-----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, UbKEQG9toJ1qj2uriwdHm8wNzzrKgtFRy8M+BVJADOjaIhh3Q1nCvBsJXJTWMfvO 1HdRhdGFwfqHXF+GK07Qtg== 0001017062-98-000724.txt : 19980401 0001017062-98-000724.hdr.sgml : 19980401 ACCESSION NUMBER: 0001017062-98-000724 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROELECTRONIC PACKAGING INC /CA/ CENTRAL INDEX KEY: 0000916232 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943142624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23562 FILM NUMBER: 98580580 BUSINESS ADDRESS: STREET 1: 9577 CHESAPEAKE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 6192927000 MAIL ADDRESS: STREET 1: 9577 CHESAPEAKE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92123 10-K 1 10-K FOR 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 ----------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________________ to _____________________ Commission file number: 0-23562 MICROELECTRONIC PACKAGING, INC. (Exact name of Registrant as specified in its charter) California 94-3142624 ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 9577 Chesapeake Drive, San Diego, California 92123 -------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (619) 292-7000 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, no par value. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 25, 1998 was approximately $5,112,000 (based upon the closing price for shares of the Registrant's Common Stock as quoted by the OTC Bulletin Board for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On March 25, 1998, 10,793,279 shares of the Registrant's Common Stock, no par value, were outstanding. Documents Incorporated By Reference. Portions of the Registrant's Definitive Proxy Statement for the Registrant's ---------------------------------------------------------------------------- Annual Meeting to be held on June 17, 1998, are incorporated by reference into - ------------------------------------------------------------------------------ Part III of this Report on Form 10-K. ------------------------------------- PART I ------ ITEM 1. BUSINESS The following Business section contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K. Microelectronic Packaging, Inc. ("MPI") and its wholly-owned subsidiaries (collectively, the "Company") is an electronic interconnect solutions company with design, manufacturing, and sales services to support the requirements of electronic systems and integrated circuit manufacturers ("IC" or "semiconductor" manufacturers). MPI was incorporated in California in 1984. The Company develops, manufactures, markets and sells multichip modules ("MCMs") and, until July 1997, pressed ceramic packages, to customers in the IC, telecommunications, automatic test equipment and other electronics related industries. In July 1997, one of the Company's creditors placed the Company's pressed ceramic package operation into receivership in Singapore, thereby closing that operation. The Company maintains product development, manufacturing and sales facilities in San Diego, California, where it produces MCMs, electronic subsystems comprised of integrated circuits and passive components mounted on a printed circuit board or ceramic substrate. Until July 1997, when one of Company's creditors placed the Company's pressed ceramic package operation into receivership, the Company also maintained product development, manufacturing and sales facilities in Singapore, where the Company developed and manufactured a variety of electronic packages that were used to enclose and protect ICs from corrosion, humidity, shock, handling and other contaminants, and ceramic dual-in-line packages ("CERDIPs"), special CERDIPs used to house erasable programmable read only memory chips ("EPROM CERDIPs"), cerquad and quad flat packages for various applications. MPI is primarily a holding company with seven wholly-owned consolidated subsidiaries: CTM Electronics, Inc. ("CTM"), Microelectronic Packaging America ("MPA"), Microelectronic Packaging (S) Pte., Ltd. ("MPS"), MPC (S) Pte., Ltd. ("MPC"), Furnace Technology ("FT"), MPM (S) Pte., Ltd. ("MPM") and Microelectronic Packaging Asia Pte. Ltd. ("MP Asia"). MPS and MPM are currently being managed by a receiver and are in liquidation as described below. MPC has ceased operations during 1997. FT is in liquidation. CTM, a California corporation, was acquired by MPI in June 1993 and manufactures and sells MCMs. MPA, a California corporation, is the successor-in-interest to the business of the West Coast division of Cabot Ceramics, Inc., which was acquired by MPA in 1991, and manufactured advanced IC packaging products. Most of MPA's assets were sold to Advanced Packaging Concepts, Inc. ("APC"), a California corporation, on or about September 30, 1996. MPA's remaining assets were sold in 1997 and MPA's remaining activities were transferred to CTM. MPS, a Singapore company, manufactured and sold CERDIPs and EPROM CERDIPs. On July 10, 1997, The Development Bank of Singapore Limited, one of MPS' largest creditors, placed MPS in receivership as defined under the laws of Singapore. All of MPS sales ended as of the receivership date, and all MPS employees were terminated on such date. MPS was subsequently placed into liquidation. MPC is a Singapore company which was organized to manufacture and sell packaging products utilizing aluminum nitride components ("AlNs") to The Carborundum Company ("Carborundum"). Due to a fire and the loss of its only customer in April 1997, MPC is being liquidated by the Company. MPM is a Singapore company which was formed as a result of a license obtained from IBM in 1994 to manufacture multilayer ceramic packaging using "flip-chip" technology. The Company announced on March 3, 1997 the cessation of the development of the Company's multilayer ceramic operations and the liquidation of MPM's assets. MPM is currently in receivership and liquidation as defined under the laws of Singapore. The 2 estimated loss recorded for disposal of the Singapore subsidiaries was $29.3 million in 1996 and a further loss of $11.8 million was recognized in 1997. MP Asia was formed in 1997, has had no operating activities, and is being liquidated. See "License and Other Significant Agreements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results --Repayment of Debt Obligations by MPM and MPS-- Adverse Impact of MPM and MPS Liquidations on MPI -- Certain Obligations of MPS -- High Leverage." INDUSTRY OVERVIEW In recent years, advances in interconnection technology has allowed semiconductor companies and systems designers to increase the speed and complexity and reduce the size, power and prices of their products. Until recently, interconnection technology has not been considered a limiting factor in systems design and development. However, emerging electronic products such as semiconductor related automatic test equipment and military aerospace telecommunications equipment require designs that cannot always be done with conventional interconnection technology. Recent developments in MCMs have allowed the packaging and interconnect industry to become an enabling rather than a limiting factor in both price and performance for advanced electronic products. The increased reliance by IC and systems designers on interconnection solutions has created a new challenge and opportunity for the electronic packaging and interconnection industry to develop products that can effectively respond to customers' new requirements. Today's IC and system designers work together with interconnection designers and manufacturers in the early stages of product development. These products must accommodate constant reductions in size, increases in speed and complexity and the ability to handle the increased heat generated by more powerful systems. Today's conventional electronic systems are comprised of printed circuit boards ("PCBs") and single chip packages. The size, weight and speed of the electronic system is a function of the size, weight and performance of the fully assembled PCB. The PCB and the IC packages generally account for the majority of the size, weight and the limitations on speed of the system. Efforts to develop smaller, lighter and faster electronic assemblies have recently focused on improvements in IC packaging and interconnection technology. Conventional system architecture utilizing single chip packages and PCBs is being replaced by MCMs for more advanced systems. MCMs can be used to interconnect ICs for more advanced systems without the need for single chip packages. With MCMs, multiple ICs are interconnected on a single high density substrate. The substrate with the mounted ICs can be utilized as a replacement for the PCB or the substrate can be enclosed in a high pin count package and mounted onto a PCB. The advantage of MCMs is generally believed to be their ability to interconnect ICs, which allows for much closer spacing between ICs. Closer spacing between ICs facilitates smaller, lighter and faster overall circuitry. Manufacturers in the interconnection industry are evaluating technologies to support market driven requirements for reduced size and increased performance. Improvements in semiconductor and electronic interconnection technologies enable this continued reduction in size and cost with increasing performance for electronic systems. THE MPI SOLUTION The Company offers products and services to support the electronic interconnection market, consisting primarily of MCMs and contract manufacturing and design services. The Company's MCMs are designed to provide the higher density interconnection that in turn facilitates smaller, lighter and faster overall circuitry. The Company's design services consist of system packaging and interconnection design on a turnkey basis. 3 Multichip Modules. The Company provides MCMs to both the IC and electronic systems markets. The Company designs and manufactures MCMs that replace entire PCBs to reduce overall system size and increase performance. The Company also designs and manufactures MCMs to interconnect multiple ICs, which the Company encloses in an advanced IC package. The advanced IC package with the enclosed MCM is then mounted onto a PCB. All of the Company's MCM products are designed to provide its customers with increased speed and performance and decreased size and weight. Contract Manufacturing and Design Services. The Company offers design services for both single chip packages and MCMs and can provide a complete turnkey solution for interconnection of electronic systems. These services provide customers with a cost-effective alternative to existing product design processes. IMPLEMENTATION OF THE MPI SOLUTION The Company's strategy is to provide electronic interconnection products and services that meet the performance, time to market and low cost needs of IC and systems designers. The key elements of the Company's strategy include: Performance. The Company's MCM products are designed to provide size, weight and speed advantages as compared to conventional PCB interconnect solutions. Time to Market. To assist its customers in meeting time to market demands, the Company provides design, prototyping and quick turn-around production of MCMs at its San Diego, California facilities. Through its design expertise and the close proximity of its design and prototype production facilities to the design facilities of its primary customers located principally in California, the Company is able to offer quick turn-around design and prototype production of its MCM products. PRODUCTS AND SERVICES The Company's products and services consist primarily of MCMs and contract manufacturing and design services. Multichip Modules. The Company believes that MCMs bridge the gap between conventional PCB assembly technology, which is not adequate for many of today's advanced design requirements, and silicon integration, which is currently too expensive or not currently available for many systems. By densely packaging multiple die onto a substrate, distances between components are reduced, which generally increases performance since signals do not have as far to travel between components and results in cost savings through reduced materials requirements. Through internal development programs and its acquisition of CTM, the Company is able to provide its customers with MCM products and services. The Company believes that CTM was one of the first users of dense, high speed, multichip wire bonding and chip-on-board assembly. The Company believes that its MCM designs offer the heat dissipation, circuit density, and electrical characteristics that permit VLSI, VHSIC, ASIC and other high performance integrated circuits to operate at their highest rated specifications. CTM also offers programs for the design and manufacture of MCMs that meet military specifications. Typical MCM products include commercial electronic products, such as automatic test equipment ("ATE") products, and consumer electronic products, such as video camcorders, cellular telephones and personal computers. Sales of MCMs accounted for approximately 93%, 80% and 80% of the Company's net sales in 1997, 1996 and 1995 respectively. Sales of MCMs to Schlumberger Technologies, Inc. ("Schlumberger") accounted for most of the Company's net sales of MCMs in 1997, 1996 and 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Future Operating Results -- Technological Change; Importance of Timely Product Introduction; Uncertainty of Market Acceptance and Emerging Markets." 4 Contract Manufacturing and Design Services. The Company offers design services for both single chip packages and MCMs and can provide a complete turn key solution for interconnection of electronic systems. These services provide customers with a cost-effective alternative to existing product design processes. Industry Segments. The Company previously operated in multiple industry segments. During 1997 and 1996 the Company discontinued its industry segments which were located in Singapore. See Notes 15 and 16 to Consolidated Financial Statements. CUSTOMERS, APPLICATIONS AND MARKETS One of the Company's customers, Schlumberger, comprises most of the sales of the Company. Sales to Schlumberger accounted for 89%, 76% and 76% of the Company's net sales in 1997, 1996 and 1995 respectively. The Company furnishes MCMs to this customer for automated test equipment usage. Amounts due from the Company's major customer accounted for 81% and 22% of accounts receivable at December 31, 1997 and December 31, 1996, respectively. Effective July 25, 1997, Schlumberger informed the Company that it would no longer sell die to the Company, but instead would provide the die on consignment. The die supplied by Schlumberger is used in the assembly of MCMs sold to Schlumberger. This change to providing die on consignment has had the effect of reducing sales revenues to Schlumberger by approximately 60% of the Company's sales for 1997. The change to providing die on consignment has had no impact on the units sold by the Company to Schlumberger. See "Liquidity and Capital Resources Reliance on Schlumberger". SGS-Thomson Microelectronics, which comprised 34% of the sales of MPS in 1996, terminated its relationship with the Company as of February 1997. Carborundum, the sole customer of MPC, terminated its relationship with the Company in April 1997, as a result of Carbonundum's sale of its assets to a third party. During 1997, 1996 and 1995 the Company had foreign net sales of $90,000, $1,785,000 and $0, respectively. The foreign sales were made to one customer located in China. See Note 15 of Notes to Consolidated Financial Statements. The Company currently sells its products through a combination of fourteen independent sales representatives. The Company can provide engineering, design and technical support to its sales staff and potential customers. LICENSE AND OTHER SIGNIFICANT AGREEMENTS The Company seeks to obtain licenses to technologies that complement and expand the current technologies that the Company owns. These agreements, along with certain other significant agreements of the Company, are discussed below. Schlumberger. In January 1998, the Company signed an agreement with Schlumberger. Pursuant to the terms of the agreement, MPI supplies MCM products to Schlumberger. The agreement includes warranty provisions, protection for raw materials purchased by MPI against production demand forecasts supplied by Schlumberger but subsequently changed, certain guaranteed minimum allocations of sales to MPI for the first quarter of 1998 and pricing provisions. After March 31, 1998, there is no commitment from Schlumberger to the Company for guaranteed sales, other than outstanding purchase orders issued by Schlumberger in the ordinary course of business to the Company. The pricing provisions of the agreement provide for periodic review of the selling prices of the Company's products. Such reviews can be requested by either the Company or Schlumberger. Prices for the first quarter of 1998 were negotiated with Schlumberger in January 1998 and resulted in the decline in unit selling prices for some products. Schlumberger has requested a pricing review by March 31, to be effective for pricing for the second quarter of 1998. The Company has agreed to the requested pricing review and anticipates further declines in unit selling prices of selected products provided by the Company to Schlumberger. The agreement expires in October 2000. See "Liquidity and Capital Resources Reliance on Schlumberger". 5 Samsung Corning. In December 1994, MPS entered into a purchase agreement with Samsung Corning Co., Ltd. ("Samsung Corning") for the purchase of certain CERDIP manufacturing equipment and alumina powder equipment, including production supplies and spare parts (collectively, the "Equipment"). In conjunction with the purchase agreement, MPS obtained $12,000,000 principal amount of financing to consummate its obligations under the purchase agreement and to provide for its related working capital requirements from a consortium of customers consisting of SGS-Thomson, Texas Instruments Singapore ("TI"), NS Electronics Bangkok, Ltd. ("NSEB"), Motorola, Inc. ("Motorola") and Samsung Corning, the terms of which are discussed below. Due to the loss of a significant customer of MPS(SGS-Thomson) and a decline in the market for pressed ceramics, much of this equipment represented excess capacity by the end of 1996. As of December 31, 1996, MPS wrote-down the value of the equipment comprising this excess capacity by $6.2 million. In July 1997, MPS wrote-off the remaining equipment which was in excess of its estimated market value of $300,000. In 1995, MPS borrowed $4,000,000 from SGS-Thompson at an interest rate of 7.25% per annum. The principal on the note is repayable in eight equal quarterly installments that began in August 1996. MPS ceased making interest payments due under the note as of December 31, 1996, and no principal payments have been made. The note was fully guaranteed by MPI. The note is also secured by the CERDIP manufacturing equipment owned by MPS. The Company is currently attempting to renegotiate the terms of the agreement, including repayment terms. In 1995, MPS borrowed $3,500,000 from TI at an interest rate of 7.25% per annum and the principal on the note is repayable in eight quarterly installments that began in November 1996 The note is fully guaranteed by MPI and is secured by certain CERDIP manufacturing equipment. On April 2, 1997, MPS entered into an Amended Loan and Security Agreement with TI pursuant to which TI agreed to (i) waive its right to pursue a default remedy under the original loan agreement, (ii) a lower interest rate on the outstanding balance of 3.5% per annum on the outstanding balance and (iii) a revised (and extended) payment schedule for the outstanding balance owed by MPS. MPI ceased to make principal and interest payments under the Amended Loan in February 1998. The Company is currently attempting to renegotiate the terms of the agreement, including repayment terms. In 1995, MPI borrowed $1,500,000 from NSEB at an interest rate of 14% per annum and the principal is repayable in six quarterly installments that began in September 1996. The Company has made no principal payments since September 1996. The NSEB note is secured by all of MPI's domestic equipment and trade receivables that are not subject to liens or other encumbrances existing prior to May 30, 1995. In March 1997, the Company entered into an Amended Loan and Security Agreement and a Second Secured Promissory Note with NSEB pursuant to which NSEB agreed to waive any breach of the covenants, terms and conditions of the original Loan and Security Agreement and the original Secured Promissory Note (both dated May 30, 1995) and agreed to a revised (and extended) payment schedule. The interest rate on the outstanding balance, however, was raised from 14% per annum to 18% per annum and MPI is currently in default under the terms of the Second Secured Note. The Company is currently attempting to renegotiate the terms of the agreement, including repayment terms. In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an interest rate of 7% per annum and the principal was repayable in twelve quarterly installments commencing in March 1997. The loan has been guaranteed by Motorola. MPI, MPS, MPA and CTM have agreed to indemnify and defend Motorola in any action taken by Citibank to enforce its guarantee against Motorola. The obligation of indemnification is secured by all of the assets of MPI, CTM and MPA not previously pledged to NSEB, as well as all capital stock of MPS, CTM and MPA. The first principal payment was not made when due in March 1997 and on May 13, 1997, the Company gave Citibank USA a short-term note to repay the principal and accrued interest owed by MPS. MPI has made all interest payments when due. The note became due on January 30, 1998. MPI informed Citibank and Motorola in February 1998 of its intent to default under the note. Citibank orally 6 informed the Company of its intent to call on the guarantee issued by Motorola. No such action has yet occurred. The Company is currently attempting to renegotiate the terms of the Citibank agreement, including repayment terms. In 1996, MPS borrowed $1,000,000 from The Development Bank of Singapore ("DBS") at the Singapore Interbank offer interest rate plus 1.5%, repayable in twelve monthly installments beginning in November 1996. The loan has been fully guaranteed by Samsung Corning, and co-guaranteed by MPI. MPS made payments under the note totaling approximately $417,000 during 1996 and 1997. The remaining balance of approximately $583,000 was paid to DBS by Samsung Corning after DBS had called upon the guarantee of Samsung Corning. Samsung Corning has requested that MPI reimburse it for the amount paid under the guarantee. