-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I234c/b14EdeJvKM5F9wtyME5u9MNiV6NgtKEFZEcjt/s+A4bszx3i+45pjkTrAz lLrrH54uOQ+//9fCYf26pQ== 0001017062-96-000142.txt : 19960816 0001017062-96-000142.hdr.sgml : 19960816 ACCESSION NUMBER: 0001017062-96-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROELECTRONIC PACKAGING INC /CA/ CENTRAL INDEX KEY: 0000916232 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943142624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23562 FILM NUMBER: 96613174 BUSINESS ADDRESS: STREET 1: 9350 TRADE PLACE CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195301660 10-Q 1 FORM 10-Q DATED JUNE 30, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q (MARK ONE) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 -------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9350 Trade Place, San Diego, California 92126 - ---------------------------------------- -------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (619) 530-1660 -------------------------- - ----------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. 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 ---- ---- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: At June 30, 1996, there were outstanding 5,558,813 shares of the ------------- --------- Registrant's Common Stock, no par value per share.
Index Page No. - ----- -------- PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Condensed Consolidated Balance Sheets.................... 3 Condensed Consolidated Statements of Operations......... 4 Condensed Consolidated Statements of Cash Flows.......... 5 Condensed Consolidated Statement of Changes in Shareholders' Equity..................................... 6 Notes to Condensed Consolidated Financial Statements..... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 10 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................ 25 Item 2. Changes in Securities.................................... 25 Item 3. Defaults Upon Senior Securities.......................... 25 Item 4. Submission of Matters to a Vote of Securityholders....... 25 Item 5. Other Information........................................ 26 Item 6. Exhibits and Reports on Form 8-K......................... 26
SIGNATURES............................................................ 28 EXHIBIT INDEX......................................................... 29 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash $ 6,205,000 $ 2,923,000 Accounts receivable, net 8,783,000 6,815,000 Inventories 7,266,000 7,158,000 Other current assets 4,836,000 3,659,000 ------------ ------------ Total current assets 27,090,000 20,555,000 Property, plant and equipment, net 21,711,000 16,943,000 Deferred facility start-up costs 4,764,000 1,920,000 Other non-current assets 3,422,000 3,009,000 ------------ ------------ $56,987,000 $42,427,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit borrowings, due on demand $10,206,000 $ 9,245,000 Accounts payable 8,877,000 7,767,000 Accrued liabilities 3,557,000 4,538,000 Deferred revenue 599,000 572,000 Current portion of long-term debt 5,456,000 3,316,000 ------------ ------------ Total current liabilities 28,695,000 25,438,000 Long-term debt 17,715,000 9,573,000 Commitments and contingencies (Note 7) Total shareholders' equity 10,577,000 7,416,000 ------------ ------------ $56,987,000 $42,427,000 ============ ============
3 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended June 30, Six months ended June 30, --------------------------- -------------------------- 1996 1995 1996 1995 ----------- ------------ ----------- ------------ Net sales: Product sales $15,541,000 $13,185,000 $32,758,000 $25,881,000 Other sales 582,000 - 817,000 ----------- ------------ ----------- ------------ 16,123,000 13,185,000 33,575,000 25,881,000 Cost of goods sold: Product sales 12,458,000 11,038,000 26,697,000 22,186,000 Other sales 514,000 - 729,000 ----------- ------------ ----------- ------------ 12,972,000 11,038,000 27,426,000 22,186,000 ----------- ------------ ----------- ------------ Gross profit 3,151,000 2,147,000 6,149,000 3,695,000 Selling, general and administrative 1,530,000 1,906,000 2,974,000 3,378,000 Engineering and product development 672,000 570,000 1,286,000 1,051,000 Provision for revaluation of subsidiary and other related assets - 1,000,000 - 1,000,000 ----------- ------------ ----------- ------------ Income (loss) from operations 949,000 (1,329,000) 1,889,000 (1,734,000) Other income/(expense): Foreign exchange gain/(loss) 170,000 (226,000) 300,000 (595,000) Interest (expense), net (626,000) (279,000) (1,084,000) (456,000) Other income, net 64,000 1,000 117,000 392,000 ----------- ------------ ----------- ------------ Income (loss) before provision for income taxes 557,000 (1,833,000) 1,222,000 (2,393,000) Provision (benefit) for income taxes (53,000) - 47,000 - ----------- ------------ ----------- ------------ Net income (loss) $ 610,000 $(1,833,000) $ 1,175,000 $(2,393,000) =========== ============ =========== ============ Net income (loss) per common share $ 0.11 $ (0.39) $ 0.22 $ (0.51) =========== ============ =========== ============ Weighted average shares used in per share calculation 5,746,000 4,660,000 5,327,000 4,660,000 =========== ============ =========== ============
4 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 1996 1995 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,175,000 $(2,393,000) Adjustments to reconcile net income (loss) to net cash (used) by operating activities: Depreciation and amortization 1,347,000 1,258,000 Provision for revaluation of subsidiary and other related assets - 1,000,000 Unrealized loss on borrowings denominated in foreign currency - 212,000 Realized (gain) on forward foreign currency contracts (215,000) (563,000) Changes in assets and liabilities: Accounts receivable (1,968,000) (517,000) Inventories (108,000) (17,000) Other current assets (1,177,000) (3,720,000) Defered facility start-up costs and other non-current assets (3,326,000) (52,000) Accounts payable, accrued liabilities and deferred revenue 156,000 3,690,000 ------------- ------------- Net cash (used) by operating activities (4,116,000) (1,102,000) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of fixed assets (6,046,000) (2,831,000) Increase in net assets held for sale, net of related borrowings of $2,427,000 - (760,000) Advances under notes receivable - (30,000) Realized gain from forward foreign currency contracts 215,000 563,000 ------------- ------------- Net cash (used) by investing activities (5,831,000) (3,058,000) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit facilities 46,669,000 16,878,000 Repayments uncer line of credit facilities (45,708,000) (16,633,000) Borrowings under long-term debt 10,616,000 5,075,000 Principal payments on long-term debt (334,000) (495,000) Issuance of common stock 1,986,000 - ------------- ------------- Net cash provided by financing activities 13,229,000 4,825,000 ------------- ------------- NET INCREASE IN CASH 3,282,000 665,000 CASH AT BEGINNING OF PERIOD 2,923,000 1,346,000 ------------- ------------- CASH AT END OF PERIOD $ 6,205,000 $ 2,011,000 ============= =============
5 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Common Stock ---------------------------- Accumulated Shares Amount Deficit Total ------------ ------------ ------------ ------------ Balance at January 1, 1996 4,660,093 $34,326,000 $(26,910,000) $ 7,416,000 Issuance of common stock 842,058 1,911,000 1,911,000 Stock options exercised 56,662 75,000 75,000 Net income 1,175,000 1,175,000 ------------ ------------ ------------ ------------ Balance at June 30, 1996 5,558,813 $36,312,000 $(25,735,000) $10,577,000 ============ ============ ============ ============
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. QUARTERLY FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements and related notes for the three and six month periods ended June 30, 1996 and 1995 are unaudited but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position and results of operations of the Company for the interim periods. The results of operations for the three and six month periods ended June 30, 1996 are not necessarily indicative of the operating results to be expected for the full fiscal year. The information included in this report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other information, including risk factors, set forth for the year ended December 31, 1995 in the Company's Annual Report on Form 10-K. Readers of this Quarterly Report on Form 10-Q are strongly encouraged to review the Company's Annual Report on Form 10-K. Copies are available from the Chief Executive Officer of the Company at 9350 Trade Place, San Diego, California 92126. 2. INVENTORIES Inventories, net of obsolescence reserves, consist of the following:
June 30, December 31, 1996 1995 -------------- --------------- Raw materials $3,681,000 $3,304,000 Work in progress 1,619,000 1,641,000 Finished goods 1,966,000 2,213,000 -------------- --------------- $7,266,000 $7,158,000 ============== ===============
3. EFFECTS OF INCOME TAXES For the six month period ended June 30, 1996, the Company has recorded an income tax expense of $47,000, which is comprised of $5,000 for federal alternative minimum taxes and $42,000 for state franchise taxes. For purposes of computing federal income tax liability, the Company believes that it has sufficient net operating losses, which can be carried forward, to eliminate the federal income tax liability that would otherwise be due on the income generated in the first six months of 1996. Federal alternative minimum tax is not entirely eliminated by the Company's net operating losses from previous years. Due to the varying rules governing state franchise taxes for California, the Company does not have sufficient net operating losses from previous years to eliminate its franchise tax liability for 1996. As of the filing of the Company's Form 10-Q for the first quarter of 1996, the Company believed that recent stock transactions may have caused the Company to have to defer a portion of the benefit of its net operating losses under Internal Revenue Code Section 382. Based on a study of the Company's stock transactions and impact on the Company's net operating losses, the Company believes no such limitation exists. The taxable income generated by the Company's foreign operations during this time period was offset through the utilization of capital allowance carryforwards. No income tax expense was recorded in the comparable period of 1995 as the Company's foreign and domestic operations generated net operating losses for both financial reporting and income tax purposes. 4. NET INCOME (LOSS) PER SHARE The computation of primary net income (loss) per share is based upon the weighted average number of outstanding common shares during the period, plus, when their effect is dilutive, common stock equivalents 7 from the exercise of stock options (using the treasury stock method). Where dilutive, the computation fully diluted net income (loss) per share would include the effects of the issuance of a minority interest in the Company's MPM subsidiary (the "MPM Option") upon the conversion of the Transpac Debenture issued by MPM in March 1996 (see Note 5). Fully diluted net income (loss) per share has not been presented as the effect of this conversion would be antidilutive. At the Company's Special Meeting of Shareholders which was held on May 29, 1996, the shareholders approved the convertibility of the Transpac Debenture (see Note 5) into shares of MPI Common Stock (the "MPI Option"). As a result, any computation of fully diluted net income (loss) per share will include the effects of the more dilutive conversion of either the MPI Option or the MPM Option. 5. TRANSPAC FINANCING In March 1996, the Company and MPM consummated a financing (the "Transpac Financing") with Transpac Capital Pte. Ltd. and certain other affiliated investors (collectively, "Transpac") in which the Company issued 842,013 shares of its Common Stock to Transpac for the aggregate purchase price of $2,000,000 and MPM issued a debenture (the "Debenture") to Transpac in the principal amount of $9.0 million. The Debenture, repayment of which has been guaranteed by MPI, has a term of five years and bears interest at the rate of 8.5% per annum. Accrued and unpaid interest is due and payable in annual installments at the end of each year of the term of the Debenture. The principal outstanding under the Debenture will be due and payable in full at the end of the five-year term; however, from and after April 23, 1997, and through the term of the Debenture, the Debenture will be convertible at Transpac's option into the number of shares of MPM capital stock that is equivalent to up to 45% of MPM's outstanding capitalization at the time of conversion, or into the number of shares of MPI capital stock that, when combined with the shares discussed above, will not exceed 49% of the Company's outstanding capitalization at the time of any such conversion. 6. OTHER FINANCING TRANSACTIONS During the first quarter of 1996, the Company's MPS subsidiary borrowed $1.0 million under a credit facility bearing interest at 7%. MPS also entered into a term sheet with the Development Bank of Singapore ("DBS") for a $1.0 million credit facility bearing interest at 7.5% (the Singapore interbank offered rate plus 1.5%). 7. COMMITMENTS AND CONTINGENCIES The Company previously shipped quantities of hazardous waste to a Whittier, California, hazardous waste treatment facility for recycling. The owner of that facility allegedly failed to recycle or dispose of the various wastes shipped to the site and has now filed for bankruptcy. The Company is one of more than four thousand generators, including numerous Fortune 500 corporations, identified by the State of California as having responsibility for cleanup at the site, and it is not ranked as one of the generators that has shipped a significant amount of hazardous waste. On May 15, 1995, the United States Environmental Protection Agency ("EPA") issued written notice that it considers the Company to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The EPA has determined that there may be an imminent and substantial endangerment to the public health, welfare, and environment because of a release and/or threat of a release of hazardous substances from the site located in Whittier, California. The notice requires the Company to take immediate actions to contain and prevent any further release of hazardous substances at the site. In response to the EPA notice, the Company and approximately 100 of the other named generators provided the necessary funding to effect the removal and destruction of the hazardous wastes stored at this site. In addition, the Company and such generators have provided the necessary funding to test the soil and ground-water at this site, which testing is currently ongoing. Although the cost incurred by the Company to date of removing and destroying the hazardous waste stored at this facility was not significant, this effort does not address the cleanup of any potential soil and/or ground-water contamination present at this site. There can be no assurance, therefore, that the costs and expenses associated with this action will not increase in the future to a level that would have a material adverse effect upon the Company's business, financial condition, results of operations or cash flows. Based upon the 8 Company's investigation to date, the Company does not believe that this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's financial position, results of operations or cash flows. The Company has also previously shipped small quantities of hazardous waste for recycling to a San Diego hazardous waste treatment facility operated by a third party operator ("Operator"). The owner of the property and the State of California have filed suits against the Operator and two of its officers and the owner of the property has obtained a mandatory injunction to compel the removal of hazardous waste on site. If the Operator does not comply, it is possible that the property owner or a government agency could also sue or bring enforcement proceedings against approximately 100 hazardous waste generators, including the Company, that shipped such wastes to the facility to pay for the removal and to participate in site cleanup if any contamination is discovered. Based upon the Company's limited investigation to date, the Company does not believe that this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's business, financial condition, results of operations or cash flows. In November 1995, the Company reached an agreement to settle a consolidated class action lawsuit in exchange for $950,000. The proposed settlement required the Company to contribute $525,000, with the remainder paid by the Company's insurance carrier. The proposed settlement is subject to final approval by the U.S. District Court for the Southern District of California. The Company provided for the anticipated costs of settlement of such litigation during 1995. The Company is involved in various claims arising in the ordinary course of business; none of these claims, in the opinion of management, is expected to have a material adverse impact on the financial condition, cash flows or overall trends in the results of operations of the Company. The ultimate resolution of certain of these claims, however, could have a potentially material adverse effect on the Company's results of operations in the individual period in which the claim is resolved. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS NET SALES - --------- Net sales were $16.1 million for the second quarter and $33.6 million for the first six months of 1996, representing increases of $2.9 million or 22.3% and $7.7 million or 29.7%, respectively, over the comparable periods of 1995. The increase in product sales during 1996 over the comparable periods of 1995 is primarily attributable to increases in revenues from sales of pressed ceramics products at the Company's Microelectronic Packaging (s) Pte. Ltd. ("MPS") subsidiary ($700,000 and $2.1 million, respectively), and an increase in revenues from the sales of MCM products at the Company's CTM Electronics, Inc. ("CTM") subsidiary ($1.6 million and $4.8 million, respectively). The increase in sales of pressed ceramic products reflects both an increase in units sold and, to a lesser extent, a general price increase implemented by MPS in the second quarter of 1995. The increase in revenue from the sale of MCM's was due primarily to an increase in the number of units sold. Net sales for the second quarter and for the first six months of 1996 also reflects the inclusion of $582,000 and $817,000, respectively, of revenues derived under an equipment and technology transfer agreement with a government factory in Yixing, China. Such revenues have been included in other sales in the Condensed Consolidated Statement of Operations. COST OF GOODS SOLD - ------------------ Cost of goods sold were $13.0 million for the second quarter and $27.5 million for the first six months of 1996, representing increases of $1.9 million or 17.5% and $5.2 million or 23.6%, respectively, over the comparable periods of 1995. These increases were primarily attributable to increased sales during these periods. Cost of goods sold as a percentage of net sales was 80.8% in the second quarter and 81.8% in the first six months of 1996, compared with 83.7% and 85.7%, respectively, for the corresponding periods of 1995. During 1996, gross margin from sales in percentage terms has increased over the comparable periods of 1995 as the impact of improved pricing at MPS and improved overhead absorption at MPS and CTM (due to increased shipping volumes) have offset increases in the costs of certain of the Company's raw materials and increases in certain fixed costs at MPS. SELLING, GENERAL AND ADMINISTRATIVE - ----------------------------------- Selling, general and administrative expenses were $1,530,000 for the second quarter and $2,974,000 for the first six months of 1996, representing decreases of $376,000 or 19.7% and $404,000 or 12.0%, respectively, from the comparable periods of 1995. This decrease is the result of the non-recurring settlement expenses incurred in 1995. The Company currently anticipates that selling, general and administrative expenses may increase in absolute dollars during 1996. ENGINEERING AND PRODUCT DEVELOPMENT - ----------------------------------- Engineering and product development expenses were $672,000 for the second quarter and $1,286,000 for the first six months of 1996, representing increases of $102,000 or 17.9% and $235,000 or 22.4%, respectively, over the comparable periods of 1995. These increases are primarily due to an increase in personnel costs and expenditures on materials used in product development. The Company currently anticipates that engineering and product development costs will increase in absolute dollars in the future as it continues to develop products such as low-temperature cofired multilayer ceramics for use in the production of MCM's and products incorporating thick film technology. FOREIGN EXCHANGE GAIN (LOSS) - ---------------------------- As discussed in more detail below, the Company's operating results are subject to the impact of fluctuations in the relative values of certain currencies. The Company reported net foreign exchange gains of $170,000 for the second quarter and $300,000 for the first six months of 1996, as compared to net foreign exchange losses of $226,000 and $595,000, respectively, for the comparable periods of 1995. The appreciation of the value of the US dollar relative 10 to the Japanese yen during the first half of 1996 had the effect of decreasing the cost of certain raw materials as well as reducing the carrying value of certain of the Company's obligations and was primarily responsible for the gains recognized during this period. The loss recognized during 1995 was primarily attributable to the declining value of the US dollar compared to both the yen and the Singapore dollar during that period. Fluctuations in foreign exchange rates have had a significant impact on the Company's results of operations. Certain of the Company's raw material purchases and other costs of production and administration are denominated in Japanese yen and Singapore dollars while all of the Company's sales are denominated in US dollars. Consequently, a change in exchange rates between the US dollar and the Japanese yen or the Singapore dollar can affect the Company's cost of goods sold or its selling, general and administrative expenses, resulting in gains or losses that are included in the Company's results of operations. Exchange rate fluctuations also impact the carrying value of certain of the Company's obligations, resulting in foreign currency transaction gains or losses that are likewise included in the Company's results of operations. Fluctuations in exchange rates also subject the Company to gains or losses on its outstanding forward foreign currency contracts. For financial reporting purposes, the gain or loss arising from exchange rate fluctuations between the transaction date for a transaction denominated in a foreign currency and that transaction's settlement date, or reporting date for transactions which have not settled, is characterized as a foreign exchange gain or loss, as is the gain or loss suffered on outstanding forward foreign currency contracts. In an effort to minimize the impact of foreign exchange rate movements on the Company's operating results, and subject to financing from and the consent of the Development Bank of Singapore ("DBS"), the Company enters into forward foreign currency contracts to hedge foreign currency transactions such as purchases of raw materials denominated in Japanese yen. The terms of the forward contracts involve the exchange of US dollars for either Japanese yen or Singapore dollars at a future date, with maturities generally ranging from one to several months from the execution date of the forward contract. At contract maturity, the Company makes net settlements of US dollars for foreign currencies at forward rates that were agreed to at the execution date of the forward contracts. The Company utilizes its S$30,000,000 (US$21,260,000 at March 31, 1996) foreign exchange line of credit with DBS to finance the purchase of forward foreign currency contracts with maturities of up to 12 months. Advances under this line of credit are guaranteed by MPI and are secured by all of the assets of MPS, including a second mortgage on MPS's leasehold land and buildings. The Company's ability to utilize this line is subject to significant limitations imposed by DBS. Another factor which restricts the Company's hedging activities is the available borrowing capacity of the foreign exchange line of credit. In addition, the Company generally enters into forward contracts only when it anticipates future weakening of the US dollar relative to either the Singapore dollar or Japanese yen. As a result of these and other factors, the Company's hedging measures have been and may continue to be severely limited in their effectiveness. The Company's operating results have been and will continue to be affected by any fluctuations in the value of the US dollar relative to either the Japanese yen or the Singapore dollar. Any future weakening of the US dollar relative to either the Singapore dollar or the Japanese yen will have a material adverse effect upon the Company's business, financial condition and results of operations. To attempt to mitigate the effects of any such weakening in the value of the US dollar, the Company will attempt to qualify non-Japanese sources of key materials, and accelerate the relocation of its pressed ceramic products manufacturing operations to Indonesia from Singapore. There can be no assurance that such measures can or will be taken or financed to a sufficient degree such that they will offset the impact of a weaker US dollar on the Company's operating results. INTEREST EXPENSE - ---------------- Interest expense was $626,000 for the second quarter and $1,084,000 for the first six months of 1996, respresenting increases of $347,000 or 124.4% and $628,000 or 137.7%, respectively, over the comparable periods of 1995. Such increases were primarily due to additional borrowings by the Company under its borrowing arrangements with DBS Bank and the Debenture issued as part of the Transpac Financing (see Liquidity and Capital Resources). The Company currently anticipates that interest expense will continue at the second quarter level for the rest of 1996. 11 OTHER INCOME (EXPENSE) - ---------------------- Other income was $64,000 for the second quarter and $117,000 for the first six months of 1996, as compared to $1,000 and $392,000, respectively, for the comparable periods of 1995. The majority of other income arising in 1995 reflects the receipt during the second quarter of a $375,000 payment from an insurance policy covering product losses incurred in 1988 due to the contamination of products during the manufacturing process. EFFECTS OF INCOME TAXES - ----------------------- For the six month period ended June 30, 1996, the Company has recorded an income tax expense of $47,000, which is comprised of $5,000 for federal alternative minimum taxes and $42,000 for state franchise taxes. For purposes of computing federal income tax liability, the Company believes that it has sufficient net operating losses, which can be carried forward, to eliminate federal income tax liability that would otherwise be due on the income generated in the first six months of 1996. Federal alternative minimum tax is not entirely eliminated by the Company's net operating losses from previous years. Due to the varying rules governing state franchise taxes for California, the Company does not have sufficient net operating losses from previous years to eliminate its franchise tax liability for 1996. As of the filing of the Company's Form 10-Q for the first quarter of 1996, the Company believed that recent stock transactions may have caused the Company to have to defer a portion of the benefit of its net operating losses under Internal Revenue Code Section 382. Based on a study of the Company's stock transactions and impact on the Company's net operating losses, the Company believes that no such limitation exists. The taxable income generated by the Company's foreign operations during this time period was offset through the utilization of capital allowance carryforwards. No income tax expense was recorded in the comparable period of 1995 as the Company's foreign and domestic operations generated net operating losses for both financial reporting and income tax purposes. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During the second quarter of 1996, the Company financed its operations through a combination of cash flows from its operating units and certain other borrowings and equity financings. As discussed in Note 5 to the Condensed Consolidated Financial Statements, the Company consummated an equity financing of $2,000,000 with Transpac and the Company's MPM subsidiary raised an additional $9,000,000 through the issuance of the Debenture to Transpac in March 1996. The Company's principal sources of liquidity as of June 30, 1996, consisted of $6,205,000 of cash, and certain limited available borrowing capacity with DBS. The $9.0 million raised by MPM is not available for use in other portions of the Company's business. MPS, the Company's principal operating subsidiary, has a S$9,500,000 (US$6,733,000) borrowing arrangement with DBS, guaranteed by MPI, consisting of a working capital line of credit facility and an overdraft facility. Borrowings under this arrangement are due on demand and are secured by substantially all of the assets of MPS. Borrowings under the working capital line and the overdraft facility bear interest at the Singapore prime rate plus 1/2% and plus 3/4%, respectively. At June 30, 1996, MPS had outstanding borrowings under this arrangement of $6,521,000. MPC has a S$500,000 (US$354,000) borrowing arrangement with DBS, guaranteed by both MPI and MPS, consisting of a working capital line and an overdraft facility. Borrowings under this arrangement are also due on demand and are secured by all of the assets of MPC. Borrowings under the working capital line of credit facility and the overdraft facility bear interest at the Singapore prime rate plus 1/2% and plus 3/4% respectively. At June 30, 1996, MPC had outstanding borrowings under this arrangement of $177,000. MPM has a $3,500,000 borrowing facility with DBS which is guaranteed by both MPI and MPS. This facility consists of a $3.2 million short-term advance facility and a $300,000 import/export bills facility. Advances under this credit facility are secured by substantially all of the assets of MPM and bear interest at the bank's prime lending rate plus 2.5% and cannot remain outstanding for more than 30 days. The facility does permit rolling over of existing outstanding balances. This credit facility matured in May 1996, but has not yet been converted into a term loan, which is at the election of DBS. This facility automatically terminates in the event of the termination of the 12 Company's technology transfer agreement with IBM. At June 30, 1996, MPM had outstanding borrowings under this arrangement of $3,197,000. The MPS borrowing agreement includes affirmative and negative covenants with respect to MPS, including the maintenance of certain financial statement ratios, balances, earning levels and limitations on payment of dividends, transfers of funds and incurrence of additional debt. The MPM agreement also contains certain restrictive provisions. As of June 30, 1996, MPS was in compliance with all covenants set forth in its agreement with DBS. The Company anticipates that the pressed-ceramics industry may soften in the third quarter of 1996. Should this softening market result in a reduced demand for the Company's pressed ceramic products, the Company may have difficulty in meeting some of its covenants with DBS. The Company is in regular communication with DBS Bank, providing them with data on the Company and the industry. No assurances can be made that the Company will receive a waiver of compliance with these convenants, should a waiver of compliance be required. Failure to receive these waivers would materially adversely affect the Company's results of operations, financial position and prospects. At June 30, 1996, the Company also had borrowings of $9,000,000 under the Debenture discussed above, $11.0 million under notes payable to various customers bearing interest at rates ranging from 7.0% to 14.0%, $1,335,000 under mortgage notes bearing interest at a rate of 7.5%, $155,000 under term loans bearing interest at 12.2% and $1,344,000 under capital lease obligations, consisting of various machinery and equipment financing agreements, bearing interest at 4% to 6%. Borrowings under the above arrangements are secured by substantially all of the assets of the Company. The Company also incurred certain non-interest bearing obligations in connection with an acquisition in 1993 that have been discounted to their net present value of $337,000 at June 30, 1996. Since the execution of the Company's technology licensing agreement with the International Business Machines Corporation (the "IBM Agreement"), expenditures associated with the establishment by MPM of a production facility in Singapore to manufacture products incorporating such licensed technology have totaled approximately $10,100,000. During the same period, the Company also paid an additional $2,000,000 of up-front non-refundable royalties to IBM. These expenditures, which have been partially funded through bank and lease financing, have had a material adverse effect on the Company's cash flow and capital resources. In addition to the $2.0 million payment, the Company has significant continuing obligations under the IBM Agreement. Under the IBM Agreement, the Company is also required to attain certain production milestones at specified dates, which the Company has not achieved. Failure to achieve these specified milestones permits IBM to terminate the IBM Agreement. In addition, commencing in August 1996, the IBM Agreement is terminable by either party without cause upon six months prior written notice. The Company is currently in the process of renegotiating with IBM certain restrictive covenants of the original 1994 Agreement. There can be no assurance that such covenants will be changed. Although the Company currently believes that with adequate financing it can achieve revised production milestones, there can be no assurance that the Company will be able to achieve such milestones on a timely basis, or at all. Furthermore, there can be no assurance that IBM will not terminate the IBM Agreement after August 1996. If the Company does not renegotiate the Covenants of the IBM Agreement and achieve the revised production milestones under a revised IBM Agreement, the Company could lose its rights to the technology licensed to the Company by IBM under such agreement. If IBM terminates the IBM Agreement after August 1996, the Company would lose its right to such technology. The loss of such rights would have a material adverse impact on the Company's future revenues and on the Company's future. The Company is in the process of seeking additional financing, but other than credit facilities discussed above, had no legally binding commitments or arrangements for such financing as of June 30, 1996, other than the term sheet entered into with a bank lender in March 1996 for a $1.0 million term facility and there can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all, when required by the Company. FUTURE OPERATING RESULTS FUTURE CAPITAL NEEDS; NEED FOR ADDITIONAL FINANCING. The Company's future capital requirements will depend upon many factors, including the extent and timing of acceptance of the Company's products in the market, requirements to retire its substantial debt, requirements to construct, transition and maintain existing or new 13 manufacturing facilities, commitments to third parties to develop, manufacture, license and sell products, the Company's operating results and the status of competitive products. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and obligations associated with MPM, the Company currently anticipates that cash on hand, excluding the remaining funds from the Transpac Financing, anticipated cash flow from operations and funds available from the MPS bank line of credit will be adequate to fund its operations, excluding MPM, in the ordinary course through the twelve months subsequent to June 30, 1996. See "Repayment of Bank Obligations by MPM; Need for Additional Financing by MPM." There can be no assurance, however, that the Company will not require additional financing prior to such date to fund its operations. In addition, the Company will require additional financing after such date to fund its operations in the ordinary course and retire its significant debt obligations. Furthermore, the Company will require significant additional financing in order to carry out its current corporate development programs, including the provision of certain raw materials and production supplies to a third party supplier in Indonesia and the consolidation of MPS's Singapore operations. There can be no assurance that the Company will be able to obtain such additional financing on terms acceptable to the Company, or at all. Pursuant to a subcontract manufacturing agreement between the Company and Innoventure, a third party supplier, Innoventure established a manufacturing facility in Indonesia that partially processes pressed ceramic products on behalf of the Company. Partial processing of pressed ceramic products commenced in the second quarter of 1995. Pressed ceramic products that are partially processed in the Indonesian facility are completed in the Company's Singapore facility. The Company currently anticipates that the Indonesian facility may be able to fully process and produce pressed ceramic products by the middle of 1998. Equipping such facility to fully process and produce pressed ceramic products is subject to a number of conditions, including, but not limited to, additional transfers of pressed ceramic manufacturing equipment from Singapore, and there can be no assurance that such facility will be so equipped. Pursuant to the terms of this agreement, the Company agreed to provide Innoventure with raw materials and other production supplies necessary for the commencement of production in this facility. This obligation to provide raw materials and production supplies has subsequently been modified by both parties such that the Company is now purchasing these items from its suppliers on behalf of Innoventure. Innoventure currently owes the Company approximately $2,185,000 related to the supply of such raw materials and related production supplies, and the Company anticipates that it will continue to purchase such items on Innoventure's behalf for the foreseeable future. The foregoing amount is structured to be repaid to the Company by Innoventure with the form and timing of such payments being agreed to by both parties. There can be no assurance that amounts of raw materials and production supplies being provided to Innoventure will not increase in the future, however, or that such amounts will continue to be repaid by Innoventure in a timely fashion, or at all. Under this agreement, the Company also agreed to lease certain production equipment to Innoventure. To date, the parties have not finalized the terms of this leasing arrangement. In the interim, the Company moved certain of its production equipment from its Singapore facilities and certain of the equipment purchased from Samsung Corning to the Innoventure facility. There can be no assurance that the Company will not be required to replace such equipment in MPS's Singapore facilities or incur additional costs as a result of replacing such equipment. Although limited processing of pressed ceramic products commenced in Indonesia during the second quarter of 1995, the full transition of the Company's pressed ceramic production operations from Singapore to Indonesia has not yet been completed and such operations are still primarily located at its Singapore facility. After the completion of the transfer of its pressed ceramic production operations to the facility in Indonesia, the Company may consolidate the MPS Singapore operations, which currently occupy two facilities, into one facility. Such consolidation, if undertaken by the Company, would cost a minimum of $1.0 to $3.0 million and such consolidation may be completed no earlier than the end of 1998. The Company does not currently have the resources to consolidate MPS's Singapore facilities. In the event that the Company requires additional funds to finance the consolidation of MPS's facilities, the Company will seek additional financing through subsequent sales of its debt or equity securities or through bank or lessor financing alternatives, if available. There can be no assurance that the Company will not incur additional costs with respect to the establishment of the manufacturing facility in Indonesia or the consolidation, if any, of MPS's Singapore operations. The DBS line of credit available to MPS, which is guaranteed by MPI, contains numerous restrictive covenants on the ability of such subsidiary to provide funds to MPI or to other subsidiaries and on the use of proceeds. The credit 14 facilities at MPC and MPM, customer loan agreements and the Transpac agreements also contain similar restrictions. The Company's high level of outstanding indebtedness and the numerous restrictive coven-ants set forth in the agreements covering this indebtedness prohibit the Company from obtaining additional bank lines of credit and from raising funds through the issuance of debt or other securities without the prior consent of DBS, certain customers and Transpac. The Company is in the process of seeking additional financing, but as of March 31, 1996, had no legally binding commitments or arrangements for such financing other than a term sheet for a $1.0 million term loan from a bank lender. The $9.0 million raised by MPM is not available for use in other portions of the Company's business, except for the development of the IBM technology. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all, when required by the Company. If additional funds are raised by issuing equity or convertible securities, further dilution to the existing shareholders will result. If adequate funds are not available, the Company will be required to delay, scale back or eliminate programs such as the consolidation of MPS's Singapore facility or development of the IBM technology, which could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. In addition, the Company will be required to take similar action with respect to other research and development or manufacturing, construction or transitioning programs or alliances or obtain funds through arrangement with third parties that may require the Company to relinquish rights to certain of its technologies or potential products or other assets that the Company would not otherwise relinquish. The delay, scaling back or elimination of any such programs or alliances or the relinquishment of any such rights could have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE OPERATING RESULTS. The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future depending upon a variety of factors, including foreign currency losses, losses associated with the Company's MPM subsidiary, downward pressure in gross margins at the Company's subsidiaries, continued losses at certain of the Company's subsidiaries due to low shipping volume, market acceptance of new and enhanced versions of the Company's products, delays, cancellations or reschedulings of orders, delays in product development, defects in products, the mix of products sold, political and economic instability, natural disasters, outbreaks of hostilities, variations in manufacturing yields, changes in manufacturing capacity and variations in the utilization of such capacity, changes in the length of the design-to-production cycle, relationships with and conditions of customers, subcontractors, and suppliers, receipt of raw materials, including consigned materials, customer concentration, price competition, cyclicality in the semiconductor industry and conditions in the pressed ceramic and personal computer industries. In addition, operating results may fluctuate significantly based upon several other factors, including the Company's ability to attract new customers, seasonal fluctuations in business activity worldwide, changes in pricing by the Company, its competitors, subcontractors, customers or suppliers, the conversion, if any, of existing Singapore facilities, and fluctuations in manufacturing yields at the Singapore and Indonesian facilities. Furthermore, there can be no assurance that revenue levels, if any, during the start-up phase of operations at MPM will be adequate to cover MPM's fixed overhead costs, which may result in significant operating losses arising at this subsidiary and thereby materially adversely affect the Company's business, prospects, financial condition and results of operations. The absence of significant backlog for an extended period of time will also limit the Company's ability to plan production and inventory levels, which could lead to substantial fluctuations in operating results. Accordingly, the failure to receive anticipated orders or delays in shipments due, for example, to unanticipated shipment reschedulings or defects or to cancellations by customers, or to unexpected manufacturing problems may cause net sales in a particular quarter to fall significantly below the Company's expectations, which would materially adversely affect the Company's operating results for such quarter. The impact of these and other factors on the Company's net sales and operating results in any future period cannot be forecasted with certainty. In addition, the significant fixed overhead costs at the Company's facilities, the need for continued expenditures for research and development, capital equipment and other commitments of the Company, among other factors, will make it difficult for the Company to reduce its expenses in a particular period if the Company's sales goals for such period are not met. A large portion of the Company's operating expenses are fixed and are difficult to reduce or modify should revenues not meet the Company's expectations, thus magnifying the material adverse impact of any such revenue shortfall. Accordingly, there can be no assurance that the Company will not continue to sustain losses in the future or that such losses will not have a material adverse effect on the Company's business, financial condition and results of operations. 15 REPAYMENT OF BANK OBLIGATIONS BY MPM; NEED FOR ADDITIONAL FINANCING BY MPM. As of June 30, 1996, MPM had outstanding borrowings of approximately $3,197,000 under its borrowing arrangement with DBS. The facility, which is guaranteed by both MPI and MPS, is a short term credit facility which cannot remain outstanding for more than 30 days although the facility does permit rolling over of existing outstanding balances. In March 1996, MPM issued a $9,000,000 convertible debenture to Transpac, which debenture is due and payable in March 2001 unless earlier converted. The existence of the debenture and its convertibility feature into shares of common stock of MPI will significantly dilute any earnings per share amounts and could significantly dilute the ownership interests of MPI's investors. The existence of the debenture and its convertibility into shares of Common Stock of MPM could have the same effect on MPI, as the current sole shareholder, as the potential creation of a minority interest in the earnings of MPM, if any, would reduce the Company's proportional earnings from this subsidiary with a corresponding reduction in the Company's overall results of operations. MPM will require additional financing to commence limited production of partially-processed revenue-producing units by the fourth quarter of 1996. With adequate additional financing, the Company currently anticipates that volume production of fully-processed revenue-producing units may commence by the end of 1997. The Company currently anticipates that expenditures associated with equipping the MPM facility so that it may commence limited production of partially processed revenue producing units by the end of 1996 will total several million dollars, and, thereafter, tens of millions of dollars in order for the facility to commence full production of fully processed revenue producing units by the end of 1997. The Company will require significant additional financing above and beyond the proceeds from the Transpac Financing to adequately fund its obligations under the IBM Agreement and the manufacture of products based on such technology. Neither MPI nor any of its subsidiaries is currently able to generate such funds from its respective operations. Therefore, if additional funds are required, the Company would be required to undertake another offering of its debt and/or equity securities. There can be no assurances that the Company would be able to obtain such additional funds on terms acceptable to the Company, or at all, if required. A failure to obtain such additional funds as required would have a material adverse effect on MPM's operations and, therefore, on the business financial condition and results of operation of the Company. Furthermore, if the Company is unable to obtain additional funds as needed and MPM defaults on its obligations under the facility with DBS or the debenture with Transpac, MPM would be unable to achieve the production milestones under the IBM Agreement, giving IBM the right to terminate such agreement. In the event of such termination by IBM, the Company would lose the rights to the technology licensed to it by IBM under the IBM Agreement. The failure by the Company to obtain the necessary additional funds to maintain MPM's operations, a default by MPM under the DBS facility or MPM's loss of its technology rights under the IBM Agreement would materially and adversely and affect the Company's business, prospects, financial condition and loss of operations. ADVERSE IMPACT OF MPM DEFAULT ON MPS AND MPI; REPAYMENT OF BANK OBLIGATIONS BY MPS; ADVERSE IMPACT OF MPS DEFAULT ON MPM. At June 30, 1996, MPS had outstanding borrowings of approximately $8.0 million with DBS and an aggregate of approximately $9.5 million from a consortium of customers (the "Consortium"). MPM's bank obligations also consist of borrowings of $3.2 million from DBS and $2.5 million from Orix Leasing. If MPM defaults on its obligations under the DBS facility, DBS could, as one of its numerous remedies, declare the debt owed to it by MPS to be immediately due and payable. Such an action would also result in defaults under certain of MPS's loan agreements pursuant to which it borrowed funds from the Consortium, among other lenders. Such accelerations would materially adversely affect the Company's ability to continue as an ongoing concern. In addition, in November 1995, Motorola, Inc. ("Motorola") guaranteed MPS's repayment of $2.0 million in borrowings from a certain bank lender. Under the terms of the agreement relating to Motorola's guarantee, MPI granted Motorola a security interest in all of the issued and outstanding capital stock of MPS, CTM and MPA. In the event that MPS defaults under its obligations to this bank lender and while such event of default continues, Motorola will have the right to vote and