guaranteed by MPI to DBS Bank, accrued as of
December 31, 1997 (which is the entire amount MPI and DBS Bank have agreed is
due and payable), into One Million One Hundred Fifty Four Thousand Three Hundred
and Eleven (1,154,311) shares of Series A Preferred Stock.
2
<PAGE>
1.6 "Motorola Conversion" means the conversion of indebtedness
in the amount of principal and interest owed by MPS and guaranteed by MPI to
Motorola, Inc., accrued as of December 31, 1997 (which is the entire amount MPI
and Motorola have agreed is due and payable), into Eight Hundred Sixty Nine
Thousand Nine Hundred Thirty Two (869,932.00) shares of Series A Preferred
Stock.
1.7 "NS Electronics Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPI to NS
Electronics Bangkok Ltd., accrued as of December 31, 1997 (which is the entire
amount MPI and NS Electronics have agreed is due and payable), into Two Hundred
Seventy One Thousand One Hundred Seventy Six (271,176) shares of Series A
Preferred Stock.
1.8 "Orix Leasing Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPM and MPS and
guaranteed by MPI to Orix Leasing Singapore Limited, accrued as of December 31,
1997 (which is the entire amount MPI and Orix Leasing have agreed is due and
payable) into Four Hundred Seventy Three Thousand Five Hundred Eighty Four
(473,584) shares of Series A Preferred Stock.
1.9 "Samsung Corning Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPS and guaranteed
by MPI to Samsung Corning Co., Ltd., accrued as of December 31, 1997 (which is
the entire amount MPI and Samsung Corning have agreed is due and payable) into
One Hundred Eighty Three Thousand Two Hundred Seventy Five (183,275) shares of
Series A Preferred Stock.
1.10 "STMicroelectronics Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPS and guaranteed
by MPI to STMicroelectronics, Inc. (and/or any one or more assignees and/or
transferees of STMicroelectronics, Inc.), accrued as of December 31, 1997 (which
is the entire amount MPI and STMicroelectronics have agreed is due and payable)
into One Million Three Hundred Twenty Two Thousand Six Hundred Forty One
(1,322,641) shares of Series A Preferred Stock.
1.11 "Texas Instruments Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPS and guaranteed
by MPI to Texas Instruments Incorporated, accrued as of December 31, 1997 (which
is the entire amount MPI and Texas Instruments have agreed is due and payable)
into One Million Fifty Six Thousand and Twenty Seven (1,056,027) shares of
Series A Preferred Stock.
1.12 "Other Creditor Conversions" means collectively the DBS Bank
Conversion, the Motorola Conversion, the NS Electronics Conversion, the Orix
Leasing Conversion, the Samsung Corning Conversion, the STMicroelectronics
Conversion and the Texas Instruments Conversion.
1.13 "Other Creditors" means collectively DBS Bank; Motorola,
Inc.; NS Electronics Bangkok Ltd.; Orix Leasing Singapore Limited; Samsung
Corning Co., Ltd.; STMicroelectronics, Inc.; and Texas Instruments Incorporated.
3
<PAGE>
1.14 "Insolvency Action" means the commencement of a voluntary or
involuntary case against MPI under the United States Bankruptcy Code ("Code") or
an assignment for the benefit of creditors by MPI, but shall not include any
involuntary case brought under the Code which is dismissed within sixty (60)
days of its commencement where no action is brought during such time period to
avoid any issuance of Series A Preferred Stock by MPI or the performance by MPI
of any of its other obligations pursuant to this Conversion Agreement.
2. Duration of Conversion Agreement. This Conversion Agreement shall
-------------------------------
remain in full force and effect until the Conversion Date, subject to the
following termination provisions:
2.1 Prior to the Performance Date, no party shall have any right
to terminate this Conversion Agreement in any respect, and all of the terms and
conditions hereof shall remain in full force and effect as set forth herein.
2.2 As of and after the Conversion Date, even if the Conversion
Date occurs after the Performance Date, no party shall have any right to
terminate this Conversion Agreement in any respect, and all of the terms and
conditions hereof shall remain in full force and effect as set forth herein.
2.3 After the Performance Date, so long as the Conversion Date
has not occurred, Transpac Capital shall have sole discretion on behalf of the
Investor Group (but shall not be required) to terminate this Conversion
Agreement by giving a written termination notice to MPI ("Termination Notice").
In the event Transpac Capital gives MPI a Termination Notice after the
Performance Date and prior to any occurrence of the Conversion Date, then this
Conversion Agreement shall be deemed terminated as of the date the Termination
Notice is deemed given to MPI pursuant to the provisions of Section 10.3 hereof.
In the event this Conversion Agreement is terminated by Transpac Capital
pursuant to the provisions of this Section 2.3, then this Conversion Agreement
shall be deemed completely void, and MPI and the Investor Group shall retain and
remain subject to whatever respective rights and obligations they may otherwise
have under the Former Agreements.
2.4 Regardless of any other provision of this Section 2, if an
Insolvency Action is commenced prior to the Conversion Date, then this
Conversion Agreement and the respective rights and obligations of MPI and the
Investor Group hereunder shall be deemed immediately terminated without notice,
and MPI and the Investor Group shall retain and remain subject to whatever
respective rights and obligations they may have under the Former Agreements.
2.5 Except as provided otherwise in Sections 7.1 or 7.3 of this
Agreement, the Former Agreements shall remain in full force and effect at all
times after the Effective Date.
3. Conditions to Transpac Conversion. The completion of the Transpac
---------------------------------
Conversion pursuant to the terms and conditions of this Conversion Agreement
shall be subject to the performance and satisfaction of each of the following
conditions, either prior to or concurrently with the occurrence of the Transpac
Conversion ("Completion Conditions"):
4
<PAGE>
3.1. The completion of the Other Creditor Conversions pursuant to
agreements entered into between MPI and the Other Creditors upon terms and
conditions that are not more favorable to any of such Other Creditors than the
terms and conditions contained in this Conversion Agreement. In particular, but
without limiting the generality of the foregoing provisions of this section, the
effective price per share of the Series A Preferred Stock applicable to the
Other Creditor Conversions shall not be less than One Dollar and Two Cents
($1.02), and the terms and conditions of the settlement and release provisions
applicable to the Other Creditor Conversions shall not be different in any
material respect from the terms and conditions of the settlement and release
provisions contained in this Conversion Agreement. Furthermore, in connection
with the STMicroelectronics Conversion, MPI will have agreed to amend the
warrants to purchase MPI's common stock held by STMicroelectronics, Inc., if at
all, only upon terms and conditions no more favorable to STMicroelectronics,
Inc., than those in the Transpac Warrant Amendments.
3.2 The material terms and conditions of the Transpac Conversion
and the Other Creditor Conversions shall have been approved by MPI's Board of
Directors, which approval shall be sought and obtained by MPI in accordance with
all applicable laws.
3.3 The material terms and conditions of the Transpac Conversion
and the Other Creditor Conversions shall have been approved by MPI's
Shareholders, which approval shall be sought and obtained by MPI in accordance
with all applicable laws.
3.4 The Certificate of Amendment of the Amended and Restated
Articles of Incorporation of MPI, in the form attached hereto as Exhibit "A" and
incorporated herein by reference ("Certificate of Amendment"), shall have been
duly adopted by all necessary corporate action of the Board of Directors and
shareholders of MPI, and shall have been duly filed with and accepted by the
California Secretary of State, upon which filing and acceptance MPI shall be
authorized to issue the Series A Preferred Stock to the Investor Group and the
Other Creditors as required pursuant to the Transpac Conversion and the Other
Creditor Conversions.
3.5 L.H. Friend, Weinress, Frankson & Presson, Inc., an
investment banking firm who serves as financial adviser to MPI, shall have
executed and issued to MPI a written opinion, in form and substance satisfactory
to MPI in its sole discretion, concluding that the Transpac Conversion and the
Other Creditor Conversions are fair to MPI's Shareholders ("Fairness Opinion"),
and a copy of such Fairness Opinion shall have been provided to Transpac
Capital.
3.6 MPI and the Investor Group shall have performed each of
their respective obligations and conditions that this Conversion Agreement
requires them to perform on or prior to the Conversion Date.
4. Obligations of MPI for Transpac Conversion. MPI shall have the
------------------------------------------
following affirmative obligations under this Conversion Agreement until such
time as the Transpac Conversion has been completed, or this Conversion Agreement
has been terminated pursuant to the provisions of Section 2 hereof:
5
<PAGE>
4.1 MPI shall use its best and most diligent efforts to obtain
the agreement of each of the Other Creditors to complete the Other Creditor
Conversions pursuant to agreements entered into between MPI and the Other
Creditors upon terms and conditions that are not more favorable to such Other
Creditors than the terms and conditions contained in this Conversion Agreement.
In particular, but without limiting the generality of the foregoing provisions
of this section, MPI shall use its best and most diligent efforts to obtain the
agreement of the Other Creditors that the effective price per share of the
Series A Preferred Stock applicable to the Other Creditor Conversions shall not
be less than One Dollar and Two Cents ($1.02), and the terms and conditions of
the settlement and release provisions applicable to the Other Creditor
Conversions shall not be different in any material respect from the terms and
conditions of the settlement and release provisions contained in this Conversion
Agreement.
4.2 MPI shall use its best and most diligent efforts to obtain
the approval of MPI's Board of Directors of the material terms and conditions of
the Transpac Conversion and the Other Creditor Conversions, which approval shall
be obtained in accordance with applicable laws.
4.3 MPI shall use its best and most diligent efforts to obtain
the approval of MPI's Shareholders of the material terms and conditions of the
Transpac Conversion and the Other Creditor Conversions, which approval shall be
obtained in accordance with applicable laws.
4.4 MPI shall use its best and most diligent efforts to cause
the Certificate of Amendment to be approved by MPI's Board of Directors and
shareholders, which approval shall be obtained in accordance with applicable
laws, and to cause the Certificate of Amendment to be filed with and accepted by
the California Secretary of State, upon which filing and acceptance MPI shall be
authorized to issue the Series A Preferred Stock to the Investor Group and the
Other Creditors as required pursuant to the Transpac Conversion and the Other
Creditor Conversions.
4.5 MPI shall use its best and most diligent efforts to cause
the Transpac Conversion to be completed as soon as reasonably possible.
4.6 MPI shall use its best and most diligent efforts at all
times prior to the Conversion Date, to conduct its business in the usual and
ordinary course.
5. [This Section has been intentionally left blank.]
6. Completion of Conversion. At such time as all of the Completion
------------------------
Conditions have been performed and satisfied by MPI, then MPI and the Investor
Group shall complete the Transpac Conversion concurrently with the completion by
MPI and the Other Creditors of the Other Creditor Conversions, by concurrently
taking the following actions:
6.1 Actions By MPI.
--------------
6
<PAGE>
(a) MPI shall duly execute and deliver to Transpac Capital a
counterpart copy of the form of Registration Rights Agreement attached to this
Conversion Agreement as Exhibit "B" and incorporated herein by reference
("Registration Agreement").
(b) MPI shall duly execute and deliver to Transpac Capital four
(4) counterpart copies of the form of First Amendment to Warrant To Purchase
Common Stock of MPI attached to this Conversion Agreement as Exhibit "C" and
incorporated herein by reference (collectively the "Transpac Warrant
Amendments"), one with respect to each of the Warrants to Purchase Common Stock
of MPI, dated April 24, 1998 (collectively the "Transpac Warrants"), issued
respectively to Transpac Capital, Transpac Holdings, Regional Investment and
Natsteel Equity.
(c) MPI shall duly execute and deliver to Transpac Capital a
counterpart copy of the form of IBM Proceeds Agreement attached to this
Conversion Agreement as Exhibit "D" and incorporated herein by reference ("IBM
Agreement").
(d) MPI's Chief Executive Officer shall duly execute and deliver
to Transpac the form of Certificate of Chief Executive Officer attached to this
Conversion Agreement as Exhibit "E" and incorporated herein by reference
("Certificate of CEO"), certifying the following matters:
(i) Any approvals of MPI's shareholders and directors
that may be required under any applicable law, in connection with the
transactions contemplated by this Conversion Agreement, have been duly obtained
and are in full force and effect as of the Conversion Date.
(ii) All of the representations and warranties of MPI set
forth in this Conversion Agreement,. the Ancillary Agreements (as defined below)
or in any other document delivered to the Investor Group in connection herewith,
are true, accurate, complete, and not misleading in any material respect as of
the Conversion Date.
(iii) MPI has performed all of the duties and obligations
required to be performed by MPI on or prior to the Conversion Date, pursuant to
the provisions of this Conversion Agreement, the Ancillary Agreements (as
defined below) or in any other document delivered to the Investor Group in
connection herewith.
(e) MPI shall cause its legal counsel to duly execute and
deliver to Transpac the form of legal opinion letter attached to his Conversion
Agreement as Exhibit "F" and incorporated herein by reference ("Legal Opinion").
(f) MPI shall deliver to Transpac copies of certificates of good
standing for MPI issued by the California Secretary of State and the California
Franchise Tax Board, dated not more than five (5) days prior to the Conversion
Date.
7
<PAGE>
(g) MPI shall deliver to Transpac stock certificates
representing shares of Series A Preferred Stock issued by MPI to the Investor
Group in the following names and numbers of shares:
(i) Transpac Capital Pte Ltd, 1,624,822
(ii) Transpac Industrial Holdings Ltd, 1,599,632
(iii) Regional Investment Company Ltd, 440,843
(iv) Natsteel Equity III Pte Ltd, 366,529
(h) MPI shall deliver to Transpac and its legal counsel copies
of the following documents:
(i) A copy of the Certificate of Amendment and Bylaws of
MPI (as amended through the Conversion Date), certified by the Secretary of MPI
as true and correct copies thereof as of the Conversion Date.
(ii) A copy of the resolutions of the Board of Directors
and shareholders of MPI evidencing the amendment to MPI's Amended and Restated
Articles of Incorporation providing for the authorization of the Series A
Preferred Stock and the approval of this Agreement and the other agreements,
documents, and matters contemplated hereby, certified by the Secretary of MPI to
be true, complete and correct.
6.2 Actions By Investor Group.
-------------------------
(a) Each member of the Investor Group shall duly execute
and deliver to MPI a counterpart copy of the Registration Agreement.
(b) Each member of the Investor Group shall duly execute
and deliver to MPI the counterpart copy of the Transpac Warrant Amendment that
relates to the Transpac Warrant of the respective member of the Investor Group.
(c) Each member of the Investor Group shall duly execute
and deliver to MPI a counterpart copy of the form of IBM Agreement.
6.3 Effect of Conversion. Upon the occurrence of the
--------------------
Conversion Date, (a) the debts owed by MPI to all members of the Investor Group
shall be deemed to have been converted, respectively, into the number of shares
of MPI's Series A Preferred Stock issued to each respective member of the
Investor Group, as set forth in Section 6.1; and (b) as of and after the
Conversion Date, MPI shall not owe any debt of any kind to any of the members of
the Investor Group, as set forth in more detail pursuant to Section 7 of this
Conversion Agreement.
7. Settlement and Mutual Release. If and only if the Conversion is
-----------------------------
completed pursuant to the terms and conditions of this Conversion Agreement,
then in that case
8
<PAGE>
only, effective as of the Conversion Date, MPI and the Investor Group agree that
the terms and conditions of this Section 7 shall be in effect with respect to
the Former Agreements and all of the respective rights and obligations of MPI
and the Investor Group pursuant to the Former Agreements and all other related
agreements:
7.1 The Former Agreements shall be deemed to have been
voluntarily terminated pursuant to the mutual agreement of MPI and the Investor
Group, without any remaining liability to either MPI or the Investor Group.
Without limiting the generality of the foregoing provisions of this section, MPI
and the Investor Group agree that MPI shall no longer have any obligations of
any kind under the Former Agreements to pay any amount to the Investor Group,
and the Investor Group shall no longer have any rights of any kind under the
Former Agreements to convert any amounts owed under the Former Agreements into,
or to otherwise obtain ownership of, shares of MPI's stock of any class or
series.
7.2 All rights of the Investor Group described in a letter from
Wong Lin Hong to Denis Trafecanty, dated March 4, 1998, written with reference
to the Written Consent Solicitation of Shareholders, to the effect that MPI will
not issue any shares of preferred stock for an amount in excess of Two Hundred
Fifty Thousand Dollars ($250,000.00) without first obtaining the agreement of
Transpac Capital and/or the Investment Group, shall be deemed to have been
voluntarily terminated pursuant to the mutual agreement of MPI and the Investor
Group, without any remaining liability to either MPI or the Investor Group. As
of and at all times after the Conversion Date, the Investor Group agrees that
neither Transpac Capital nor any other member of the Investor Group has any
right of any kind to approve or consent to any issuance by MPI of any shares of
its stock of any class or series, except as provided otherwise under MPI's
articles of incorporation in effect from time to time, or except as provided
otherwise under applicable law. Furthermore, by executing this Conversion
Agreement, Transpac Capital and the other members of the Investment Group agree
to and approve all issuances by MPI of Series A Preferred Stock that are to be
issued in connection with the Transpac Conversion and the Other Creditor
Conversions, so long as such transactions are carried out in compliance with the
terms and conditions of this Conversion Agreement and the debt conversion
agreements between MPI and the Other Creditors
7.3 The MPI Group with respect to the Investor Group, and the
Investor Group with respect to the MPI Group, shall be deemed to have forever
released and discharged each other from and against any and all claims, damages
and caused of action they may have against each other with respect to and in
connection with the Former Agreements and any matter arising out of the terms
and conditions thereof, including without limitation, any breach of any
representation or warranty or noncompliance or nonfulfillment of any covenant or
agreement contained in or arising out of the Former Agreements; provided that
such release and discharge shall not extend to any claims, damages and causes of
action any member of the Investor Group may have against any member of the MPI
Group (or any member of the MPI Group may have against any member of the
Investor Group) for fraud or willful misconduct with respect to any of the
Former Agreements or any of the transactions contemplated by this Agreement.