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources and -- Future Operating Results". Carborundum. In January 1993, MPC entered into exclusive manufacturing, technology information exchange, and option (the "Option Agreement") which permits Carborundum to acquire MPC under certain circumstances, and certain other agreements with Carborundum, pursuant to which MPC manufactured aluminum nitride microelectronic packages ("AlNs") exclusively for Carborundum. In April 1997, the parent company of Carborundum notified MPC that it had sold Carborundum to another company and that it was terminating the contract with MPC. The operations of Carborundum have since been relocated from Singapore to Canada and have ceased to purchase products from MPC. Also in April 1997, a fire caused significant damage to the MPC facilities. Due to these events, the Company decided to liquidate MPC in 1997. The Company currently has insurance claims outstanding which have fully-compensated MPC for losses incurred. In addition, Carborundum has not notified the Company of its intent to exercise its option to acquire MPC under the Option Agreement. Innoventure. In July 1993, MPI entered into a preliminary subcontract manufacturing agreement (the "Innoventure Agreement") with Innoventure (S) Pte. Ltd., a Singapore company ("Innoventure") pursuant to which Innoventure established a manufacturing facility in Indonesia to manufacture certain of MPI's pressed ceramic products presently being manufactured by MPS in the Company's Singapore facilities. Under the terms of the Innoventure Agreement, MPI provided technical assistance, granted Innoventure a fully paid up, non- exclusive license to technology relating to the manufacture of certain of its pressed ceramic products and provided certain raw materials, production supplies and equipment. MPI also agreed to purchase the entire output of the facility subject to certain terms and conditions that are determined on an annual basis. Innoventure agreed to finance the construction and operation of the facility, and made a one-time non-refundable technology license fee payment of $500,000 in December 1993. Concurrent with MPS being placed into receivership by DBS in July 1997, an affiliate of Innoventure purchased many of the production assets of MPS, occupied its former facilities and began production of products and sales to former customers of MPS. The proceeds from the sale of such MPS assets, and payments made to the receiver by the Innoventure affiliate for use of the former MPS facilities, have been used by the receiver to retire a portion of MPS's debts. The receiver is still marketing for sale two buildings owned by MPS. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Future Operating Results and -- Future Capital Needs; Need for Additional Financing". International Business Machines Corporation. In August 1994, the Company entered into a multilayer technology transfer and licensing agreement with IBM (the "IBM Agreement") pursuant to which the Company was granted a license to specific technology developed by IBM for the manufacture of multilayer ceramic products. Under the terms of the IBM Agreement, the Company and MPM acquired a nonexclusive, nontransferable right to use the licensed technology to manufacture and sell certain specified products on a worldwide basis. In exchange for the license, the Company paid an up-front non-refundable royalty of $2,000,000, and was obligated to pay additional royalties based on sales of products incorporating the licensed technology during the term of the IBM Agreement, which was to remain in effect for a period of 7 ten years from the date of execution and thereafter from year to year unless terminated by either party. Commencing in August 1996, the IBM Agreement was to be terminable by either party without cause upon six months prior written notice. Pursuant to an option agreement (the "IBM Option Agreement"), IBM was also issued an option to purchase up to 51% of the capital stock of MPM, which option was to be exercisable from and after the achievement of certain production milestones by MPM as set forth in the IBM Option Agreement. The term of the option, as well as the purchase price, are defined in the IBM Option Agreement. MPM is also currently in possession of certain inventory that MPM had ordered from IBM. IBM has not yet been paid for such inventory. The outstanding debt from the inventory is less than $150,000. In connection with the IBM transaction, MPM obtained a $3.2 million line of credit from DBS, which was fully utilized during 1995 to finance equipment purchases. In March 1997, the Company ceased its multilayer ceramic operations and began the liquidation of MPM's assets. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchasing multilayer ceramic products from the Company were the principal reasons that the Company decided to liquidate MPM. All of MPM's Singapore employees have been terminated. MPM is currently in receivership, as defined under the laws of Singapore. The receiver for MPM has completed the liquidation of all of the MPM assets, and the proceeds therefrom have been used to retire a portion of MPM's debts. The Company anticipates that the liquidation of MPM will be completed during 1998. Transpac. On March 27, 1996, the Company and MPM consummated a financing with Transpac Capital Pte. Ltd. and other related investors (collectively, "Transpac") pursuant to which the Company issued 842,013 shares of its Common Stock to Transpac for the aggregate purchase price of $2,000,000 and MPM issued a debenture (the "Debenture") to Transpac in the principal amount of $9.0 million. The Debenture has a term of five years and bears interest at the rate of 8.5% per annum and is guaranteed by MPI. Accrued and unpaid interest is due and payable in annual installments at the end of each year of the term of the Debenture. The principal outstanding under the Debenture will be due and payable in full at the end of the five year term, however, from and after April 23, 1997 and through the term of the Debenture, the Debenture will be convertible at Transpac's option into shares of common stock of MPM or common stock of MPI. The Company has not made any payments under the Debenture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Future Operating Results -- Future Capital Needs; Need for Additional Financing -- Repayment of Debt Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on MPI -- High Leverage and -- Status as a Going Concern." Restructure of Debt Obligations. The Company is currently attempting to renegotiate the terms of the debt obligations of its discontinued Singapore operations. The obligations which have been guaranteed by MPI, and which are the subject of the renegotiations, total approximately $27,000,000. See "Liquidity and Capital Resources." ENGINEERING AND PRODUCT DEVELOPMENT The Company is a member of SEMI/SEMATECH, a consortium of United States companies working to enhance cooperation and participation by United States companies in assembly and packaging technology. The Company's strategy is to develop new interconnection products in an evolutionary manner, progressively upgrading from one level of technology to the next by making improvements upon commercially available materials and technology. The Company works closely with its customers to define new products and to develop new capabilities in a timely and cost effective manner. The Company also uses outside services, such as ASIC design, to supplement its internal capabilities. Engineering and product development expenditures were approximately $760,000, $666,000 and $565,000 in 1997, 1996 and 1995, respectively. 8 MANUFACTURING, SUPPLIERS AND TOTAL QUALITY PROGRAM The Company believes that its ability to manufacture its products in a timely and cost effective manner at the highest quality level is essential in order to be competitive in its markets and achieve its growth objectives. The Company's manufacturing facilities in San Diego, California include design and prototype facilities and a production capability. The Company intends to support high volume requirements for its MCM products partially through offshore subcontract manufacturing and assembly agreements. The Company believes that total quality management is a vital component of customer satisfaction and internal productivity. The Company maintains a system of quality control and documentation with respect to each of its manufacturing processes. The Company maintains a supplier quality program that includes qualification, performance measurement and corrective action requirements. The Company chooses its suppliers based on quality, delivery, service and price. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. In particular, MCMs that are provided to Schlumberger contain components which are provided solely by Schlumberger to the Company on a consignment basis. Under the Company's current arrangement with Schlumberger, the Company would be unable to supply Schlumberger with MCMs if Schlumberger were to cease supplying the Company with such components. In such event, the Company's ability to continue as a going concern would be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results and -- Sole or Limited Sources of Supply." The Company is subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. To date, compliance with such regulations has not had a material adverse effect on the Company's capital expenditures or results of operations. The Company is currently a party to certain ongoing environmental matters. See "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results and -- Environmental Regulations." BACKLOG As of December 31, 1997, the Company's backlog was approximately $11.3 million compared with approximately $13.1 million as of December 31, 1996. All product orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because the Company generally ships products within 60 to 120 days of receipt of the order, and because of possible changes in delivery schedules, cancellations or rescheduling of orders and potential delays in product shipments, the Company's backlog at any particular date is not representative of actual sales for any succeeding period. COMPETITION The MCM market is highly competitive, and the Company faces intense competition from a number of worldwide competitors. The Company's primary competitors in North America are Maxtech, VLSI Packaging, Raytheon, Hewlett- Packard, APTA and Micro-Module Systems. All of these competitors have significantly greater resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell MCMs. The principal elements of competition in the MCM market are design expertise, performance, size and cost. Although the Company believes that it competes favorably with respect to each of these factors, product improvements, technological advancements and new product introductions by the Company's competitors or customers of the Company's competitors could cause a decline 9 in sales of the Company's MCM products or prevent the Company from increasing its market share of the MCM market. See "Management's Discussion and Analysis -- Future Operating Results -- Highly Competitive Industry; Significant Price Competition." INTELLECTUAL PROPERTY RIGHTS The Company believes that the success of its business depends more on the technical competence, creativity and marketing abilities of its employees, rather than on patents, trademarks and other intellectual property rights. Nevertheless, the Company has a policy of seeking patents as appropriate on inventions resulting from its ongoing engineering and product development activities. In addition, the Company has acquired intellectual property rights through business acquisitions and technology licenses. The Company owns five United States patents. The Company has permitted two of these to lapse through non-payment of renewal fees. The other three expire beginning in February 2002 through July 2010. In addition, the Company owns three foreign patents, which expire beginning in May 1999 through March 2009, and eleven foreign patent applications are currently pending. The Company owns one registered United States trademark. There can be no assurance that any of the Company's issued patents will provide it with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design around the patents issued to the Company. In addition, the Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets. EMPLOYEES As of December 31, 1997, the Company had a total of 157 employees, including 129 engaged in manufacturing, 10 in engineering and product development, and 18 in sales, marketing and administration (including its executive officers). All of the Company's employees are located in the United States. None of the Company's employees are represented by a labor union, and the Company has not experienced any work stoppages. The Company considers its employee relations to be good. EXECUTIVE OFFICERS The Company's executive officers and key employees, and their ages as of March 23, 1998, are:
Name Age Position - --------------------------- --- --------------------------------------------------------------- Andrew K. Wrobel 46 President and Chief Executive Officer Denis J. Trafecanty 55 Senior Vice President and Chief Financial Officer and Secretary Charles F. Wheatley 63 Executive Vice President, Sales and Marketing Timothy R. Sullivan 41 Vice President and Controller
Andrew K. Wrobel, age 46, has served as the President, Chief Executive Officer and Director of the Company since November 1997. From 1988 to 1997, Mr. Wrobel served as Chairman, President and Chief Executive Officer of GIGATEK Memory Systems, Inc., a manufacturer of computer disk drives. Prior to 1988, Mr. Wrobel was Vice President of Technology for Carlisle Memory Products Group and Vice President of Engineering for Data Electronics, and held various management positions in Marketing and Engineering at Texas Instruments and BASF. Mr. Wrobel holds Masters degree from the Massachusetts Institute of Technology. 10 Denis J. Trafecanty, age 55, joined the Company in August 1996 as its Vice President and Chief Financial Officer and Secretary. In March 1997, he was promoted to Senior Vice President, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Trafecanty was the Vice President and Chief Financial Officer for Tandon Magnetics/Tandon USA, a manufacturer and distributor of personal computers and a distributor of computer hard disk drives, from September 1995 to August 1996. From December 1984 to August 1995, he was Vice President and Chief Financial Officer for Tandon Corporation (renamed TSL Holdings, Inc. in 1993), a manufacturer and distributor of personal computers and peripheral equipment. Mr. Trafecanty holds a B.A. degree in Accounting from Loyola Marymount University. Charles F. Wheatley, age 63, has served as Executive Vice President, Sales and Marketing of the Company since November 1997. Previously, Mr. Wheatley was Executive Vice President, Operations of the Company from November 1996 to November 1997, and Vice President, Sales and Marketing of the Company from January 1994 to October 1996. Prior to joining the Company, from May 1988 to January 1994, Mr. Wheatley served as a financial planning independent contractor for IDS/American Express Corp., a personal and business financial planning company. Mr. Wheatley also has 23 years of electronics industry experience in a variety of manufacturing, marketing and general management positions with several companies. Mr. Wheatley holds a B.A. degree in political science from Boston University. Timothy R. Sullivan, age 41, has served as Vice President and Controller of the Company since March 1997. Prior to joining the Company and since 1995, Mr. Sullivan was Chief Financial Officer of InteleTravel International, a wholesale provider of consumer travel-related products. From 1987 to 1995, Mr. Sullivan was Chief Financial Officer of Uni-Vite, Inc., a distributor of consumer products. Mr. Sullivan holds a B.S. degree in business administration from University of Southern California. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in San Diego, California. This leased facility totals approximately 25,000 square feet and is used for corporate administration, design, engineering, manufacturing and sales operations. The lease on this facility expires in November 2002 and the Company has an option to renew for five years at the then fair market rent. The Company pays approximately $16,000 per month with respect to its facility in the United States. In addition to its facilities in the United States, the Company, through its Singapore subsidiaries (which are currently in liquidation or receivership), owns or leases facilities totaling 173,000 square feet in Singapore. The Company formerly used these facilities for the design, manufacture and sale of certain of the Company's products, including pressed ceramic packages. The Company owns two facilities of 48,000 square feet, which are subject to mortgages in favor of DBS, located on public land in Tuas, Singapore, which the Company is leasing from a government agency under lease agreements that expire in December 2014 and December 2024, respectively. On April 5, 1997, a fire partially destroyed one of the Company's Tuas facilities. The insurance adjusters estimate the damage to be over $3 million. MPS ceased during 1997 in making mortgage payments relating to its two owned facilities. The receiver of MPS is currently marketing for sale the two facilities owned by the Company. The proceeds from such sale will be used to retire the mortgages and other debt owed to DBS. The Company also leases two facilities, located in Bukit Merah, Singapore, under leases that expire in October 1998 and three facilities, located in Tuas, Singapore, occupied by MPM, under leases that expire between October 1997 and April 1998. The receiver of MPS is presently controlling the disposition of the two MPS leased facilities. A successor company has occupied the two facilities and is paying sublease rental payments to the receiver. The MPS leases are not guaranteed by the Company. The Company notified the landlord in March 1997 of its intention to abandon the three MPM facilities pursuant to the cessation of the Company's multilayer ceramic operations and the liquidation of MPM's assets. The facilities were returned to the landlord by the receiver of MPM in June 1997. The MPM leases were not guaranteed by the Company. See "Business -- License and Other Significant Agreements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 11 ITEM 3. LEGAL PROCEEDINGS The Company previously shipped quantities of hazardous waste to a Whittier, California hazardous waste treatment facility for recycling. The owner of that facility allegedly failed to recycle or dispose of the various wastes shipped to the site and has now filed for bankruptcy. The Company is one of more than four thousand generators, including numerous Fortune 500 corporations, identified by the State of California as having responsibility for cleanup at the site, and it is not ranked as one of the generators that has shipped a significant amount of hazardous waste. In May 1995, the United States Environmental Protection Agency ("EPA") issued written notice that it considers the Company to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The EPA determined that there may be an imminent and substantial endangerment to the public health, welfare, and environment because of a release and/or threat of a release of hazardous substances from the site located in Whittier, California. The notice requires the Company to take immediate actions to contain and prevent any further release of hazardous substances at the site. In response to the EPA notice, the Company and approximately 100 of the other named generators provided the necessary funding to effect the removal and destruction of the hazardous wastes stored at this site. In addition, the Company and such generators have provided certain funding to test the soil and groundwater at this site, which testing is currently ongoing. Although the cost incurred by the Company to date of removing and destroying the hazardous waste stored at this facility was not significant, this effort does not address the cleanup of potential soil and/or ground-water contamination present at this site. There can be no assurance, therefore, that the costs and expenses associated with this action will not increase in the future to a level that would have a material adverse effect upon the Company's business, financial condition, results of operations or cash flows. The Company also previously shipped small quantities of hazardous waste for recycling to a San Diego hazardous waste treatment facility operated by a third party operator ("Operator"). The owner of the facility and the State of California have filed suits against the Operator and two of its officers and the owner of the facility has obtained a mandatory injunction to compel the removal of hazardous waste on site. If the Operator does not comply, it is possible that the property owner or a government agency could also sue or bring enforcement proceedings against approximately 100 hazardous waste generators, including the Company, that shipped such wastes to the facility to pay for the removal and to participate in site cleanup if any contamination is discovered. Based on its limited investigation to date, the Company is unable to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. Numerous creditors have filed or threatened lawsuits against MPI and its subsidiaries for their respective various defaults and violations of certain agreements including debt obligations entered into by MPI and its various subsidiaries. If such creditors choose to enforce their claims and are successful in doing so, the Company may be forced to seek protection under Chapter 7 or 11 of Title 11 the United States Code. The Company's MPM and MPS subsidiaries are currently in receivership and liquidation in Singapore. The Company's MPC subsidiary is also currently in liquidation in Singapore. Several unsecured creditors of MPM and MPS have filed claims with the receiver, or obtained judgments against MPM and MPS. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS The following items were submitted to Shareholders of record on December 31, 1997 for their approval, pursuant to a written consent solicitation approved by the Board of Directors of the Company, which was mailed to Shareholders on or about January 9, 1998. No meeting of Shareholders was held. Both of the items subject to the written consent were approved by the Shareholders as of March 10, 1998.