give consents with respect to all of the issued and outstanding capital of MPS, CTM and MPA (the "Subsidiary Voting Rights"). As a result, during the continuation of any such event of default, MPI would be unable to control at the shareholder level the direction of the subsidiaries that generate substantially all of the Company's revenues and hold substantially all of the Company's assets. Any such loss of control would have a material, adverse effect on the Company's business, financial condition and results of operations. Furthermore, the acquisition by Motorola of the Subsidiary Voting Rights would constitute an event of default under the IBM Agreement and the Manufacturing and Technology Agreements with Carborundum, thereby giving IBM and Carborundum the right to terminate the IBM Agreement and the Manufacturing and Technology Agreements. Upon such a termination by IBM or Carborundum, the Company would lose the rights to the 16 technology that it has licensed from each of such entities, as applicable. The Company's loss of either of these rights would preclude the Company from manufacturing and selling products based on such technologies and thereby have a material adverse effect on the Company's business, financial condition and results of operations. The acquisition of the Subsidiary Voting Rights by Motorola would also constitute a default under the IBM Option Agreement, thereby triggering IBM's right to purchase up to 51% of the then outstanding capital stock of MPM. IBM's exercise of this right would cause MPI to lose voting control over MPM, which could have a material adverse effect on the Company's business, financial condition and results of operations. The agreements covering the Transpac Financing, including the convertible debenture and MPI's guarantee of such MPM indebtedness, contain numerous restrictions and events of default that could be triggered by the aforementioned actions and would, if they become effective, materially adversely affect the Company's business, prospects, results of operations and condition. HIGH LEVERAGE. The Company is highly leveraged and has substantial debt service requirements. As of June 30, 1996, the Company and its subsidiaries had approximately $33.4 million in debt obligations while shareholders' equity totaled approximately $10.6 million. The Company's ability to meet its debt service will be dependent upon the Company's future performance, which will be subject to financial, business and other factors affecting the operation of the Company, many of which are beyond its control. The Company must continue to raise capital in order to increase the production capacity of its MPM and MPS facilities. These additional capital requirements will be substantial. 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 the capital requirements described above or, if the Company is able to meet such requirements, that the terms available will be favorable to the Company. STATUS AS A GOING CONCERN. The Company's independent accountants have included an explanatory paragraph in their audit report with respect to the Company's 1995 audited consolidated financial statements related to a substantial doubt with respect to the Company's ability to continue as a going concern. There can be no assurance that the Company will operate profitably in the future and that losses will not continue to occur. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and obligations associated with MPM, the Company currently anticipates that cash on hand, anticipated cash flow from operations and funds available from the MPS bank line of credit, excluding the funds from the Transpac Financing, will be adequate to fund its operations, excluding MPM, in the ordinary course through the twelve months subsequent to June 30, 1996. The Company is currently seeking additional financing through sales of debt or equity securities and through bank or lessor financing alternatives, if available, to finance its future capital projects. These efforts may be hampered by the Company's high level of existing indebtedness, secured and otherwise. Any significant increase in planned capital expenditures or other costs or any decrease in or elimination of anticipated sources of financing could cause the Company to restrict its business and product development efforts. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all, when required by the Company. If adequate funds are not available, the Company will be unable to execute its business development efforts and will be required to delay, scale back or eliminate programs such as the transition of the Singapore operations to Indonesia and may be unable to continue as a going concern. There can be no assurance that the Company's future consolidated financial statements will not include another going concern explanatory paragraph if the Company is unable to raise sufficient funds to fund its operations. The factors leading to and the existence of the explanatory paragraph will have a material adverse effect on the Company's ability to obtain additional financing. See "-- Future Capital Needs; Need for Additional Financing," "Liquidity and Capital Resources" and "Consolidated Financial Statements." FOREIGN CURRENCY FLUCTUATIONS. Although the Company's sales are denominated in United States dollars, the majority of the Company's operating expenditures are made in other currencies, namely Japanese yen and Singapore dollars. As a result, the Company's operating results have been and will continue to be materially adversely affected by any weakening of the United States dollar relative to these currencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Any appreciation of such currencies relative to the United States dollar would result in exchange losses for the Company and could have the effect of increasing the Company's costs of goods and general administrative expenses and decreasing its margins or in making the prices of the Company's or its customers' products less competitive. Accordingly, such effects have had and will continue to have a material adverse effect upon the business, financial condition and results of operations 17 of the Company. Although the Company seeks to mitigate its currency exposure through hedging measures, these measures have been and may in the future be significantly limited in their effectiveness. In the future, the Company's operating results will also be materially adversely affected by any weakening of the United States dollar relative to Indonesia's currency. See "New Manufacturing Facilities in Indonesia; Transition of Existing Singapore Operations; New Manufacturing Facilities in Indonesia and Singapore." NEW MANUFACTURING FACILITIES IN INDONESIA; TRANSITION OF EXISTING SINGAPORE OPERATIONS; NEW MANUFACTURING FACILITIES IN INDONESIA AND SINGAPORE. In 1993, the Company entered into a subcontract manufacturing agreement with Innoventure pursuant to which Innoventure designed and constructed a new manufacturing facility in Indonesia. The Company currently anticipates moving its pressed ceramic production operations presently located in MPS's facilities in Singapore to Indonesia. In connection with such move, the Company may consolidate MPS's Singapore operations, which currently occupy two facilities, into one facility. Such consolidation, if undertaken by the Company, will cost a minimum of $1.0 to $3.0 million and such consolidation would be completed no earlier than the end of 1998. To date, the transition of the Company's pressed ceramic production operations from Singapore to Indonesia has not yet been completed and the bulk of such operations are still located at its Singapore facility. The operation of the Indonesian facility by Innoventure is designed to increase the Company's manufacturing capacity and to lower costs of production. Partial processing of pressed ceramic products, which are completed in the Company's Singapore facility, commenced in the second quarter of 1995. The Company currently anticipates that it will be increasingly dependent on the Indonesian facility to conduct the initial processing of its pressed ceramic products in future periods. The Company's increasing reliance on Innoventure as a subcontractor involves certain risks: reduced control over delivery schedules, quality assurance, manufacturing yields and costs. Although the Company has not experienced material disruptions in supply from Innoventure to date, there can be no assurance that manufacturing problems will not occur in the future. Any such material disruption could have a material adverse effect on the Company's business, financial condition and results of operations. The complete equipping and operation of the facility in Indonesia could take several years to accomplish. Innoventure is not under any unconditional obligation to fully equip such facility and there are a number of other conditions that must be satisfied before such Indonesian facilities can be fully equipped. There can be no assurance, therefore, that such Indonesian facility will be fully completed. Innoventure is also not subject to any written contractual obligation to continue operating such facility. Thus, there can be no assurance that the agreement with Innoventure is enforceable or that any judgment secured by the Company, whether in Singapore or elsewhere, upon a breach of such agreement will be upheld by Singapore courts. Innoventure is entitled to the first $4.5 million in profits generated by the Indonesian facility within five years of project start-up. See "-- Future Capital Needs; Need for Additional Financing." If the Company's revenues do not increase commensurate with the anticipated increase in capacity in Indonesia, the Company's results of operations could be materially adversely affected. As is typical in the semiconductor industry, new manufacturing facilities initially experience low production yields. Any inability on the Company's or Innoventure's part to obtain adequate production yields or to maintain such yields in the future could delay shipments of products. No assurance can be given that the facility in Indonesia will not experience production yield problems or delays in completing product testing required by a customer to qualify the Company as a vendor, either of which, given that such facilities will be manufacturing pressed ceramic products and advanced multilayer packages, respectively, could materially adversely affect the Company's business, financial condition and results of operations. SIGNIFICANT CUSTOMER CONCENTRATION. Historically, the Company has sold its products to a very limited number of customers. Recently, certain of the Company's key customers have notified the Company that they intend to decrease their product purchase orders with the Company. The loss of or any reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions in the semiconductor, personal computer or electronic industries or in other industries that manufacture products utilizing semiconductors or MCMs, would materially adversely affect the Company's business, financial condition and results of operations. The supply agreements with certain of these customers do not obligate them to purchase products from the Company. The Company's ability to increase its sales in the future will also depend in part upon its ability to obtain orders from new customers. There can be no assurance that the Company's sales will increase in the future or that 18 the Company will be able to retain existing customers or to attract new ones. There can also be no assurance that any of the Company's subsidiaries will be able to diversify or enhance its customer base. Failure to develop new customer relationships could materially adversely affect each such subsidiary's results of operations and could materially adversely affect the Company's business, financial condition and results of operations. MATURE MARKET; DEPENDENCE ON SEMICONDUCTOR AND PERSONAL COMPUTER INDUSTRIES. To date, a significant portion of the Company's revenues have been derived from sales of pressed ceramic products to customers in the semiconductor industry. The market for pressed ceramic product is relatively mature and demand for pressed ceramic products may decline in the future. Accordingly, the Company believes that sales of its pressed ceramic products may decrease in the future and, as a result, the Company's business, financial condition and results of operations may be materially adversely affected. The financial performance of the Company is dependent in large part upon the current and anticipated market demand for semiconductors and products such as personal computers that incorporate semiconductors. The semiconductor industry is highly cyclical and historically has experienced recurring periods of oversupply, resulting in significantly reduced demand for the Company's pressed ceramic products, as is currently being experienced by the Company and the industry. The Company believes that the markets for new generations of semiconductors will also be subject to similar fluctuations. 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 affect the Company's business, financial conditions 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 occur in the future. HIGHLY COMPETITIVE INDUSTRY; SIGNIFICANT PRICE COMPETITION. The electronic packaging and inter-connection technology industries are intensely competitive. The Company experiences intense competition worldwide from a number of manufacturers, many of which have substantially greater financial resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell their products. The market for sales of the Company's pressed ceramic products is highly concentrated with a few competitors, all of which provide intense competition and have substantially greater financial resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell pressed ceramic products. The Company faces competition from certain of its customers that have the internal capability to produce products competitive with the Company's products and may face competition from new market entrants in the future. In addition, corporations with which the Company has agreements are conducting independent research and development efforts in areas which are or may be competitive with the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved performance characteristics. New product introductions by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's existing products which could materially adversely affect the Company's business, financial condition and results of operations. Moreover, the Company has historically experienced significant price competition in the sale of its pressed ceramic products, which has materially adversely affected the prices and gross margins of such products and the Company's business, financial condition and results of operations. The Company is also experiencing significant price competition which may materially adversely affect the Company's business, financial condition and results of operations. The Company believes that to remain competitive in the future it will need to continue to develop new products and to invest significant financial resources in new product development. There can be no assurance that such new products will be developed or that sales of such new products will be achieved. There can be no assurance that the Company will be able to compete successfully in the future. TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION; UNCERTAINTY OF MARKET ACCEPTANCE AND EMERGING MARKETS. The markets for the Company's products are subject to technological change and new product introductions and enhancements. Customers in the Company's markets require products embodying increasingly 19 advanced electronics packaging and interconnection technology. Accordingly, the Company must anticipate changes in technology and define, develop and manufacture or acquire new products that meet its customers' needs on a timely basis. The Company anticipates that technological changes, such as FLASH memory, advances in plastic materials technology and other semiconductor devices that may be more cost effectively assembled into plastic packages and that do not require the protection characteristics of the Company's ceramic packages, could cause the Company's net sales to decline in the future. There can be no assurance that the Company will be able to identify, develop, manufacture, market, support or acquire new products successfully, that any such new products will gain market acceptance, or that the Company will be able to respond effectively to technological changes. If the Company is unable for technological or other reasons to develop products in a timely manner in response to changes in technology, the Company's business, financial condition and results of operations will be materially adversely affected. There can be no assurance that the Company will not encounter technical or other difficulties that could in the future delay the introduction of new products or product enhancements. In addition, new product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's products, which could materially adversely affect the Company's business, financial condition and results of operations. Even if the Company develops and introduces new products, such products must gain market acceptance and significant sales in order for the Company to achieve its growth objectives. Furthermore, it is essential that the Company develop business relationships with and supply products to customers whose end-user products achieve and sustain market penetration. There can be no assurance that the Company's products will achieve widespread market acceptance or that the Company will successfully develop such customer relationships. Failure by the Company to develop products that gain widespread market acceptance and significant sales or to develop relationships with customers whose end-use 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 matters could materially adversely affect the Company's business, financial condition and results of operations. INTERNATIONAL OPERATIONS. Most of the Company's net sales to date have been made to foreign subsidiaries of European and United States corporations. The Company anticipates that sales to such types of customers will continue to account for most of its net sales in the foreseeable future. As a result, most of the Company's sales will continue to be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing contract manufacturers and customers that are provided with contract manufacturing, potentially adverse tax consequences, extended payment terms, and difficulty in accounts receivable collection. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be implemented by the United States or any other country upon the importation or exportation of the Company's products in the future. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could materially adversely affect the Company's ability to manufacture or sell in foreign markets. There can be no assurance that any of these factors or the adoption of restrictive policies will not have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, as the Company continues to transfer an increasing amount of production equipment to the facility in Indonesia, the Company will be increasingly subject to the risks associated with conducting business in Indonesia, including economic conditions in Indonesia, the burdens of complying with Indonesian laws, particularly with respect to private enterprise and commercial activities, and, possibly, political instability. Enforcement of existing and future laws and private contracts is uncertain, and the implementation and interpretation thereof may be inconsistent. As the Company increases the amount of its assets, particularly in the form of manufacturing equipment, that are located in Indonesia, there can be no assurance that changes in economic and political conditions in Indonesia will not have a material adverse effect on the Company's business, financial condition and results of operations. Enforcement of existing and future laws and private contracts is uncertain, and the implementation and interpretation thereof may be inconsistent. See "-- New 20 Manufacturing Facilities in Indonesia; Transition of Existing Singapore Operations; New Manufacturing Facilities in Indonesia and Singapore." SOLE OR LIMITED SOURCES OF SUPPLY. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. In the production of its CERDIP products the Company has one supplier for its alumina powder, two suppliers for its ultraviolet lenses and one supplier of certain sealing glasses. The Company also has two suppliers of the integrated circuits that are sold with the Company's MCM products. In addition, there are a limited number of qualified suppliers of laminate substrates which are of critical importance to the production of the Company's MCM-L products. The Company's reliance on sole or a limited group of suppliers 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. 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 one year, the Company may expend significant resources. Although recently the Company has generally met its customers' quality and reliability product specifications, the Company has been experiencing difficulties in meeting some of these standards. Although the Company has addressed past concerns and has resolved a number of quality and reliability problems, there can be no assurance that such problems will not recur in the future. If such problems did recur, the Company could experience delays in shipments, increased costs, delays in or cancellation of orders and product returns, any of which would have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the contract manufacturing of pressed ceramic products in Indonesia and commencement of operations in such new facility and conversion of its existing facilities in Singapore for new products will increase the probability of many such risks. The manufacture of the Company's products is complex and subject to a wide variety of factors, including the level of contaminants in the manufacturing environment and the materials used and the performance of personnel and equipment. The Company has in the past experienced lower than anticipated production yields and written off defective inventory as a result of such factors. The Company must also successfully increase production to support anticipated sales volumes. There can be no assurance that the Company will be able to do so or that it will not experience problems in increasing production in the future. The Company's failure to adequately increase production or to maintain high quality production standards would have a material adverse effect on the Company's business, financial condition and results of operations. EXPANSION OF OPERATIONS. In order to be competitive, the Company must implement a variety of systems, procedures and controls and greatly improve its communications between its US and Singapore operations. The Company expects its operating expenses to continue to increase significantly. If orders received by the Company do not result in sales or if the Company is unable to sustain net sales at anticipated levels, the Company's operating results will be materially adversely affected until operating expenses can be reduced. The Company's expansion will also continue to cause a significant strain on the Company's management, financial and other resources. If the Company is to grow, it must expand its accounting and other internal management systems and greatly improve its communications between its US and Singapore operations, and there can be no assurance that the Company will be successful in effecting such expansion. Any failure to expand these areas in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's results of operations. Moreover, there can be no assurance that net sales will increase or remain at or above recent levels or that the Company's systems, procedures and controls will be adequate to support the Company's operations. The Company's financial performance will depend in part on its ability to continue to improve its systems, procedures and controls. INTELLECTUAL PROPERTY MATTERS. Although the Company attempts to protect its intellectual property rights through patents, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise, manufacturing efficiency and marketing and sales abilities of its employees. 21 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 claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company, or that third parties will not assert intellectual property infringement claims against the Company. In addition, there can be no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. Litigation is becoming necessary to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity of and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has not conducted any patent searches or obtained an opinion of counsel with respect to its proprietary rights. Although no claims or litigation related to any intellectual property matter are currently pending against the Company, there can be no assurance that infringement or invalidity claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition and results of operations. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. In addition, the Company could decide to litigate such claims, which could be extremely expensive and time-consuming and could materially adversely affect the Company's business, financial condition and results of operations. POTENTIAL DIVESTITURE OF MPC (S) PTE. LTD. ALUMINUM NITRIDE SUBSIDIARY; OBLIGATION TO PURCHASE PRODUCTS. In connection with the agreements with the Carborundum Company ("Carborundum") for the manufacture of microelectronic packages fabricated with aluminum nitride compounds, the Company granted to Carborundum an irrevocable option, exercisable at any time through December 31, 1996, to acquire for an agreed-upon price set forth in the agreements up to 75% of the ownership of MPC, a subsidiary of the Company organized to manufacture and sell such products only to Carborundum. In addition, Carborundum has a right to acquire for an agreed-upon price set forth in the agreements up to 100% of the ownership of MPC in the event that competitors of Carborundum's microelectronics business acquire more that 10% of the ownership of MPI or gain access to any confidential information of either MPC or MPI relating to Carborundum's microelectronics business. In either event, MPI would lose control of the management and direction of MPC and, in the event of a total divestiture, the right to participate in the profits, if any, of MPC. The exercise of either such option could materially adversely affect the Company's business, financial condition and results of operations. In addition, although Carborundum is obligated to purchase certain specified quantities of such packages from MPC, Carborundum may purchase such products from any other party without regard to such purchase requirements if Carborundum determines in good faith that such third party is more attractive to Carborundum than MPC on an economic, quality or risk basis. The Manufacturing Agreement and Technology Agreement expire after December 31, 1996, if not renewed by the parties. Furthermore, commencing January 1, 1997, Carborundum may unilaterally terminate the Manufacturing Agreement without cause, which termination would also terminate the Technology Agreement. There can be no assurance that Carborundum will not terminate the Manufacturing Agreement after January 1, 1997. The Company would lose its rights to the technology currently licensed to it by Carborundum and the right to manufacture products based on such technology as a result of the expiration of the Manufacturing Agreement or if Carborundum terminates the Manufacturing Agreement. Accordingly, any such expiration or termination would have a material adverse effect on the Company's business, financial condition and results of operation. The Company was recently notified that the new owner of Carborundum has announced its intention to sell such corporation. The Company is unable to determine what impact, if any, such announcement or sale will have on the Company's agreements with Carborundum. 22 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 conducts 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 the Company to significant liabilities, including joint and several liability under certain statues. The imposition of such liabilities could materially adversely affect the Company's business, financial condition or results of operations. GROWTH STRATEGY THROUGH ACQUISITIONS. As part of its growth strategy, the Company has in the past sought and may in the future continue to seek to increase sales and achieve growth through the acquisition of comparable or complementary businesses or technologies. The implementation of this strategy will depend on many factors, including the availability of acquisitions at attractive prices and the ability of the Company to make acquisitions, the integration of acquired businesses into existing operations, the expansion of the Company's customer base and the availability of required capital. Acquisitions by the Company may result in dilutive issuances of equity securities, and in the incurrence of debt and the amorti-zation of goodwill and other intangible assets that could adversely affect the Company's profitability. Any inability to control and manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will successfully expand or that growth and expansion will result in profitability or that the Company's growth plans through acquisitions will not be inhibited by the Company's current lack of resources. DEPENDENCE ON KEY PERSONNEL. The Company's performance depends in significant part upon the continued services of its President and Chief Executive Officer, Timothy da Silva, the Senior Vice President of MPS, Jee Fook Pak, as well as other key personnel, many of whom would be difficult to replace. Mr. Pak is not bound by an employment agreement with the Company. The Company's financial performance also depends in part upon its ability to attract and retain qualified management, technical, and sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The loss of any key employee, the failure of any key employee to perform in his current position or the Company's inability to attract and retain skilled employees, as needed, could materially adversely affect the Company's business, financial condition and results of operations. NASDAQ NATIONAL MARKET LISTING REQUIREMENTS. The Company will be subject to continuing requirements to be listed on the Nasdaq National Market. There can be no assurance that the Company can continue to meet such requirements. The price and liquidity of the Common Stock may be materially adversely affected if the Company is unable to meet such requirements in the future. SALE OF SHARES INTO THE MARKETPLACE. On April 29, 1996, upon termination of the two-year lock-up agreement entered into in connection with the Company's initial public offering, more than an additional 3,000,000 shares of Common Stock became immediately available for sale in the public market, subject, in part, to the volume restrictions of Rule 144. Sales of a significant number of such shares could materially adversely affect the Company's stock price. VOLATILITY OF STOCK PRICE. The Company believes that factors such as announcements of development related to the Company's business, fluctuations in the Company's financial results, general conditions or developments in the semiconductor and personal computer industry and the general economy, sales of the Company's Common Stock into the marketplace, an outbreak of hostilities, natural disaster, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in the Company's relationships with its customers and suppliers, or a shortfall or changes in revenue, gross margins or earnings or other financial results from Analysts' expectations could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In recent years the stock market in general, and the market for share of small capitalization stocks in 23 particular, including the Company, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's Common Stock will not continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. 24 PART II - OTHER INFORMATION
Item 1. Legal Proceedings In February 1995, the Company was sued in the United States District Court for the Southern District of California in two separate class actions alleging various federal securities laws violations by the Company and certain of its officers and directors. In October 1995, these two lawsuits were subsequently combined into one consolidated class action. In November 1995, the Company reached an agreement in principle to settle the consolidated class action lawsuit in exchange for a cash payment of $950,000. The proposed settlement required the Company to contribute $525,000, with the remainder to be paid by the Company's insurance carrier. The proposed settlement was given final approval in May 1996. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Securityholders The Annual Meeting of Shareholders of the Company was held on May 29, 1996. The following items were voted upon by the shareholders with all items being approved.
Votes Against or Votes Broker Votes For Withheld Abstained Non-Votes --------- ---------- --------- --------- (1) Election of the following persons, who were the only nominees, as Directors to hold office until the next Annual Meeting or until their successors are elected and qualified: Wilmer R. Bottoms 3,566,126 19,164 Timothy da Silva 3,566,126 19,164 Cecil E. Smith, Jr. 3,566,126 19,164 Frank L. Howland 3,566,126 19,164 William R. Thompson 3,566,126 19,164 (2) Amendment of the Company's 1993 Stock Option/Stock Issuance Plan to (i) increase the maximum number of shares of Common Stock authorized for issuance over the term of the 1993 Plan from 390,632 to 690,632 shares and (ii) establish a limit on the number of shares of Common Stock for which any one participant may be issued options, separately exercisable stock appreciation rights and direct stock issuances over the term of the 1993 Plan 2,345,753 62,264 7,101 1,170,172 (3) Ratification of BDO Seidman, LLP as the Company's independent accountants for the fiscal year ending December 31, 1996 3,569,490 9,750 1,250
25 On May 29, 1996, a Special Meeting of Shareholders of the Company was held. The following items were voted upon by the shareholders with all items being approved.