However, the foregoing release provisions of this section do not apply to this
Conversion Agreement, or the Certificate of Amendment, the Registration
Agreement, the Transpac Warrants (as amended by the Transpac Warrant
Amendments), or the IBM Agreement
9
<PAGE>
(collectively the "Ancillary Agreements"), or any of the respective rights and
obligations of MPI and/or the Investor Group pursuant to the terms and
conditions of this Conversion Agreement or the Ancillary Agreements.
8. Representations, Warranties and Agreements of MPI. In addition
-------------------------------------------------
to any representations and warranties MPI may make to the Investor Group
elsewhere in this Conversion Agreement, the Ancillary Agreements or in any other
document delivered to the Investor Group in connection herewith, MPI represents
and warrants to the Investor Group that the statements contained in this Section
8 are true, accurate, complete, and not misleading in any material respect, and
also shall be so as of the Conversion Date.
8.1 Organization and Good Standing, and Other Status. MPI is a
------------------------------------------------
corporation, legally and validly incorporated, organized and existing under the
laws of the State of California. MPI is in good standing as certified by both
the California Secretary of State and the California Franchise Tax Board.
8.2 Authority to Conduct Business. MPI possesses full
-----------------------------
corporate power and lawful authority to own, lease and operate its assets, and
to carry on its business as presently conducted. MPI is duly and legally
qualified to do business and is in good standing in each country, state, county,
city or other jurisdiction in which the failure to so qualify would have a
material adverse impact on MPI's business.
10
<PAGE>
8.3 Authority Regarding this Agreement.
----------------------------------
8.3.1 MPI has the complete and unrestricted right, power,
authority and capacity to (a) execute and deliver this Conversion Agreement, the
Ancillary Agreements and every other document executed and delivered by MPI to
the Investor Group in connection therewith (collectively the "Transaction
Documents"); and (b) carry out and perform each of MPI's obligations pursuant to
the Transaction Documents.
8.3.2 As of the Conversion Date, no further corporate or
shareholder authority, approvals, actions or proceedings will be necessary on
the part of MPI to authorize the Transaction Documents or any of the
transactions contemplated thereby.
8.3.3 This Conversion Agreement has been, and, as of the
Conversion Date all of the other Transaction Documents will have been, duly and
validly executed and delivered by MPI, and when so executed and delivered, will
constitute legal, valid and binding obligations of MPI, enforceable in
accordance with their terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, 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 the Registration Agreement may be limited by applicable federal or
state securities laws.
8.3.4 The execution and delivery of this Conversion
Agreement does not, the execution and delivery of the other Transaction
Documents will not, and the consummation of the transactions contemplated
thereby will not, violate any provision of MPI's Amended and Restated Articles
of Incorporation or Bylaws (as amended), or any mortgage, lien, lease,
agreement, instrument, order, judgment or decree to which MPI is a party or by
which MPI or any of its assets is bound.
8.4 Valid Issuance of Preferred and Common Stock. The Series A
---------------------------------------------
Preferred Stock, when issued and delivered in accordance with the terms of this
Conversion Agreement, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than those
stated in this Conversion Agreement and/or that may arise under applicable state
and federal securities laws. The common stock of MPI issuable upon conversion of
the Series A Preferred Stock has been duly and validly reserved for issuance
and, upon issuance in accordance with the terms of the Certificate of Amendment,
will be duly and validly issued, fully paid, and nonassessable, and will be free
of restrictions on transfer other than those stated in this Conversion Agreement
and/or that may arise under applicable state and federal securities laws.
8.5 Consents. No consent, approval, order or authorization of,
---------
or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any third party on the part of
MPI is required in connection with the consummation of the transactions
contemplated by this Conversion Agreement, except (i) the filing of the
Certificate of Amendment with the California Secretary of State; (ii) the filing
required pursuant to Section 25102(f) of the California Corporate Securities Law
of 1968, as
11
<PAGE>
amended, and the rules thereunder, which filing will be effected
within 15 days after the issuance of the Series A Preferred Stock pursuant
hereto.
8.6 Offering. Subject in part to the truth and accuracy of the
--------
representations of the Investor Group set forth in Section 9 of this Agreement,
the issuance of the Series A Preferred Stock as contemplated by the Transaction
Documents is exempt from the registration and qualification requirements of any
applicable state and federal securities laws, and neither MPI nor any authorized
agent acting on its behalf will take any action hereafter that would cause the
loss of such exemption.
8.7 Disclosure. MPI has fully provided each member of the
-----------
Investor Group with all information each such party has requested for deciding
whether to enter into the transactions contemplated by the Transaction
Documents, including without limitation, the acquisition of the Series A
Preferred Stock.
8.8 Brokers. MPI has not taken any actions in connection with
-------
the negotiations relating to the Transaction Documents or the transactions
contemplated thereby that could give rise to an obligation on the part of any
member of the Investor Group to pay any brokerage or finder's fee, commission or
similar compensation to any party in connection therewith.
8.9 Litigation: Except as set forth in this Section 8.9, there
----------
is no action, suit, proceeding, claim, arbitration or investigation ("Action")
pending (or, to the best of MPI's knowledge, currently threatened) against MPI,
its activities, properties or assets or, to the best of MPI's knowledge, against
any officer, director or employee of MPI in connection with such officer's,
director's or employee's relationship with, or actions taken on behalf of, MPI.
To the best of MPI's knowledge, there is no factual or legal basis for any such
Action that might result, individually or in the aggregate, in any material
adverse change in the business, properties, assets, financial condition, affairs
or prospects of MPI. MPI is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality, and there is no Action by MPI currently pending or which MPI
intends to initiate (other than claims for monetary damages asserted by MPI
against International Business Machines Corporation ("IBM") under the Purchase
Option Agreement dated August 4, 1994, between IBM and MPI and the Multilayer
Technology Transfer and Licensing Agreement dated August 4, 1994, between IBM
and MPI). MPI is a defendant in a lawsuit filed on December 18, 1998, against
MPI and Schlumberger Technologies, Inc., in the United States District Court for
the Southern District of New York ("Lawsuit"). The plaintiffs in the Lawsuit
are Gary Stein and Lewis Solomon. Both Mr. Solomon and Mr. Stein are former
directors of MPI. The Lawsuit alleges the following claims against MPI:
(a) Failure to pay an amount alleged to be not less than
Thirty Thousand Dollars ($30,000.00) allegedly owed to Lewis Solomon as
compensation for services performed by him as the former Chairman of MPI's Board
of Directors;
12
<PAGE>
(b) Failure to pay an amount alleged to be not less than
Seventy One Thousand Two Hundred Fifty Dollars ($71,250.00) allegedly owed in
the aggregate to Mr. Stein and Mr. Solomon as compensation under a consulting
agreement;
(c) Wrongful termination of a consulting agreement, for
which wrongful termination Mr. Stein and Mr. Solomon allege damages in the
aggregate of not less than Five Hundred Thousand Dollars ($500,000.00);
(d) Tortious interference with Mr. Stein's and Mr.
Solomon's prospective economic relationships and business advantages as
consultants and directors of public corporations, presumably arising out of
MPI's termination of their consulting agreement, for which Mr. Stein and Mr.
Solomon allege damages in the aggregate of not less than Five Million Dollars
($5,000,000.00);
(e) Costs and expenses incurred in the Lawsuit in an
unspecified amount.
MPI believes the claims made by Mr. Stein and Mr. Solomon against
MPI in the lawsuit are completely without merit. MPI is actively and vigorously
defending the lawsuit, and has made substantial counterclaims against Mr. Stein
and Mr. Solomon .
8.10 Capitalization. The capitalization of MPI immediately
--------------
prior to the Conversion Date will consist of the following:
(a) Preferred Stock. A total of 9,362,778 authorized
---------------
shares of preferred stock, no par value per share, consisting of 9,362,778
shares designated as Series A Preferred Stock, none of which will be issued and
outstanding. Upon the Transpac Conversion and Other Creditor Conversions, the
rights, preferences and privileges of the Series A Preferred Stock will be as
stated in MPI's Amended and Restated Articles of Incorporation, as amended by
the Certificate of Amendment, and as provided by law.
(b) Common Stock. A total of Fifty Million (50,000,000)
------------
authorized of common stock, no par value per share (the "Common Stock"), of
which not more than Eleven Million (11,000,000) shares will be issued and
outstanding.
(c) Options, Warrants, Reserved Shares. Except for: (i)
----------------------------------
the conversion privileges of the Series A Preferred Stock; (ii) the rights of
first refusal granted to Transpac Capital, Transpac Holdings, Regional
Investment and Natsteel Equity under Section 8.1 of the Subscription Agreement;
(iii) Four Million Six Hundred Ninety Thousand Six Hundred Thirty Two
(4,690,632) shares of Common Stock reserved for issuance under MPI's 1993 Stock
Option Plan under which options to purchase Two Million Four Hundred Twenty Four
Thousand Five Hundred (2,424,500) shares are outstanding; and (iv) warrants to
purchase Seven Hundred Thousand (700,000) shares of Common Stock; there is no
outstanding, option, warrant, right (including conversion or preemptive rights)
or agreement for the purchase or acquisition from MPI of any shares of its
capital stock or any securities convertible into or ultimately exchangeable or
exercisable for any shares of MPI's capital stock. Apart from the
13
<PAGE>
exceptions noted in this Section 8.10, and except for rights of first refusal
held by MPI to purchase shares of its stock issued under MPI's 1993 Stock Option
Plan, no shares of MPI's outstanding capital stock , or stock issuable upon
exercise or exchange of any outstanding options, warrants or rights, or other
stock issuable by MPI, are subject to any preemptive rights, rights of first
refusal or other rights to purchase such stock (whether in favor of MPI or any
other person), pursuant to any agreement or commitment of MPI.
9. Representations, Warranties and Agreements of the Investor
-----------------------------------------------------------
Group. In addition to any representations and warranties the Investor Group may
make to MPI elsewhere in this Conversion Agreement, the Ancillary Agreements or
in any other document delivered to MPI in connection herewith, the members of
the Investor Group severally as to themselves, but not jointly, represent and
warrant to MPI that the statements contained in this Section 9 are true,
accurate, complete, and not misleading in any material respect, and also shall
be so as of the Conversion Date.
9.1 Authority Regarding this Agreement.
----------------------------------
9.1.1 Each member of the Investor Group has the complete
and unrestricted right, power, authority and capacity to (a) execute and deliver
each Transaction Document to which it is a party; and (b) carry out and perform
each of their respective obligations pursuant to such Transaction Documents.
9.1.2 As of the Conversion Date, no further corporate or
shareholder authority, approvals, actions or proceedings will be necessary on
the part of any member of the Investor Group to authorize the Transaction
Documents or any of the transactions contemplated thereby.
9.1.3 This Conversion Agreement has been, and, as of the
Conversion Date all of the other Transaction Documents will have been, duly and
validly executed and delivered by each member of the Investor Group which is a
party to such agreements or documents, and when so executed and delivered, will
constitute legal, valid and binding obligations of each member of the Investor
Group which is a party to such agreements or documents, enforceable in
accordance with their terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, 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 the Registration Agreement may be limited by applicable federal or
state securities laws.
9.2 Purchase Entirely For Own Account. MPI is entering into the
---------------------------------
Transaction Documents in reliance on the representation made by each member of
the Investor Group, which representation is respectively confirmed by each such
member's execution of this Conversion Agreement, and each such member hereby
confirms, that the Series A Preferred Stock to be received by each respective
member of the Investor Group, and MPI's common stock issuable upon conversion
thereof (collectively the "Securities") will be acquired for investment and not
with a view to the resale or distribution of any part thereof, and that such
member has no
14
<PAGE>
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Conversion Agreement, each member of
the Investor Group further represents that such member 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. Notwithstanding the foregoing, MPI
acknowledges and understands that Transpac Capital may hold the Securities on
behalf of, for the benefit of or as the nominee for, certain affiliated or
related entities, and thus may distribute the Securities to such entities.
9.3 Disclosure of Information. Each respective member of the
-------------------------
Investor Group believes it has received all the information it considers
necessary or appropriate for deciding whether to acquire the Securities. Each
member of the Investor Group further represents that it has had an opportunity
to ask questions and receive answers from MPI regarding the terms and conditions
of the Transaction Documents and the business, properties, prospects and
financial condition of MPI.
9.4 Investment Experience. Each member of the Investor Group
---------------------
acknowledges that it is able to fend for itself, can bear the economic risk of
its investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Securities. Each member of the Investor Group has carefully evaluated
such member's financial resources and investment position and the risks
associated with an investment in the Securities, and acknowledges that such
member is able to bear the economic risks of this investment. Each member of the
Investor Group further acknowledges that such member's financial condition is
such that the member is not under any present necessity or constraint to dispose
of the securities to satisfy any existing or contemplated debt or undertaking.
If other than an individual, each member of the Investor Group also represents
it has not been organized for the purpose of acquiring the Securities.
9.5 Restricted Securities. Each member of the Investor Group
---------------------
understands that the Securities are characterized as "restricted securities"
under the federal securities laws of the United States, inasmuch as they are
being acquired from MPI in a transaction not involving a public offering, and
that under such laws and applicable regulations the Securities may be resold
without registration only in certain limited circumstances. In this connection,
each member of the Investor Group represents that it is familiar with Securities
and Exchange Commission ("SEC") Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and generally by the federal
securities laws of the United States. Each member of the Investor Group further
understands that the Securities have not been registered under the Securities
Act of 1933, as amended ("33 Act") or qualified or otherwise registered under
the applicable securities laws of any state or other jurisdiction, that any
disposition of the Securities by such Buyer is subject to restrictions imposed
by federal and state laws, that the stock certificates representing the
Securities will bear a restrictive legend stating that such member cannot
dispose of the Securities absent such registration and qualification, except
pursuant to any available exemption from such registration and qualification.
9.6 Further Restrictions on Transfer. Without in any way
--------------------------------
limiting the representations set forth above in this Section 9, each member of
the Investor Group further agrees not to make any disposition of all or any
portion of the Securities unless and until the
15
<PAGE>
transferee has agreed in writing for the benefit of MPI to be bound by the
provisions of Sections 9.3 through 9.7 hereof, and the provisions of the
Registration Agreement, to the extent such sections and such agreement are then
applicable, and:
(a) There is then in effect a Registration Statement under
the 33 Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) The member of the Investor Group disposing of the
Securities shall have notified MPI of the proposed disposition and shall have
furnished MPI with a detailed statement of the circumstances surrounding the
proposed disposition, and if reasonably requested by MPI, such member shall have
furnished MPI with an opinion of counsel, reasonably satisfactory to MPI, that
such disposition will not require registration of the Securities in question
under the 33 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above,
no such registration statement or opinion of counsel shall be required: (i) for
any transfer of any Securities in compliance with SEC Rule 144 or Rule 144A; or
(ii) for any transfer of any Securities by a holder thereof that is a
partnership or a corporation to: (1) a partner of such partnership or a
shareholder of such corporation; (2) a retired partner of such partnership who
retires after the date hereof; or (3) the estate of any such partner or
shareholder; provided, that in each of the foregoing cases the transferee agrees
--------
in writing to be subject to the terms of this Section 9 to the same extent as if
the transferee were an original purchaser of Securities hereunder.
9.7 Restrictive Legend. Each certificate representing the
------------------
Series A Preferred Stock or any other securities issued in respect of the Series
A Preferred Stock or upon the conversion thereof, shall be stamped or otherwise
imprinted with a legend in the following form, in addition to any legend
required pursuant to applicable state securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (AS AMENDED), NOR QUALIFIED OR OTHERWISE REGISTERED
UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THESE
SECURITIES HAVE BEEN ACQUIRED ONLY FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF OR HYPOTHECATED (a) IN THE
ABSENCE OF BOTH (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933 (AS AMENDED), AND (ii) AN EFFECTIVE QUALIFICATION OR REGISTRATION UNDER
THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, OR (b) UNLESS
AN EXEMPTION FROM ANY SUCH REGISTRATIONS OR QUALIFICATIONS IS AVAILABLE AND THE
ISSUER HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT
SUCH REGISTRATIONS OR QUALIFICATIONS ARE NOT REQUIRED.
9.8 Foreign Persons. If a member of the Investor Group is not
---------------
a United States person, such member hereby represents that (a) they have
satisfied themselves as to
16
<PAGE>
the full observance of the laws of their own jurisdiction in connection with any
acquisition of the Securities, including without limitation (i) the legal
requirements within such jurisdiction applicable to the acquisition of the
Securities; (ii) any foreign exchange restrictions applicable to such
acquisition; (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 acquisition, holding, sale or transfer of the Securities; and
(b) such member's acquisition and continued ownership of the Securities will not
violate any applicable securities or other laws of such member's jurisdiction.
9.9 Brokers or Finders. The member of the Investor Group have
------------------
not taken any actions in connection with the negotiations relating to this
Conversion Agreement or the transactions contemplated hereby that could give
rise to an obligation on the part of MPI to pay any brokerage or finder's fee,
commission or similar compensation to any party in connection therewith.
9.10 Transpac Capital as Agent. Each member of the Investor
-------------------------
Group hereby appoints Transpac Capital to act as its agent for purposes of this
Conversion Agreement. Each member of the Investor Group hereby authorizes
Transpac Capital to take such actions and exercise such rights, powers and
discretions as are specifically delegated to Transpac Capital pursuant to this
Conversion Agreement, and to take such other actions and exercise such other
rights, powers and discretions as are reasonably incidental thereto. However,
Transpac Capital shall not commence any legal action or other legal proceeding
in the name of any other member of the Investor Group without such member's
consent. The relationship between Transpac Capital and the Other Investors for
this purpose is that of agent and principal only. Transpac Capital shall not, by
virtue of any provision of this Conversion Agreement, be deemed to be a trustee
for any other member of the Investor Group, nor an agent or trustee for MPI.
10. Miscellaneous Provisions.
------------------------
10.1 Exhibits. All exhibits described in this Conversion
--------
Agreement are incorporated by reference as if fully set forth herein, and
constitute a material part of this Conversion Agreement, whether or not such
exhibits are attached hereto.
10.2 Governing Law. This Conversion Agreement shall in all
-------------
respects be construed, interpreted and enforced in accordance with and governed
by the laws of the State of California, United States of America. Any legal
action between the parties regarding this Conversion Agreement shall be brought
in, and the parties hereby consent to the jurisdiction of and venue in, either
(a) the federal and state courts located in the County of San Diego, State of
California, United States of America; or (b) the courts located in the country
of Singapore.