Consents Against or Abstained Broker Matter Submitted to Shareholders Consents For Withheld Non-Votes - ------------------------------------------------------------------------------------------------------------------------- Increase in the Company's authorized but unissued shares of capital stock to consist of 35,000,000 additional shares of Common Stock for a total of 50,000,000 shares of Common Stock 9,307,750 564,978 71,802 -- Increase in the Company's authorized but unissued shares of capital stock to consist of 10,000,000 shares of undesignated Preferred Stock 6,528,673 718,239 238,492 2,571,551
13 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock was traded on the Nasdaq National Market under the symbol MPIX from April 21, 1994 until March 12, 1997. On March 13, 1997, the Company was delisted from the Nasdaq National Market; subsequently, the Company's Common Stock has been quoted on the OTC Bulletin Board. The following table sets forth the range of high and low per share bid information, as reported on the Nasdaq National Market (through March 12, 1997) and the OTC Bulletin Board (from March 12, 1997) for each quarter for the last two years through December 31, 1997. On March 25, 1998, the average of the highest and lowest trading price per share was $0.56. On March 25, 1998, the Company had 117 holders of record of its Common Stock and 10,793,279 shares outstanding.
Quarter Ended High Low ------------- -------- ------- March 31, 1996 $4.375 $2.000 June 30, 1996 $5.625 $2.750 September 30, 1996 $4.750 $3.250 December 31, 1996 $3.625 $0.688 March 31, 1997 $1.250 $0.280 June 30, 1997 $0.406 $0.156 September 30, 1997 $0.500 $0.156 December 31, 1997 $0.820 $0.360
During the past year, the Company did not declare or pay any cash dividends on its Common Stock. The Company currently plans to retain all of its earnings to support the development and expansion of its business and has no present intention of paying any dividends on the Common Stock in the foreseeable future. The Company is prohibited by certain agreements from paying cash dividends. MPS is a party to a line of credit facility with DBS that requires MPS to obtain the consent of DBS prior to declaring dividends, repaying creditors or transferring funds to MPI. In addition, an agreement relating to the guarantee by Motorola of a bank loan to MPS grants Motorola the right to prohibit payment of dividends on the stock of MPI, CTM and MPA. The Transpac agreements also contain similar restrictions. 14 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended December 31, ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ----------- (In thousands, except per share amounts) Consolidated Statements of Operations Data: Net sales........................................ $ 28,522 $ 19,044 $ 15,181 $ 10,445 $ 5,066 Cost of goods sold............................... 23,352 15,774 11,980 9,512 4,637 ------------ ------------ ------------ ------------ ----------- Gross profit..................................... 5,170 3,270 3,201 933 429 Selling, general and administrative.............. 4,204 4,353 4,524 3,042 1,723 Engineering and product development.............. 760 666 565 406 193 ------------ ------------ ------------ ------------ ----------- Income (loss) from operations.................... 206 (1,749) (1,888) (2,515) (1,487) Other income (expense): Interest expense.............................. (37) (787) (69) (90) (160) Royalty revenue............................... -- -- -- 153 114 Other income.................................. 209 99 66 235 14 ------------ ------------ ------------ ------------ ----------- Income (loss) from continuing operations before income taxes and the cumulative effect of change in accounting principle....... 378 (2,437) (1,891) (2,217) (1,519) Discontinued operations.......................... (11,874) (39,405) 505 (722) 1,373 ------------ ------------ ------------ ------------ ----------- Net income (loss) (1)(4)......................... $ (11,496) $ (41,842) $ (1,386) $ (2,939) $ (146) ============ ============ ============ ============ =========== Net loss per common share:(2) Historical.................................... $ 0.04 $ (0.45) $ (0.41) $ -- $ -- Pro forma before change in accounting principle (unaudited - Note 1).............. -- -- -- (0.53) (0.50) Pro forma cumulative effect of change in accounting principle..................... -- -- -- -- 0.11 Discontinued operations....................... (1.15) (7.23) 0.11 (0.17) 0.34 ------------ ------------ ------------ ------------ ---------- Net (loss).................................... $ (1.11) $ (7.68) $ (0.30) $ (0.70) $ (0.05) ============ ============ ============ ============ ========== Shares used in pro forma per share calculation... 10,361 5,445 4,660 4,174 3,076 ============ ============ ============ ============ ========== December 31, ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ----------- (In thousands) Consolidated Balance Sheet Data: Working capital (deficiency)..................... $(41,657) $(30,015) $(4,883) $ (368) $ (1,461) Total assets..................................... 9,911 24,894 42,427 27,635 21,825 Current liabilities.............................. 50,074 50,726 25,438 16,603 14,836 Long-term debt, less current portion............. 69 4,782 9,573 2,230 1,154 Accumulated deficit (3) (80,248) (68,752) (26,910) (25,524) (22,585) Total shareholders' equity (deficit)............. (40,232) (30,614) 7,416 8,802 5,835
_________ (1) See discussion of effects of income taxes in Note 9 to Notes to Consolidated Financial Statements. (2) Historical net income (loss) per share has been omitted for 1993 through 1994 since it is not considered meaningful due to the automatic conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock upon the closing of the Company's initial public offering in April 1994. The calculation of the number of shares used in computing pro forma net income per share in 1993 and 1994 includes the effect of the conversion of all Series A and B Preferred Stock into 1,774,808 shares of Common Stock upon the closing of the Company's initial public offering as if such Preferred Stock had been converted into Common Stock on January 1, 1993. (3) Includes stock dividends of $6,234,000 issued to the Company's preferred shareholders in 1993. See Note 10 to Notes to Consolidated Financial Statements. (4) See discussion of discontinued operations in Note 15 to Notes to Consolidated Financial Statements. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of Financial Conditions and Results of Operations contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Annual Report on Form 10-K. RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data of the Company expressed as a percentage of net sales for the periods indicated:
YEAR ENDED DECEMBER 31, 1997 1996 1995 --------- --------- --------- Net sales................................... 100.0% 100.0% 100.0% Cost of goods sold.......................... 81.9 82.8 78.9 Gross profit................................ 18.1 17.2 21.1 Selling, general and administrative......... 14.7 22.9 29.8 Engineering and product development......... 2.7 3.5 3.7 Income (loss) from operations............... 0.7 (9.2) (12.4) Other income (expense): Interest expense.......................... (0.1) (4.1) (0.5) Foreign exchange gain (loss).............. Other income.............................. 0.7 0.5 0.4 Income (loss) from continuing operations.... 1.3 (12.8) (12.5) Loss from discontinued operations......... (41.6) (206.9) 3.3 Net income (loss)........................... (40.3) (219.7) (9.1)
YEARS ENDED 1997, 1996 AND 1995 Net sales. For the year ended December 31, 1997 ("1997"), net sales were $28,522,000, representing an increase of $9,478,000 or 50% over net sales of $19,044,000 for the year ended December 31, 1996 ("1996"). Sales for 1996 increased by 25% from $15,181,000 for the year ended December 31, 1995 ("1995"). The increase in net sales from 1996 to 1997 is primarily attributable to an increase in revenues from the sale of the Company's MCM products at CTM , partially offset by a reduction of $2,100,000 in revenues from MPA, as well as a reduction of $1,694,000 in revenues derived under an equipment and technology transfer agreement. Revenues derived under the equipment and technology transfer agreement are classified as "other sales" in the Company's Consolidated Statements of Operations. The increase in sales of MCMs for 1997 resulted from a 136% increase in the number of units sold over 1996, partially offset by a 29% decrease in average selling prices. The primary reason for the decrease in average selling prices resulted from CTM's principal customer deciding, effective July 25, 1997, to provide certain die on consignment, rather than selling them to the Company (see Note 5 to the Consolidated Financial Statements). This change to the provision of die on a consigned basis has resulted in a permanent reduction in selling prices of products sold to this customer. After removing the effect of the change to consignment basis, the average selling price declined by 10% when comparing 1997 to 1996. This reduction is due to changed product mix. The reduction in 1997 revenues at MPA are the result of the Company's sale of the assets and closing of that business in September 1996. The increase in net sales of 1996 as compared to 1995 is principally due to an increase in revenues from the sales of MCM products. The 1996 increase is due to both an increase in units sold and higher average selling prices on new components being produced, which corresponds to a higher raw material cost for these new 16 components. Additionally, a decrease in revenues of $2,568,000 from MPA due to the sale of its assets and closing of that business in September 1996, was substantially offset by an increase of $1,785,000 in revenues derived under an equipment and technology transfer agreement begun in 1996. Cost of goods sold. For 1997, cost of goods were $23,352,000, representing an increase of $7,578,000 or 48% over cost of goods for 1996. Cost of goods sold for 1996 increased by $3,794,000 or 32% over cost of goods sold of $11,980,000 for 1995. The increase in cost of goods sold for 1997 over 1996 is the result of an increase of $10,136,000 for cost of MCM products sold at CTM, offset by a reduction at MPA due to the sale and closure of the MPA operation in September 1996. Additionally, cost of goods sold for "other sales" decreased by $1,480,000 from 1996 to 1997 due to the completion in 1997 of an equipment and technology transfer agreement. The increase in cost of goods sold of MCMs for 1997 resulted from a 136% increase in the number of units sold over 1996, partially offset by a decrease in average per unit costs. The primary reason for the decrease in average per unit costs resulted from CTM's principal customer deciding, effective July 25, 1997, to provide certain die on consignment, rather than selling them to the Company (see Note 5 to the Consolidated Financial Statements). This change to the provision of die on a consigned basis has resulted in a permanent reduction in unit costs of products sold to this customer. Cost of goods sold in percentage terms decreased in 1997 as compared to 1996 from 83% to 82% due to the efficiencies of higher sales volumes and improved overhead absorption at CTM. Cost of goods sold includes the cost of certain customer-supplied material through July 25, 1997, at which time the material was supplied by the customer on consignment. If such change had been made effective as of the beginning of each year and the cost of the customer-supplied material was eliminated from the period, cost of goods sold as a percentage of sales would have been 71% for 1997, as compared to 70% for 1996. As noted above, the reduction in unit costs of these products is permanent and will be reflected in future periods as lower cost on a percentage basis. The increase in cost of goods for 1996 as compared to 1995 is the result of an increase of $4,021,000 in the cost of MCM products sold at CTM, which increase is principally the result of an increase in the number of units sold of the Company's MCMs. Cost of goods sold for "other sales" increased by $1,523,000 for 1996 as compared to 1995 due to the commencement of an equipment and technology transfer agreement. Cost of goods sold at MPA declined by $1,751,000 due to a decrease in sales volume. Cost of goods sold in percentage terms increased in 1996 over 1995 from 79% to 83% primarily due to lower overall margins at CTM and increased gross margin degradation at MPA. If the effect of the change to customer-supplied material as described above had been made effective as of the beginning of each year and the cost of the customer-supplied material was eliminated from the period, cost of goods sold as a percentage of sales would have been 70% for 1996, as compared to 67% for 1995. Gross profit. Gross profit for 1997 was $5,170,000, an increase of $1,900,000 or 58% over 1996. Gross profit for 1996 increased by $69,000 or 2% over gross profit of $3,201,000 in 1995. Gross profit for 1997 represents 18% of net sales, as compared to 17% for 1996 and 21% for 1995. The increase in gross profit for 1997 is principally the result of the increase in the Company's sales for the same period. The increase in gross profit when expressed as a percentage of sales for 1997 as compared to 1996 is primarily due to the efficiencies of higher sales volumes and improved overhead absorption at CTM as well as differing product mix. If the effect of the change to customer-supplied material as described above had been made effective as of the beginning of each year and the sales to, and attendant cost of, the customer-supplied material was eliminated from the period, gross profit as a percentage of sales would have been 29% for 1997, as compared to 30% for 1996. The increase in gross profit for 1996 as compared to 1995 is principally the result of the increase in the Company's sales for the same period. The decrease in gross profit when expressed as a percentage of sales for 1996 as compared to 1995 is primarily due to the lower overall margins at CTM and increased gross margin 17 degradation at MPA. If the effect of the change to customer-supplied material as described above had been made effective as of the beginning of each year and the sales to, and attendant cost of, the customer-supplied material was eliminated from the period, gross profit as a percentage of sales would have been 30% for 1996, as compared to 33% for 1995. With the combination of increasing demand for newer, lower-margin products, and the increase in margins which results from the effect of eliminating die cost from certain net sales and cost of goods sold (resulting from the change to consigned die), it is difficult for the Company to predict gross profit levels for 1998. Selling, General and Administrative. Selling, general and administrative expenses were $4,204,000 for 1997, a decrease of $149,000 or 3% as compared to 1996. Selling, general and administrative expenses were $4,353,000 for 1996, a decline of $171,000 or 4% as compared to 1995. Costs associated with MPA , which was active in 1995, declined throughout 1996 and ended when the subsidiary was closed in September 1996. The administrative costs associated with this separate operation were eliminated in the last quarter of 1996 and throughout 1997 after the subsidiary was closed. Engineering and Product Development. Engineering and product development expenses were $760,000 for 1997, an increase of $94,000 or 14% as compared to 1996. Engineering and product development expenses were $666,000 in 1996, an increase of $101,000 or 18% as compared to 1995. Engineering and product development expenses at MPA declined from $328,000 in 1995 to $149,000 in 1996 to zero in 1997, reflecting the closure of this subsidiary in September 1996. Engineering and product development expenses at CTM increased by more than the decline at MPA during the same periods. The increased expenses at CTM reflect an increase in personnel costs and expenditures on materials used in product development for both comparative periods. Interest expense. Interest expense totaled $37,000 for 1997, a decrease of $750,000 or 95% from 1996. Interest expense was $787,000 for 1996, an increase of $718,000 from 1995. Interest expense for 1996 is higher as compared to 1997 and 1995 primarily due to the discount and interest on the convertible debentures issued to offshore investors in 1996. Other income. Other income was $209,000 for 1997, an increase of $110,000 or 111% as compared to 1996. Other income was $99,000 for 1996, an increase of $33,000 or 50% as compared to 1995. Other income consists principally of interest income and the sale of scrap in 1996 and 1995. In addition, other income for 1997 includes the collection of $190,000 as partial collection of an amount written off as uncollectible in 1995. Effects of income taxes. During 1996, the Company's foreign and domestic operations generated operating losses for both financial reporting and income tax purposes. During 1997 and 1995, taxable income at the Company's domestic and foreign operations was offset by the utilization of net operating loss and other carryforwards. As of December 31, 1997, the Company had net operating loss carryforwards of approximately $11,445,000 for federal income tax purposes and approximately $1,025,000 for California tax purposes. In addition, at December 31, 1997, the Company had $431,000 in federal research and development credits and $37,000 in investment tax credits available for United States income tax purposes. The Company believes it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. As of December 31, 1997, the Company had capital allowance carryforwards of approximately $5,700,000 for Singapore income tax purposes. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this 18 method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion of all of the deferred tax assets will not be realized. As a result of the Company's significant losses in 1997 and prior years and uncertainties surrounding the realization of the net operating loss carryforward which was generated during 1997 and prior years, management has determined that the realization of deferred tax assets is not more likely than not. Accordingly, a 100% valuation allowance has been recorded as of December 31, 1997 and December 31, 1996 in the amounts of $7,452,000 and $7,355,000, respectively. Discontinued operations. The income from discontinued operations, combined with the estimated loss on disposal of the assets of those discontinued operations, was a loss of $11,874,000 for 1997, as compared to a loss of $39,405,000 for 1996, as compared to income of $505,000 for 1995. Discontinued operations consist of the net activities of the Company's Singapore subsidiaries: MPM, MPS, MPC, and FT. In March 1997, the Board of Directors of the Company decided to discontinue the multilayer ceramic operations, MPM, and had recorded $29,345,000 of the effect of this decision in 1996 and a further $1,413,000 in 1997. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchase products from the Company were the main reasons that the Board decided to discontinue the multilayer ceramic operations. All of MPM's employees were terminated by April 1997. MPM is currently in receivership and liquidation as defined under the laws of Singapore. The receiver for MPM has completed the liquidation of all of the MPM assets, and the proceeds therefrom have been paid to retire a portion of MPM's debts. The Company anticipates that the liquidation of MPM will be completed during 1998. On July 10, 1997, DBS, one of largest creditors of MPS, appointed a Receiver and Manager to liquidate the assets of MPS, the Company's subsidiary that manufactured pressed ceramic products. DBS exercised its option to appoint a Receiver and Manager under the terms of a Deed of Debenture dated November 27, 1984 (as amended) between DBS and MPS. All of MPS's employees were terminated on July 10, 1997 when MPS ceased operations. MPS has subsequently been placed into liquidation. The Company has recorded reserves for $5,938,000 in 1997 relating to the closure and liquidation of MPS. The receiver for MPS has liquidated most of the assets of MPS, except for two buildings located in Tuas, Singapore owned by MPS. The buildings are expected to be sold during 1998 and the proceeds therefrom used to retire indebtedness owed to DBS by MPS or MPM. The proceeds from the liquidation of the assets have been paid to DBS to retire a portion of MPS's debt. In April 1997, MPC was informed that Carborundum , its sole customer, was immediately cancelling the manufacturing and related agreements with MPC as a result of Carborundum's sale of its assets to a third party. Also in April 1997, a fire at the MPC facility caused damage to the building and certain equipment. The Company is insured against the fire. The Company has closed the MPC operation and terminated all of its employees. The Company anticipates the liquidation of MPC will be completed in 1998. FT is a dormant subsidiary of the Company located in Singapore. FT is being wound up and will be liquidated in 1998. The net operating results of the activities of MPM, MPS, MPC and FT for each of the years 1997, 1996 and 1995 have been included as income or loss from discontinued operations on the Consolidated Statement of Operations. Amounts recorded as estimated losses on disposal of assets of the discontinued operations reflect management's best estimates of the amounts expected to be realized on the sale of the assets associated with these discontinued operations and the expenses to be incurred through the disposal date. Such expenses include 19 $3.5 million of interest expense relating to the indebtedness of the discontinued operations through the expected completion of the liquidation process. The amounts the Company will ultimately realize and incur could be materially different from the amounts assumed in arriving at the loss on disposal of the discontinued operations. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company financed its operations from operating cash flow. In 1996 and 1995, the Company financed its operations through a combination of cash flow from operations, bank and other borrowings, equipment lease financings and certain other debt and equity financings. During 1997, operating activities of continuing operations provided $1,095,000, while discontinued operations provided $3,200,000. Investing activities, consisting principally of sales of assets of discontinued operations, provided $1,881,000, and financing activities used $7,834,000 during 1997, primarily due to the repayment of long-term debt at discontinued operations. At December 31, 1997, the Company had a working capital deficiency of $41,657,000 and an accumulated deficit of $80,248,000. The Company had outstanding at December 31, 1997 approximately $27,151,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and most of which debt is in default and due on demand. During 1997, the Company had no significant additions of liquidity from outside the Company. During 1996, the Company completed two financings. The Company completed in March 1996 an equity financing of $2,000,000 with Transpac and also issued to Transpac $9,000,000 of convertible debentures. The Company completed in October 1996 an additional $2,800,000 financing by issuing a series of convertible debentures to various investors. During 1995, the Company completed several borrowings with customers of its now-discontinued Singapore operations, totaling approximately $11,000,000. The Company's sole source of liquidity at December 31, 1997 consisted of $1,296,000 of cash from operations. The Company has no borrowing arrangements available to it. The Company is currently in default on substantially all of its debt obligations. It is currently attempting to negotiate more favorable repayment terms for all of its debt obligations. At December 31, 1997, the Company had outstanding borrowings due to DBS totaling $3,955,000, excluding mortgages. The amount outstanding is the remaining balance of various borrowings made by MPM, MPS and MPC under lines of credit, overdraft facilities, and an accounts receivable financing line of credit. This balance remains after the liquidation of assets of MPM and MPS by the receivers and the application to these debts of the resulting proceeds from those assets of those entities. All assets of MPM have been liquidated by the receiver of MPM. Two buildings located in Tuas, Singapore and owned by MPS are still owned by MPS. These buildings are currently being marketed by the receiver of MPS and proceeds from the sale of those buildings will be utilized first, to retire the two mortgages encumbering the properties (described below), and any remaining proceeds will be used to retire these outstanding borrowings. The receiver is additionally attempting to collect approximately $2,400,000 payable by a former customer of MPS. The amount has been unpaid since June 1997 and has been fully reserved for by MPS. If the receiver is successful in collecting all or a portion of this receivable, the proceeds will be used to retire these borrowings. These amounts are currently in default, payable upon demand, and bear interest at the bank's prime rate plus 5%, which is equal to the rate of 13.75% as of December 31, 1997. All of these amounts are secured by the remaining assets of MPM and MPS and are guaranteed by MPI. At December 31, 1997, the Company had borrowings of $9,000,000 under the Transpac debentures (see Note 7 to Consolidated Financial Statements). The debentures bear interest at the rate of 8.5%. As of December 31, 1997, approximately $1,375,000 of accrued interest was due and payable under the Transpac debentures. The debenture has been fully guaranteed by MPI. The debentures are currently in default and payable upon demand. 20 At December 31, 1997, the Company had outstanding a term note due to NS Electronics, a former customer of MPS, a discontinued Singapore operation. The note bears interest at 18% per annum. The balance due under the note is $1,250,000 and approximately $172,000 of accrued interest was also due and payable as of December 31, 1997. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At December 31, 1997, the Company had outstanding a term note due to TI, a former customer of MPS. The note bears interest at the rate of 3.5% per annum. The balance due under the note is $3,521,000 and approximately $69,000 of accrued interest was due and payable as of December 31, 1997. The note has been fully guaranteed by MPI. The note is currently in default and payable upon demand. At December 31, 1997, the Company had outstanding a term note due to SGS- Thomson Microelectronics, a former customer of MPS. The note bears interest at the rate of 7.25% per annum. The balance due under the note is $4,000,000 and approximately $381,000 of accrued interest was due and payable as of December 31, 1997. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At December 31, 1997, the Company had outstanding a term note due to Citibank N.A., which note is guaranteed by Motorola, a former customer of MPS. The note bears interest at approximately 7% per annum. The balance due under the note is $2,208,000 and approximately $10,000 of accrued interest was due and payable as of December 31, 1997. The note has been guaranteed by MPI and is secured by certain assets of the Company as well as all shares of CTM and MPA. The note is currently in default and payable upon demand. At December 31, 1997, the Company had outstanding an amount due to Samsung Corning. Samsung Corning had guaranteed a $1,000,000 loan from DBS to MPS. The remaining balance due to DBS under the loan, approximately $583,000, was paid by Samsung Corning to DBS in December 1997. The Company has accordingly recorded the $583,000 as a liability to Samsung Corning, as well as $43,000 of accrued and unpaid interest as of December 31, 1997. The Company is currently negotiating settlement of the amount paid by Samsung Corning to DBS. At December 31, 1997, the Company had outstanding two mortgage notes due to DBS, secured by two buildings located in Tuas, Singapore and owned by MPS. The mortgage notes bear interest at 13.75%. The balance due under the mortgage notes was $1,081,000 as of December 31, 1997. The notes are guaranteed by MPI. The notes are currently in default and payable upon demand. At December 31, 1997, the Company had outstanding a deficiency balance from capital leases due to Orix Leasing totaling $1,601,000. The amount outstanding is the remaining balance of various lease borrowings made by MPM and MPS. This balance remains after the liquidation of the leased assets of MPM by Orix Leasing and the application to these leases of the resulting proceeds from those assets of those entities. The remaining amount outstanding is represented by a note issued by MPI at an interest rate of 7.25%. The note is currently in default and is payable upon demand. The Company also has various capitalized leases for equipment utilized in the US operations, with a total balance of approximately $91,000 as December 31, 1997. These lease obligations are being serviced currently by CTM. The Company is currently attempting to renegotiate the terms of the debt obligations of its discontinued Singapore operations. Certain obligations which total approximately $27,000,000 have been guaranteed by MPI. The Company has reached nonbinding oral agreements to restructure these guaranteed debts with creditors comprising over 76% of the obligations. The Company has reached preliminary, nonbinding written agreements with three of these creditors, whose debts total approximately 58% of the total debt obligations of $27,000,000. 21 The agreements reached with creditors principally involve MPI paying 30% of the principal and accrued but unpaid interest owed to each creditor as of December 31, 1997, within six months of formal documents being agreed between the parties. The remaining 70% would be forgiven by the creditors at the time of the payment of the 30% portion. The Company intends to attempt to obtain financing for the 30% portion to be paid by the Company. There can be no assurance that the Company will be successful in its efforts to reduce the nonbinding agreements reached with the creditors to binding written agreements. There can also be no assurance that the Company will be successful in its efforts to obtain the financing needed, on acceptable terms, in order to fulfill its obligations under the agreements reached with creditors. The Company previously purchased raw materials from its principal customer, Schlumberger. As of July 25, 1997, the material was supplied by the customer on consignment. As of December 31, 1997, the Company owes to that customer approximately $4,959,000 from purchases previously made before the change to consignment. The Company is making regular payments to Schlumberger under an informal repayment plan. In October 1996, the Company issued $2,800,000 of convertible debentures at a per annum interest rate of 8% to a group of offshore investors. This offering was not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided by Regulation S promulgated thereunder. The Company also issued to one of the offshore investors a warrant to purchase 75,421 shares of the Company's Common Stock. The exercise price of the warrant is the lesser of the average price at which the debentures are converted ($0.55 per share) or 110% of the closing bid price of the Company's Common Stock as reported by Nasdaq National Market on October 23, 1996 (which was $2.75 per share). The warrant became exercisable 45 days after October 23, 1996 and expired on October 23, 1997. The debentures were converted beginning December 13, 1996 and completely converted on February 20, 1997. The offshore investors were issued an aggregate of 5,108,783 shares of the Company's Common Stock. The conversion of these debentures significantly diluted any earnings per share amount and significantly diluted the ownership interests of MPI's shareholders. The Company has outstanding indebtedness at December 31, 1997 denominated in Singapore dollars of approximately Singapore $3,400,000 (U.S. equivalent $2,144,000). Further, the Company has two buildings, also located in Singapore, which are mortgaged as security for the Singapore loans and are anticipated to be sold within the next year. All of the Company's other indebtedness is denominated in U.S. dollars, and all other Singapore-based assets have been liquidated by the receiver of MPM or MPS and used to retire outstanding indebtedness. The Company believes that the value of the buildings located in Singapore is at least equal to the amount of the Company's debt which is denominated in Singapore dollars. Accordingly, the Company believes its exposure to foreign currency rate movements is extremely limited since it has matched the maturity and approximate amount of assets and liabilities denominated in the Singapore dollar. FUTURE OPERATIONS Status as a Going Concern. The Company's independent certified public accountants have included an explanatory paragraph in their audit report with respect to the Company's 1997, 1996 and 1995 consolidated financial statements related to a substantial doubt with respect to the Company's ability to continue as a going concern. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and assuming the Company is successful in restructuring its debt, the Company currently anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations in the ordinary course throughout 1998. Any significant increase in planned capital expenditures or other costs or any decrease in or elimination of anticipated sources of revenue or the inability of the Company to restructure its debt could cause the Company to restrict its business and product development efforts. There can be no assurance that the Company will be successful in restructuring its debt on acceptable terms, or at all. If adequate revenues are not available, the Company will be unable to execute its business development efforts and may be unable to continue as a going concern. There can be no assurance that the Company's future consolidated financial statements will not include another going concern 22 explanatory paragraph if the Company is unable to restructure its debt and become profitable. The factors leading to and the existence of the explanatory paragraph will have a material adverse effect on the Company's ability to obtain additional financing. See "Future Capital Needs; Need for Additional Financing - -- Liquidity and Capital Resources -- Consolidated Financial Statements." Risk of Bankruptcy. The Company may need to be reorganized under Chapter 11 of Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of the United States Code. There can be no assurance that if the Company decides to reorganize under the applicable laws of the United States that such reorganizational efforts would be successful or that shareholders would receive any distribution on account of their ownership of shares of the Company's stock. Similarly, there can be no assurances that if the Company decides to liquidate under the applicable laws of the United States that such liquidation would result in the shareholders receiving any distribution on account of their ownership of shares of the Company's stock. In fact, if the Company were to be reorganized or liquidated under the applicable laws of the United States, the bankruptcy laws would require (with limited exceptions) that the creditors of the Company be paid before any distribution is made to the shareholders. Future Capital Needs; Need for Additional Financing. The Company's future capital requirements will depend upon many factors, including the extent and timing of acceptance of the Company's products in the market, requirements to restructure and retire its substantial debt, requirements to construct, transition and maintain existing or new manufacturing facilities, commitments to third parties to develop, manufacture, license and sell products, the progress of the Company's research and development efforts, the Company's operating results and the status of competitive products. If the Company is successful in restructuring its debt obligations, absent debt or equity financing and excluding significant expenditures required for the Company's major projects, the Company anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations through 1998. There can be no assurance, however, that the Company will not require additional financing prior to such date to fund its operations. In addition, the Company may require substantial additional financing to fund its operations in the ordinary course, particularly if the Company is unable to restructure its debt obligations. Furthermore, the Company may require additional financing to fund the acquisition of selected assets needed in its production facilities. There can be no assurance that the Company will be able to obtain such additional financing on terms acceptable to the Company, or at all. The Company is in breach of substantially all of its debt obligations and is in default under each of such agreements. If the Company cannot reach an agreement with its creditors to repay its obligations, the Company will not be able to continue as a going concern. The Company's high level of outstanding indebtedness and the numerous restrictive covenants set forth in the agreements covering this indebtedness and its default position prohibit the Company from obtaining additional bank lines of credit and from raising funds through the issuance of debt or other securities without the prior consent of DBS and Transpac. The Company is currently in default on its guarantee and loan obligations to DBS as a result of the Company's decision to cease its multilayer and pressed ceramics operations, and to liquidate the assets of MPM and MPS. The liquidation of MPM and MPS have also resulted in the Company's default under a number of other agreements, and certain creditors have informed the Company they intend to accelerate outstanding payments due to them under various credit agreements because of such defaults. There can be no assurance that other creditors of the Company will not also choose to accelerate the Company's debt obligations and the Company will not able to repay such accelerated obligations as they become due and immediately payable. If either a sufficient number of creditors or any of the substantial creditors choose to accelerate payments or to place MPI or one or more of its subsidiaries under judicial reorganization, the