Votes Against or Votes Broker Votes For Withheld Abstained Non-Votes --------- ---------- --------- --------- (1) Approval of the convertibility of a debenture issued by MPM (S) Pte. Ltd., a wholly-owned subsidiary of the Company, to a group of related investors, into shares of the Company's Common Stock 3,692,982 (2) Approval of an amendment to the Company's Amended and Restated Articles of Incorporation to increase the authorized number of shares of Common Stock from 10,000,000 shares to 15,000,000 shares, which amendment was necessary in part to effect an increase in the number of shares of Common Stock that may be necessary to provide for the convertibility of the Debenture submitted for approval pursuant to Proposal One 3,692,982
Item 5. Other Information On July 30, 1996, Wilmer R. Bottoms, Chairman of the Board of Directors of the Company, resigned his position on the Board. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: . Exhibit 3.6 - Amended and Restated Articles of Incorporation of the Company. . Exhibit 10.76 - Subscription Agreement by and among the Company, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte Ltd./(1)/ . Exhibit 10.77 - Convertible Loan Agreement by and among the Company, MPM, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd./(1)/ . Exhibit 10.78 - Guarantee issued by the Company /(1)/ . Exhibit 10.79 - 1993 Stock Option/Stock Issuance Plan. . Exhibit 11.1 - Computation of Net Income (Loss) per Common Share . Exhibit 27.1 - Financial Data Schedule /(1)/ These documents are incorporated by reference to the Exhibits 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.
26 (b) The following report on Form 8-K was filed during the quarter ended June 30, 1996: . Report on Form 8-K dated March 27, 1996 was filed with the Securities and Exchange Commission on April 5, 1996, regarding the issuance of 842,013 shares of the Company's Common Stock to Transpac Capital Pte. Ltd. and certain other foreign investors (collectively, "Transpac"), for a purchase price of $2,000,000 and the issuance of a $9,000,000 convertible debenture by one of the Company's subsidiaries to Transpac. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROELECTRONIC PACKAGING, INC. (Registrant) By: /s/ TIMOTHY DA SILVA ----------------------------------------- Timothy da Silva President and Chief Executive Officer and Acting Chief Financial Officer Date: August 14, 1996 28 EXHIBIT INDEX
Number Description - ------ ----------- 3.6 Amended and Restated Articles of Incorporation of the Company. 10.76 Subscription Agreement by and among the Company, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte Ltd./(1)/ 10.77 Covertible Loan Agreement by and among the Company, MPM, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd./(1)/ 10.78 Guarantee issued by the Company/(1)/ 10.79 1993 Stock Option/Stock Issuance Plan 11.1 Computation of Net Income (Loss) per Common Share 27.1 Financial Data Schedule /(1)/ These documents are incorporated by reference to the Exhibits 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.
29 EX-3.6 2 AMENDED & RESTATED ARTICLES OF INCORP. EXHIBIT 3.6 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MICROELECTRONIC PACKAGING, INC., a California Corporation The undersigned Timothy da Silva and Warren T. Lazarow hereby certify that: ONE: They are the duly elected and acting President and Assistant Secretary, respectively, of said corporation. TWO: The Amended and Restated Articles of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I --------- The name of the corporation (herein called the "Corporation") is MICROELECTRONIC PACKAGING, INC. ARTICLE II ---------- The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III ----------- (a) Class of Stock. The Corporation is authorized to issue one class -------------- of stock to be designated "Common Stock," no par value per share. The total number of shares that the Corporation is authorized to issue is fifteen million (15,000,000) shares. Fifteen million (15,000,000) shares shall be Common Stock. (b) Rights and Restrictions of Common Stock. The Common Stock --------------------------------------- authorized by this Amended and Restated Articles of Incorporation shall have the rights and restrictions as follows: 1. Dividend Rights. The holders of the Common Stock shall be --------------- entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. In the event of any voluntary or involuntary ------------------ liquidation, dissolution or winding up of the Corporation, the holders of shares of the Common Stock shall be entitled to receive all of the assets of the Corporation available for distribution to its shareholders, ratably in proportion to the number of shares of the Common Stock held by them. 3. Redemption. The Common Stock is not redeemable. ---------- 4. Voting Rights. The holders of shares of Common Stock shall be ------------- entitled to vote on all matters at all meetings of the shareholders of the Corporation and shall be entitled to one vote for each share of Common Stock entitled to vote at such meeting. ARTICLE IV ---------- Except as otherwise provided in this Amended and Restated Articles of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation. ARTICLE V --------- The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the shareholders of the Corporation. ARTICLE VI ---------- Elections of directors need not be by ballot unless a shareholder demands election by ballot at a meeting of shareholders and before the voting begins or unless the Bylaws of the Corporation shall so provide. ARTICLE VII ----------- Meetings of shareholders may be held within or without the State of California, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of California at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE VIII ------------ A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the California General Corporation Law. Any repeal or modification of this Article VIII by the shareholders of the Corporation shall 2. not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE IX ---------- The Corporation is authorized to indemnify the directors and officers of the Corporation to the fullest extent permissible under California law. ARTICLE X --------- The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. * * * THREE: The foregoing amendment and restatement has been approved by the Board of Directors of said Corporation. FOUR: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said Corporation in accordance with Sections 902 and 903 of the California General Corporation Law; the total number of outstanding shares of the only class entitled to vote with respect to the foregoing amendment was 5,508,813 shares of Common Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock. IN WITNESS WHEREOF, the undersigned has executed this certificate on May 29, 1996. ______________________________ Timothy da Silva, President ______________________________ Warren T. Lazarow, Assistant Secretary 3. The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and the statements therein are true. Executed at San Diego, California, on May 29, 1996. _____________________________ Timothy da Silva _____________________________ Warren T. Lazarow 4. EX-10.79 3 1993 STOCK OPTION/STOCK ISSUANCE PLAN EXHIBIT 10.79 MICROELECTRONIC PACKAGING, INC. 1993 STOCK OPTION/STOCK ISSUANCE PLAN ------------------------------------- (Amended through February 29, 1996) ARTICLE ONE GENERAL ------- I. PURPOSE OF THE PLAN A. This 1993 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote the interests of Microelectronic Packaging, Inc., a California corporation (the "Corporation"), by providing eligible individuals with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation (or its parent or subsidiary corporations). B. The Discretionary Option Grant and Stock Issuance Programs under this Plan became effective on the date on which the shares of the Corporation's Common Stock were first registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Such date is hereby designated as the Plan Effective Date. The Automatic Option Grant Program under this Plan became effective immediately upon the execution and final pricing of the Underwriting Agreement for the initial public offering of the Corporation's Common Stock. The execution date of such Underwriting Agreement is hereby designated as the Automatic Grant Program Effective Date. C. This Plan serves as the successor to the Corporation's 1988 Stock Option Plan (the "Predecessor Plan"), and no further option grants or share issuances shall be made under the Predecessor Plan from and after the Plan Effective Date. All outstanding stock options and unvested share issuances under the Predecessor Plan on such Plan Effective Date are hereby incorporated into this Plan and shall accordingly be treated as outstanding stock options and unvested share issuances under this Plan. However, each outstanding option grant so incorporated shall continue to be governed solely by the express terms and conditions of the instrument evidencing such grant, and no provision of this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of the Corporation's Common Stock thereunder. All unvested shares of Common Stock outstanding under the Predecessor Plan on the Plan Effective Date shall continue to be governed solely by the express terms and conditions of the instruments evidencing such issuances, and no provision of this Plan shall be deemed to affect or modify the rights or obligations of the holders of such unvested shares. II. DEFINITIONS A. For purposes of the Plan, the following definitions shall be in effect: Board: the Corporation's Board of Directors. Change in Control: a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept; or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. Code: the Internal Revenue Code of 1986, as amended. Committee: the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan. Common Stock: shares of the Corporation's common stock. Corporate Transaction: any of the following shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Corporation is incorporated, 2. (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation, or (iii) any reverse merger in which the Corporation is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. Employee: an individual who performs services while in the employ of the Corporation or one or more parent or subsidiary corporations, subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance. Fair Market Value: the Fair Market Value per share of Common Stock determined in accordance with the following provisions: - If the Common Stock is not at the time listed or admitted to trading on any national stock exchange but is traded on the Nasdaq National Market, the Fair Market Value shall be the closing selling price per share on the date in question, as such price is reported by the National Association of Securities Dealers through the Nasdaq National Market or any successor system. If there is no reported closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value. - If the Common Stock is at the time listed or admitted to trading on any national stock exchange, then the Fair Market Value shall be the closing selling price per share on the date in question on the exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. Optionee: a person to whom an option is granted under the Discretionary Option Grant or Automatic Option Grant Program. Participant: a person who is issued Common Stock under the Stock Issuance Program. 3. Permanent Disability or Permanently Disabled: the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. Plan Administrator: the Committee in its capacity as the administrator of the Plan. Service: the performance of services on a periodic basis for the Corporation (or any parent or subsidiary corporation) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor, except to the extent otherwise specifically provided in the applicable stock option or stock issuance agreement. B. The following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. III. STRUCTURE OF THE PLAN A. Stock Programs. The Plan shall be divided into three separate -------------- components: the Discretionary Option Grant Program specified in Article Two, the Automatic Option Grant Program specified in Article Three and the Stock Issuance Program specified in Article Four. Under the Discretionary Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock in accordance with the provisions of Article Two. Under the Automatic Option Grant Program, each individual serving as an eligible non-employee Board member on the Automatic Grant Program Effective Date and each individual who first joins the Board as an eligible non-employee director after the Automatic Grant Program Effective Date will at periodic intervals receive option grants to purchase shares 4. of Common Stock in accordance with the provisions of Article Three, with the first such grants to be made on the Automatic Grant Program Effective Date. Under the Stock Issuance Program, eligible individuals may be issued shares of Common Stock directly, either through the immediate purchase of such shares at a price not less than eighty-five percent (85%) of the fair market value of the shares at the time of issuance or as a bonus for past services rendered the Corporation. B. General Provisions. Unless the context clearly indicates ------------------ otherwise, the provisions of Articles One and Five shall apply to the Discretionary Option Grant Program, the Automatic Option Grant Program and the Stock Issuance Program and shall accordingly govern the interests of all individuals under the Plan. IV. ADMINISTRATION OF THE PLAN A. Both the Discretionary Option Grant Program and the Stock Issuance Program shall be administered by the Committee. No non-employee Board member shall be eligible to serve on the Committee if such individual has, within the relevant period designated below, received an option grant or direct stock issuance under this Plan or any other stock plan of the Corporation (or any parent or subsidiary corporation), other than pursuant to the Automatic Option Grant Program: (i) for each of the initial members of the Committee, the period commencing with the Plan Effective Date and ending with the date of his or her appointment to the Committee, or (ii) for any successor or substitute member, the twelve (12)- month period immediately preceding the date of his or her appointment to the Committee or (if shorter) the period commencing with the Plan Effective Date and ending with the date of his or her appointment to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. B. The Committee as Plan Administrator shall have full power and authority (subject to the express provisions of the Plan) to establish rules and regulations for the proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding option grants or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Option Grant or Stock Issuance Program or any outstanding option or share issuance thereunder. C. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the express terms and conditions of Article Three, and the 5. Plan Administrator shall exercise no discretionary functions with respect to option grants made pursuant to that program. V. OPTION GRANTS AND STOCK ISSUANCES A. The persons eligible to participate in the Discretionary Option Grant Program under Article Two and the Stock Issuance Program under Article Four shall be limited to the following: (i) officers and other key employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations); and (ii) those consultants or other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. The non-employee members of the Board shall not be eligible to --- participate in the Discretionary Option Grant and Stock Issuance Programs or in any other stock option, stock purchase, stock bonus or other stock plan of the Corporation (or its parent or subsidiary corporations). Non-employee members of the Board shall, however, be eligible to receive automatic option grants pursuant to the provisions of Article Three. C. The Plan Administrator shall have full authority to determine, (i) with respect to the option grants made under the Discretionary Option Grant Program, which eligible individuals are to receive option grants, the number of shares to be covered by each such grant, the status of the granted option as either an incentive stock option ("Incentive Option") that satisfies the requirements of Section 422 of the Code or a non-statutory option not intended to meet such requirements, the time or times at which each granted option is to become exercisable and the maximum term for which the option may remain outstanding and (ii), with respect to stock issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule (if any) to be applicable to the issued shares, and the consideration to be paid by the individual for such shares. VI. STOCK SUBJECT TO THE PLAN A. Shares of Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 690,632 shares, subject to adjustment from time to time in accordance with the provisions of this Section VI. Such authorized share reserve is comprised of (i) the number of shares which remained for 6. issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation's shareholders prior to such Plan Effective Date, including the shares subject to the outstanding options incorporated into this Plan and any other shares which would have been available for future option grant under the Predecessor Plan as last approved by the shareholders, (ii) an additional increase of 251,447 shares authorized by the Board under this Plan and approved by the Corporation's shareholders prior to the Plan Effective Date and (iii) additional increases of 110,000 shares and 190,000 shares authorized by the Board on June 5, 1995 and February 29, 1996, respectively, subject to the approval of the Corporation's shareholders at the 1996 Annual Meeting. To the extent one or more outstanding options under the Predecessor Plan incorporated into this Plan are subsequently exercised, the number of shares issued with respect to each such option shall reduce, on a share-for-share basis, the number of shares available for issuance under this Plan. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1996 calendar year. C. Should one or more outstanding options under this Plan (including outstanding options under the Predecessor Plan incorporated into this Plan) expire or terminate for any reason prior to exercise in full (including any option cancelled in accordance with the cancellation-regrant provisions of Section IV of Article Two of the Plan), then the shares subject to the portion of each option not so exercised shall be available for subsequent option grants under the Plan. All share issuances under the Plan (including unvested share issuances under the Predecessor Plan which have been incorporated into this Plan), whether or not the shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for- share basis the number of shares of Common Stock available for subsequent option grants under the Plan. In addition, should the exercise price of an outstanding option under the Plan (including any option incorporated from the Predecessor Plan) be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan or the vesting of a direct share issuance made under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the share issuance, and not by the net number of shares of Common Stock actually issued to the holder of such option or share issuance. D. Should any change be made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances per calendar year, 7. (iii) the number and/or class of securities for which automatic option grants are to be subsequently made per eligible non-employee Board member under the Automatic Option Grant Program, (iv) the number and/or class of securities and price per share in effect under each option outstanding under either the Discretionary Option Grant or Automatic Option Grant Program and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 8. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM ---------------------------------- I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Discretionary Option Grant Program shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or non-statutory options. Individuals who are not Employees of the Corporation or its parent or subsidiary corporations may only be granted non-statutory options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply -------- with the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Option Price. ------------ 1. The option price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The option price per share of Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of such Common Stock on the grant date. (ii) The option price per share of Common Stock subject to a non-statutory stock option shall in no event be less than eighty-five percent (85%) of the Fair Market Value of such Common Stock on the grant date. 2. The option price shall become immediately due upon exercise of the option and, subject to the provisions of Section I of Article Five and the instrument evidencing the grant, shall be payable in one of the following alternative forms specified below: (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); 9. (iii) full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date and cash or check drawn to the Corporation's order; or (iv) full payment through a broker-dealer sale and remittance procedure pursuant to which the Optionee shall provide irrevocable written instructions to (I) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and state income and employment taxes required to be withheld by the Corporation in connection with such purchase and (II) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this subparagraph 2, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure is used in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. B. Term and Exercise of Options. Each option granted under this ---------------------------- Discretionary Option Grant Program shall be exercisable at such time or times and during such period as is determined by the Plan Administrator and set forth in the instrument evidencing the grant. No such option, however, shall have a maximum term in excess of ten (10) years from the grant date. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution following the Optionee's death. C. Termination of Service. ---------------------- 1. The following provisions shall govern the exercise period applicable to any outstanding options held by the Optionee at the time of cessation of Service or death. (i) Should an Optionee cease Service for any reason (other than death) while holding one or more outstanding options under this Article Two, then none of those options shall remain exercisable for more than a ninety (90)-day period (or such shorter period determined by the Plan Administrator and set forth in the instrument evidencing the grant) measured from the date of such cessation of Service. 10. (ii) Any option held by the Optionee under this Article Two and exercisable in whole or in part on the date of his or her death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such exercise, however, must occur prior to the earlier ------- of (A) six (6) months measured from the date of the Optionee's death or (B) the specified expiration date of the option term. Upon the occurrence of the earlier event, the option shall terminate. (iii) Under no circumstances shall any such option be exercisable after the specified expiration date of the option term. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of shares (if any) in which the Optionee is vested at the time of his or her cessation of Service. Upon the expiration of the limited post-Service exercise period or (if earlier) upon the specified expiration date of the option term, each such option shall terminate and cease to be outstanding with respect to any vested shares for which the option has not otherwise been exercised. However, each outstanding option shall immediately terminate and cease to be outstanding, at the time of the Optionee's cessation of Service, with respect to any shares for which the option is not otherwise at that time exercisable or in which the Optionee is not otherwise vested. (v) Should (A) the Optionee's Service be terminated for misconduct (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement) or (B) the Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Corporation or its parent or subsidiary corporations, then in any such event all outstanding options held by the Optionee under this Article Two shall terminate immediately and cease to be outstanding. 2. The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the Optionee under this Article Two to be exercised, during the limited post-Service exercise period applicable under subparagraph 1 above, not only with respect to the number of vested shares of Common Stock for which each such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more subsequent installments in which Optionee would have otherwise vested had such cessation of Service not occurred. 11. D. Shareholder Rights. ------------------ An Optionee shall have no shareholder rights with respect to any shares covered by the option until such individual shall have exercised the option and paid the option price for the purchased shares. E. Repurchase Rights. ----------------- The shares of Common Stock acquired upon the exercise of any Article Two option grant may be subject to repurchase by the Corporation in accordance with the following provisions: (i) The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under this Article Two. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase any or all of those unvested shares at the option price paid per share. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the instrument evidencing such repurchase right. (ii) All of the Corporation's outstanding repurchase rights under this Article Two shall automatically terminate, and all shares subject to such terminated rights shall immediately vest in full, upon the occurrence of a Corporate Transaction, except to the extent: (A) any such repurchase right is expressly assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (B) such termination is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. (iii) The Plan Administrator shall have the discretionary authority, exercisable either before or after the Optionee's cessation of Service, to cancel the Corporation's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Optionee under this Article Two and thereby accelerate the vesting of such shares in whole or in part at any time. II. INCENTIVE OPTIONS The terms and conditions specified below shall be applicable to all Incentive Options granted under this Article Two. Incentive Options may only be granted to individuals who are Employees. Options which are specifically designated as "non-statutory" options when issued under the Plan shall not be --- subject to such terms and conditions. 12. A. Dollar Limitation. The aggregate Fair Market Value (determined as ----------------- of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee after December 31, 1986 under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. Should the number of shares of Common Stock for which any Incentive Option first becomes exercisable in any calendar year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation, then that option may nevertheless be exercised in that calendar year for the excess number of shares as a non-statutory option under the Federal tax laws. B. 10% Shareholder. If any individual to whom an Incentive Option is --------------- granted is the owner of stock (as determined under Section 424(d) of the Code) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation or any one of its parent or subsidiary corporations, then the option price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the grant date, and the option term shall not exceed five (5) years, measured from the grant date. Except as modified by the preceding provisions of this Section II, the provisions of Articles One, Two and Five of the Plan shall apply to all Incentive Options granted hereunder. III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL A. In the event of any Corporate Transaction, each option which is at the time outstanding under this Article Two shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. However, an outstanding option under this Article Two shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option, or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option 13. comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. Immediately following the consummation of the Corporate Transaction, all outstanding options under this Article Two shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company. C. Each outstanding option under this Article Two which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to the option holder, in consummation of such Corporate Transaction, had such person exercised the option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such -------- securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan following the consummation of the Corporate Transaction shall be appropriately adjusted. D. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide (upon such terms as it may deem appropriate) for the automatic acceleration of one or more outstanding options granted under the Plan that are assumed or replaced in a Corporate Transaction and do not otherwise accelerate at that time, in the event the Optionee's Service should subsequently terminate within a designated period following the effective date of such Corporate Transaction. E. The grant of options under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. F. The Plan Administrator shall have the discretionary authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under this Article Two (and the termination of one or more of the Corporation's outstanding repurchase rights under this Article Two) upon the occurrence of a Change in Control. The Plan Administrator shall also have full power and authority to condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the subsequent termination of the Optionee's Service within a specified period following the Change in Control. G. Any options accelerated in connection with the Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. 14. H. The exercisability as incentive stock options under the Federal tax laws of any options accelerated under this Section III in connection with a Corporate Transaction or Change in Control shall remain subject to the dollar limitation of Section II of this Article Two. To the extent such dollar limitation is exceeded, the accelerated option shall be exercisable as a non- statutory option under the Federal tax laws. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, the cancellation of any or all outstanding options under this Article Two (including outstanding options under the Predecessor Plan incorporated into this Plan) and to grant in substitution new options under the Plan covering the same or different numbers of shares of Common Stock but with an option price per share not less than (i) one hundred percent (100%) of the Fair Market Value on the new grant date in the case of a grant of an Incentive Option, (ii) one hundred ten percent (110%) of such Fair Market Value in the case of a grant of an Incentive Option to a 10% Shareholder or (iii) eighty-five percent (85%) of such Fair Market Value in the case of all other grants. V. INITIAL GRANTS For purposes of option grants made at the time of the Common Stock is first registered under Section 12(g) of the 1934 Act or at any time thereafter prior to the time the Common Stock is first traded on a national securities exchange or the Nasdaq National Market, the Fair Market Value of the Common Stock at such time shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. 15. ARTICLE THREE AUTOMATIC OPTION GRANT PROGRAM ------------------------------ I. ELIGIBILITY A. Eligible Optionees. The individuals eligible to receive ------------------ automatic option grants pursuant to the provisions of this Article Three program shall be limited to those individuals who are serving as non-employee Board members on the Automatic Grant Program Effective Date or who are first elected or appointed as non-employee Board members on or after such Effective Date, whether through appointment by the Board or election by the Corporation's shareholders. In no event, however, shall a non-employee Board member be eligible to participate in the Automatic Option Grant Program if such individual has at any time been in the prior employ of the Corporation (or any parent or subsidiary corporation). Each non-employee Board member eligible to participate in the Automatic Option Grant Program pursuant to the foregoing criteria shall be designated an Eligible Director for purposes of the Plan. B. Limitation. Except for the option grants to be made pursuant to ---------- the provisions of this Automatic Option Grant Program, Eligible Directors shall not be eligible to receive any additional option grants or stock issuances under - --- this Plan or any other stock plan of the Corporation (or its parent or subsidiaries). II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant Dates. Option grants shall be made under this Article ----------- Three on the dates specified below: 1. Initial Grant. Each Eligible Director who is a non-employee Board member on the Automatic Grant Program Effective Date and each Eligible Director who is first elected or appointed as a non-employee Board member after such date shall automatically be granted, on the Automatic Grant Program Effective Date or on the date of such initial election or appointment (as the case may be), a Non- Statutory Option to purchase 9,000 shares of Common Stock upon the terms and conditions of this Article Three. 2. Annual Grant. On the date of each Annual Shareholders Meeting, beginning with the 1995 Annual Meeting, each individual who is to continue to serve as an Eligible Director shall automatically be granted, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, a Non-Statutory Option to purchase an additional 900 shares of Common Stock upon the terms and conditions of this Article Three, provided he or she has served as a non-employee Board 16. member for at least six (6) months prior to the date of such Annual Meeting. There shall be no limit on the number of such 900-share option grants any one Eligible Director may receive over his or her period of Board service. B. Exercise Price. The exercise price per share of Common Stock -------------- subject to each automatic option grant made under this Article Three shall be determined in accordance with the following provisions: - For the automatic option grants made on the Automatic Grant Program Effective Date, the exercise price per share of Common Stock shall be equal to the price per share at which the Common Stock is sold in the initial public offering of the Common Stock pursuant to the Underwriting Agreement. - For all other automatic option grants, the exercise price per share of Common Stock shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. C. Payment. ------- The exercise price shall be payable in one of the alternative forms specified below: (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); (iii) full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date and cash or check drawn to the Corporation's order; or (iv) full payment through a sale and remittance procedure pursuant to which the Optionee shall provide irrevocable written instructions to (I) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares and (II) the 17. Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this subparagraph C, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure specified above is used for the exercise of the option for vested shares, payment of the exercise price for the purchased shares must accompany the exercise notice. D. Option Term. Each automatic grant under this Article Three shall ----------- have a maximum term of ten (10) years measured from the automatic grant date. E. Exercisability. Each automatic grant shall become exercisable in -------------- a series of four (4) equal and successive annual installments over the Optionee's period of continued service as a Board member, with the first such installment to become exercisable one (1) year after the automatic grant date. The exercisability of each automatic grant outstanding under this Article Three shall be accelerated as provided in Section II.G and Section III of this Article Three. F. Non-Transferability. During the lifetime of the Optionee, each ------------------- automatic option grant shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution following Optionee's death. G. Effect of Termination of Board Membership. ----------------------------------------- 1. Should the Optionee cease to serve as a Board member for any reason (other than death or Permanent Disability) while holding one or more automatic option grants under this Article Three, then such individual shall have a ninety (90)-day period following the date of such cessation of Board membership in which to exercise each such option for any or all of the shares of Common Stock for which that option is exercisable at the time of such cessation of Board service. Each such option shall immediately terminate and cease to be outstanding, at the time of such cessation of Board service, with respect to any shares for which the option is not otherwise at that time exercisable. 2. Should the Optionee die within ninety (90) days after cessation of Board service, then any automatic option grant held by the Optionee at the time of death may subsequently be exercised, for any or all of the shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Board membership (less any option shares subsequently purchased by the Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and 18. distribution. Any such exercise must occur within six (6) months after the date of the Optionee's death. 