10.3 Notices. Any notice, demand or other communication
-------
required or permitted under this Conversion Agreement shall be deemed given and
delivered when in writing and (a) personally served upon the receiving party, or
(b) upon the third (3rd) calendar day after mailing to the receiving party by
either (i) United States registered or certified mail, postage prepaid, or (ii)
FedEx or other comparable overnight delivery service, delivery charges prepaid,
and addressed as follows:
17
<PAGE>
To MPI: Microelectronic Packaging, Inc.
9577 Chesapeake Drive
San Diego, CA 92123
Attn: Chief Executive Officer
To any member of Transpac Capital Pte Ltd
the Investor Group 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Attn: Wong Lin Hong
Any party may change the address specified in this section by giving the other
party notice of such new address in the manner set forth herein.
10.4 Severability. In the event that any provision of this
------------
Conversion Agreement becomes or is declared by a court of competent jurisdiction
to be illegal, unenforceable or invalid, then this Conversion Agreement shall
continue in full force and effect without said provision. If this Conversion
Agreement continues in full force and effect as provided above, the parties
shall replace the invalid provision with a valid provision which corresponds as
far as possible to the spirit and purpose of the invalid provision.
10.5 Counterparts. This Conversion Agreement may be executed
------------
in any number of counterparts, each of which may be executed by less than all of
the parties hereto, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall constitute
one document.
10.6 Entire Agreement. This Conversion Agreement, the Ancillary
----------------
Agreements, and the documents and agreements contemplated herein and therein,
constitute the entire agreement between the parties with respect to the subject
matter hereof, and supersede all prior oral or written agreements,
representations or warranties between the parties other than those set forth
herein or herein provided for.
10.7 Successors and Assigns. Except as specifically permitted
----------------------
pursuant to the terms and conditions hereof, no party shall be permitted to
assign their respective rights or obligations under this Conversion Agreement
without the prior written consent of the other parties. The provisions hereof
shall inure to the benefit of, and be binding upon, the permitted successors and
assigns, heirs, executors, and administrators of the parties hereto.
10.8 Amendment and Waiver. No modification or waiver of any
--------------------
provision of this Conversion Agreement shall be binding upon the party against
whom it is sought to be enforced, unless specifically set forth in writing
signed by an authorized representative of that party. A waiver by any party of
any of the terms or conditions of this Conversion Agreement in any one instance
shall not be deemed or construed to be a waiver of such terms or conditions for
the future, or of any subsequent breach thereof. The failure by any party hereto
at any time to enforce any of the provisions of this Conversion Agreement, or to
18
<PAGE>
require at any time performance of any of the provisions hereof, shall in no way
to be construed to be a waiver of such provisions or to affect either the
validity of this Conversion Agreement or the right of any party to thereafter
enforce each and every provision of this Conversion Agreement.
[The remainder of this page has been intentionally left blank.]
19
<PAGE>
10.9 Survivability. All of the representations, warranties,
-------------
agreements and obligations of the parties pursuant to this Conversion Agreement
shall survive any issuance of the Shares and/or the Option Shares by the Company
to the Buyers.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Conversion Agreement as of the date first above written.
MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD
By:_________________________ By:______________________________
Signature Signature
By:_________________________ By:______________________________
Print Print
Title:______________________ Title:___________________________
[The remainder of this page has been intentionally left blank.]
20
<PAGE>
CONTINUATION OF SIGNATURES FOR
DEBT CONVERSION
AND
MUTUAL SETTLEMENT AND RELEASE AGREEMENT
dated April 29, 1999
TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD
By:_________________________ By:______________________________
Signature Signature
By:_________________________ By:______________________________
Print Print
Title:______________________ Title:___________________________
NATSTEEL EQUITY III PTE LTD
By:______________________________
Signature
By:______________________________
Print
Title:___________________________
21
<PAGE>
EXHIBIT "B"
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MICROELECTRONIC PACKAGING, INC.
a California corporation
Andrew Wrobel and Denis Trafecanty certify that:
1. They are the President and the Secretary, respectively, of
MICROELECTRONIC PACKAGING, INC., a California corporation.
2. Article III of the Restated Articles of Incorporation of this
corporation is amended to read as follows:
ARTICLE III
-----------
This corporation is authorized to issue two classes of shares to be
designated respectively "Common Stock" and "Preferred Stock." The number of
shares of Common Stock this corporation is authorized to issue is Fifty Million
(50,000,000), without par value. The number of shares of Preferred Stock this
corporation is authorized to issue is Nine Million Three Hundred Sixty Two
Thousand Seven Hundred Seventy Eight (9,362,778), without par value, all of
which are designated as "Series A Preferred Stock."
1. Rights, Preferences, Privileges and Restrictions of Common Stock. The
----------------------------------------------------------------
rights, preferences, privileges and restrictions granted to and imposed on this
corporation's Common Stock are as follows:
A. Dividend Rights. Subject to any rights, preferences and
---------------
privileges that have been granted to the Series A Preferred Stock, the holders
of the Common Stock shall be entitled to receive, when and as declared by the
Board of Directors, out of any assets of the corporation legally available
therefor, such dividends as may be declared from time to time by the Board of
Directors.
B. Liquidation Rights. Subject to any rights, preferences and
------------------
privileges that have been granted to the Series A Preferred Stock, in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
corporation, the holders of shares of the Common Stock shall be entitled to
receive all of the assets of the corporation available for distribution to its
shareholders, ratable in proportion to the number of shares of the Common Stock
held by them.
C. Redemption. The Common Stock is not redeemable.
----------
<PAGE>
D. Voting Rights. Subject to any rights, preferences and privileges
-------------
that have been granted to the Series A Preferred Stock, the holders of shares of
Common Stock shall be entitled to vote on all matters at all meetings of the
shareholders of the corporation and shall be entitled to one vote for each share
of Common Stock entitled to vote at such meeting.
2. Rights, Preferences, Privileges and Restrictions of Series A Preferred
----------------------------------------------------------------------
Stock. The rights, preferences, privileges and restrictions granted to and
- -----
imposed on this corporation's Series A Preferred Stock are as follows:
A. Dividends.
---------
1. Fixed Amount. Out of any assets legally available
------------
therefor, the Board shall have discretion (but shall not be required) to declare
a dividend on the outstanding Series A Preferred Stock at the fixed rate of
Three Point Five Seven Cents ($0.0357) per share per annum (subject to
adjustment to equitably account for any stock splits, stock dividends,
combinations, recapitalizations or the like, and not compounded from one year to
the next) ("Fixed Amount Dividends"). Fixed Amount Dividends shall be payable
only when, as, and if declared by the Board. Fixed Amount Dividends payable to
the holders of Series A Preferred Stock pursuant hereto, whether or not declared
by the Board, shall at all times be cumulative until paid in full, and shall be
paid in preference and priority to any Common Equivalent Dividends (as that term
is defined in Section A(2) below), and any dividend or other distribution being
paid or distributed to the holders of Common Stock.
2. Common Equivalent. Subject to the priority of the Fixed
-----------------
Amount Dividends, in the event the Board declares a dividend on or other
distribution with respect to the corporation's outstanding common stock ("Common
Stock"), which is payable other than in Common Stock and/or other securities or
rights convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock, then out of any assets legally
available therefor, the holders of Series A Preferred Stock shall concurrently
receive dividends or other distributions in an amount equal to (a) the amount of
the dividend or other distribution payable on one share of Common Stock;
multiplied by (b) the number of shares of Common Stock, rounded to the nearest
whole number (with one half being rounded upward), into which the total number
of shares of Series A Preferred Stock held by such holder could be converted on
the record date for determining which holders of Common Stock are entitled to
receive the dividend or other distribution in question ("Common Equivalent
Dividends"). Common Equivalent Dividends payable to the holders of Series A
Preferred Stock pursuant hereto shall at all times be cumulative until paid in
full, and shall be paid in preference and priority to any dividend or other
distribution being paid or distributed to the holders of Common Stock.
3. Treatment Upon Conversion. Upon any conversion of the
-------------------------
Series A Preferred Stock pursuant to the provisions of Section D hereof entitled
Conversion ("Triggering Conversion"), any Fixed Amount Dividends and/or Common
- ----------
Equivalent Dividends payable with respect to the shares of Series A Preferred
Stock being converted (collectively "Conversion Dividends"), shall concurrently
be converted into that number of shares of this corporation's fully paid and
nonassessable Common Stock determined by dividing the dollar amount of the
Conversion Dividends by the Conversion Price applicable to the Triggering
Conversion ("Dividend Conversion Shares"). Otherwise, the provisions of Section
D hereof entitled Conversion shall be applicable to the Dividend Conversion
----------
Shares in the same manner as
2
<PAGE>
such provisions are applicable to any other shares of Common Stock to be issued
pursuant to the Triggering Conversion.
4. Waiver. Pursuant to the affirmative vote, written
------
consent or agreement of the holders of a majority of the then outstanding Series
A Preferred Stock ("Approving Preferred Majority"), the Approving Preferred
Majority shall be entitled on behalf of all holders of Series A Preferred Stock,
to waive any dividend such holders would otherwise be entitled to receive,
including without limitation, any Fixed Amount Dividends and/or Common
Equivalent Dividends (collectively the "Preferred Dividends").
B. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of this corporation, either voluntary or involuntary:
1. Priority Distribution. The holders of Series A Preferred
---------------------
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or funds of this corporation to the holders of Common Stock
by reason of their ownership thereof, an amount per share equal to the sum of
(a) One Dollar and Two Cents ($1.02) for each outstanding share of Series A
Preferred Stock (subject to adjustment to equitably account for any stock
splits, stock dividends, combinations, recapitalizations or the like) ("Original
Series A Issue Price"), plus (b) an amount equal to any declared but unpaid
dividends on such share, including without limitation, any accumulated balance
of Preferred Dividends ("Priority Distribution"). If the assets and funds thus
distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit payment to such holders of the full amount of the
Priority Distribution, then the entire assets and funds of this corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock in proportion to the amount of such
stock owned by each such holder.
2. Acquisition or Sale. For purposes of this Section B
-------------------
entitled Liquidation Preference, a liquidation, dissolution or winding up of
----------------------
this corporation shall be deemed to be occasioned by, or to include (unless an
Approving Preferred Majority shall determine otherwise), (a) the acquisition of
this corporation by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization, merger
or consolidation) that results in the transfer of fifty percent (50%) or more of
the outstanding voting power of this corporation; or (b) a sale of all or
substantially all of the assets of this corporation (collectively "Acquisition
or Sale"). In the event of any Acquisition or Sale, if the consideration
received by this corporation or its shareholders is other than cash, the value
of the non-cash consideration will be deemed to be equal to its fair market
value, except that the value of any securities received in any Acquisition or
Sale shall be determined as follows:
(a) For securities not subject to an investment letter
or other similar restriction on free marketability covered by Section B(2)(b)
below:
(i) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange or system over the
thirty (30) day period ending three (3) days prior to the closing of the
Acquisition or Sale;
(ii) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over
3
<PAGE>
the thirty (30) day period ending three (3) days prior to the closing of the
Acquisition or Sale; or
(iii) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
Board and an Approving Preferred Majority.
(b) The method of valuation of securities subject to
an investment letter or other restriction on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined above in Section B(2)(a), to reflect the approximate fair
market value thereof, as mutually determined by the Board and an Approving
Preferred Majority.
(c) In the event the requirements of this Section
B(2)(c) are not complied with, this corporation shall forthwith either: (i)
cause the closing of the Acquisition or Sale to be postponed until the time such
requirements have been complied with; or (ii) cancel the Acquisition or Sale, in
which event the rights, preferences, privileges and restrictions of the holders
of Series A Preferred Stock shall revert to and be the same as such rights,
preferences, privileges and restrictions existing immediately prior to the date
the first Transaction Notice (as hereafter defined) is given. This corporation
shall give each holder of record of Series A Preferred Stock written notice of
any impending Acquisition or Sale not later than (i) twenty (20) days prior to
the shareholders' meeting called to approve such Acquisition or Sale, or (ii)
twenty (20) days prior to the closing of such Acquisition or Sale, whichever is
earlier, and shall also notify such holders in writing of the final approval of
such Acquisition or Sale (any of the foregoing a "Transaction Notice"). The
first Transaction Notice to be given shall describe the material terms and
conditions of the impending Acquisition or Sale, and this corporation shall
thereafter give holders of record of the Series A Preferred Stock prompt notice
of any material changes in such material terms and conditions ("Material Change
Notice"). The Acquisition or Sale shall in no event take place sooner than
twenty (20) days after this corporation has given the first Transaction Notice,
or sooner than ten (10) days after this corporation has given any Material
Change Notice; provided, however, that such periods may be shortened by an
Approving Preferred Majority.
C. Redemption. To the extent it may otherwise lawfully do so, this
----------
corporation shall be entitled, in the sole discretion of the Board, to redeem
all or any part of the outstanding shares of Series A Preferred Stock, in
accordance and compliance with the following provisions:
1. Notice. Not less than twenty (20) and not more than thirty
------
(30) days prior to the date as of which the Board intends to give effect to a
redemption of some or all of the shares of Series A Preferred Stock ("Redemption
Date"), a written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next preceding
the day on which notice is mailed) of the Series A Preferred Stock to be
redeemed, at the address last shown on the records of this corporation for such
holder, notifying such holder of the redemption to be effected on the applicable
Redemption Date, specifying each of the following: (a) the number of shares to
be redeemed from such holder ("Redemption Shares"); (b) the Redemption Date; (c)
the Series A Redemption Price (as that term is hereafter defined); (d) the then
applicable Conversion Price (as that term is hereafter defined); (e) the date of
termination of the right to convert the Redemption Shares into shares of Common
Stock,
4
<PAGE>
which date shall not be earlier than five (5) days prior to the Redemption Date
("Conversion Termination Date"); and (e) the place at which payment may be
obtained; and shall call upon such holder to surrender to this corporation, in
the manner and at the place designated, his, her or its certificate or
certificates representing the shares to be redeemed ("Redemption Notice").
2. Partial Redemptions to be Pro-Rata. In the event a
----------------------------------
Redemption Notice specifies that less than all of the outstanding shares of
Series A Preferred Stock are to be redeemed, then the number of shares of Series
A Preferred Stock to be redeemed shall be allocated pro-rata among all of the
holders thereof, based on the proportionate number of shares of Series A
Preferred Stock held by each such holder.
3. Conversion Prior to Redemption. Upon receiving a
------------------------------
Redemption Notice, at any time prior the to Conversion Termination Date stated
therein, each holder of Series A Preferred Stock shall be entitled to convert
some or all of the Redemption Shares into shares of Common Stock pursuant to the
provisions of Section D(1) below. Any such conversion shall be deemed to take
place on the Redemption Date. Any shares of Series A Preferred Stock not
converted to shares of Common Stock pursuant hereto shall remain subject to
redemption pursuant to the provisions of this Section C entitled Redemption, and
----------
as set forth in the Redemption Notice. If this corporation fails to carry out
the redemption of any Redemption Shares that are not converted to shares of
Common Stock pursuant to this Section C(3), then in such event, the redemption
described in the Redemption Notice shall be deemed null and void, and any
conversion of shares of Series A Preferred Stock into shares of Common Stock
pursuant hereto, shall also be deemed null and void.
4. Redemption Price. The price per share required to be paid
----------------
by the corporation upon the redemption of any share of Series A Preferred Stock
pursuant hereto shall be equal to the sum of (a) the Original Series A Issue
Price (subject to adjustment to equitably account for any stock splits, stock
dividends, combinations, recapitalizations or the like), plus (b) an amount
equal to any declared but unpaid dividends on such share, including without
limitation, any accumulated balance of Preferred Dividends ("Series A Redemption
Price").
5. Certificates. On or after the Redemption Date, each
------------
of Redemption Shares that have not been converted into shares of Common Stock
pursuant to Section C(3) hereof, shall surrender to this corporation the
certificate or certificates representing such Redemption Shares ("Redemption
Certificates"), in the manner and at the place designated in the Redemption
Notice, and thereupon the applicable Series A Redemption Price shall be payable
to the order of the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
canceled. In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. If on the Redemption Date the funds necessary for the
redemption of the Redemption Shares shall be available therefor, then any
Redemption Shares so called for redemption for which Redemption Certificates are
not surrendered, shall nevertheless be considered redeemed, and all rights of
the holders thereof shall be terminated, except for only the right to receive
the Redemption Price without interest upon the surrender of the Redemption
Certificates.
6. Payment. Concurrently with receiving the Redemption
-------
Certificates, this corporation shall pay the Series A Redemption Price to the
person whose name
5
<PAGE>
appears on the Redemption Certificates, in cash in one lump sum.
7. No Previous Redemption of Common Stock. At all times while
--------------------------------------
any shares of Series A Preferred Stock are outstanding, this corporation shall
not redeem any shares of Common Stock, unless such redemption has been
authorized by an Approving Preferred Majority.
8. Good Faith Modification. Regardless of any of the
-----------------------
provisions of this Section C entitled Redemption, the holders of the outstanding
----------
shares of Series A Preferred Stock shall consider in good faith any request of
the Board to modify the rights, preferences and privileges of such holders
pursuant to this Section C entitled Redemption, if the Board deems such
----------
modification reasonably necessary to permit this corporation to obtain financing
or credit from a financial institution.
D. Conversion. The holders of the Series A Preferred Stock shall
----------
have conversion rights as follows ("Conversion Rights"):
1. Voluntary Conversion. Each share of Series A Preferred
--------------------
Stock shall be convertible, at the option of the holder thereof, (i) at any time
after the date of issuance of such share, and (ii) on or prior to the fifth
(5th) day prior to the Redemption Date, if any, as may have been fixed in any
Redemption Notice with respect to such share of the Series A Preferred Stock, at
the office of this corporation or any transfer agent for such stock ("Voluntary
Conversion"), into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing the Original Series A Issue Price by the
Conversion Price applicable to such share, determined as hereafter provided, in
effect on the date the certificate is surrendered for conversion. The initial
Conversion Price per share for shares of Series A Preferred Stock shall be Fifty
One Cents ($0.51); provided, however, that the Conversion Price for the Series A
Preferred Stock shall be subject to adjustment as set forth in Section D(4)
below.
