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:
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.
CONSENT SOLICITATION STATEMENT
TABLE OF CONTENTS
Page
----
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
i
Consent Solicitation Statement
Table of Contents (cont'd)
Page
----
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
ii
Page
----
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
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
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
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
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: denist@mpix.com
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
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.
Number of Shares Percent of Total Shares
Name and Address of Beneficial Owner Beneficially Owned/(1)/ Outstanding Beneficially Owned
- ------------------------------------ ----------------------- -------------------------------
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%
4
Timothy R. Sullivan/(5)/ 150,000 1.3%
All directors and executive officers
as a group (7 persons)............................... 1,408,402 11.4%
(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
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
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
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
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
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
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
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
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
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
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
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
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
(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
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
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
("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
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
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
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:
Name Amount Relationship Number of Shares
---- ------ ------------ ----------------
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
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
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
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
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
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
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
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
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
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
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
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
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 $100,000 in compensation for the 1998 fiscal year
(hereafter referred to as "Named Executive Officers").
Annual Compensation Long Term Compensation
Awards Payouts
Other Restricted Securities LTIP All Other
Name and Salary Bonus Annual Stock Underlying Payouts Comp.
Principal Position Year ($) ($) Comp./(1)/($) Award(s)($) Options (#) ($) ($)/(2)/
- ----------------------------------------------------------------------------------------------------------------------------------
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 --- --- --- --- --- --- ---
____________
(1) Other Annual Compensation for all other employees listed in the table is
less than $50,000 and 10% of the total of annual salary and bonus for such
individual.
(2) All other compensation if comprised of (i) matching contributions made by
the Company on behalf of the Named Executive Officer to its Section 401 (k)
Plan and (ii) annual premiums paid for group term life insurance policies.
Under such policies, the Named Executive Officer may designate the
beneficiary of the insurance proceeds payable upon death. The amounts of
the Company's matching contribution to its Section 401 (k) Plan and the
life insurance premiums are set forth below:
35
Matching 401(k) Life Insurance
Contribution ($) Premium ($)
--------------------------------------
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
(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
$0.15 per share, based on the average of the highest bid and lowest ask
price as quoted on the OTC Bulletin Board. No stock appreciation rights
were exercised or outstanding during such fiscal year.
36
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End (#) at Fiscal Year-End($)
--------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------
Andrew K. Wrobel.......... 233,334 366,666 ----- -----
Denis J. Trafecanty....... 147,500 152,500 ----- -----
Timothy R. Sullivan....... 75,000 75,000 ----- -----
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
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
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
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
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
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 DENIST@MPIX.COM.
A-2
FINANCIAL INFORMATION OF
MICROELECTRONIC PACKAGING INC.
INDEX
Page(s)
-------
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
F-1
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
MICROELECTRONIC PACKAGING, INC.
PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
Amounts in Thousands
------------------------------------------------
Proforma After
Adjustments Adjustment
Historical (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------
See accompanying notes for an explanation of the Proforma Adjustments.
F-3
MICROELECTRONIC PACKAGING, INC.
PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
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)
- -----------------------------------------------------------------------------------------------------------------------------------
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
=======================================================================================================
F-4
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
================================================================================
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
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
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
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
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
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
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
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
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:
Name Age Position
- ---- --- --------
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
F-14
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
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
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
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
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- --------- -------- -------
(In thousands, except per share amounts)
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
======= ======== ========= ======== =======
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- ---------
(In thousands)
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
_________
(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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
(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
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
Date: April 14, 1999 By: /s/ WONG LIN HONG
------------------
Wong Lin Hong
Director of the Company
F-43
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
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
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
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.
F-46
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
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.
F-47
MICROELECTRONIC PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
------------------------------ Accumulated
Shares Amount Deficit Total
- -----------------------------------------------------------------------------------------------------------------
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.
F-48
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
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
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
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
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
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.
=================================================================================================
Historical Pro Forma
Year Ended Pro Forma Year Ended
December 31, 1997 Adjustments December 31, 1997
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
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)
=================================================================================================
=================================================================================================
Historical Pro Forma
Year Ended Pro Forma Year Ended
December 31, 1996 Adjustments December 31, 1996
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
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)
=================================================================================================
(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
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
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
Debt of discontinued operations, in default, due on demand
consists of:
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
F-55
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
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
=========== ===========
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
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.
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- --------------------------------------------------------------------------
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
==========================================================================
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
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
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:
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
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)
======================================================================
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
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
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
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996
Net loss:
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)
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:
1998 1997 1996
-----------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
SHARES AVERAGE Shares Average Shares Average
(000) EXERCISE PRICE (000) Exercise Price (000) Exercise Price
-----------------------------------------------------------------------------------------------
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
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
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
- --------------------------------------------------------------------------------------------------------------------
$ 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
============== =============
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
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
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
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
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
Year ended December 31, 1998 1997 1996
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)
===============================================================================================
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
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - EARNINGS PER SHARE
For the Year Ended December 31, 1998
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
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
======== ========== =======
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.
For the Year Ended December 31, 1997
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------------
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
======== ========== =======
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
MICROELECTRONIC PACKAGING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1996
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------------
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)
============= =========== =========
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
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
MICROELECTRONIC PACKAGING, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
SCHEDULE II
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:
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) --
(1) Pertains To Other Receivables, Including Innoventure Receivable for 1996.
F-70
================================================================================
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
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
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
====================================================================================================================
F-72
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
---------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
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
======================================================================================================================
F-73
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
---------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
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
======================================================================================================================
F-74
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
Common Stock Accumulated
---------------------------------------
Shares Amount Deficit Total
----------------- ----------------- ------------------ ------------------
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)
============================================================================================================================
F-75
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:
MARCH 31, 1999 December 31, 1998
---------------------------- ----------------------------
(UNAUDITED)
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
============================ ============================
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. NET INCOME (LOSS) PER SHARE
For the three months ended March 31, 1999
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ---------
Loss from continuing operations $(1,084,000)
BASIC EPS
Loss available to common shareholders $ (0.10)
$(1,084,000) 10,856,890
========
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.
For the three months ended March 31, 1998
---------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------- --------------- -----------------
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
================= =============== =================
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
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
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
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
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
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
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
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
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
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
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
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