Company may be forced to seek protection under Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. If the Company were to seek additional financing, such additional financing may not be available to the Company on acceptable terms, or at all. If additional funds are raised by issuing equity or convertible securities, further dilution to the existing shareholders will result. Since adequate funds are not currently 23 available, the Company has been required to delay, scale back or eliminate programs which could continue to have a material adverse effect on the Company's business, prospects, financial condition and results of operations. In addition, the Company has been forced to delay, downsize or eliminate other research and development, manufacturing, construction or transitioning programs or alliances or obtain funds through arrangements with third parties pursuant to which the Company has been forced to relinquish rights to certain of its technologies or to other assets that the Company would not otherwise relinquish. The delay, scaling back or elimination of any such programs or the relinquishment of any such rights could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. See "Status as a Going Concern", "Future Capital Needs; Need for Additional Financing" and "Liquidity and Capital Resources". Future Operating Results. The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future depending upon a variety of factors, including foreign currency losses, corporate and debt restructurings, creditor relationships, conversions of significant amounts of debt into a significant amount of equity, downward pressure in gross margins, losses due to low shipping volume, delayed market acceptance, if any, of new and enhanced versions of the Company's products, delays, cancellations or reschedulings of orders, delays in product development, defects in products, integration of acquired businesses, political and economic instability, natural disasters, outbreaks of hostilities, variations in manufacturing yields, changes in manufacturing capacity and variations in the utilization of such capacity, changes in the length of the design-to-production cycle, relationships with and conditions of customers, subcontractors, and suppliers, receipt of raw materials, including consigned materials, customer concentration, price competition, cyclicality in the semiconductor industry and conditions in the personal computer industries. In addition, operating results will fluctuate significantly based upon several other factors, including the Company's ability to attract new customers, changes in pricing by the Company, its competitors, subcontractors, customers or suppliers, and fluctuations in manufacturing yields. The absence of significant backlog for an extended period of time will also limit the Company's ability to plan production and inventory levels, which could lead to substantial fluctuations in operating results. Accordingly, the failure to receive anticipated orders or delays in shipments due, for example, to unanticipated shipment reschedulings or defects or to cancellations by customers, or to unexpected manufacturing problems may cause net sales in a particular quarter to fall significantly below the Company's expectations, which would materially adversely affect the Company's operating results for such quarter. The impact of these and other factors on the Company's net sales and operating results in any future period cannot be forecasted with certainty. In addition, the significant fixed overhead costs at the Company's facilities, the need for continued expenditures for research and development, capital equipment and other commitments of the Company, among other factors, will make it difficult for the Company to reduce its expenses in a particular period if the Company's sales goals for such period are not met. A large portion of the Company's operating expenses are fixed and are difficult to reduce or modify should revenues not meet the Company's expectations, thus magnifying the material adverse impact of any such revenue shortfall. Accordingly, there can be no assurance that the Company will not incur losses in the future or that such losses will not have a material adverse effect on the Company's business, financial condition and results of operations. Repayment of Debt Obligations by MPM and MPS. As of December 31, 1997, MPM and MPS had combined outstanding borrowings of approximately $27,151,000. Most of the assets of MPM and MPS have been liquidated by receivers appointed by DBS. The Company currently anticipates that the remaining proceeds from the liquidation of assets will be insufficient to fully repay its outstanding debt. Since the borrowings have been guaranteed by MPI, the Company is currently attempting to negotiate more favorable terms for the repayment of the remaining indebtedness. The failure of the Company to obtain favorable repayment terms would materially adversely affect the Company's financial condition and the ability of the Company to continue as a going concern. 24 MPM is obligated, pursuant to its real property lease in Singapore with Jurong Town Corporation ("JTC"), to return the facilities which it has been leasing to their original state before returning the facilities to JTC. Returning the facilities to their original state would require the expenditure of a substantial amount of money. There can be no assurance that JTC will not enforce this lease provision. If MPM were forced to return the facilities to their original state, such actions could materially adversely affect any plans to restructure MPM's debt obligations. See "Liquidity and Capital Resources". Adverse Impact of MPM and MPS Liquidations on MPI. MPM and MPS are currently being liquidated under the laws of Singapore. The liquidation of the assets of MPM and MPS are expected to generate proceeds that total less than the outstanding obligations of those entities guaranteed by MPI. If such shortfall occurs, MPI may be forced to repay any outstanding debt because of its role as guarantor of such debts. If MPI were unable to repay these debts, the Company may be forced to seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code or similar bankruptcy laws of Singapore for MPI and its subsidiaries. Certain Obligations of MPS. At December 31, 1997, MPS had outstanding borrowings of approximately $3,955,000 with DBS and had borrowed an aggregate of approximately $11,354,000 from a consortium of customers to fund its purchase of certain CERDIP manufacturing and alumina powder equipment from Samsung Corning. All such amounts are in default. If any lender were to accelerate the principal due as one of their remedies, such accelerations will materially adversely affect the Company's ability to continue as an ongoing concern and may force the Company to seek bankruptcy protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. As a part of the Consortium, Motorola guaranteed MPS' repayment of $2.0 million in borrowings from a certain bank lender. Under the terms of the agreement relating to Motorola's guarantee, MPI granted Motorola a security interest in all of the issued and outstanding capital stock of MPS, CTM and MPA. While in default, Motorola may have the right to vote and give consents with respect to all of the issued and outstanding capital of MPS, CTM and MPA . As a result, during the continuation of any such event of default, MPI may be unable to control at the shareholder level the direction of the subsidiaries that generate substantially all of the Company's revenues and hold substantially all of the Company's assets. Any such loss of control would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. The agreements covering the Transpac Financing, including the convertible debenture and MPI's guarantee of such MPM indebtedness, contain numerous restrictions and events of default that have been triggered by the aforementioned actions and would, if they became effective and operative, materially adversely affect the Company's business, prospects, results of operations, condition and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. High Leverage. The Company is highly leveraged and has substantial debt service requirements. The Company has $50,143,000 in liabilities as of December 31, 1997. On December 31, 1997, the Company had a total shareholders' deficit of approximately $40,232,000. The Company's ability to meet its debt service requirements will be dependent upon the Company's future performance, which will be subject to financial, business and other factors affecting the operation of the Company, many of which are beyond its control and on the willingness of the Company's creditors to participate in restructuring the Company's debt. There can be no assurance that the Company will be able to meet the capital requirements described above or, if the Company is able to meet such requirements, that the terms available will be favorable to the Company. See "Liquidity and Capital Resources". Highly Competitive Industry; Significant Price Competition. The electronic interconnection technology industry is intensely competitive. The Company experiences intense competition worldwide from 25 a number of manufacturers, including Maxtek Components Corporation, VLSI Packaging, Raytheon Electronic Systems, Hewlett-Packard Company, Advanced Packaging Technology of America and MicroModule Systems, all of which have substantially greater financial resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell their products. The Company faces competition from certain of its customers that have the internal capability to produce products competitive with the Company's products and may face competition from new market entrants in the future. In addition, corporations with which the Company has agreements are conducting independent research and development efforts in areas which are or may be competitive with the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved performance characteristics. New product introductions by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's existing products which could materially adversely affect the Company's business, financial condition and results of operations. The Company is also experiencing significant price competition, which may materially adversely affect the Company's business, financial condition and results of operations. The Company believes that to remain competitive in the future it will need to continue to develop new products and to invest significant financial resources in new product development. There can be no assurance that such new products will be developed or that sales of such new products will be achieved. There can be no assurance that the Company will be able to compete successfully in the future. Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for 89% of the Company's net sales in 1997 and is expected to continue to account for a significant part of the Company's net sales. Under the agreement between Schlumberger and the Company entered into in January 1998, the Company is obligated to provide Schlumberger with its requirements for MCM product. Given the Company's anticipated continued reliance on its MCM business as a percentage of overall net sales, the failure to meet Schlumberger's requirements will materially adversely affect the Company's ability to continue as an ongoing concern. In addition, under the terms of the agreement , Schlumberger is entitled to request repricing of the Company's products. Schlumberger hs requested repricing for the second quarter of 1998. Such repricing in the future may result in the Company being unable to produce the products made for Schlumberger with an adequate operating profit, and the Company may be unable to compete with the prices of other vendors who supply the same or similar products to Schlumberger. The failure to satify the terms of the agreement, or the failure of the Company to achieve an operating profit under the contract, would have a material adverse impact on the Company's business, financial condition, and results of operation. Significant Customer Concentration. Historically, the Company has sold its products to a very limited number of customers. Any reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions in the semiconductor, personal computer or electronic industries or in other industries that manufacture products utilizing semiconductors or MCMs, could materially adversely affect the Company's business, financial condition and results of operations. The supply agreements with certain of the Company's customers do not obligate them to purchase products from the Company. The Company's ability to increase its sales in the future will also depend in part upon its ability to obtain orders from new customers. There can be no assurance that the Company's sales will increase in the future or that the Company will be able to retain existing customers or to attract new ones. Failure to develop new customer relationships could materially adversely affect each such subsidiary's results of operations and would materially adversely affect the Company's business, financial condition and results of operations. Dependence on Semiconductor and Personal Computer Industries. The financial performance of the Company is dependent in large part upon the current and anticipated market demand for semiconductors and products such as personal computers that incorporate semiconductors. The semiconductor industry is highly cyclical and historically has experienced recurring periods of oversupply The Company believes that the markets for new generations of semiconductors will also be subject to similar fluctuations. The semiconductor 26 industry is currently experiencing rapid growth but lately has demonstrated a slowdown in demand. There can be no assurance that such growth will return and that the slowdown will not continue. A reduced rate of growth in the demand for semiconductor component parts due, for example, to competitive factors, technological change or otherwise, may materially adversely affect the markets for the Company's products. From time to time, the personal computer industry, like the semiconductor industry, has experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions. Accordingly, any factor adversely affecting the semiconductor or the personal computer industry or particular segments within the semiconductor or personal computer industry may materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially adversely affected if downturns or slowdowns in the semiconductor, personal computer industry or other industries utilizing the Company's products continue or again occur in the future. Technological Change; Importance of Timely Product Introduction; Uncertainty of Market Acceptance and Emerging Markets. The markets for the Company's products are subject to technological change and new product introductions and enhancements. Customers in the Company's markets require products embodying increasingly advanced electronics interconnection technology. Accordingly, the Company must anticipate changes in technology and define, develop and manufacture or acquire new products that meet its customers' needs on a timely basis. The Company anticipates that technological changes could cause the Company's net sales to decline in the future. There can be no assurance that the Company will be able to identify, develop, manufacture, market, support or acquire new products successfully, that any such new products will gain market acceptance, or that the Company will be able to respond effectively to technological changes. If the Company is unable for technological or other reasons to develop products in a timely manner in response to changes in technology, the Company's business, financial condition and results of operations will be materially adversely affected. There can be no assurance that the Company will not encounter technical or other difficulties that could in the future delay the introduction of new products or product enhancements. In addition, new product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's products, which could materially adversely affect the Company's business, financial condition and results of operations. Even if the Company develops and introduces new products, such products must gain market acceptance and significant sales in order for the Company to achieve its growth objectives. Furthermore, it is essential that the Company develop business relationships with and supply products to customers whose end-user products achieve and sustain market penetration. There can be no assurance that the Company's products will achieve widespread market acceptance or that the Company will successfully develop such customer relationships. Failure by the Company to develop products that gain widespread market acceptance and significant sales or to develop relationships with customers whose end-user products achieve and sustain market penetration will materially adversely affect the Company's business, financial condition and results of operations. The Company's financial performance will depend in significant part on the continued development of new and emerging markets such as the market for MCMs. The Company is unable to predict with any certainty any growth rate and potential size of emerging markets. Accordingly, there can be no assurance that emerging markets targeted by the Company, such as the market for MCMs, will develop or that the Company's products will achieve market acceptance in such markets. The failure of emerging markets targeted by the Company to develop or the failure by the Company's products to achieve acceptance in such markets could materially adversely affect the Company's business, financial condition and results of operations. Sole or Limited Sources of Supply. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. There are a limited number of qualified suppliers of laminate substrates and die which are of critical importance to the production of the Company's MCM products. In the manufacturing process, the Company also utilizes consigned materials supplied by certain of its customers. The Company's reliance on sole or a limited group of 27 suppliers and certain customers for consigned materials involves several risks, including a potential inability to obtain an adequate supply of required materials and reduced control over the price, timely delivery, and quality of raw materials. There can be no assurance that problems with respect to yield and quality of such materials and timeliness of deliveries will not continue to occur. Disruption or termination of these sources could delay shipments of the Company's products and could have a material adverse effect on the Company's business, financial condition and operating results. Such delays could also damage relationships with current and prospective customers, including customers that supply consigned materials. Product Quality and Reliability; Need to Increase Production. The Company's customers establish demanding and time-consuming specifications for quality and reliability that must be met by the Company's products. From initial customer contact to actual qualification for production, which may take as long as three years, the Company typically expends significant resources. Although the Company has generally met its customers' quality and reliability product specifications, the Company has in the past experienced and is currently experiencing difficulties in meeting some of these standards. Although the Company has addressed past concerns and has resolved a number of quality and reliability problems, there can be no assurance that such problems will not continue or recur in the future. If such problems did continue or recur, the Company could experience delays in shipments, increased costs, delays in or cancellation of orders and product returns, any of which would have a material adverse effect on the Company's business, financial condition or results of operations. The manufacture of the Company's products is complex and subject to a wide variety of factors, including the level of contaminants in the manufacturing environment and the materials used and the performance of personnel and equipment. The Company has in the past experienced lower than anticipated production yields and written off defective inventory as a result of such factors. The Company must also successfully increase production to support anticipated sales volumes. There can be no assurance that the Company will be able to do so or that it will not experience problems in increasing production in the future. The Company's failure to adequately increase production or to maintain high quality production standards would have a material adverse effect on the Company's business, financial condition and results of operations. Expansion of Operations. In order to be competitive, the Company must implement a variety of systems, procedures and controls. The Company expects its operating expenses to continue to increase. If orders received by the Company do not result in sales or if the Company is unable to sustain net sales at anticipated levels, the Company's operating results will be materially adversely affected until operating expenses can be reduced. The Company's expansion will also continue to cause a significant strain on the Company's management, financial and other resources. If the Company is to grow, it must expand its accounting and other internal management systems, and there can be no assurance that the Company will be successful in effecting such expansion. Any failure to expand these areas in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's results of operations. Moreover, there can be no assurance that net sales will increase or remain at or above recent levels or that the Company's systems, procedures and controls will be adequate to support the Company's operations. The Company's financial performance will depend in part on its ability to continue to improve its systems, procedures and controls. Intellectual Property Matters. Although the Company attempts to protect its intellectual property rights through patents, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise, manufacturing efficiency and marketing and sales abilities of its employees. There can be no assurance that others will not independently develop similar proprietary information and techniques or gain access to the Company's intellectual property rights or disclose such technology or that the Company can meaningfully protect its intellectual property rights. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at 28 all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company, or that third parties will not assert intellectual property infringement claims against the Company. In addition there can be no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. Environmental Regulations. The Company is subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject to the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, financial condition or results of operations. The Company has been notified by the United States Environmental Protection Agency that it considers the Company to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986. See "Legal Proceedings." Growth Strategy Through Acquisitions. As part of its growth strategy, the Company has in the past sought and may in the future continue to seek to increase sales and achieve growth through the acquisition of comparable or complementary businesses or technologies. The implementation of this strategy will depend on many factors, including the availability of acquisitions at attractive prices and the ability of the Company to make acquisitions, the integration of acquired businesses into existing operations, the expansion of the Company's customer base and the availability of required capital. Acquisitions by the Company may result in dilutive issuances of equity securities, and in the incurrence of debt and the amortization of goodwill and other intangible assets that could adversely affect the Company's profitability. Any inability to control and manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will successfully expand or that growth and expansion will result in profitability or that the Company's growth plans through acquisitions will not be inhibited by the Company's current lack of resources. Dependence on Key Personnel. The Company's financial performance depends in part upon its ability to attract and retain qualified management, technical, and sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The loss of any key employee, the failure of any key employee to perform in his current position or the Company's inability to attract and retain skilled employees, as needed, could materially adversely affect the Company's business, financial condition and results of operations. Nasdaq National Market Listing Requirements. The Company was delisted from the Nasdaq National Market on March 13, 1997, at which date the Company's Common Stock began trading on the OTC Electronic Bulletin Board. The Company will be subject to continuing requirements to be listed on the OTC Electronic Bulletin Board. There can be no assurance that the Company can continue to meet such requirements. The price and liquidity of the Common Stock may be materially adversely affected if the Company is unable to meet such requirements in the future. There can be no assurance that the Company will be able to requalify for listing on the Nasdaq National Market. 29 Volatility of Stock Price. The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's financial results, general conditions or developments in the semiconductor and personal computer industry and the general economy, sales of the Company's Common Stock into the marketplace, the ability of the Company to sell its stock on an exchange or over-the-counter, an outbreak of hostilities, natural disasters, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in the Company's relationships with its customers and suppliers, or a shortfall or changes in revenue, gross margins or earnings or other financial results from analysts' expectations could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In recent years the stock market in general, and the market for shares of small capitalization stocks in particular, including the Company, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's Common Stock will not continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. Recurring net operating losses. The Company's decision to discontinue its multilayer ceramic operations was the primary factor contributing to its 1996 net loss of $41,842,000. The decision by the principal secured creditors of the Company's pressed ceramic operations to liquidate that operation's assets was the primary factor contributing to the 1997 net loss of $11,496,000, as well as additional loss provisions made in 1997 relating to the discontinuance of the multilayer ceramic operations. At December 31, 1997, the Company had a working capital deficiency of $41,657,000 and an accumulated deficit of $80,248,000. The Company had outstanding at December 31, 1997 approximately $27,151,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and most of which debt is in default and due on demand. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than three years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry and in other industries concerning the potential effects associated with such compliance. Although the Company currently offers products that are designed to be Year 2000 compliant, there can be no assurance that the Company's products and the software products used by the Company contain all necessary date code changes. In addition, the Company has not comprehensively tested all of its internal software systems, or the third-party software it uses in its business, for Year 2000 problems. Year 2000 problems in the Company's internal software, or in the software of third parties that the Company uses in its business, could have a material adverse effect on the Company's business, operating results and financial condition. The Company believes that the purchasing patterns of customers and potential customers and the performance of vendors may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by the Company or the inability to render services or provide supplies to the Company. Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products, and disruption of supply patterns. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers and vendors, to spend significant resources upgrading their internal systems, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. New Accounting Standards - The following accounting standards have been issued during the last year: SFAS No. 132 - In February, 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This pronouncement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer considered useful. This pronouncement is effective for fiscal years beginning after December 15, 1997 and will require restatement of disclosures for earlier periods provided for comparative purposes. The Company has not determined the effect, if any, of adoption on its financial reporting. SFAS No. 131 - In June, 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. This pronouncement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 1997. The Company has not determined the effect, if any, of adoption on its financial reporting. SFAS No. 130 - In June, 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income, which includes certain items which have historically been excluded from the income statement, and instead charged directly to equity. The Company has not incurred any of the specific items addressed in this pronouncement. As a result, management does not believe that this pronouncement will have any impact on the Company's financial reporting. This pronouncement is effective for fiscal years beginning after December 15, 1997. SFAS No. 129 - In February, 1997, the FASB issued Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure. This pronouncement establishes standards for disclosing information about the capital structure for nonpublic entities which were previously exempt from certain disclosure requirements. This pronouncement is effective for fiscal years ending after December 15, 1997. Management does not believe that this pronouncement will have any effect on the Company's financial reporting. 30 ITEM 8. FINANCIAL STATEMENTS See Item 14(a) for an index to the financial statements and supplementary financial information which are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 31 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item relating to the Company's directors and nominees and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by this item relating to the Company's executive officers and dey employees is included under the caption "Executive Officers" in Part I of the Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item "Executive Compensation and Related Information" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included under the caption "Certain Transactions" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and is incorporated herein by reference. 32 PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Index to Consolidated Financial Statements. Form 10K Page Number ----------- Report of Independent Certified Public Accountants... F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996......................... F-2 Consolidated Statements of Operations for the three-year period ended December 31, 1997.................................. F-3 Consolidated Statements of Cash Flows for the three-year period ended December 31, 1997.................................. F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three-year period ended December 31, 1997............................ F-5 Notes to Consolidated Financial Statements........... F-6 2. Consolidated Financial Statement Schedules. The following financial statement schedules of Microelectronic Packaging, Inc. and its subsidiaries are included in this annual report on Form 10-K. Form 10K Page Number ----------- Report of Independent Certified Public Accountants on Financial Statement Schedules...................... F-28 Schedule II -- Valuation and Qualifying Accounts and Reserves........................................... F-29 Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter ended December 31, 1997. 33 (c) Exhibits The following exhibits are referenced or included in this report. Exhibit Description - ------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company filed March 23, 1998. 3.2(1) Amended and Restated Bylaws of the Company. 4.1(1) Specimen Certificate of Common Stock. 4.2(1) Form of Warrant to purchase 160,000 shares of Common Stock of the Company issued by the Company to Thomas James Associates, Inc. entered into upon the closing of the offering made pursuant to the Company's Registration Statement on Form S-1. 4.3(1) Form of Warrant to Purchase Common Stock dated August 31, 1993 issued by the Company to certain investors. 4.4 Warrants issued to The Seidler Companies dated November 3, 1997. 4.5 Warrants issued to H.J. Meyers & Company, Inc. dated November 19, 1997. 10.1(1) Second Amended and Restated Registration Rights Agreement, Waiver Agreement and Conversion Agreement entered into among the Company and certain investors named therein. 10.2(1) Employment Agreement dated June 15, 1993 between CTM Electronics, Inc. and Mr. Waldemar Heeb. 10.3(1) Installment Insurance Agreement dated June 15, 1993 between the Company and Mr. Waldemar Heeb. 10.4(1)+ License Agreement dated July 27, 1992 among the Company and Micro Substrates, Inc. and Micro Substrates, L.P. 10.5(1) Employment Agreement between the Company and Mr. Timothy da Silva. 10.6(1) Letter Agreement for General Banking Facilities dated October 9, 1993 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company ("MPS"), and Development Bank of Singapore, as revised by Letter Agreement dated November 19, 1993. 10.7(1) Guaranty dated August 24, 1990 between the Company and Development Bank of Singapore, as confirmed by Letter of Confirmation dated April 29, 1992. 10.8(1) Term Loan between MPS and Development Bank of Singapore. 10.9(1) Mortgages dated August 16, 1989 among MPS, DBS Finance Limited, a Singapore company, and Development Bank of Singapore. 10.10(1) Escrow Agreement dated October 11, 1993 between the Company and Innoventure (S) Pte. Ltd., a Singapore company. 10.11(1) Collaborative Manufacturing Agreement dated July 29, 1993 between the Company and Innoventure (S) Pte. Ltd., a Singapore company. 10.12(1) Technical Information Agreement dated January 19, 1993 between The Carborundum Company and MPC (S) Pte. Ltd., a Singapore company. 10.13(1)+ Option Agreement dated January 19, 1992 among the Company, The Carborundum Company and MPC (S) Pte. Ltd., a Singapore company. 10.14(1)+ Technical License Agreement dated September 14, 1987 between the Company and Samsung Corning Co. Ltd., a Korean company ("Samsung"). 10.15(1) Agreement dated September 14, 1987 between the Company and Samsung. 10.16(1) Alumina Powder Agreement dated December 17, 1987 between the Company and Samsung. 10.17(1) Investment Agreement dated September 14, 1987 between the Company and Samsung. 10.18(1) Lease Agreement dated September 10, 1990, as amended February 20, 1991, between CTM Electronics, Inc. and Judd/King No. 1, a California general partnership, for the San Diego office and industrial center at 9350 Trade Place, Suite A. 10.19(1) Lease Agreement dated February 6, 1991 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for the industrial premises at 31 Tuas Avenue 8, Jurong Town, Singapore, as renewed by a Lease Renewal Letter dated August 26, 1993. 34 10.20(1) Lease Agreement dated February 11, 1993 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for a portion of the premises at 1003 Bukit Merah Central, Singapore. 10.21(1) Lease Agreement dated November 21, 1984 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for the premises at 28 Tuss, Jurong Town, Singapore. 10.22(1) Form of Indemnification Agreement between the Company and each of its officers and directors. 10.23(1) Letter Agreement dated December 21, 1993, by and between the Company and Samsung. 10.24(1) Letter Agreement, dated December 16, 1993, by and between the Company and Samsung. 10.25(1) Letter of Intent to Reach Cooperation Agreement dated February 7, 1994 between the Company and Schott Glaswerice, a Germany corporation. 10.26(1) Secondary Agreement dated January 7, 1994 between MPS and Schott Glass Singapore Pte. Ltd., a Singapore company. 10.27(1) Tenancy dated January 7, 1994 between MPS and Schott Glass Singapore, Pte. Ltd. 10.28(1) Agreement to Lease dated December 13, 1993 between MPS and Schott Glass Singapore Pte, Ltd. 10.29(1) Consent to Certain Corporate Actions dated February 11, 1994 between the Company and Development bank of Singapore. 10.30(1) Consent to Certain Corporate Actions dated April 12, 1994 between the Company and Development Bank of Singapore. 10.31(3) Letter Agreement, dated May 27, 1994, by and between the Company and Development Bank of Singapore. 10.32(3)+ Purchase Option Agreement dated August 4, 1994 by and between International Business Machines ("IBM") and the Company. 10.33(3)+ Multilayer Technology Transfer and Licensing Agreement, dated August 4, 1994, by and between the Company and IBM. 10.34(3) Form of Promissory Note Issued by Contact International Corporation in favor of the Company. 10.35(3) Form of Common Stock Option issued by CIC Holding, Inc. to the Company. 10.36(3) Form of Common Stock Warrant issued by CIC Holding, Inc. to the Company. 10.37(3) Form of Option to purchase the Common Stock of CIC Holding, Inc. issued by D.G.D. Bucci to the Company. 10.38(3) Tenancy Agreement relating to Private Lot A14698 at 9 Tuas Basin Link between Jurong Town Corporation and MPM Singapore Pte. Ltd. dated November 18, 1994. 10.39(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot A14698(A) at 5 Tuas Basin Link, Jurong Industrial Estate, Singapore 2263 from Jurong Town Corporation dated December 2, 1994. 10.40(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot A14698(B) at 7 Tuas Basin Link, Jurong Industrial Estate, Singapore 2263 from Jurong Town Corporation dated January 26, 1995. 10.41(3) Offer Letter from DBS Bank of Term Loan/Short Term Advances Facilities dated December 15, 1994. 10.42(3) Sale and Purchase Agreement for CERDIP Manufacturing Equipment and Alumina Powder Equipment between the Company and Samsung Corning Company, Ltd., dated December 19, 1994. 