2. Automatic Conversion. Each share of Series A Preferred
--------------------
Stock shall automatically be converted into shares of Common Stock at the
Conversion Price in effect at that time for the Series A Preferred Stock,
immediately upon this corporation's receipt of the written consent of the
Approving Preferred Majority to the conversion of all then outstanding Series A
Preferred Stock under this Section D.
3. Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he or she shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to this corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. This corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record
6
<PAGE>
holder or holders of such shares of Common Stock as of such date.
Regardless of any of the foregoing provisions, this corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless certificates evidencing the shares of
Series A Preferred Stock being converted are either delivered to the corporation
or any transfer agent as provided herein, or the holder notifies the corporation
or any transfer agent that such certificates have been lost, stolen, or
destroyed and executes an agreement satisfactory to the corporation to indemnify
the corporation from any loss incurred by it in connection therewith.
4. Conversion Price Adjustments of Preferred Stock for
-----------------------------------------------
Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the
- ---------------------------------------------------
Series A Preferred Stock shall be subject to adjustment from time to time as
follows:
(a) If this corporation shall issue, after the date
upon which any shares of Series A Preferred Stock were first issued ("Purchase
Date"), any Additional Stock (as hereafter defined) without consideration or for
a consideration per share less than the Conversion Price for the Series A
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock, the Conversion Price for the Series A Preferred Stock in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this Section D(4)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, (i) the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of the Additional Stock in question (including shares of Common Stock deemed to
be issued pursuant to Section D(4)(f)(i) or (ii) hereof, but not including
shares excluded from the definition of Additional Stock by Section D(4)(g)(ii)
hereof), plus the number of shares of Common Stock that the aggregate
consideration received by this corporation for such issuance would purchase at
such Conversion Price; and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance (including
shares of Common Stock deemed to be issued pursuant to Section D(4)(f)(i) or
(ii) hereof, but not including shares excluded from the definition of Additional
Stock by Section D(4)(g)(ii) hereof), plus the number of shares of Additional
Stock in question.
(b) No adjustment of the Conversion Price for the
Series A Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments that are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward.
(c) Except to the extent provided for in Section
D(4)(f)(iii) and (iv) hereof, and Section D(4)(i) hereof, no adjustment of the
Conversion Price pursuant to this Section D(4) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(d) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
7
<PAGE>
(e) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration shall
be deemed to be the fair market value thereof as determined in good faith by the
Board irrespective of any accounting treatment.
(f) In the case of the issuance (whether before, on
or after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms ultimately convertible
into or exchangeable for Common Stock, or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of Sections D(4)(a) through (g) hereof:
(i) The aggregate maximum number of shares
of Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments), to the
extent then exercisable, of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided in Section D(4)(d) and (e) hereof), if any,
received by this corporation upon the issuance of such options or rights plus
the minimum exercise price provided for in such options or rights (without
taking into account potential antidilution adjustments) for the Common Stock
covered thereby.
(ii) The aggregate maximum number of shares
of Common Stock deliverable upon conversion of, or in exchange for (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments), to the extent then convertible or
exchangeable, any such convertible or exchangeable securities, or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and the subsequent conversion or exchange thereof, shall
be deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to (1) the
consideration, if any, received by this corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends); plus (2) the minimum additional consideration,
if any, to be received by this corporation (without taking into account
potential antidilution adjustments) upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in Sections D(4)(d) and (e)
hereof).
(iii) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, then
the Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
8
<PAGE>
(iv) Upon the expiration of any such options
or rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, to the extent
in any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities that remain in effect) actually issued upon the exercise
of such options or rights, upon the conversion or exchange of such securities or
upon the exercise of the options or rights related to such securities.
(v) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant to Sections
D(4)(f)(i) and (ii) hereof, shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either Section
D(4)(f)(iii) and (iv) hereof.
(g) For purposes of this Section D(4), the term
"Additional Stock" shall mean any shares of Common Stock issued (or deemed to
have been issued pursuant to Section D(4)(f)) by this corporation after the
Purchase Date, except for any of the following:
(i) Common Stock issued pursuant to a
transaction described in Section D(4)(h) below; or
(ii) Common Stock issuable or issued to (1)
employees, consultants or directors of this corporation directly or pursuant to
a stock option plan or restricted stock plan, and such issuance has been
approved by the Board, or (2) vendors or joint venture partners of this
corporation, but only if such issuance is in a transaction with primarily a non-
financing purpose, and has been approved by the Board.
(h) In the event this corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (collectively
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents (with the number of shares issuable
with respect to Common Stock Equivalents determined from time to time in the
manner provided for deemed issuances in Section D(4)(f) hereof).
(i) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock shall be
appropriately increased so that the number of shares of
9
<PAGE>
Common Stock issuable on conversion of each share of such series shall be
decreased in proportion to such decrease in outstanding shares.
5. Other Distributions. In the event this corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section D(4)(h) hereof, then,
in each such case for the purpose of this Section D(5), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of this corporation into which their shares of Series A Preferred Stock
are convertible as of the record date fixed for the determination of the holders
of Common Stock of this corporation entitled to receive such distribution.
6. Recapitalizations. If at any time or from time to time
-----------------
there shall be a recapitalization or reclassification of the Common Stock (other
than a subdivision, combination or merger or sale of assets transaction provided
for elsewhere in this Section D entitled Conversion, or in Section B hereof
----------
entitled Liquidation Preference, provision shall be made so that the holders of
----------------------
the Series A Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series A Preferred Stock the number of shares of stock or
other securities or property of this corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization or reclassification. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section D entitled
Conversion, with respect to the rights of the holders of the Series A Preferred
- ----------
Stock after the recapitalization or reclassification, to the end that the
provisions of this Section D entitled Conversion (including adjustment of the
----------
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
7. No Impairment. This corporation will not, by amendment or
-------------
restatement of its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issuance or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by this corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section D entitled
Conversion, and in the taking of all such action as may be necessary or
- ----------
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment.
8. No Fractional Shares. No fractional shares shall be issued
--------------------
upon the conversion of any share or shares of the Series A Preferred Stock, and
the number of shares of Common Stock to be issued shall be rounded to the
nearest whole share (with one half being rounded upward). Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Series A Preferred Stock the holder is at
the time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
9. Certificate of Adjustment. Upon the occurrence of each
-------------------------
adjustment or readjustment of the Conversion Price of Series A Preferred Stock
pursuant to this Section D entitled Conversion, this corporation, at its
----------
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each
10
<PAGE>
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (a) such adjustment and
readjustment, (b) the Conversion Price for such series of Preferred Stock at the
time in effect, and (c) the number of shares of Common Stock and the amount, if
any, of other property that at the time would be received upon the conversion of
a share of Series A Preferred Stock.
10. Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
11. Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, this corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to the corporation's articles of incorporation.
12. Notices. Any notice required by the provisions of this
-------
Section D entitled Conversion, to be given to the holders of shares of Series A
----------
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this corporation.
E. Voting Rights.
-------------
1. Generally. The holder of each share of Series A Preferred
---------
Stock shall have the right to one vote for each share of Common Stock into which
such Series A Preferred Stock could then be converted, and with respect to such
vote, such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any shareholders' meeting in
accordance with the bylaws of this corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series A
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest
11
<PAGE>
whole number (with one-half being rounded upward).
2. Board of Directors Election and Removal.
---------------------------------------
(a) Election. So long as any shares of Series A Preferred
--------
Stock are outstanding: (i) the holders of the Series A Preferred Stock, voting
as a separate series (with cumulative voting rights as among themselves in
accordance with Section 708 of the California Corporations Code), shall be
entitled to elect one (1) director of this corporation; and (ii) the holder of
the Series A Preferred Stock and the Common Stock, voting together as a single
class (with cumulative voting rights as among themselves in accordance with
Section 708 of the California Corporations Code), shall be entitled to elect the
remaining directors of this corporation.
(b) Quorum; Required Vote.
---------------------
(i) Quorum. At any meeting held for the purpose of
------
electing directors, the presence in person or by proxy: (A) of the holders of a
majority of the shares of the Series A Preferred Stock shall constitute a quorum
of the Series A Preferred Stock for the election of directors to be elected
solely by the holders of the Series A Preferred Stock; and (B) of holders of
Series A Preferred Stock and Common Stock representing a majority of the voting
power of all the then-outstanding shares of the directors to be elected jointly
by the holders of the Series A Preferred Stock and the Common Stock.
(ii) Required Vote. With respect to the election of
-------------
any director or directors by the holders of the outstanding shares of a
specified series, series', class or classes of stock given the right to elect
such director or directors pursuant to Section E(2)(a) above (the "Specified
Stock"), that candidate or those candidates (as applicable), shall be elected
who either: (i) in the case of any such vote conducted at a meeting of the
holders of such Specified Stock, receive the highest number of affirmative votes
of the outstanding shares of such Specified Stock, up to the number of directors
to be elected by such Specified Stock; or (ii) in the case of any such vote
taken by written consent without a meeting, are elected by the unanimous written
consent of the holders of the shares of such Specified Stock, except that, if
such vote is to fill a vacancy on the Board other than a vacancy created by
removal of a director, such vacancy may be filled election by the written
consent of the holders of a majority of the outstanding shares of such Specified
Stock.
(c) Vacancy. If there shall be any vacancy in the office
-------
of a director elected by the holders of any Specified Stock pursuant to Section
E(2)(a), then a successor to hold office for the unexpired term of such director
may be elected by either: (i) the remaining director or directors (if any) in
the office that were so elected by the holders of such Specified Stock, by the
affirmative vote of a majority of such directors (or by the sole remaining
director elected by the holders of such Specified Stock if there be but one); or
(ii) the required vote of holders of the shares of such Specified Stock
specified in Section E(2)(b)(ii) above that are entitled to elect such director
under Section E(2)(a).
(d) Removal. Subject to Section 303 of the California
-------
Corporations Code, any director who shall have been elected to the Board by the
holders of any Specified Stock pursuant to Section E(2)(a) or by any director or
directors elected by holder of any Specified Stock as provided in Subsection
E(2)(c), may be removed during his or her term of
12
<PAGE>
office, either with or without cause, by, and only by, the affirmative vote of
shares representing a majority of the voting power of all the outstanding shares
of such Specified Stock entitled to vote given either at a meeting of such
shareholders duly called for that purpose or pursuant to a written consent of
shareholders without a meeting, and any vacancy created by such removal may be
filled only in the manner provided in Section E(2)(c).
(e) Procedures. Any meeting of the holders of any
----------
Specified Stock, and any action taken by the holders of any Specified Stock
written consent without a meeting, in order to elect or remove a director under
this Section E(2), shall be held in accordance with the procedures and
provisions of this corporation's bylaws, the California Corporations Code and
applicable law regarding shareholder meetings and shareholder actions by written
consent, as such are then in effect (including, but not limited to, procedures
for determining the record date for shares entitled to vote).
F. Protective Provisions. So long as any shares of Series A
---------------------
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least two thirds (2/3) of the then outstanding shares of Series A
Preferred Stock:
1. Sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed of;
2. Alter or change the rights, preferences or privileges of
the shares of Series A Preferred Stock.
3. Increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock;
4. Authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security senior to or on a parity with the Series A
Preferred Stock with respect to dividends, liquidation, redemption or voting;
5. Redeem, purchase or otherwise acquire (or pay into or
set aside for a sinking fund for such purpose) any share or shares of the
capital stock of this corporation; provided, however, that this restriction
shall not apply to (i) the repurchase of shares of Common Stock from employees,
officers, directors, consultants or other persons performing services for this
corporation or any subsidiary pursuant to agreements under which this
corporation has the option to repurchase such shares at cost, or at cost upon
the occurrence of certain events, such as the termination of employment, or (ii)
the redemption of any share or shares of Preferred Stock in accordance with the
provisions of Section C hereof entitled Redemption;
----------
6. Amend or otherwise modify this corporation's articles of
incorporation in such a manner as to alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock so as to adversely affect
such shares;
7. Declare or pay any dividends or other distributions of
any kind
13
<PAGE>
on or with respect to shares of Common Stock (other than such a dividend payable
solely in the form of shares of Common Stock);
8. Declare or pay any dividends or other distributions of
any kind on or with respect to shares of Series A Preferred Stock, except for
Fixed Amount Dividends.
9. Take any other action with respect to which the holders
of Series A Preferred Stock are entitled to vote and/or grant approval as a
separate class or series under the applicable laws of the State of California.
10. Reclassify any outstanding shares of securities of this
corporation into shares having rights, preferences or privileges senior to or on
a parity with the Series A Preferred Stock.
G. Status of Redeemed or Converted Stock. In the event any shares of
-------------------------------------
Series A Preferred Stock shall be redeemed or converted pursuant to Section C
hereof entitled Redemption, or Section D hereof entitled Conversion, the shares
---------- ----------
so redeemed or converted shall be canceled.
3. The foregoing amendment of Amended and Restated Articles of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment of Amended and Restated Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 and Section 903 of the California Corporations Code.
The total number of outstanding shares of this corporation's Common Stock is not
more than Eleven Million (11,000,000). There are no outstanding shares of this
corporation's Preferred Stock. The number of shares of this corporation's
Common Stock
[The remainder of this page has been intentionally left blank.]
14
<PAGE>
voting in favor of the Amendment equaled or exceeded the vote required. The
percentage vote required was more than fifty percent (50%).
The undersigned further declare under penalty of perjury under the
laws of the State of California that the matters set forth in this certificate
are true and correct of their own knowledge.
Date: _____________, 1999
___________________________________ ____________________________________
Andrew K. Wrobel Denis J. Trafecanty
Chairman, President and Senior Vice President
Chief Executive Officer Chief Financial Officer
15
<PAGE>
EXHIBIT "C"
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Agreement") is entered
into at San Diego, California, effective as of this day ______, 1999 ("Effective
Date"), between Microelectronic Packaging, Inc. ("Company"); and Transpac
Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd
("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"),
and Natsteel Equity III Pte Ltd ("Natsteel Equity") (each an "Investor" or
"Holder," and collectively the "Investor Group" or the "Holders"). This
Registration Agreement is entered into between the Company and the Investor
Group pursuant to the provisions of Section 6.1 of the Debt Conversion and
Mutual Settlement and Release Agreement ("Conversion Agreement") entered into
between the Company and the Investor Group as of the Effective Date.
1. Defined Terms. In addition to those terms defined elsewhere in this
-------------
Registration Agreement, the following terms shall have the meanings defined for
such terms in this Section 1:
(a) "33 Act" means the Securities Act of 1933, as amended.
(b) "Form S-3" means such form under the 33 Act as in effect on
the date hereof or any registration form under the 33 Act subsequently adopted
by the Securities and Exchange Commission ("Commission") that permits inclusion
or incorporation of substantial information by reference to other documents
filed by the Company with the Commission.
(c) "Holder" means any person owning or having the right to
acquire Registrable Securities, or any assignee thereof in accordance with
Section 8 hereof.
(d) "34 Act" means the Securities Exchange Act of 1934, as
amended.
(e) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 33 Act, and the declaration or ordering
of effectiveness of such registration statement or document.
(f) "Registrable Securities" means (i) common stock of the
Company issuable or issued upon conversion of the Series A Preferred Stock; and
(ii) any common stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security that is issued as) a
dividend or other distribution with respect to, or in exchange for, or in
replacement of any Registrable Securities, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which rights under
this Registration Agreement are not assigned in accordance with this
Registration Agreement.
<PAGE>
(g) The number of shares of "Registrable Securities" outstanding
shall be determined by the number of shares of Common Stock outstanding that
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities that are, Registrable Securities.
(h) "Common Stock" means common stock of the Company.
(i) "Series A Stock" means the Series A Preferred Stock of the
Company.
1. Registration. Subject to all of the provisions of this Registration
------------
Agreement, commencing as of the Effective Date, the Company shall use best
efforts to cause be registered under the 33 Act, all, or as many as reasonably
possible of the Registrable Securities, by means of a Form S-3 registration
statement, or if the use of Form S-3 is not then available, then by means of
such other Form(s) as may be available in connection with the Registrable
Securities (all subsequent references herein to Form S-3 shall be deemed to
include references to such other Form(s) unless expressly provided otherwise);
provided, however, that the Company shall not be obligated to effect any such
registration any of the following situations:
(a) If the Holders, together with the holders of any other securities
of the Company entitled to inclusion or otherwise included in such registration,
propose to sell securities of the Company on Form S-3 at an aggregate price to
the public of less than One Million Five Hundred Thousand Dollars
($1,500,000.00), provided, however, that such One Million Five Hundred Thousand
Dollar ($1,500,000.00) minimum shall not apply if the Holders represent in
writing to the Company that they intend to dispose of at least Two Million
(2,000,000) shares of Registrable Securities; or
(b) Within one hundred and twenty (120) days after the filing and/or
effective date of any other registration filed pursuant hereto.
(c) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, unless the Company is already subject to service in such
jurisdiction and except as may be required under the 33 Act.
In addition, during such times as the Company is causing Registrable
Securities to be registered under the 33 Act pursuant to this Registration
Agreement, the Company shall not register or attempt to register any other
securities of the Company under the 33 Act for purposes of effecting a public
offering of such securities without the prior written consent of a majority in
interest of the holders of Series A Preferred Stock, except for (a)
registrations of Registrable Securities held by other holders of Series A
Preferred Stock pursuant to registration agreements substantially the same as
this Registration Agreement; and (b) registrations relating to an employee
benefit plan of the Company or a business combination involving the Company.
2
<PAGE>
2. Company's Duties. In connection with any registration effected by the
----------------
Company pursuant hereto, the Company will keep each Holder advised in writing as
to the initiation of the registration and as to the completion thereof. The
Company shall:
(a) File a Form S-3 registration statement with the Securities and
Exchange Commission ("Commission") not later than six (6) months after the
Effective Date, and to the extent practicable, cause such registration statement
to be declared effective within 45 days of such filing. However, in the event
such registration statement is not on Form S-3, then the 45 day period set forth
in the immediately preceding sentence shall be extended to 90 days.