3. Should the Optionee die or become Permanently Disabled while serving as a Board member, then any automatic option grant held by such Optionee under this Article Three shall accelerate in full, and the Optionee (or the representative of the Optionee's estate or the person or persons to whom the option is transferred upon the Optionee's death) shall have a six (6)-month period following the date of the Optionee's cessation of Board membership in which to exercise such option for any or all of the shares of Common Stock subject to the option at the time of such cessation of Board membership. 4. In no event shall any automatic grant under this Article Three remain exercisable after the expiration date of the ten (10)-year option term. Upon the expiration of the applicable post-service exercise period under subparagraph 1, 2 or 3 above or (if earlier) upon the expiration of the ten (10)-year option term, the automatic grant shall terminate and cease to be outstanding for any unexercised shares for which the option was otherwise exercisable at the time of the Optionee's cessation of Board membership. H. Shareholder Rights. The holder of an automatic option grant under ------------------ this Article Three shall have none of the rights of a shareholder with respect to any RESTRICTIONS shares subject to such option until such individual shall have exercised the option and paid the exercise price for the purchased shares. I. Remaining Terms. The remaining terms and conditions of each --------------- automatic option grant shall be as set forth in the form Director Automatic Grant Agreement attached as Exhibit A. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each automatic option grant at the time outstanding under this Article Three shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares. Immediately after the consummation of the Corporate Transaction, all automatic option grants under this Article Three shall terminate and cease to be outstanding. B. In connection with any Change in Control, each automatic option grant at the time outstanding under this Article Three shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares. Any option accelerated in connection with the Change in 19. Control shall remain fully exercisable until the expiration or sooner termination of the option term. C. The automatic option grants outstanding under this Article Three shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS The provisions of this Automatic Option Grant Program, together with the automatic option grants outstanding under this Article Three, may not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations. 20. ARTICLE FOUR STOCK ISSUANCE PROGRAM ---------------------- I. TERMS AND CONDITIONS OF STOCK ISSUANCES Shares may be issued under the Stock Issuance Program through direct and immediate purchases without any intervening stock option grants. The issued shares shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") that complies with the terms and conditions of this Article Four. A. Consideration ------------- 1. Shares of Common Stock shall be issued under the Stock Issuance Program for one or more of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check drawn to the Corporation's order; (ii) a promissory note payable to the Corporation's order in one or more installments, which may be subject to cancellation in whole or in part upon terms and conditions established by the Plan Administrator; or (iii) past services rendered to the Corporation or any parent or subsidiary corporation. 2. Shares of Common Stock may, in the absolute discretion of the Plan Administrator, be issued for consideration with a value less than one hundred percent (100%) of the Fair Market Value of such shares at the time of issuance, but in no event less than eighty-five percent (85%) of such Fair Market Value. B. Vesting Provisions ------------------ 1. Shares of Common Stock issued under the Stock Issuance Program may, in the absolute discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: 21. (i) the Service period to be completed by the Participant or the performance objectives to be achieved by the Corporation, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Issuance Agreement executed by the Corporation and the Participant at the time such unvested shares are issued. 2. The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to him or her under the Plan, whether or not his or her interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares by reason of any stock dividend, stock split, reclassification of Common Stock or other similar change in the Corporation's capital structure or by reason of any Corporate Transaction shall be issued, subject to (i) the same vesting requirements applicable to his or her unvested shares and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock under the Plan, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further shareholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money promissory note), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 4. The Plan Administrator may in its discretion elect to waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non- completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. 22. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service. II. CORPORATE TRANSACTIONS/CHANGE IN CONTROL A. Upon the occurrence of any Corporate Transaction, all unvested shares of Common Stock at the time outstanding under the Stock Issuance Program shall immediately vest in full, except to the extent the Plan Administrator imposes limitations in the Issuance Agreement which preclude such accelerated vesting in whole or in part. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the shares are issued under the Stock Issuance Program or at any time while the issued shares remain unvested, to provide for the immediate and automatic vesting of one or more of those shares at the time of a Change in Control. The Plan Administrator shall also have full power and authority to condition any such accelerated vesting upon the subsequent termination of the Participant's Service within a specified period following the Change in Control. III. TRANSFER RESTRICTIONS/SHARE ESCROW A. Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing such unvested shares. To the extent an escrow arrangement is utilized, the unvested shares and any securities or other assets issued with respect to such shares (other than regular cash dividends) shall be delivered in escrow to the Corporation to be held until the Participant's interest in such shares (or other securities or assets) vests. Alternatively, if the unvested shares are issued directly to the Participant, the restrictive legend on the certificates for such shares shall read substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND ARE ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER AND (II) CANCELLATION OR REPURCHASE IN THE EVENT THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) CEASES TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER RESTRICTIONS AND THE TERMS AND CONDITIONS OF SUCH CANCELLATION OR REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) DATED ________________, 199__, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." 23. B. The Participant shall have no right to transfer any unvested shares of Common Stock issued to him or her under the Stock Issuance Program. For purposes of this restriction, the term "transfer" shall include (without limitation) any sale, pledge, assignment, encumbrance, gift, or other disposition of such shares, whether voluntary or involuntary. Upon any such attempted transfer, the unvested shares shall immediately be cancelled, and neither the Participant nor the proposed transferee shall have any rights with respect to those shares. However, the Participant shall have the right to make a gift of unvested shares acquired under the Stock Issuance Program to his or her spouse or issue, including adopted children, or to a trust established for such spouse or issue, provided the donee of such shares delivers to the Corporation a written agreement to be bound by all the provisions of the Stock Issuance Program and the Issuance Agreement applicable to the gifted shares. 24. ARTICLE FIVE MISCELLANEOUS ------------- I. LOANS OR INSTALLMENT PAYMENTS A. The Plan Administrator may, in its discretion, assist any Optionee or Participant (including an Optionee or Participant who is an officer of the Corporation) in the exercise of one or more options granted to such Optionee under the Discretionary Option Grant Program or the purchase of one or more shares issued to such Participant under the Stock Issuance Program, including the satisfaction of any Federal and state income and employment tax obligations arising therefrom, by (i) authorizing the extension of a loan from the Corporation to such Optionee or Participant or (ii) permitting the Optionee or Participant to pay the option price or purchase price for the purchased Common Stock in installments over a period of years. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be upon such terms as the Plan Administrator specifies in the applicable option or issuance agreement or otherwise deems appropriate under the circumstances. Loans or installment payments may be authorized with or without security or collateral. However, any loan made to a consultant or other non- employee advisor must be secured by property other than the purchased shares of Common Stock. In all events, the maximum credit available to the Optionee or Participant may not exceed the option or purchase price of the acquired shares plus any Federal and state income and employment tax liability incurred by the Optionee or Participant in connection with the acquisition of such shares. B. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under this financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Plan Administrator may deem appropriate. II. AMENDMENT OF THE PLAN AND AWARDS A. The Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. However, (i) no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Stock Issuance Program prior to such action, unless the Optionee or Participant consents to such amendment, and (ii) any amendment made to the Automatic Option Grant Program (or any options outstanding thereunder) shall be in compliance with the limitation of Section IV of Article Three. In addition, the Board may not, without the approval of the Corporation's shareholders, amend the Plan to (i) materially increase the maximum number of shares 25. issuable under the Plan, the number of shares for which options may be granted under the Automatic Option Grant Program, or the maximum number of shares for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances per calendar year, except for permissible adjustments under Section VI.C. of Article One, (ii) materially modify the eligibility requirements for Plan participation or (iii) materially increase the benefits accruing to Plan participants. B. (i) Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and (ii) shares of Common Stock may be issued under the Stock Issuance Program, which are in both instances in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Discretionary Option Grant Program or the Stock Issuance Program are held in escrow until shareholder approval is obtained for a sufficient increase in the number of shares available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the first such excess option grants or excess share issuances are made, then (I) any unexercised excess options shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund the purchase price paid for any excess shares actually issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow. III. TAX WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of stock options for such shares or the vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income tax and employment tax withholding requirements. The Plan Administrator may, in its discretion and in accordance with the provisions of this Section III of Article Five and such supplemental rules as the Plan Administrator may from time to time adopt (including the applicable safe-harbor provisions of Rule 16b-3 of the Securities and Exchange Commission), provide any or all holders of non-statutory options (other than the automatic grants made pursuant to Article Three of the Plan) or unvested shares under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Federal, state and local income and employment tax liabilities incurred by such holders in connection with the exercise of their options or the vesting of their shares (the "Taxes"). Such right may be provided to any such holder in either or both of the following formats: (i) Stock Withholding: The holder of the non-statutory ----------------- option or unvested shares may be provided with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such non-statutory option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal 26. to the percentage of the applicable Taxes (not to exceed one hundred percent (100%)) designated by the holder. (ii) Stock Delivery: The Plan Administrator may, in its -------------- discretion, provide the holder of the non-statutory option or the unvested shares with the election to deliver to the Corporation, at the time the non-statutory option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such individual (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes incurred in connection with such option exercise or share vesting (not to exceed one hundred percent (100%)) designated by the holder. IV. EFFECTIVE DATE AND TERM OF PLAN A. Provided this Plan is approved by the Corporation's shareholders on or before the Plan Effective Date, this Plan shall, as successor to the Predecessor Plan, become effective as of such Effective Date, and no further option grants or stock issuances shall be made under the Predecessor Plan from and after the Plan Effective Date. B. Each stock option grant outstanding under the Predecessor Plan immediately prior to the Plan Effective Date shall be incorporated into this Plan and treated as an outstanding option under this Plan, but each such option shall continue to be governed solely by the terms and conditions of the instrument evidencing such grant, and nothing in this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to their acquisition of shares of Common Stock thereunder. Each unvested share of Common Stock outstanding under the Predecessor Plan on the Plan Effective Date shall continue to be governed solely by the terms and conditions of the instrument evidencing such share issuance, and nothing in this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holder of such unvested shares. C. The option/vesting acceleration provisions of Section III of Article Two and Section II of Article Four relating to Corporate Transactions and Changes in Control may, in the Plan Administrator's discretion, be extended to one or more stock options or unvested share issuances which are outstanding under the Predecessor Plan on the Plan Effective Date but which do not otherwise provide for such acceleration. D. The Plan was amended by the Board on June 5, 1995 to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 110,000 shares, and the Plan was further amended by the Board on February 29, 1996 to (i) increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 190,000 shares and (ii) establish a 500,000-share limit on the aggregate number of shares of Common Stock for which any one participant may be issued stock options and direct stock issuances over the remaining term of the Plan. Each of the amendments is 27. subject to shareholder approval at the 1996 Annual Shareholders Meeting, and no option granted on the basis of the share increases authorized by those amendments shall become exercisable in whole or in part unless and until such shareholder approval is obtained. If such shareholder approval is not obtained at the 1996 Annual Meeting, then all options granted on the basis of those share increases shall immediately terminate without ever becoming exercisable for the non-approved shares, and no further option grants shall be made on the basis of those increases. However, the Plan shall continue in effect until the reserve of Common Stock under the Plan as last approved by the Corporation's shareholders shall have been issued. E. The Plan shall terminate upon the earlier of (i) December 8, 2003 ------- or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options granted under the Plan or the issuance of shares (whether vested or unvested) under the Stock Issuance Program. If the date of termination is determined under clause (i) above, then all option grants and unvested share issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such grants or issuances. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants or share issuances under the Plan shall be used for general corporate purposes VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option under the Plan, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise or surrender of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any securities exchange on which stock of the same class is then listed. 28. VII. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. VIII. MISCELLANEOUS PROVISIONS A. The right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee or Participant. B. The provisions of the Plan relating to the exercise of options and the vesting of shares shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. C. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the Participants and Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 29. EX-11.1 4 COMPUTATION OF NET INCOME (LOSS) PER SHARE Exhibit 11.1 MICROELECTRONIC PACKAGING, INC. COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Three months ended June 30, Six months ended June 30, ---------------------------- ---------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Net income (loss) $ 610,000 $(1,833,000) $ 1,175,000 $(2,393,000) ------------ ------------ ------------ ------------ Weighted average shares outstanding: Common stock and common stock equivalents 5,746,000 4,660,000 5,327,000 4,660,000 ------------ ------------ ------------ ----------- Net income (loss) per common share $ 0.11 $ (0.39) $ 0.22 $ (0.51) ============ ============ ============ ===========
EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AS OF 6/30/96 AND STATEMENTS OF OPERATIONS CASH FLOW AND SHAREHOLDERS EQUITY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 6,205 0 8,783 0 7,266 27,090 21,711 0 56,987 25,077 0 0 0 0 0 56,987 33,575 33,575 27,426 31,686 117 0 1,084 1,222 47 0 0 0 0 1,175 .22 0
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