10.43(3) Letter dated march 31, 1995 from Development Bank of Singapore. 10.44(4) Loan and Security Agreement, dated May 16, 1995, between the Company, MPS and Texas Instruments. 10.45(4) Loan and Security Agreement, dated May 30, 1995, between the Company, and NSEB. 10.46(4) Supply Guarantee and Preferred Allocation Agreement dated August 17, 1995 between Registrant, MPS and SGS-Thomson Microelectronics Pte. Ltd. (the "Supply Guarantee"). 10.47(4) Agreement Relating to Guarantee among Registrant, MPA, CTM, MPS and Motorola. 10.48(4) Supplemental Agreement to the Supply Guarantee dated October 19, 1995. 10.49(4) $1,000,000 Term Loan Financing between Citibank N.A. and MPS. 35 10.50(7) Subscription Agreement by and among MPI, Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd. 10.51(7) Convertible Loan Agreement by and among MPI, MPM, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd. 10.52(7) Guarantee issued by MPI. 10.53(5) Form of Offshore Securities Subscription Agreement dated October 22, 1996 by and among MPI, Purchaser and Loselle Greenawalt Kaplan Blair & Adler. 10.54(5) Form of 8% Convertible Debenture issued to the Purchasers. 10.55(5) Form of Common Stock Purchase Warrant dated October 22, 1995 issued by MPI to Dusseldorf Securities Limited. 10.56(6) Form of Amendment to 8% Convertible Debenture. 10.57(8) Novation Agreement between Microelectronic Packaging, Inc. and Innoventure (S) Pte. Ltd. 10.58(8) Agreement for Subcontract Manufacturing between Microelectronic Packaging (S) Pte. Ltd. and PT Ironhill dated September 5, 1995. 10.59(8) Sub-Contract Manufacturing Agreement between Microelectronic Packaging, Inc. and Innoventure (S) Pte. Ltd. dated July 29, 1993. 10.60(8) Sub-Contract Manufacturing Agreement between Microelectronic Packaging, Inc. and PT Ironhill Micro Electronic Packaging Co. Ltd. dated July 29, 1993. 10.61(8) Amended Loan and Security Agreement dated January 2, 1997 by and between NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging, Inc. 10.62(8) Second Secured Promissory Note dated January 2, 1997 by and between NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging, Inc. 10.63(8) Amended Loan and Security Agreement dated February 16, 1997 by and between Texas Instruments Singapore (Pte) Limited and Microelectronic Packaging (S) Pte. Ltd. 10.64(8) Consulting Agreement dated November 21, 1996, as amended, by and between the Company and The Watley Group, LLC. 10.65(8) Consulting Agreement dated November 21, 1996, as amended, by and between the Company and G&L Investments. 10.66(10) Loan and Security Agreement dated May 13, 1997, between the Company and Texas Instruments (Pte) Limited. 10.67(10) Promissory Note dated May 13, 1997, between the Company and Citicorp USA, Inc. 10.68(10) Amendment (to Promissory Note) dated July 11, 1997, between the Company and Citicorp USA, Inc. 10.69(11) Building lease dated September 2, 1997. 10.70(11) Employment agreement with Andrew K. Wrobel, dated October 6, 1997. 10.71(11) Amendment dated September 9, 1997 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. 10.72(11) Agreement dated October 8, 1997 between ORIX Leasing and Microelectronic Packaging, Inc. 10.73 Amendment dated December 8, 1997 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. 10.74 Amendment dated January 30, 1998 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. 10.75+ Agreement among Schlumberger Technologies, Inc. ATE Division and Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective January 5, 1998. 16.1(4) Letter dated November 27, 1995 from Price, Waterhouse LLP to Registrant. 21.1(3) Subsidiaries of the Company. 23.1 Consent of BDO Seidman LLP. 24.1 Power of Attorney (see page 38). 27.1 Financial Data Schedule - 1997 27.2 Financial Data Schedule - 1996 27.3 Financial Data Schedule - 1995 99.1(12) Amended 1993 Stock Option/Stock Issuance Plan dated April 10, 1997 and filed in the state of California on March 23, 1998. 36 99.2(2) Form of Notice of Grant of Stock Option and Stock Option Agreement. 99.3(2) Addendum to Stock Option Agreement (Special Tax Elections). 99.4(2) Addendum to Stock Option Agreement (Financial Assistance). 99.5(2) Form of Notice of Grant of Stock Option with Stock Option Agreement (Non-Employee Director Automatic Grant). 99.6(2) Form of Stock Issuance Agreement. 99.7(2) Compensation Agreement between Timothy da Silva and the Company dated April 12, 1994. 99.8(2) Stock Option Agreement between Timothy da Silva and the Company dated October 22, 1992. 99.9(2) Compensation Agreement between Ernest J. Joly and the Company dated April 12, 1994. 99.10(2) Stock Option Agreement between Ernest J. Joly and the Company dated February 16, 1994. 99.11(2) Compensation Agreement between Charles F. Wheatley and the Company dated April 12, 1994. 99.12(2) Stock Option Agreement between Charles F. Wheatley and the Company dated February 16, 1994. 99.13(1) Form of Director Automatic Option Grant Agreement. 99.14(1) Option Agreement between the Company and Mr. Timothy da Silva. _____________________ (1) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-72890) declared effective by the Securities and Exchange Commission on April 21, 1994. (2) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 33-78452) filed with the Securities and Exchange Commission on April 29, 1994. (3) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 1995 as amended. (4) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1995 fiscal year filed with the Securities and Exchange Commission. (5) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 1996. (6) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 1997. (7) Incorporated by reference from an exhibit filed with the Company's current report on Form 8-K dated March 27, 1996 and filed with the Securities and Exchange Commission on April 5, 1996. (8) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1996 fiscal year filed with the Securities and Exchange Commission on April 15, 1997, as amended. (9) Incorporated by reference from an exhibit filed with the Company's current report on Form 8-K dated July 10, 1997 and filed with the Securities and Exchange Commission on July 23, 1997. (10) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 1997. (11) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997. (12) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 25, 1998. + Confidential Treatment has been granted for the deleted portions of this document. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 1998. MICROELECTRONIC PACKAGING, INC. Date: March 30, 1998 By: /s/ Andrew K. Wrobel -------------------- Andrew K. Wrobel President and Chief Executive Officer, Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew K. Wrobel and Denis Trafecanty, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 30, 1998 By: /s/ Andrew K. Wrobel ---------------------------- Andrew K. Wrobel President and Chief Executive Officer, Director Date: March 30, 1998 By: /s/ Denis J. Trafecanty ---------------------------- Denis J. Trafecanty Senior Vice President, Chief Financial Officer and Secretary Date: March 30, 1998 By: /s/ Lewis Solomon ---------------------------- Lewis Solomon Chairman of the Board of Directors of the Company Date: March 30, 1998 By: /s/ Anthony J. A. Bryan ---------------------------- Anthony J. A. Bryan Director of the Company Date: March 30, 1998 By: /s/ Frank L. Howland ---------------------------- Frank L. Howland Director of the Company Date: March 30, 1998 By: /s/ Gary S. Stein ---------------------------- Gary S. Stein Director of the Company 38 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Microelectronic Packaging, Inc. San Diego, California We have audited the accompanying consolidated balance sheets of Microelectronic Packaging, Inc. as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Microelectronic Packaging, Inc. at December 31, 1997 and 1996 and the results of its operations and its cash flows for the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered a net loss in the amount of $11,496,000 which included a loss from discontinued operations of $11,874,000 in 1997, has a working capital deficiency of $41,657,000 and an accumulated deficiency of $80,248,000 as of December 31, 1997, is in default of most of its loan agreements, is economically dependent on a single customer, has three foreign subsidiaries in receivership and/or liquidation under Singapore law, has various claims and lawsuits filed against the Company and its subsidiaries and may be forced to seek protection for the Company and certain subsidiaries under United States bankruptcy laws. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. Continuation of the Company thereafter is dependent on the Company's ability to negotiate arrangements with its lenders, raise sufficient capital and achieve sufficient cash flow to meet its restructured debt obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO SEIDMAN, LLP Costa Mesa, California March 16, 1998 F-1 Microelectronic Packaging, Inc. Consolidated Balance Sheets
December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Assets Current Assets Cash $ 1,296,000 $ 2,954,000 Accounts receivable, net 2,504,000 5,849,000 Inventories 4,230,000 10,072,000 Other current assets 387,000 1,836,000 - ------------------------------------------------------------------------------------------------------------------ Total Current Assets 8,417,000 20,711,000 - ------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net 1,212,000 3,479,000 Other non-current assets 282,000 704,000 - ------------------------------------------------------------------------------------------------------------------ $ 9,911,000 $ 24,894,000 ================================================================================================================== Liabilities and Shareholders' Deficit Current Liabilities Current portion of long-term debt $ 22,000 $ 2,527,000 Line of credit borrowings, due on demand -- 5,201,000 Accounts payable 7,450,000 12,522,000 Accrued liabilities 1,711,000 2,626,000 Deferred revenue 265,000 503,000 Debt of discontinued operations, in default, due on demand 27,151,000 8,084,000 Current liabilities of discontinued operations, net 13,475,000 19,263,000 - ------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 50,074,000 50,726,000 - ------------------------------------------------------------------------------------------------------------------ Long-term debt, less current portion 69,000 4,782,000 Commitments, Contingencies and Subsequent Events Shareholders' Deficit Common stock, no par value: Authorized shares - 50,000,000 Issued and outstanding - 10,793,279 at 1997 and 6,991,493 at 1996 40,016,000 38,138,000 Accumulated deficit (80,248,000) (68,752,000) - ------------------------------------------------------------------------------------------------------------------ (40,232,000) (30,614,000) - ------------------------------------------------------------------------------------------------------------------ $ 9,911,000 $ 24,894,000 ==================================================================================================================
See accompanying notes to consolidated financial statements. F-2 Microelectronic Packaging, Inc. Consolidated Statements of Operations
Year ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Net Sales Product sales $ 28,432,000 $ 17,259,000 $15,181,000 Other sales 90,000 1,785,000 -- - ----------------------------------------------------------------------------------------------------- 28,522,000 19,044,000 15,181,000 - ----------------------------------------------------------------------------------------------------- Cost of goods sold Product sales 23,309,000 14,251,000 11,980,000 Other sales 43,000 1,523,000 -- - ----------------------------------------------------------------------------------------------------- 23,352,000 15,774,000 11,980,000 - ----------------------------------------------------------------------------------------------------- Gross profit 5,170,000 3,270,000 3,201,000 Selling, general and administrative 4,204,000 4,353,000 4,524,000 Engineering and product development 760,000 666,000 565,000 - ----------------------------------------------------------------------------------------------------- Income (loss) from operations 206,000 (1,749,000) (1,888,000) Other income (expense): Interest expense (37,000) (787,000) (69,000) Other income, net 209,000 99,000 66,000 - ----------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 378,000 (2,437,000) (1,891,000) Discontinued operations: Income (loss) from operations, including a 1996 provision of $6,163,000 for impairment of long-lived assets (4,523,000) (10,060,000) 505,000 Estimated loss on disposal of discontinued operations, including provision of $3,500,000 in 1997 and $1,580,000 in 1996 for operating losses through disposal date (7,351,000) (29,345,000) -- - ----------------------------------------------------------------------------------------------------- Net loss $(11,496,000) $(41,842,000) $(1,386,000) ===================================================================================================== Earnings per common share: Income (loss) from continuing operations $ 0.04 $ (0.45) $ (0.41) Discontinued operations (1.15) (7.23) 0.11 - ----------------------------------------------------------------------------------------------------- Net loss per common share $ (1.11) $ (7.68) $ (0.30) ===================================================================================================== Weighted average number of shares outstanding 10,361,000 5,445,000 4,660,000 ===================================================================================================== Earnings per common share assuming dilution: Income (loss) from continuing operations $ 0.03 $ (0.45) $ (0.41) Discontinued operations (1.09) (7.23) 0.11 - ----------------------------------------------------------------------------------------------------- Net loss per share $ (1.06) $ (7.68) $ (0.30) ===================================================================================================== Weighted average number of shares outstanding 10,886,000 5,445,000 4,660,000 =====================================================================================================
See accompanying notes to consolidated financial statements. F-3 Microelectronic Packaging, Inc. Consolidated Statements of Cash Flows
Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $(11,496,000) $(41,842,000) $ (1,386,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 324,000 2,607,000 2,521,000 Discontinued operations 11,874,000 39,405,000 -- Provision for revaluation of long-lived assets -- 6,163,000 -- Non-employee stock-based compensation 177,000 332,000 -- Discount on conversion of debentures -- 700,000 -- Loss on sale of fixed assets 8,000 12,000 -- Write down for revaluation of subsidiary -- -- 1,000,000 Unrealized loss on borrowings denominated in foreign currency and from forward foreign currency contracts -- -- 903,000 Realized benefit forward foreign currency contracts -- (292,000) (358,000) Changes in assets and liabilities, net of effects of discontinuance in 1997 and 1996: Accounts receivable (1,066,000) 966,000 642,000 Inventories 375,000 (3,354,000) (2,148,000) Other current assets (242,000) 1,731,000 (1,236,000) Other non-current assets 108,000 1,303,000 (1,801,000) Accounts payable, accrued liabilities and deferred revenue 1,033,000 3,641,000 2,162,000 - ------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities of: Continuing operations 1,095,000 11,372,000 299,000 Discontinued operations 3,200,000 (15,529,000) -- - ------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities 4,295,000 (4,157,000) 299,000 - ------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Acquisition of fixed assets Continuing operations (973,000) (1,284,000) (12,163,000) Discontinued operations -- (8,852,000) -- Proceeds from sale of fixed assets Continuing operations 49,000 310,000 -- Discontinued operations 2,805,000 -- -- Advances under notes receivable -- -- (30,000) Realized benefit from forward foreign currency contracts -- 292,000 358,000 - ------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 1,881,000 (9,534,000) (11,835,000) - ------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Increase (decrease) in short-term notes payable Continuing operations -- (847,000) 3,405,000 Discontinued operations (6,500,000) 101,000 -- Borrowings under long-term debt and promissory notes Continuing operations 109,000 5,128,000 10,599,000 Discontinued operations -- 9,000,000 -- Principal payments on long-term debt and promissory notes Continuing operations (386,000) (1,200,000) (891,000) Discontinued operations (1,057,000) (340,000) -- Issuance of common stock, net -- 1,880,000 -- - ------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (7,834,000) 13,722,000 13,113,000 - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash (1,658,000) 31,000 1,577,000 Cash at beginning of year 2,954,000 2,923,000 1,346,000 - ------------------------------------------------------------------------------------------------------------ Cash at end of year $ 1,296,000 $ 2,954,000 $ 2,923,000 ============================================================================================================
See accompanying notes to consolidated financial statements. F-4 Microelectronic Packaging, Inc. Consolidated Statement of Changes in Shareholders' Equity (Deficit)
Common Stock ------------------------ Accumulated Shares Amount Deficit Total - ------------------------------------------------------------------------------------------- Balance, January 1, 1995 4,660,093 $34,326,000 $(25,524,000) $ 8,802,000 Net loss -- -- (1,386,000) (1,386,000) - ------------------------------------------------------------------------------------------- Balance, December 31, 1995 4,660,093 34,326,000 (26,910,000) 7,416,000 Common stock issued 2,331,400 3,480,000 -- 3,480,000 Non-employee stock compensation -- 332,000 -- 332,000 Net loss -- -- (41,842,000) (41,842,000) - ------------------------------------------------------------------------------------------- Balance, December 31, 1996 6,991,493 38,138,000 (68,752,000) (30,614,000) Common stock issued 3,801,786 1,701,000 -- 1,701,000 Non-employee stock compensation -- 177,000 -- 177,000 Net loss -- -- (11,496,000) (11,496,000) - ------------------------------------------------------------------------------------------- Balance, December 31, 1997 10,793,279 $40,016,000 $(80,248,000) $(40,232,000) ===========================================================================================