(b) Keep the registration statement effective for one year after the
effective date of such registration statement.
(c) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 33 Act with respect to the disposition of all securities
covered by such registration statement.
(d) Furnish such number of prospectuses and other documents incident
to such registration statement, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request.
(e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 33 Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances then
existing, and shall promptly prepare and file with the Commission either a
supplement to such prospectus, or an amendment to such registration statement,
or a filing under the 34 Act, which is incorporated by reference into such
registration statement (and in the case of an amendment to such registration
statement use the Company's best efforts to cause such amendment to become
effective as soon as reasonably possible), as may be necessary so that, as
thereafter delivered to purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in light of the circumstances
then existing, and at the request of any Holder, shall furnish to such Holder a
reasonable number of copies of such supplement, amendment or filing under the 34
Act.
(f) Cause all Registrable Securities registered hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed.
(g) Use reasonable, diligent efforts to register and qualify the
securities covered by such registration statement under such other securities
laws or Blue Sky laws of such jurisdictions as shall be reasonably requested by
the Holders, provided that the Company shall
3
<PAGE>
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions.
(h) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering.
(i) Furnish, at the request of any Holder of Registrable Securities
included in such registration, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective: (1) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders of
Registrable Securities included in such registration, addressed to the
underwriters, if any, and to the Holders of Registrable Securities included in
such registration; and (2) a "comfort" letter dated as of such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders of Registrable Securities included in such
registration, addressed to the underwriters, if any, and to the Holders of
Registrable Securities included in such registration.
3. Limiting Provisions. In connection with any offering involving an
-------------------
underwriting of shares of the Company's capital stock, the Company shall not be
required by reason of this Registration Agreement, to include any of the
Registrable Securities in such underwriting, unless the Holders accept the terms
of the underwriting as agreed upon between the Company and the underwriters
selected by it (or by other persons entitled to select the underwriters), and
then only in such quantity as the underwriters determine in their sole
discretion will not jeopardize the success of the offering or have a material
adverse effect on the price of or market for the Company's capital stock. If
the total amount of securities, including Registrable Securities, to be included
in such offering exceeds the amount of securities to be sold (other than by the
Company) that the underwriters determine in their sole discretion is compatible
with the success of the offering, then the Company shall be required to include
in the offering only that number of securities, including Registrable
Securities, which the underwriters determine in their sole discretion will not
jeopardize the success of the offering (the securities so included to be
apportioned pro rata among the selling shareholders possessing contractual
registration rights, according to the total amount of securities entitled to be
included therein that are owned by each selling shareholder, or in such other
proportions as shall mutually be agreed to by such selling shareholders);
provided, however, that the number of shares of Registrable Securities to be
- -------- -------
included in such underwriting and registration shall not be reduced unless all
other securities of the Company (including, without limitation, securities held
by officers, directors and employees of the Company and other shareholders of
the Company who do not have contractual registration rights), are first entirely
excluded from the underwriting and
4
<PAGE>
registration. Any Registrable Securities excluded and withdrawn from such
underwriting shall be withdrawn from the registration.
4. Information from Holder. It shall be a condition precedent to the
-----------------------
obligations of the Company to take any action pursuant to this Registration
Agreement with respect to the Registrable Securities of any selling Holder that
such Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
5. Expenses of Registration. All expenses other than underwriting
------------------------
discounts and commissions incurred in connection with registrations, filings or
qualifications, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of one
counsel for the selling Holders, shall be borne by the Company. Notwithstanding
the foregoing, the Company shall not be required to pay for any expenses of any
registration begun pursuant to this Registration Agreement if the registration
request is subsequently withdrawn at the request of the Holders of a majority of
the Registrable Securities to be registered, which request shall be binding on
all Holders of the Registrable Securities (in which case all participating
Holders shall bear such expenses pro rata based on the relative number of
Registrable Securities held by each Holder that were to be included in the
withdrawn registration); provided, however, that if at the time of such
withdrawal, the Holders have learned of a material adverse change in the
condition, business, or prospects of the Company not known to the Holders as of
the Effective Date and have withdrawn their request for registration with
reasonable promptness after learning of such material adverse change, then the
Holders shall not be required to pay any of such expenses and shall retain their
rights hereunder.
6. Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Registration Agreement.
7. Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement pursuant to this Registration Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners or officers, directors and shareholders
of each Holder, legal counsel and accountants for each Holder, any underwriter
(as defined in the 33 Act) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of the 33 Act or the 34 Act,
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the 33 Act, the 34 Act or any state securities
laws, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (each a "Violation"): (i) any untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a
5
<PAGE>
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the 33 Act, the 34 Act, any state securities laws or any rule or
regulation promulgated under the 33 Act, the 34 Act or any state securities
laws; and the Company will reimburse each such Holder, underwriter or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 7(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter or controlling person; provided further, however,
that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Holder or underwriter, or any
person controlling such Holder or underwriter, from whom the person asserting
any such losses, claims, damages or liabilities purchased shares in the
offering, if a copy of the prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Holder or underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the shares to such person, and if the prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability.
(b) To the extent permitted by law, each selling Holder will indemnify and
hold harmless the Company, each of its directors, each of its officers who has
signed the registration statement, each person, if any, who controls the Company
within the meaning of the 33 Act, legal counsel and accountants for the Company,
any underwriter, any other Holder selling securities in such registration
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages or liabilities (joint or several) to which
any of the foregoing persons may become subject, under the 33 Act, the 34 Act or
any state securities laws, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any person intended to be indemnified
pursuant to this Section 7(b), for any legal or other expenses reasonably
incurred by such person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder (which consent shall
not be unreasonably withheld), provided that in no event shall any indemnity
under this Section 7(b) exceed the net proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action (including any governmental action),
such
6
<PAGE>
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other indemnified parties
that may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 7, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 7.
(d) If the indemnification provided for in this Section 7 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section 7
shall survive the completion of any offering of Registrable Securities in a
registration statement filed by the Company.
8. Assignment of Registration Rights. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant hereto may be assigned (but only with
all related obligations) by a Holder to a transferee or assignee of such
securities that (i) is a subsidiary, parent, partner, limited partner, retired
partner or shareholder of a Holder, (ii) is a Holder's family member or trust
for the benefit of an individual Holder, or (iii) after such assignment or
7
<PAGE>
transfer, holds at least Fifty Percent (50%) of the Holder's original number of
Registrable Securities (subject to appropriate adjustment for stock splits,
stock dividends, combinations and other recapitalizations), provided: (a) the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned, (b) such
transferee or assignee agrees in writing to be bound by and subject to all of
the terms and conditions of this Agreement, and (c) such assignment shall be
effective only if immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the 33 Act.
9. "Market Stand-Off" Agreement. Each Holder hereby agrees that it will
---------------------------
not, without the prior written consent of the managing underwriter, during the
period commencing on the date of the final prospectus relating to any public
offering of securities by the Company, and ending on the date specified by the
Company and the managing underwriter (such period not to exceed one hundred
eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities are then owned by the Holder or are thereafter acquired), or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Common Stock,
whether any such transaction described in clause (i) or (ii) immediately above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The underwriters in connection with any public offering of
securities by the Company are intended third party beneficiaries of this Section
9 and shall have the right, power and authority to enforce the provisions hereof
as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
10. Miscellaneous Provisions.
------------------------
10.1 Exhibits. All exhibits described in this Registration Agreement
--------
are incorporated by reference as if fully set forth herein, and constitute a
material part of this Registration Agreement, whether or not such exhibits are
attached hereto.
10.2 Governing Law. This Registration Agreement shall in all
-------------
respects be construed, interpreted and enforced in accordance with and governed
by the laws of the State of California, United States of America. Any legal
action between the parties regarding this Registration Agreement shall be
brought in, and the parties hereby consent to the jurisdiction of and venue in,
the federal and state courts located in the County of Los Angeles, State of
California, United States of America.
8
<PAGE>
10.3 Notices. Any notice, demand or other communication required or
-------
permitted under this Registration Agreement shall be deemed given and delivered
when in writing and (a) personally served upon the receiving party, or (b) upon
the third (3rd) calendar day after mailing to the receiving party by either (i)
United States registered or certified mail, postage prepaid, or (ii) FedEx or
other comparable overnight delivery service, delivery charges prepaid, and
addressed as follows:
To Company: Microelectronic Packaging, Inc.
9577 Chesapeake Drive
San Diego, CA 92123
Attn: Chief Executive Officer
To any member of Transpac Capital Pte Ltd
the Investor Group 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Attn: Wong Lin Hong
Any party may change the address specified in this section by giving the other
party notice of such new address in the manner set forth herein.
10.4 Severability. In the event that any provision of this
------------
Registration Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or invalid, then this Registration
Agreement shall continue in full force and effect without said provision. If
this Registration Agreement continues in full force and effect as provided
above, the parties shall replace the invalid provision with a valid provision
which corresponds as far as possible to the spirit and purpose of the invalid
provision.
10.5 Counterparts. This Registration Agreement may be executed in
------------
any number of counterparts, each of which may be executed by less than all of
the parties hereto, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall constitute
one document.
10.6 Entire Agreement. This Registration Agreement, the Ancillary
----------------
Agreements, and the documents and agreements contemplated herein and therein,
constitute the entire agreement between the parties with respect to the subject
matter hereof, and supersede all prior oral or written agreements,
representations or warranties between the parties other than those set forth
herein or herein provided for.
10.7 Successors and Assigns. Except as specifically permitted
----------------------
pursuant to the terms and conditions hereof, no party shall be permitted to
assign their respective rights or obligations under this Registration Agreement
without the prior written consent of the other parties. The provisions hereof
shall inure to the benefit of, and be binding upon, the permitted successors and
assigns, heirs, executors, and administrators of the parties hereto.
9
<PAGE>
10.8 Amendment and Waiver. No modification or waiver of any
--------------------
provision of this Registration Agreement shall be binding upon the party against
whom it is sought to be enforced, unless specifically set forth in writing
signed by an authorized representative of that party. A waiver by any party of
any of the terms or conditions of this Registration Agreement in any one
instance shall not be deemed or construed to be a waiver of such terms or
conditions for the future, or of any subsequent breach thereof. The failure by
any party hereto at any time to enforce any of the provisions of this
Registration Agreement, or to require at any time performance of any of the
provisions hereof, shall in no way to be construed to be a waiver of such
provisions or to affect either the validity of this Registration Agreement or
the right of any party to thereafter enforce each and every provision of this
Registration Agreement.
10.9 Survivability. All of the representations, warranties,
-------------
agreements and obligations of the parties pursuant to this Registration
Agreement shall survive any registration of the Registrable Shares pursuant
hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Registration
Agreement as of the date first above written.
MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD
By:_______________________________ By:_______________________________
Signature Signature
Print Print
Name:_____________________________ Name:_____________________________
Print Print
Title:____________________________ Title:____________________________
10
<PAGE>
TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD
By:_______________________________ By:_______________________________
Signature Signature
Print Print
Name:_____________________________ Name:_____________________________
Print Print
Title:____________________________ Title:____________________________
NATSTEEL EQUITY III PTE LTD
By:_______________________________
Signature
Print
Name:_____________________________
Print
Title:____________________________
11
<PAGE>
EXHIBIT "D"
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
No. WCS-1
WARRANT TO PURCHASE COMMON STOCK
of
MICROELECTRONIC PACKAGING, INC.
Void after April 24, 2003
This certifies that, for valid and good consideration, 2 (the
"Holder") is entitled, subject to the terms set forth below, to purchase from
Microelectronic Packaging, Inc. (the "Company"), a California corporation, the
number of shares of the Common Stock of the Company, as constituted on the date
hereof, upon surrender hereof, at the principal office of the Company referred
to below at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of such shares of Common Stock are subject to
determination and adjustment as provided below.
1. Term of Warrant. Subject to the terms and conditions set forth
---------------
herein, this Warrant shall be exercisable, in whole or in part, at any time or
from time to time on or after April 24, 1998. This Warrant shall expire at 5:00
p.m., Pacific Standard Time, on April 24, 2003 without any action on the part of
any party (the "Expiration Date").
2. Exercise Price. The exercise price at which this Warrant may be
--------------
exercised shall be $1.00 per share of Common Stock, as adjusted from time to
time pursuant to Section 11 hereof (the "Exercise Price"), payable either by
cash or check or by net exercise pursuant to Section 4.d.
3. Number of Shares. The Holder is entitled, subject to the
----------------
provisions of this Warrant, to purchase from the Company an aggregate of 3 fully
paid and nonassessable shares of Common Stock of the Company (subject to
adjustment as provided herein) (the "Warrant Shares").
4. Exercise of Warrant.
-------------------
<PAGE>
a. Subject to the terms and conditions set forth herein, the
purchase rights represented by this Warrant are exercisable by the Holder in
whole or in part, at any time, or from time to time, during the term hereof as
described in Section 1 above, and such exercise shall be effected by the
surrender of this Warrant, the Notice of Paid Exercise annexed hereto and upon
payment of the Exercise Price in cash or by check.
b. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person or persons entitled to receive the
shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of record of such shares as of the close of business on
such date. As promptly as practicable on or after such date, the Company at its
expense shall issue and deliver to the person or persons entitled to receive the
same a certificate or certificates for the number of shares issuable upon such
exercise.
c. Upon any partial exercise of this Warrant, there shall be
issued to the Holder hereof a new Warrant certificate in respect of the Warrant
Shares as to which the Warrant Shares evidenced by this Warrant certificate
shall not have been exercised. This Warrant certificate may be exchanged at the
office of the Company by surrender of this Warrant certificate properly endorsed
either separately or in combination with one or more other Warrant certificates
for one or more new Warrant certificates evidencing the right of the Holder
thereof to purchase the same aggregate number of Warrant Shares as were
purchasable upon exercise of this Warrant evidenced by the Warrant certificate
or certificates exchanged. No fractional shares will be issued upon the exercise
of any Warrant, but the Company will pay the cash value thereof determined as
provided in this Warrant. This Warrant certificate is transferable at the office
of the Company in the manner and subject to the limitations set forth in this
Warrant.
d. In lieu of exercising this Warrant by paying the Exercise
Price in cash or by check, Holder may elect to receive shares equal to the value
of this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company together with the Notice of Net
Exercise annexed hereto in which event the Company shall issue to Holder a
number of shares of the Company's Common Stock, computed using the following
formula:
Where X - The number of shares of Common Stock to be
issued to Holder.
X= (Y)(A-B)
--------
A
Y - The number of shares of Common Stock covered by this
Warrant to be canceled pursuant to such exercise under
this Warrant.
A - The fair market value of one share of the Company's
Common Stock,
<PAGE>
B - Exercise Price (as adjusted to the date of such
calculations).
For purposes of this Section 4.d., the fair market value of one share
of the Company's Common Stock as of any date shall be determined as follows:
(1) if such stock is then quoted on the Nasdaq Stock
Market, American Stock Exchange or New York Stock Exchange, its average closing
price on such market or exchange calculated over the 30 trading days immediately
preceding the date of determination, as reported in The Wall Street Journal;
-----------------------
(2) if such stock is publicly traded and is then listed
on a national securities exchange, its average closing price calculated over the
30 trading days immediately preceding the date of determination on the principal
national securities exchange on which the stock is listed or admitted to trading
as reported in The Wall Street Journal;
-----------------------
(3) if such stock is publicly traded, but is not quoted
on the Nasdaq Stock Market nor listed or admitted to trading on a national
securities exchange, the mean of the average closing bid and asked prices
calculated over the 30 trading days immediately preceding the date of
determination as reported in The Wall Street Journal (or, if not so reported, as
-----------------------
otherwise reported by any newspaper or other source as the Board of Directors of
the Company may determine in good faith); or
(4) if none of the foregoing is applicable, as
determined by the Board of Directors of the Company in good faith; provided,
however, that if Transpac (as defined below), acting as agent for the Warrant
Holders (as defined below), objects to such determination, then as determined by
an investment banker or accountant mutually acceptable to the Company and
Transpac (as defined below), with the costs of such appraisal to be borne by
Transpac (as defined below).
If the Company's Common Stock is not publicly traded, the Board of
Directors of the Company shall inform the Warrant Holders (as defined below) of
its good faith determination of the fair market value of such Common Stock upon
the written request of any Warrant Holder (as defined below).
e. The Company hereby represents and covenants that the
Warrant Shares (or other securities) received upon exercise of this Warrant are
and will be listed, admitted to trading or authorized for quotation on any stock
market or securities exchange upon which the Common Stock or any other
securities of the Company are then listed, admitted to trading or authorized for
quotation.
5. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
6. No Rights of Shareholder. The Holder shall not be entitled to
------------------------
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the
<PAGE>
Company that may at any time be issuable on the exercise hereof for any purpose,
nor shall anything contained herein be construed to confer upon the Holder, as
such, any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the shares of Common
Stock purchasable upon the exercise hereof shall have been issued, as provided
herein.
7. Transfer of Warrant.
-------------------
a. Warrant Register. The Company will maintain a register
----------------
(the "Warrant Register") containing the names and addresses of the Holder or
Holders. Any Holder of this Warrant or any portion thereof may change his
address as shown on the Warrant Register by written notice to the Company
requesting such change. Any notice or written communication required or
permitted to be given to the Holder may be delivered or given by mail to such
Holder as shown on the Warrant Register and at the address shown on the Warrant
Register. Until this Warrant is transferred on the Warrant Register of the
Company, the Company may treat the Holder as shown on the Warrant Register as
the absolute owner of this Warrant for all purposes.
b. Non-transferability and Non-Negotiability of Warrant.
----------------------------------------------------
This Warrant may not be transferred or assigned without compliance with all
applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company). Any Holder of this
Warrant or Warrant Shares (i) that is a partnership or like organization may
distribute or transfer all or any portion of such securities to its partners or
affiliated entities, or (ii) that is a corporation or other entity may
distribute or transfer all or any portion of such securities to its subsidiaries
or its parent company or entity, and, in each case, shall not be obligated to
provide the Company with any securities laws opinion of counsel with respect to
such distribution or transfer.
c. Compliance with Securities Laws.
-------------------------------
(1) Authorization. Holder has full power and authority to
-------------
enter into this Warrant, and such Warrant constitutes its valid and legally
binding obligation, enforceable in accordance with its terms.
(2) Purchase Entirely for Own Account. This Warrant has
---------------------------------
been purchased by the Holder for such Holder's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and such Holder has no present intention of selling, granting any participation
in, or otherwise distributing the same. Such Holder does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer, or
grant participation to any person with respect to this Warrant or underlying
shares of Common Stock.
(3) Disclosure of Information. Such Holder acknowledges
-------------------------
that it has received all the information that it has requested in connection
with the purchase of this Warrant, including the Company's filings with the
Securities and Exchange Commission.
<PAGE>
Holder further represents that it has had an opportunity to ask questions and
receive answers from the Company, as well as to consult its own legal, tax and
other advisors, regarding the information provided and the terms and conditions
of the offering of this Warrant. Holder represents and warrants that it is
prepared to lose its entire interest in this Warrant and the underlying shares
of Common Stock and has not relied on the Company or any of the Company's
advisors in determining whether to make this investment in the Company.
(4) Investment Experience. Holder acknowledges that it is
---------------------
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in this Warrant and
the underlying shares of Common Stock. Such Holder also represents it has not
been organized for the purpose of acquiring this Warrant.
(5) Accredited Investor.
-------------------
(A) Holder is an "accredited investor" as defined
below and understands the meaning of that term.
(B) The term "accredited investor" as used herein
refers to:
(a) Any bank as defined in section 3(a)(2) of the
Act, or any savings and loan association or other institution as defined in
section 3(a)(5(A) of the Act whether acting in its individual or fiduciary
capacity; any broker dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in
section 2(13) of the Act; any investment company registered under the
Investment Borrower Act of 1940 or any business development company as
defined in section 2(a)(48) of that Act; any Small Business Investment
Borrower licensed by the U.S. Small Business Administration under section
301(c) or (d) of the Small Business Investment Act of 1958; any plan
established and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political subdivisions, for the
benefit of its employees, if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974, if the investment decision is made
by a plan fiduciary, as defined in section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit plan has total
assets in excess of $5,000,000 or, if a self-directed plan, with investment
decisions made solely by persons that are accredited investors;
(b) Any private business development company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940;
(c) Any organization described in section
501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or
similar business trust, or partnership, not formed for the specific purpose
of acquiring the securities offered, with total assets in excess of
$5,000,000;
<PAGE>
(d) Any director, executive officer, or general partner of the
issuer of the securities being offered or sold, or any director, executive
officer, or general partner of a general partner of that issuer;
(e) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase exceeds
$1,000,000;
(f) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year;
(g) Any trust with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits
and risks of the prospective investment or the issuer believes immediately
prior to making any sale that such person comes within this description; or
(h) Any entity in which all of the equity owners are accredited
investors.
As used in this Section, the term "net worth" means the excess of
total assets over total liabilities. For the purpose of determining a person's
net worth, the principal residence owned by an individual should be valued at
fair market value, including the cost of improvements, net of current
encumbrances. As used in this Section, "income" means actual economic income,
which may differ from adjusted gross income for income tax purposes.
Accordingly, the Holder should consider whether it should add any or all of the
following items to its adjusted gross income for income tax purposes in order to
reflect more accurately its actual economic income: any amounts attributable to
tax-exempt income received, losses claimed as a limited partner in any limited
partnership, and deductions claimed for depletion.
(6) Restricted Securities. The Holder understands that this Warrant
---------------------
and underlying Common Stock it is purchasing are characterized as "restricted
securities" under U.S. federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
without registration under such laws and applicable regulations and cannot be
resold without registration under the Act, except in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with SEC Rule 144, as currently in effect, and understands the resale
limitations imposed on these securities by the Act.
(7) Representations by Foreign Investor. The Holder 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 this Warrant and
underlying shares of Common Stock, including (i) the legal requirements within
its jurisdiction for the purchase of this Warrant and underlying shares of
Common Stock, (ii) any foreign exchange restrictions applicable to
<PAGE>
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 this
Warrant and underlying shares of Common Stock. The Holder's subscription and
payment for, and its continued beneficial ownership of this Warrant, will not
violate any applicable securities or other laws of its jurisdiction.
(8) Compliance with Securities Laws. Unless otherwise provided
-------------------------------
herein, without in any way limiting the representations set forth above, the
Holder further agrees not to make any disposition of all or any portion of this
Warrant or any shares of Common Stock to be issued upon exercise hereof unless
and until the transferee has agreed in writing for the benefit of the Company to
be bound by the terms of this Warrant, provided and to the extent such sections
are then applicable, and:
(A) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(B) (1) the Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition and (2) the Holder shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
securities under the Act.
8. Legends. This Warrant and all shares of Common Stock issued upon
-------
exercise hereof will bear one or all of the following legends; provided, that if
this Warrant is exercised under Section 4.d. on or after the second anniversary
of the date of issuance of this Warrant, the legend in paragraph (A) below shall
be removed unless in the opinion of counsel reasonably acceptable to the Holder
such legend is required by applicable law:
(A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE WITH THE ACT."
(B) Any legend required by the laws of the State of California or
other applicable authority, including any legend required by the California
Department of Corporations and Sections 417 and 418 of the California
Corporations Code.
9. Reservation of Stock. The Company covenants that during the term
--------------------
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to amend its articles of incorporation to provide
sufficient reserves of shares of Common Stock issuable upon
<PAGE>
exercise of this Warrant. The Company further covenants that all shares that may
be issued upon the exercise of rights represented by this Warrant, upon exercise
of the rights represented by this Warrant and payment of the Exercise Price, all
as set forth herein, will be free from all taxes, liens, and charges in respect
of the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously or otherwise specified herein) and will be fully paid and non-
assessable. The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
10. Amendments and Waivers.
----------------------
a. Any term of this Warrant may be amended or waived with
the written consent of the Company and the Holder.
b. No waivers of or exceptions to any term, condition or
provision of this Warrant, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such term, condition or
provision.
11. Adjustments. The number of shares purchasable hereunder are
-----------
subject to adjustment from time to time as follows:
a. Merger, Sale of Assets, etc. If at any time, while this
----------------------------
Warrant, or any portion thereof, is outstanding and unexpired there shall be (i)
a reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger (other than
a mere reincorporation merger where the subsidiary or affiliate of the Company
used to effectuate the reincorporation merger assumes all of the Company's
obligations under this Warrant) or consolidation of the Company with or into
another corporation in which the Company is not the surviving entity, or a
merger in which the Company is the surviving entity but the shares of the
Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash, or otherwise, or (iii) a sale or transfer of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or transfer,
lawful provision shall be made so that the holder of this Warrant shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Exercise Price then in effect or
by net exercise pursuant to Section 4.d., the number of shares of stock or other
securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer which a holder of the
shares deliverable upon such exercise of this Warrant would have been entitled
to receive in such reorganization, consolidation, merger, sale or transfer, if
this Warrant had been exercised immediately before the consummation of such
reorganization, merger, consolidation, sale or transfer, all subject to further
adjustment as provided in this Section 11. The foregoing provisions of this
Section 11(a) shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation which are at the time receivable upon the exercise of this
Warrant. If the per share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as
<PAGE>
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Holder after the transaction, to the end that the provisions of
this Warrant shall be applicable after that event, as near as reasonably may be,
in relation to any shares or other property deliverable after that event upon
exercise of this Warrant.
b. Reclassification, etc. If the Company at any time while
----------------------
this Warrant, or any portion thereof, remains outstanding and unexpired shall,
by reclassification of securities or otherwise, change any of the securities as
to which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities which were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change, and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
c. Split, Subdivision or Combination of Shares. If the
-------------------------------------------
Company at any time while this Warrant, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, this Warrant shall thereafter represent the right
to acquire such number of securities as would have been issuable as the result
of such change with respect to the securities which were subject to the purchase
rights under this Warrant immediately prior to such change, and the Exercise
Price for such securities shall be proportionately decreased in the case of a
split or subdivision or proportionately increased in the case of a combination.
d. Adjustments for Dividends in Stock or Other Securities or
---------------------------------------------------------
Property. If while this Warrant, or any portion hereof, remains outstanding and
- --------
unexpired the holders of the securities as to which purchase rights under this
Warrant exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible shareholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property of the Company by way of dividend, then and in each case,
this Warrant shall represent the right to acquire, in addition to the number of
shares of the security receivable upon exercise of this Warrant, and without
payment of any additional consideration therefor, the amount of such other or
additional stock or other securities or property of the Company which such
holder would hold on the date of such exercise had it been the holder of record
of the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the date
of such exercise, retained such shares and/or all other additional stock
available by it as aforesaid during such period, giving effect to all
adjustments called for during such period by the provisions of this Section 11.
e. Prior Notice of Certain Events. The Company will provide
------------------------------
Holder with notice of any merger, asset sale or dividend not less than ten (10)
business days prior to the record date for such event.
12. Registration of Warrant Shares.
------------------------------
<PAGE>
a. Company Registration. If (but without any obligation to
--------------------
do so) the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the Warrant
Holders (as defined below)) any of its common stock under the Act in connection
with the public offering of such securities solely for cash (other than a
registration relating solely to the sale of securities to participants in a
Company stock plan or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities which are
also being registered), the Company shall, at such time, promptly give each
Warrant Holder thirty (30) days prior written notice of such registration. Upon
the written request of each Warrant Holder given within twenty (20) days after
mailing of notice of such registration by the Company in accordance with Section
13.b., the Company shall, subject to the provisions of Section 12.d., at the
Company's expense, cause to be registered under the Act all of the Warrant
Shares that each Warrant Holder has requested to be registered.
b. Demand Registration. Beginning April 24, 1999, Holders
-------------------
of at least 50% of the Warrant Shares issued or issuable pursuant to all of the
Warrants issued in connection with to the Restructuring, Settlement and Mutual
Release Agreement (the "Settlement Agreement") dated April 24, 1998 by and among
the Company, Transpac Capital Pte Ltd ("Transpac"), Transpac Industrial Holdings
Ltd, Regional Investment Company Ltd and Natsteel Equity III Pte Ltd (the
"Warrant Holders") shall have the right to request the filing of a registration
statement on Form S-3 but if the use of Form S-3 is not then available, then on
such other Form(s) as may be available to sell the Warrant Shares (and all
subsequent references herein to Form S-3 shall be deemed to be references to
such other Form(s) as well unless expressly provided otherwise) (such requests
shall be in writing and shall state the number of shares of Warrant Shares to be
disposed of and the intended methods of disposition of such shares by such
Holder or Holders); provided, however, that the Company shall not be obligated
to effect any such registration if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Warrant Shares and such other securities (if any) on Form S-3 at
an aggregate price to the public of less than $1,000,000, (provided that such
$1,000,000 minimum shall not apply if the Warrant Holders represent in writing
to the Company that they intend to dispose of at least 250,000 Warrant Shares)
or (ii) after the Company has effected one (1) such registration pursuant to
such a request of the Holders.
c. Company Obligations. In the case of each registration
-------------------
effected by the Company pursuant to Section 12.b., the Company will keep each
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will use its best efforts
to:
(1) File such S-3 registration statement with the
Securities and Exchange Commission within 45 days of receipt of a request
pursuant to Section 12.b. and, to the extent practicable, cause such
registration statement to be declared effective within 45 days of such request.
In the event that such registration statement is not on Form S-3, then the 45
day periods set forth in the immediately preceding sentence shall be extended to
90 days.
(2) Keep the registration statement effective for one
year after the effective date of such registration statement;
<PAGE>
(3) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(4) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(5) Notify each seller of Warrant Shares covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and shall promptly prepare and file with the
Securities and Exchange Commission either a supplement to such prospectus or
amendment to such registration statement or a filing under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), which is incorporated by
reference into such registration statement (and in the case of an amendment to
such registration statement use its best efforts to cause such amendment to
become effective as soon as possible), as may be necessary so that, as
thereafter delivered to purchasers of such shares, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or incomplete in light of the circumstances then existing, and at the
request of any such seller, shall furnish to such seller a reasonable number of
copies of such supplement, amendment or filing under the 1934 Act;
(6) Cause all such Warrant Shares registered pursuant hereunder
to be listed on each securities exchange on which similar securities issued by
the Company are then listed.
d. Limiting Provisions.
-------------------
(1) Notwithstanding the provisions of Section 12.a., if the
Company shall furnish to the Holders requesting inclusion in a registration
statement pursuant to Section 12.a., a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be detrimental to the Company and its
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer taking action with respect to such filing for a period
of not more than 120 days after receipt of the request for such registration;
provided, however, that the Company may not utilize this right more than once in
any twelve-month period.
(2) In connection with any offering involving an underwriting of
shares of the Company's capital stock, the Company shall not be required under
Section 12.a., to include any of the Warrant Shares in such underwriting, unless
the Warrant Holders accept the terms of the underwriting as agreed upon between
the Company and the underwriters selected by
<PAGE>
it (or by other persons entitled to select the underwriters), and then only in
such quantity as the underwriters determine in their sole discretion will not,
jeopardize the success of the offering or have a material adverse effect on the
price of or market for the Company's capital stock. If the total amount of
securities, including Warrant Shares, requested by shareholders to be included
in such offering exceeds the amount of securities to be sold (other than by the
Company) that the underwriters determine in their sole discretion is compatible
with the success of the offering, then the Company shall be required to include
in the offering only that number of such securities, including Warrant Shares,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders possessing contractual registration rights
according to the total amount of securities entitled to be included therein
owned by each selling shareholder or in such other proportions as shall mutually
be agreed to by such selling shareholders). The limitations contained in this
Section 12.c.(3) could result in no Warrant Shares being sold in a particular
underwriting. Officers, directors and employees of the Company, as well as other
shareholders who do not have contractual registration rights, will not be
permitted to participate in the registration unless the registration request of
the Warrant Holders is fully satisfied.
13. Miscellaneous.
-------------
a. Governing Law. This Warrant shall be governed by and
-------------
construed under the laws of California. The parties to this Warrant hereby (i)
irrevocably submit to the jurisdiction of the courts of Singapore, the courts of
the State of California, and the Federal courts of the United States sitting in
the State of California for the purpose of any action or proceeding arising out
of or relating to this Warrant and any other documents and instruments relating
hereto, (ii) agree that all claims in respect of any such action or proceeding
may be heard and determined in such courts, (iii) irrevocably waive (to the
extent permitted by applicable law) any objection which it now or hereafter may
have to the laying of venue of any such action or proceeding brought in any of
the foregoing courts, and any objection on the ground that any such action or
proceeding in any such court has been brought in an inconvenient forum and (iv)
agree that a final judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner permitted by law.
b. Notices. Unless otherwise provided, any notice required
-------
or permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof in the case of the
Company, and on the Warrant Register in the case of the Holder, or at such other
address as such party may designate by ten (10) days' advance written notice to
the other parties.
c. Counterparts. This Warrant may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
d. Successor and Assigns. This Warrant shall bind and
---------------------
benefit the Holder and each of its successors and assigns and the Company and
each of its successors and assigns.
<PAGE>
IN WITNESS WHEREOF, each of Microelectronic Packaging, Inc., and the
Holder has caused this Warrant to be executed by one of its duly authorized
officers or such other authorized person or entity.
Dated: April 24, 1998 MICROELECTRONIC PACKAGING, INC.
By:
______________
(Print Name of Signatory)
Title:
4
By:
______________
(Print Name of Signatory)
Title:
<PAGE>
NOTICE OF PAID EXERCISE
-----------------------
To: MICROELECTRONIC PACKAGING, INC.
(1) The undersigned hereby elects to purchase __________ shares of
Common Stock of Microelectronic Packaging, Inc. pursuant to Section 4(a) of the
attached Warrant, and tenders herewith payment of the purchase price for such
shares.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell, or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended, or any state
securities laws or unless sold pursuant to Rule 144 of such Act.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
[Name]
And, if said number of shares of Common Stock shall not be all the
shares of Common Stock purchasable under the within Warrant certificate, a new
Warrant certificate is to be issued in the name of said undersigned for the
balance remaining of the Warrant Shares purchasable thereunder less any fraction
of a share paid in cash.
<PAGE>
NOTICE OF NET EXERCISE
----------------------
To: MICROELECTRONIC PACKAGING, INC.
(1) The undersigned hereby elects to purchase __________ shares of
Common Stock of Microelectronic Packaging, Inc. pursuant to Section 4.d. of the
attached Warrant, such that an additional number of shares of Common Stock under
the Warrant will be cancelled in respect of the purchase price in the manner set
forth in Section 4.d.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell, or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended, or any state
securities laws or unless sold pursuant to Rule 144 of such Act.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
[Name]
And, if number of shares of Common Stock being cancelled pursuant to
Section 4.d. of the Warrant shall not be all the shares of Common Stock
purchasable under the within Warrant certificate, a new Warrant certificate is
to be issued in the name of said undersigned for the balance remaining of the
Warrant Shares purchasable thereunder less any fraction of a share paid in cash.
<PAGE>
EXHIBIT "D"
FIRST AMENDMENT
TO
WARRANT TO PURCHASE COMMON STOCK
OF
MICROELECTRONIC PACKAGING, INC.
No. WCS-1
THIS FIRST AMENDMENT ("First Amendment") TO WARRANT TO PURCHASE COMMON
STOCK OF MICROELECTRONIC PACKAGING, INC. ("Warrant"), is entered into effective
as of June _______, 1999 ("Effective Date") between Microelectronic Packaging,
Inc., a California corporation ("MPI"), and Transpac Capital Pte. Ltd. (the
"Holder"), with respect to the Warrant to Purchase Common Stock of MPI No. WCS-1
dated April 24, 1998, between MPI and Holder ("Warrant").
This First Amendment is entered into pursuant to Section 6.1(b) of the Debt
Conversion and Mutual Settlement and Release Agreement dated April 29, 1999
("Conversion Agreement"), entered into between (a) MPI on behalf of itself and
its predecessors, successors, former and current subsidiaries, affiliates,
shareholders, directors, officers, agents, attorneys, representatives, insurers,
employees and assigns; and (a) Transpac Capital Pte Ltd, Transpac Industrial
Holdings Ltd, Regional Investment Company Ltd, and Natsteel Equity III Pte Ltd,
and their respective predecessors, successors, former and current subsidiaries,
affiliates, shareholders, directors, officers, agents, attorneys,
representatives, insurers, employees and assigns.
1. Amendment of Warrant. MPI and Holder hereby agree that Section 2 of
--------------------
the Warrant shall be amended by deleting it in its entirety and replacing it
with the following new Section 2:
2. Exercise Price. The exercise price at which this Warrant may
--------------
be exercised shall be Fifty Cents ($0.50) per share of Common Stock,
as adjusted from time to time pursuant to Section 11 hereof (the
"Exercise Price"), payable either by cash or check or by net exercise
pursuant to Section 4.d.
2. No Other Amendments. Except for the amendment to the Warrant described
-------------------
in Section 1 of this First Amendment, no other provisions of the Warrant are
amended or changed by virtue of this First Amendment, and all other provisions
of the Warrant remain in full force and effect without any amendments or changes
thereto.
<PAGE>
3. Consideration. MPI and Holder agree that their respective rights and
-------------
obligations under the Conversion Agreement constitute sufficient consideration
to cause the provisions of this First Amendment to be enforceable against MPI
and Holder in accordance with its terms.
IN WITNESS WHEREOF, MPI and Holder have executed this First Amendment as of
the Effective Date.
MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE. LTD.
a California corporation
By: ____________________________ By: _____________________________
Signature Signature
Print Print
Name: __________________________ Name: ___________________________
Print Print
Title:__________________________ Title: __________________________
<PAGE>
EXHIBIT "E"
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT is entered into effective as of June _____,
1999 ("Effective Date"), between STMicroelectronics, Inc. ("ST"), and FI
Financial, LLC ("FIF"), with respect to the payment by FIF of a cash lump sum in
the amount of Five Hundred Thousand United States Dollars (US$500,000.00)
("Investor Payment"), in exchange for the assignment by ST to FIF pursuant to
the terms and conditions hereof, of all of ST's rights, title, claims and
interest in, under and pursuant to each and every one of the following
agreements and documents: (a) Deed of Guarantee and Indemnity dated August 17,
1995, entered into between Microelectronic Packaging, Inc. ("MPI") and SGS-
Thompson Microelectronics Pte Limited ("SGS") ("Guaranty"); (b) a document
entitled "Charge" dated August 17, 1995, entered into between Microelectronic
Packaging (S) PTE LTD ("MPS") and SGS ("Charge"); (c) Supply Guarantee and
Preferred Allocation Agreement dated July, 1995, between MPS and SGS ("Supply
Agreement"); (d) Supplemental Agreement to Supply Guarantee and Preferred
Allocation Agreement dated August 17, 1995 and October 19, 1995, entered into
between MPS and SGS ("Supplemental Agreement"); (e) Warrant to Purchase Common
Stock of MPI dated September 24, 1998, pursuant to which ST is entitled to
purchase an aggregate of Two Hundred Thousand (200,000) shares of MPI's common
stock at a price of One Dollar ($1.00) per share ("Warrant"); (f) the Judgment
by Confession and Stipulated Judgment dated September 24, 1998, between MPI and
ST, and all agreements and documents related thereto ("Judgments"); and (g)
Restructuring, Settlement and Mutual Release Agreement dated September 24, 1998,
entered into between, among others, ST and MPI (all of the foregoing agreements
and documents are referred to collectively in this letter as the "ST
Agreements").
FOR VALUE RECEIVED, and in consideration of the payment to ST of the
Investor Payment, ST hereby completely assigns, conveys and transfers to FIF,
all of ST's rights, title, claims and interests in, under and pursuant to each
and every one of the ST Agreements ("Assignment").
In connection with the Assignment, ST represents and warrants to FIF
that as of the Effective Date, ST is the sole and exclusive owner of all of the
rights, title, claims and interests of SGS and ST in, under and pursuant to the
ST Agreements, and that ST has not assigned, conveyed or otherwise transferred
any interest in or any portion of the ST Agreements to any party other than FIF.
Otherwise, ST does not make any additional representations or warranties of any
kind with respect to the ST Agreements. Regardless of any other provision of
this Assignment Agreement, FIF represents, warrants and agrees that:
(a) FIF is a sophisticated and experienced investor who has the
capability to evaluate the risks of the transactions contemplated by this
Assignment Agreement, and has the ability to protect FIF's own interests in
connection therewith.
1
<PAGE>
(b) FIF has performed whatever due diligence review FIF deems
necessary and/or appropriate in connection with the transactions contemplated by
this Assignment Agreement, and is satisfied with the results of such due
diligence review.
(c) FIF has not requested that ST make, and ST has not made and
is not making, any representations or warranties of any kind regarding the
propriety of FIF's contemplated acquisition of the ST Agreements, the value or
enforceability of any rights ST may have under the ST Agreements, the value or
enforceability of any rights FIF may have as an assignee of the ST Agreements,
the value or enforceability of any rights FIF may have to acquire shares of
capital stock of MPI by virtue of FIF's acquisition of the ST Agreements, or the
current or potential value of any of such shares of capital stock
IN WITNESS WHEREOF, ST and FIF have executed and delivered this
Assignment Agreement as of the Effective Date.
STMICROELECTRONICS, INC. FI FINANCIAL, LLC
By:__________________________________ By:_____________________________
Steven K. Rose, Vice President James T. Waring, Manager
2
<PAGE>
ASSIGNMENT OF INTEREST
UNDER
LETTER AGREEMENT
WITH
STMICROELECTRONICS, INC.
THIS ASSIGNMENT OF INTEREST UNDER LETTER AGREEMENT WITH
STMICROELECTRONICS, INC. ("Assignment"), is entered into effective as of April
21, 1999 ("Effective Date"), between FI Financial, LLC ("FIF"), and the party
whose name appears below, which party is referred to herein as the "Assignee":
_____________________________________________________________________________
PRINT NAME OF "ASSIGNEE"
Unless otherwise defined herein, all capitalized terms appearing in
this Assignment shall have the meanings defined for such terms in the letter
agreement dated April 14, 1999, entered into between FIF, STMicroelectronics,
Inc. ("ST"), and Microelectronic Packaging, Inc. ("MPI") ("Letter Agreement").
Pursuant to the Letter Agreement, FIF and ST have opened an escrow
with Mission Valley Escrow ("Escrow Account"), and FIF has deposited into the
Escrow Account the amount of Five Hundred Thousand Dollars ($500,000.00).
Pursuant to this Assignment, Assignee desires to acquire from FIF an
interest in the Escrow Account, and a corresponding interest under the Letter
Agreement, all in accordance with the provisions of this Assignment.
FOR VALUE RECEIVED, FIF hereby assigns and transfers to Assignee, and
Assignee hereby accepts from FIF, an interest in the Escrow Account ("Assigned
Interest") in the dollar amount appearing below, which dollar amount is referred
to herein as the "Escrow Reimbursement":
______________________________________________________________________________
PRINT APPLICABLE DOLLAR AMOUNT FOR "ESCROW REIMBURSEMENT"
In exchange for receiving the Assigned Interest, Assignee hereby
directs Ross, Dixon & Bell, LLP ("RDB") to withdraw the amount of the Escrow
Reimbursement from RDB's Client Trust Account, which amount was received by RDB
from Assignee for the purpose of acquiring the Assigned Interest, and
immediately pay the amount of the Escrow Reimbursement to FIF or its assignee,
which assignee may be designated by James T. Waring.
3
<PAGE>
By executing this Assignment where indicated below, Assignee confirms
that Assignee has acquired the Assigned Interest in exchange for the Escrow
Reimbursement, and FIF confirms that FIF has in fact assigned and transferred
the Assigned Interest to Assignee, which shall be deemed to be a portion of the
Escrow Account in an amount equal to the Escrow Reimbursement.
Furthermore, by executing this Assignment where indicated below,
Assignee hereby authorizes FIF to act as the agent for Assignee in connection
with all matters pertaining to the Escrow Account, subject to the limitation
that Assignee's portion of the Escrow Account in an amount equal to the Escrow
Reimbursement ("Assignee's Balance") shall be withdrawn from the Escrow Account
only for the following purposes ("Authorized Purposes"): (a) to pay the amount
of Assignee's Balance to ST pursuant to the terms and conditions of the Letter
Agreement, but only after Assignee has executed and delivered to MPI a
counterpart copy of the Debt Conversion and Mutual Settlement and Release
Agreement and the other agreements related thereto, that pertain to the shares
of MPI's Series A Preferred Stock that are being acquired by Assignee in
exchange for Assignee's Balance ("ST Transaction"); or (b) in the event the ST
Transaction for any reason is not completed on or before June 30, 1999 (or such
later date as may be agreed upon in writing by Assignee), to pay the amount of
Assignee's Balance to Assignee upon the closing of the Escrow Account.
Assignee agrees that FIF has consented to act as agent for Assignee in
connection with the Escrow Account solely for the convenience of Assignee, and
that FIF shall not have any liabilities or obligations of any kind to Assignee
in connection with the Escrow Account, unless and only unless FIF authorizes
Assignee's Balance to be withdrawn from the Escrow Account for any reason other
than the Authorized Purposes, without Assignee's written approval.
Assignee agrees that all of the funds on deposit in the Escrow Account
are being invested at a nominal rate of interest roughly equivalent to the rate
of interest generally paid by national banks on funds deposited in passbook
savings accounts, and that for the convenience of the parties, FIF shall be
entitled to collect and retain all of the interest earned on the funds deposited
in the Escrow Account. FIF expects the amount of such interest to be minor and
nominal, and Assignee agrees that the amount of such interest will not be
material to Assignee under the circumstances and should be paid to FIF for the
convenience of the parties.
IN WITNESS WHEREOF, the undersigned have executed this Assignment as
of the Effective Date.
FI FINANCIAL, LLC ASSIGNEE
By:________________________________ _________________________________
James T. Waring, Manager Signature
4
<PAGE>
_________________________________
Print Name
5
<PAGE>
EXHIBIT "F"
IBM PROCEEDS AGREEMENT
THIS IBM PROCEEDS AGREEMENT ("IBM Agreement") is entered into
effective as of this day _________, 1999 ("Effective Date"), between
Microelectronic Packaging, Inc. ("MPI"), on behalf of itself and its
predecessors, successors, former and current subsidiaries, affiliates,
shareholders, directors, officers, agents, attorneys, representatives, insurers,
employees and assigns (collectively with MPI the "MPI Group"); and Transpac
Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd
("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"),
and Natsteel Equity III Pte Ltd ("Natsteel Equity"), and their respective
predecessors, successors, former and current subsidiaries, affiliates,
shareholders, directors, officers, agents, attorneys, representatives, insurers,
employees and assigns (collectively the "Investor Group"). This IBM Agreement is
being entered into between the MPI and the Investor Group pursuant to the
applicable terms and conditions of the Debt Conversion and Mutual Settlement and
Release Agreement dated as of the Effective Date ("Conversion Agreement"),
entered into between the MPI Group and the Investor Group. Unless otherwise
defined herein, capitalized terms appearing in this IBM Agreement shall have the
meanings defined for such terms in the Conversion Agreement.
1. Defined Terms. In addition to defined terms whose meanings may be
-------------
defined elsewhere in this IBM Agreement or in the Conversion Agreement, the
following terms shall have the meanings defined for such terms in this Section
1:
1.1 "Covered Agreements" means one or both of the following
agreements entered into by and between MPI and International Business Machines
Corporation ("IBM"): (a) the Purchase Option Agreement dated August 4, 1994 by
and between IBM and MPI; and (b) the Multilayer Technology Transfer and
Licensing Agreement dated August 4, 1994 between IBM and MPI.
1.2 "Covered Payments" means the gross monetary proceeds MPI
receives directly from IBM or any agent of IBM pursuant to any cash settlement,
monetary award granted pursuant to court-ordered arbitration or mediation
proceedings, or court order based upon claims for monetary damages, in any
manner arising under any one or both of the Covered Agreements.
1.3 "Net MPI Proceeds" means the Covered Payments, less (a) the
first Three Million Three Hundred Thirty Three Thousand Dollars and Thirty Three
Cents ($3,333,333.33) of Covered Payments MPI receives, (b) any portion of the
Covered Payments that MPI is obligated to pay, and in fact pays, to MPI's legal
counsel and/or other parties other than the Investor Group or the Development
Bank of Singapore Limited ("DBS"), in exchange for such legal counsel's and/or
other parties' services in seeking enforcement of the Covered Agreements and
collection of the Covered Payments ("Compensation Payments"), and (c) the total
amount of all fees and expenses MPI has incurred that are directly related to
seeking
<PAGE>
enforcement of the Covered Agreements and/or collection of the Covered Payments,
including without limitation, legal fees and expenses, but excluding any amount
included in Compensation Payments ("Enforcement Expenses"). In the event the
Covered Payments are to be paid in a series of installments ("Installment
Payments"), then the total amount of the Compensation Payments and the
Enforcement Expenses ("Covered Payment Deductions") shall be spread out and
applied to each of the Installment Payments on a pro-rata basis, meaning that
each of the Installment Payments shall be reduced by an amount calculated by
multiplying the total amount of the Covered Payment Deductions by a fraction,
the numerator of which is the amount of the Installment Payment in question, and
the denominator of which is the total amount of all of the Installment Payments
to be paid. The number resulting from this multiplication shall be the Net MPI
Proceeds with respect to the Installment Payment in question.
2. Investor Group Percentages. Not later than thirty (30) days after
--------------------------
MPI receives any Net MPI Proceeds, MPI shall pay to the respective members of
the Investor Group a percentage of the Net MPI Proceeds ("Investor Group
Payments") equal to the percentage set forth opposite the name of such member as
follows ("Investor Group Percentage"):
Name of Member of Investor Group Percentage of Net MPI Proceeds
--------------------------------------------------------------------
Transpac Capital 12.090%
Transpac Holdings 11.900%
Regional Investment 3.280%
Natsteel Equity 2.730%
--------------------------------------------------------------------
TOTAL for all members of the Investor Group 30.000%
In the event the Covered Payments are to be paid in a series of
installments, (a) then not later than thirty (30) days after MPI receives a
particular Installment Payment, MPI shall pay to the respective members of the
Investor Group an amount equal to the Installment Payment in question,
multiplied by the applicable Investor Group Percentage.
3. Consideration. MPI and the Investor Group agree that their
-------------
respective rights and obligations under the Conversion Agreement constitute
sufficient consideration to cause the provisions of this IBM Agreement to be
enforceable against the MPI Group and the Investor Group in accordance with its
terms.
4. Miscellaneous Provisions.
------------------------
4.1 Governing Law. This IBM Agreement shall in all respects be
-------------
construed, interpreted and enforced in accordance with and governed by the laws
of the State of California, United States of America. Any legal action between
the parties regarding this IBM Agreement shall be brought in, and the parties
hereby consent to the jurisdiction of and venue in,
2
<PAGE>
either (a) the federal and state courts located in the County of San Diego,
State of California, United States of America; or (b) the courts located in the
country of Singapore.
4.2 Notices. Any notice, demand or other communication required
-------
or permitted under this IBM Agreement shall be deemed given and delivered when
in writing and (a) personally served upon the receiving party, or (b) upon the
third (3rd) calendar day after mailing to the receiving party by either (i)
United States registered or certified mail, postage prepaid, or (ii) FedEx or
other comparable overnight delivery service, delivery charges prepaid, and
addressed as follows:
To MPI: Microelectronic Packaging, Inc.
9577 Chesapeake Drive
San Diego, CA 92123
Attn: Chief Executive Officer
To any member of Transpac Capital Pte Ltd
the Investor Group 6 Shenton Way
#20-09 DBS Building
Tower Two
Singapore 068809
Attn: Wong Lin Hong
Any party may change the address specified in this section by giving the other
party notice of such new address in the manner set forth herein.
4.3 Severability. In the event that any provision of this IBM
------------
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or invalid, then this IBM Agreement shall continue in
full force and effect without said provision. If this IBM Agreement continues in
full force and effect as provided above, the parties shall replace the invalid
provision with a valid provision which corresponds as far as possible to the
spirit and purpose of the invalid provision.
4.4 Counterparts. This IBM Agreement may be executed in any
------------
number of counterparts, each of which may be executed by less than all of the
parties hereto, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
document.
4.5 Entire Agreement. This IBM Agreement, the Conversion
----------------
Agreement, the other Ancillary Agreements, and the documents and agreements
contemplated herein and therein, constitute the entire agreement between the
parties with respect to the subject matter hereof, and supersede all prior oral
or written agreements, representations or warranties between the parties other
than those set forth herein or herein provided for.
4.6 Successors and Assigns. Except as specifically permitted
----------------------
pursuant to the terms and conditions hereof, no party shall be permitted to
assign their respective rights or
3
<PAGE>
obligations under this IBM Agreement without the prior written consent of the
other parties. The provisions hereof shall inure to the benefit of, and be
binding upon, the permitted successors and assigns, heirs, executors, and
administrators of the parties hereto.
4.7 Amendment and Waiver. No modification or waiver of any
--------------------
provision of this IBM Agreement shall be binding upon the party against whom it
is sought to be enforced, unless specifically set forth in writing signed by an
authorized representative of that party. A waiver by any party of any of the
terms or conditions of this IBM Agreement in any one instance shall not be
deemed or construed to be a waiver of such terms or conditions for the future,
or of any subsequent breach thereof. The failure by any party hereto at any time
to enforce any of the provisions of this IBM Agreement, or to require at any
time performance of any of the provisions hereof, shall in no way to be
construed to be a waiver of such provisions or to affect either the validity of
this IBM Agreement or the right of any party to thereafter enforce each and
every provision of this IBM Agreement.
4.8 Survivability. All of the representations, warranties,
-------------
agreements and obligations of the parties pursuant to this IBM Agreement shall
survive any issuance of the Shares by MPI to the Investor Group.
IN WITNESS WHEREOF, the parties hereto have duly executed this IBM
Agreement as of the date first above written.
MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD
By:____________________________ By:_______________________________
Signature Signature
Print Print
Name:__________________________ Name:_____________________________
Print Print
Title:_________________________ Title:____________________________
[The remainder of this page has been intentionally left blank.]
4
<PAGE>
CONTINUATION OF SIGNATURES FOR
IBM PROCEEDS AGREEMENT
dated __________, 1999
TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD
By:____________________________ By:___________________________
Signature Signature
Print Print
Name:__________________________ Name:_________________________
Print Print
Title:_________________________ Title:________________________
NATSTEEL EQUITY III PTE LTD
By:___________________________
Signature
Print
Name:_________________________
Print
Title:________________________
5
<PAGE>
EXHIBIT "G"
April 14, 1999
VIA FAX TRANSMISSION
- --------------------
(972) 466-7044
- --------------
AND REGULAR MAIL
- ----------------
Steven K. Rose, Esq.
Vice President, Secretary and
General Counsel
STMicroelectronics, Inc.
1310 Electronics Drive
M. S. 2346
Carrollton, Texas 75006
Re: Microelectronic Packaging, Inc.
Dear Mr. Rose:
The purpose of this letter is to provide a statement of the good faith
intent and agreement of STMicroelectronics, Inc. ("ST"), Microelectronic
Packaging, Inc. ("MPI") and FI Financial, LLC ("FIF"), with respect to the
complete assignment and transfer by ST to FIF (and by FIF at its discretion to
certain employees of Microelectronic Packaging, Inc. ("MPI") and certain non-
employees of MPI ("Investor Group")), of all of ST's rights, title, claims and
interests in, under and pursuant to the following agreements and documents: (a)
Deed of Guarantee and Indemnity dated August 17, 1995, entered into between MPI
and SGS-Thompson Microelectronics Pte Limited ("SGS") ("Guaranty"); (b) a
document entitled "Charge" dated August 17, 1995, entered into between
Microelectronic Packaging (S) PTE LTD ("MPS"), and SGS ("Charge"); (c) Supply
Guarantee and Preferred Allocation Agreement dated July, 1995, between MPS and
SGS ("Supply Agreement"); (d) Supplemental Agreement to Supply Guarantee and
Preferred Allocation Agreement dated August 17, 1995 and October 19, 1995,
entered into between MPS and SGS ("Supplemental Agreement"); (e) Warrant to
Purchase Common Stock of MPI dated September 24, 1998, pursuant to which ST is
entitled to purchase an aggregate of Two Hundred Thousand (200,000) shares of
MPI's common stock at a price of One Dollar ($1.00) per share ("Warrant"); (f)
the Judgment by Confession and Stipulated Judgment dated September 24, 1998,
between MPI and ST, and all agreements and documents related thereto
("Judgments"); and (g) Restructuring, Settlement and Mutual Release Agreement
dated September 24, 1998, entered into between, among others, ST and MPI
("Settlement Agreement") (all of the foregoing agreements and documents are
referred to collectively in this letter as the "ST Agreements").
<PAGE>
1. In addition to those terms that may be defined elsewhere in this
letter, the following terms shall have the meanings defined in this Section 1.
1.1 "Transpac Conversion" means the conversion of indebtedness
in the amount of principal and interest owed by MPM (S) Pte. Ltd. ("MPM") and
guaranteed by MPI in the aggregate to Transpac Capital Pte Ltd ("Transpac
Capital"), Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional
Investment Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd
("Natsteel Equity") (collectively the "Transpac Entities"), accrued as of
December 31, 1997 (which is the entire amount MPI and the Transpac Entities have
agreed is due and payable), into Four Million Thirty One Thousand Eight Hundred
and Twenty Six (4,031,826) shares of Series A Preferred Stock, or such other
amounts as may be agreed upon between such parties.
1.2 "DBS Conversion" means the conversion of indebtedness in the
amount of principal and interest owed by MPM and MPS and guaranteed by MPI to
Development Bank of Singapore Limited ("DBS"), accrued as of December 31, 1997
(which is the entire amount MPI and DBS have agreed is due and payable), into
One Million One Hundred Fifty Four Thousand Three Hundred and Eleven (1,154,311)
shares of Series A Preferred Stock, or such other amounts as may be agreed upon
between such parties.
1.3 "Motorola Conversion" means the conversion of indebtedness
in the amount of principal and interest owed by MPS and guaranteed by MPI to
Motorola, Inc. ("Motorola"), accrued as of December 31, 1997 (which is the
entire amount MPI and Motorola have agreed is due and payable), into Eight
Hundred Sixty Nine Thousand Nine Hundred Thirty Two (869,932) shares of Series A
Preferred Stock, or such other amounts as may be agreed upon between such
parties.
1.4 "NS Electronics Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPI to NS
Electronics Bangkok (1993) Ltd. ("NS Electronics"), accrued as of December 31,
1997 (which is the entire amount MPI and NS Electronics have agreed is due and
payable), into Two Hundred Seventy One Thousand One Hundred Seventy Six
(271,176) shares of Series A Preferred Stock, or such other amounts as may be
agreed upon between such parties.
1.5 "Orix Leasing Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPM and MPS and
guaranteed by MPI to Orix Leasing Singapore Limited ("Orix Leasing"), accrued as
of December 31, 1997 (which is the entire amount MPI and Orix Leasing have
agreed is due and payable) into Four Hundred Seventy Three Thousand Five Hundred
Eighty Four (473,584) shares of Series A Preferred Stock, or such other amounts
as may be agreed upon between such parties.
1.6 "Samsung Corning Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPS and guaranteed
by MPI to Samsung Corning Co., Ltd. ("Samsung Corning"), accrued as of December
31, 1997 (which is
2
<PAGE>
the entire amount MPI and Samsung have agreed is due and payable) into One
Hundred Eighty Three Thousand Two Hundred Seventy Five (183,275) shares of
Series A Preferred Stock, or such other amounts as may be agreed upon between
such parties.
1.7 "Texas Instruments Conversion" means the conversion of
indebtedness in the amount of principal and interest owed by MPS and guaranteed
by MPI to Texas Instruments Incorporated ("Texas Instruments"), accrued as of
December 31, 1997 (which is the entire amount MPI and Texas Instruments have
agreed is due and payable) into One Million Fifty Six Thousand and Twenty Seven
(1,056,027) shares of Series A Preferred Stock, or such other amounts as may be
agreed upon between such parties.
1.8 "Other Creditor Conversions" means collectively the Transpac
Conversion, the DBS Conversion, the Motorola Conversion, the NS Electronics
Conversion, the Orix Leasing Conversion, the Samsung Corning Conversion, and the
Texas Instruments Conversion.
1.9 "Other Creditors" means collectively the Transpac Entities,
DBS; Motorola ; NS Electronics; Orix Leasing; Samsung Corning; and Texas
Instruments.
2. None of the funds to be paid by FIF or any member of the Investor
Group to ST in exchange for the assignment and transfer of the ST Agreements
will have been obtained from MPI.
3. Assuming the terms and conditions of this letter and the Escrow
Instructions (as hereafter defined) are satisfied, all of the rights, title,
claims and interests of ST in, under and pursuant to the ST Agreements will be
transferred to FIF, and none of such rights, title, claims and interests will be
transferred to MPI. ST agrees that, pursuant to agreements that will be entered
into between FIF and members of the Investor Group, certain portions of the
interests obtained by FIF in the ST Agreements will be assigned by FIF to
members of the Investor Group. However, the respective rights and obligations of
FIF and ST pursuant to this letter and the Escrow Instructions (as hereafter
defined) shall not be affected in any manner by any assignment or lack of
assignment by FIF to members of the Investor Group or any other party, of any
portion of FIF's interests in the ST Agreements. Regardless of any other
provision of this letter, the Escrow Instructions (as hereafter defined) or the
Assignment Agreement (as hereafter defined), FIF represents, warrants and agrees
that:
3.1 FIF is a sophisticated and experienced investor who has the
capability to evaluate the risks of the transactions described in and
contemplated by this letter, and has the ability to protect FIF's own interests
in connection therewith.
3.2 FIF has performed whatever due diligence review FIF deems
necessary and/or appropriate in connection with the transactions described in
and contemplated by this letter, and is satisfied with the results of such due
diligence review.
3
<PAGE>
3.3 FIF has not requested that ST make, and ST has not made and
is not making, any representations or warranties of any kind regarding the
propriety of FIF's contemplated acquisition of the ST Agreements, the value or
enforceability of any rights ST may have under the ST Agreements, the value or
enforceability of any rights FIF may have as an assignee of the ST Agreements,
the value or enforceability of any rights FIF may have to acquire shares of
capital stock of MPI by virtue of FIF's acquisition of the ST Agreements, or the
current or potential value of any of such shares of capital stock.
4. Subject to the terms and conditions of this letter and the Escrow
Instructions (as hereafter defined), not later than June 30, 1999, FIF will pay
to ST in cash in one lump sum, the amount of Five Hundred Thousand United States
Dollars (US$500,000.00) ("Investor Payment"), in exchange for ST's complete
assignment and transfer to FIF of all of ST's rights, title, claims and
interests in, under and pursuant to the ST Agreements ("ST Assignment"). The ST
Assignment will be evidenced by an assignment agreement in the form of Exhibit
"A" attached hereto and incorporated herein by reference ("Assignment
Agreement"). ST agrees that, pursuant to agreements that will be entered into
between FIF and members of the Investor Group, certain portions of the interests
obtained by FIF under the Assignment Agreement will be assigned by FIF to
members of the Investor Group. However, the respective rights and obligations of
FIF and ST pursuant to this letter and the Escrow Instructions (as hereafter
defined) shall not be affected in any manner by any assignment or lack of
assignment by FIF to members of the Investor Group or any other party, of any
portion of FIF's interests under the Assignment Agreement.
5. FIF shall not have any obligations to pay the Investor Payment to
ST until such time as all of the following conditions have been completely
satisfied:
5.1 MPI has obtained the approval of its Board of Directors and
Shareholders with respect to the Other Creditor Conversions and the conversion
of the ST Agreements by FIF (and its assignees) into an aggregate of One Million
Three Hundred Twenty Two Thousand Six Hundred Forty Seven (1,322,647) shares of
MPI's Series A Preferred Stock, or such other amounts as may be agreed upon
between such parties.
5.2 ST shall have duly executed the Assignment Agreement
and delivered such originally executed copy to the Escrow Agent (as hereafter
defined).
5.3 ST shall have delivered to the Escrow Agent (as
hereafter defined) (a) the originally executed copies of the Warrant, the
Judgments and the Settlement Agreement; and (b) all of the originally executed
copies, or in the alternative the cleanest copies in ST's possession, of the
remainder of the ST Agreements (collectively "ST Agreement Copies").
6. Not later than April 19, 1999, FIF shall have deposited the
entire amount of the Investor Payment in trust with Mission Valley Escrow
Company in San Diego, California ("Escrow Agent"), pursuant to written escrow
instructions ("Escrow Instructions") that have been approved and executed by
both FIF and ST ("Escrow Account"), and the entire amount of the Investor
Payment shall continually remain on deposit in the Escrow Account at all times
4
<PAGE>
during the term of this letter. MPI shall pay all fees and expenses charged by
the Escrow Agent. All interest or other amounts earned or accrued with respect
to the Escrow Account prior to the payment of the Investor Payment to ST, shall
remain the property of FIF and its assignees. The Escrow Instructions shall
include the following provisions, in addition to any other provisions that may
be jointly approved by FIF and ST:
6.1 At such time during the term of the Escrow Account as the
conditions stated in Sections 5.1, 5.2 and 5.3 above have been satisfied, the
Escrow Agent shall (a) deliver the Investor Payment to ST; and (b) concurrently
deliver the original executed copy of the Assignment Agreement and the ST
Agreement Copies to FIF.
6.2 In the event the Investor Payment has not been paid to ST at
or before 5:00 p.m. California time on June 30, 1999 ("Escrow Termination
Date"), then the Escrow Account shall be deemed to have been automatically
terminated as of that specific time, without the need for any further
instructions from or actions taken by either ST or FIF, and the Escrow Agent
shall thereupon immediately return all funds in the Escrow Account to FIF, and
immediately return the originally executed copy of the Assignment Agreement and
the ST Agreement Copies to ST.
6.3 The Escrow Termination Date shall not be extended beyond
June 30, 1999, except pursuant to the written agreement of ST and FIF.
7. Once the Investor Payment has been deposited in the Escrow
Account pursuant to the provisions of Section 6 hereof, this letter shall remain
in full force and effect until 5:00 p.m. California time on June 30, 1999, or
until such earlier time as the Investor Payment has been paid to ST. In the
event the Investor Payment is not deposited in the Escrow Account pursuant to
the provisions of Section 6 hereof, then this letter shall be deemed void and of
no force or effect.
8. Once the Investor Payment has been deposited in the Escrow
Account pursuant to the provisions of Section 6 hereof, if thereafter the
Investor Payment has not been paid to ST at or before 5:00 p.m. California time
on June 30, 1999, then as of that specific time, this letter shall immediately
terminate ("Automatic Termination").
9. Once the Investor Payment has been deposited in the Escrow
Account pursuant to the provisions of Section 6 hereof, until such time as there
has been an Automatic Termination, ST hereby specifically agrees that ST will
not seek to enforce any of the ST Agreements, or any of ST's rights pursuant
thereto, including without limitation, any rights ST may have pursuant to the
Judgments. However, MPI agrees that no provision of this letter or the Escrow
Instructions, and no actions taken or omitted to be taken by ST in connection
therewith, nor any other fact or circumstance existing in connection with any of
the foregoing, shall constitute or be construed to constitute any (a) waiver by
ST of any rights ST may have under the ST Agreements prior to the time ST has
received the Investor Payment; or (b) basis for the allegation of any defense by
MPI against the enforcement of the ST Agreements in accordance
5
<PAGE>
with their terms, including without limitation, any defense based on theories of
estoppel or laches.
10. MPI agrees that concurrently with the Escrow Agent's delivery of
the Investor Payment to ST as described herein, MPI will duly execute and
deliver to ST a release agreement in a form that is substantially the same as
the releases granted by MPI to ST pursuant to the provisions of the Settlement
Agreement.
11. The parties intend that the provisions of this letter be binding
upon each of them in accordance with their respective rights and obligations as
set forth herein.
By executing this letter where indicated below, ST, FIF and MPI are
indicating their agreement to be bound by the terms and conditions of this
letter.
STMICROELECTRONICS, INC. FI FINANCIAL, LLC
By:_______________________________________ By:________________________________
Steven K. Rose, Vice President James T. Waring, Manager
MICROELECTRONIC PACKAGING, INC.
By:_______________________________________
Denis Trafecanty, Senior Vice President
and Chief Financial Officer
6
<PAGE>
EXHIBIT "H"
April 28, 1999
Board of Directors
Microelectronic Packaging, Inc.
9577 Chesapeake Drive
San Diego, CA 92123 PERSONAL & CONFIDENTIAL
-----------------------
Gentlemen:
You have asked L.H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") for
our opinion as investment bankers as to the fairness, from a financial point of
view, to Microelectronic Packaging, Inc., a California corporation (the
"Company" or "MPI") and its stockholders, of the conversion of $27,556,801 of
debt related to the Company's discontinued operations into shares (the "Debt")
of the Company's Series A Convertible Preferred Stock (the "Preferred Stock")
pursuant to the Debt Conversion and Mutual Settlement and Release Agreements
(the "Agreements") between the Company and Transpac Capital Pte. Ltd., Texas
Instruments Incorporated, Motorola, Inc., The Development Bank of Singapore
Limited, FI Financial LLC, ORIX Leasing Singapore Limited, NS Electronics
Bangkok (1993) Ltd. and Samsung Corning Co. Ltd. (the "Creditors") (collectively
the "Transaction").
The Agreements provide for the Creditors to convert the Debt into 9,362,777
shares of the Preferred Stock, which will be convertible into 18,725,554 shares
of the Company's Common Stock.
As part of its investment banking business, Friend is continually engaged in the
evaluation of businesses and their securities in connection with debt
restructurings, mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We have acted as advisors
to the Company's Board of Directors as to the fairness of the conversion of the
Debt to shares of the Preferred Stock, but have not materially participated in
the negotiations leading to the Agreements.
You have requested our opinion as to whether the Proposed Transaction is fair to
MPI and its Stockholders from a financial point of view.
In connection with formulating our opinion, we have, among other things:
(a) Reviewed the Agreements between the Company and the Creditors;
<PAGE>
(b) Reviewed the Company's Annual Report to Stockholders on Form 10-K for the
fiscal years ended December 31, 1998, 1997 and 1996, and Form 10-Q for the
quarter ended March 31, 1999;
(c) Examined certain operating and financial information and financial
projections provided to us by the management of MPI;
(d) Reviewed the historical market prices and trading volume of the Company's
Common Stock;
(e) Analyzed publicly available financial and market data regarding certain
companies in the electronic component manufacturing industry and compared
them to the Company's financial and market data;
(f) Conducted interviews with certain members of MPI's management; and
(g) Performed such other studies, analyses, inquires and investigations as we
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition and business prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent appraisal of any of
the properties or assets of the Company, or conducted any independent inquiry or
investigation with respect to the Company or the Transaction. This opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
This opinion is furnished solely for the benefit of the Company, its Board of
Directors, and its stockholders in connection with the Transaction, and may not
be relied upon by any other person or for any other purpose without our express,
prior, written consent. This opinion is delivered to each recipient subject to
the conditions, scope of engagement, limitations and understandings set forth in
this opinion and our engagement letter dated December 8, 1998, and subject to
the understanding that the obligations of Friend in the Transaction are solely
corporate obligations, and no officer, director, employee, agent, shareholder or
controlling person of Friend shall be subjected to any personal liability
whatsoever to any person, nor will any such claim be asserted by or on behalf of
any recipient of this opinion.
<PAGE>
Our opinion is limited to the fairness, from a financial point of view, of the
Transaction and does not address MPI's underlying business decision to effect
the Transaction.
As of the date hereof, based upon and subject to the foregoing, and based upon
such other matters as we deemed relevant, it is our opinion that the Transaction
is fair to the Company and its stockholders from a financial point of view.
Very truly yours,
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