See accompanying notes to consolidated financial statements. F-5 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements Note 1 - Description of Company and Summary of Accounting Policies Microelectronic Packaging, Inc. ("MPI" or the "Company") is an electronic interconnect solutions company with design, manufacturing and sales services to support the requirements of electronic systems companies. The Company develops, manufactures, markets and sells multichip modules ("MCMs") and, until July 1997 pressed ceramic packages, to customers in the integrated circuit, telecommunications, automatic test equipment and other electronics related industries. Principles of Consolidation - The consolidated financial statements include the accounts of MPI and its wholly-owned subsidiaries, CTM Electronics, Inc. ("CTM"), Microelectronic Packaging America ("MPA") which is dormant, Microelectronic Packaging (S) Pte. Ltd. ("MPS") (including its wholly-owned subsidiary Furnace Technology (S) Pte. Ltd.) which is in liquidation, MPC (S) Pte. Ltd. ("MPC") which has ceased operations and MPM (S) Pte. Ltd. ("MPM") which is in receivership. All significant intercompany accounts, transactions and profits have been eliminated. Cash and Cash Equivalents - For the purpose of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Inventories - Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. Property, Plant and Equipment - Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally ranging from three to five years. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful lives of the assets or the life of the lease. Impairment of Long-Lived Assets - As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 prescribes that an impairment loss is recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on an estimate of future discounted cash flows. Adoption of SFAS No. 121 did not have a material impact on the Company's financial statements. Long-Term Prepaid and Intangible Assets - Long-term prepaid and intangible assets are comprised of prepaid royalties, deferred facility start-up costs and certain other intangible assets. The amortization of such amounts is included in the operating results of the period of expected benefit. The Company periodically assesses the recoverability of these assets and records an impairment of such assets when the projected gross cash flows are no longer estimated to be sufficient to recover such assets. Deferred Facility Start-up Costs - The Company has incurred costs associated with establishing a production facility to manufacture product utilizing the technology licensed from IBM (see Note 4). Such deferred facility start-up costs primarily consisted of direct incremental employee and employee related costs and pre-operating rent for new facilities which were included in other non-current assets at December 31, 1995. These costs, which totaled $8,921,000, were expensed in 1996 as a result of the discontinuance of the multilayer ceramics operations. Intangible Assets - Intangible assets consist of an acquired customer base and purchased technology licenses and are classified as other non-current assets. Intangible assets are amortized using the straight-line method over estimated useful lives of 7 years. In 1996, the Company determined that F-6 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements the purchased technology is of no further benefit to the Company, and wrote- off the remaining net book value in 1996. Revenue Recognition - The Company recognizes revenue from product sales at the time of shipment. Non-refundable license fees are recognized as revenue when the Company has no material remaining performance obligations under the associated license agreement. Other sales in 1997 and 1996 include the revenue arising from the resale of certain production equipment and related production supplies. The equipment and supplies were purchased by the Company on behalf of, and sold to, a third party pursuant to purchase orders. Revenues from these transactions were recognized at the time the Company had satisfied all of its significant performance obligations. Income Taxes - The domestic parent Company and its U.S. subsidiaries file consolidated returns for U.S. federal income tax purposes. For California income tax purposes, the domestic parent company files on a unitary basis with all foreign and domestic subsidiaries. The Singapore subsidiaries file income tax returns in Singapore based upon their separate taxable income. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. This requires that the Company record a deferred tax asset related to the future income tax benefits associated with tax loss and credit carryforwards, and certain temporary differences for which tax benefits have not previously been recognized. Deferred tax assets are to be reduced by a valuation allowance when it is more likely than not that a portion or all of the deferred tax asset will not be realized. In addition, under SFAS 109, the tax benefit associated with the utilization of operating loss carryforwards is included in the regular provision for income taxes. Stock-Based Compensation - The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost is recognized for its employee stock option plans, unless the exercise price of options granted is less than fair market value on the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (see Note 12). Foreign Currency Transactions - The accounts of the Company's Singapore subsidiaries are maintained in U.S. dollars and the U.S. dollar is considered to be the functional currency of all consolidated subsidiaries. Transaction gains/(losses) resulting from transactions denominated in foreign currencies (primarily related to certain raw material purchases denominated in Japanese yen and other costs of production and administration denominated in Singapore dollars) are included in the results of operations for the period in which the exchange rates change. Forward Foreign Currency Contracts - Subject to bank financing and consent, the Company enters into forward foreign currency contracts to minimize the short- term impacts of exchange rate fluctuations related to certain raw material purchases denominated in Japanese yen and other costs of production and administration denominated in Singapore dollars. The cost of the contracts and any resulting gains and losses on the contracts are included in the results of operations in the period in which the exchange rates change. F-7 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements Fair Value of Financial Instruments - The carrying amount of cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The carrying amounts of the Company's short-term credit facilities and mortgage notes approximate fair value because the interest rates on these instruments are subject to change with market interest rates. As the majority of the Company's long-term obligations are classified as current liabilities (due on demand, due to defaults under debt covenants), the Company believes that their carrying amounts approximate their fair value. Engineering and Product Development Cost - Engineering and product development costs are expensed as incurred. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including the inventory obsolescence provision, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standards - The following accounting standards have been issued during 1997: SFAS No. 131 - In June, 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. This pronouncement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 1997. The Company has not determined the effect, if any, of adoption on its financial reporting. SFAS No. 130 - In June, 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income, which includes certain items which have historically been excluded from the income statement, and instead charged directly to equity. The Company has not incurred any of the specific items addressed in this pronouncement. As a result, management does not believe that this pronouncement will have any impact on the Company's financial reporting. This pronouncement is effective for fiscal years beginning after December 15, 1997. SFAS No. 129 - In February, 1997, the FASB issued Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure. This pronouncement establishes standards for disclosing information about the capital structure for nonpublic entities which were previously exempt from certain disclosure requirements. This pronouncement is effective for fiscal years ending after December 15, 1997. Management does not believe that this pronouncement will have any effect on the Company's financial reporting. Earnings per Share - As of December 31, 1997, the company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 prescribes a different method of calculating earnings per share than was previously used in accordance with APB 15, Earnings per Share. Adoption of SFAS No. 128 did not have a material impact on the Company's financial statements. Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation. F-8 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements Note 2 - Operating Results, Capital Resources and Going Concern The Company's decision to discontinue its remaining operations in Singapore, which produced pressed ceramic packages and aluminum nitride components, was the primary cause of the 1997 net loss of $11.5 million. The discontinuation of these operations resulted in a reduction in the carrying amount of inventories by $2.3 million, production consumables by $0.8 million and property, plant and equipment by $0.8 million and the accrual of interest expense through the anticipated completion of the liquidation process (December 31, 1998) of $3.5 million. Other factors contributing to the Company's 1997 loss was the operating loss of $4.1 million generated by the Company's Singapore operations (primarily the MPS pressed ceramics operations) from the beginning of 1997 up until the time they were discontinued in July 1997, and the Company incurring significant overhead expenses in the US in connection with the restructuring of the Company's operations. The Company's decision to discontinue its multilayer ceramics operations was the leading cause of the 1996 net loss of $41.8 million. The discontinuation of this operation resulted in the write-off of $8.9 million of pre-production costs, $2.0 million of prepaid royalties, a reduction in the carrying amount of property, plant and equipment by $14.9 million, the accrual of certain miscellaneous costs of $1.9 million, and the accrual of estimated losses to be incurred through the disposal date totaling $1.6 million. Other factors contributing to the Company's 1996 loss were: (1) a $6.2 million reduction in the carrying amount of pressed ceramic equipment at the MPS facility in Singapore and in Indonesia, and a $1.6 million allowance against MPS's receivable for inventory advanced to the Company's joint venture partner in Indonesia and (2) a significant decline in sales of pressed ceramic products by MPS, due to an industry-wide over-supply of pressed ceramic products. A receiver was appointed to handle the liquidation of the pressed ceramics operations on July 10, 1997, and on March 18, 1997, a receiver was appointed to handle the liquidation of the multilayer ceramics operations. Certain other factors, including, but not limited to, the majority of the Company's debt which is currently in default, cross default provisions specified in most of the Company's borrowing arrangements, various claims and lawsuits filed against the Company and its subsidiaries, dependence on primarily one customer who is also the Company's major vendor, the high debt service costs of the Company, and the Company's scarcity of working capital have the potential to have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. The accompanying financial statements have been prepared assuming the Company (MPI along with its only operating subsidiary - CTM) will continue as a going concern. A number of factors, including the Company's history of significant losses, the debt service costs associated with the Company's high level of existing indebtedness, the need to restructure debt which is currently in default, various claims and lawsuits, and the Company's Singapore operations in receivership and liquidation raise substantial doubts about the Company's ability to continue as a going concern. As of December 31, 1997, the Company has an accumulated deficiency of $80.2 million and a working capital deficiency of $41.7 million, which includes $27.2 million of debt of discontinued operations, due on demand and net current liabilities of discontinued operations of $13.5 million. The Company does not possess sufficient cash resources to repay these obligations, and the Company would be unable to repay these loans in the event that such demand was made by the Company's creditors (see Note 15). The Company does not have the financial resources to meet its obligations or guarantees for all of its debt obligations, and thus is in default on all of these obligations. (See Note 7.) The Company is currently negotiating with these lenders about a possible restructuring of these debt obligations. If the Company is unsuccessful in its negotiations, the Company would not be able to repay the amounts outstanding under these obligations. This failure would materially adversely affect the Company's F-9 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements financial condition and ability to continue as a going concern, and could, as is the case with other debt defaults and failure to repay, require that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its U.S. subsidiaries. Note 3 - Composition of Certain Financial Statement Captions
December 31, 1997 1996 - ------------------------------------------------------------------------------- Accounts receivable consist of: Trade receivables................................ $2,739,000 $ 6,147,000 Allowance for doubtful accounts.................. (235,000) (298,000) ---------- ------------ $2,504,000 $ 5,849,000 ========== ============ Inventories consist of: Raw materials.................................... $2,689,000 $ 5,797,000 Work-in-progress................................. 1,654,000 2,977,000 Finished goods................................... 131,000 2,622,000 Obsolescence reserve............................. (244,000) (1,324,000) ---------- ------------ $4,230,000 $ 10,072,000 ========== ============ Property, plant and equipment consist of: Machinery and equipment.......................... $1,757,000 $ 14,098,000 Leasehold improvements........................... 263,000 1,701,000 Building......................................... -- 1,782,000 Furniture and fixtures........................... 41,000 242,000 ---------- ------------ 2,061,000 17,823,000 Accumulated depreciation.......................... (849,000) (14,344,000) ---------- ------------ $1,212,000 $ 3,479,000 ========== ============ Accrued liabilities consist of: Accrued employee compensation.................... $ 406,000 $ 1,150,000 Accrued interest................................. -- 641,000 Other............................................ 1,305,000 835,000 ---------- ------------ $1,711,000 $ 2,626,000 ========== ============
Note 4 - Significant Agreements Schlumberger Technologies, Inc. ATE Division - In January 1998, the Company signed an agreement with Schlumberger Technologies, Inc. The agreement delineated the terms pursuant to which MPI supplies products to Schlumberger. The agreement includes warranty provisions, protection for raw materials purchased by MPI against changing production demand forecasts supplied by Schlumberger, certain guaranteed minimum allocations of sales to MPI for the first quarter of 1998, and pricing provisions. The agreement expires in October 2000. Effective July 26, 1997, Schlumberger informed the Company that it would no longer sell die to the Company, but instead would provide the die on consignment. The die supplied by Schlumberger is used in the assembly of MCMs sold to Schlumberger. This change to providing die on consignment has had the effect of reducing sales revenue to Schlumberger by approximately 60%, although the change has no impact on the units sold by the Company to Schlumberger. F-10 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements MPC (S) Pte. Ltd. - In January 1993, the Company formed a wholly-owned Singapore subsidiary (MPC) to manufacture microelectronic packaging for the Carborundum Company ("Carborundum"), a producer of products incorporating Aluminum Nitride ("AIN") and other thermal management materials. In connection with the formation of MPC, MPC entered into several agreements with Carborundum which covered, among other things, the purchase of raw materials by MPC, the sale of finished products to Carborundum, and granted Carborundum the option to acquire, for an agreed-upon price, up to 75% of the ownership of MPC or, under certain circumstances, up to 100% of the ownership of MPC. In 1997, the company that owned Carborundum completed the sale of the Carborundum Company to a third party. Carborundum's operations have subsequently been relocated from Singapore, and the new owners advised the Company in April 1997 that they have no interest in continuing the relationship between MPC and Carborundum. Innoventure Agreement - In July 1993, the Company entered into an agreement with Innoventure (S) Pte. Ltd., a Singapore company ("Innoventure") whereby Innoventure agreed to establish a manufacturing facility in Indonesia in order to manufacture certain pressed ceramic packages on a sub-contract basis for purchase solely by MPI. Pursuant to the agreement, Innoventure entered into a commitment to finance the construction and operations of the facility, while MPI agreed to grant to Innoventure a non-exclusive technology license, agreed to lease certain production equipment to Innoventure, and committed to purchase the entire output of the facility subject to certain terms and conditions that are determined on an annual basis. In July 1997, an affiliate of Innoventure, Micropac Technology, Pte. Ltd. ("Micropac") entered into an agreement with the Receiver and Manager for MPS to purchase a significant portion of the inventory and production equipment of MPS for approximately $1.3 million. Micropac assumed operational control of the MPS facilities in July 1997 and completed the purchase in August 1997. (See Note 5.) International Business Machines Corporation - In August 1994, the Company entered into a technology transfer and licensing agreement (the "IBM Agreement") with International Business Machines Corporation ("IBM") pursuant to which the Company was granted a license to specific technology developed by IBM for the manufacture of multilayer ceramic products. Under the terms of the IBM Agreement, the Company and its wholly-owned subsidiary, MPM, acquired a nonexclusive, nontransferable right to use the licensed technology to manufacture and sell certain specified products on a worldwide basis. In exchange for the license, the Company paid an up-front non-refundable royalty of $2,000,000, and is obligated to pay additional royalties based on sales of products incorporating the licensed technology during the term of the IBM Agreement, which shall remain in effect for a period of ten years from the date of execution and thereafter from year to year unless terminated by either party. The technology agreement also requires the Company to reach certain specified production levels at specified dates. In the event the Company fails to achieve these specified milestones, IBM has the right to terminate the technology agreement. Commencing in August 1996, the IBM Agreement was terminable by either party without cause upon six months prior written notice. Pursuant to an option agreement (the "IBM Option Agreement"), IBM was also issued an option to purchase up to 51% of the capital stock of MPM, which option is exercisable from and after the achievement of certain production milestones by MPM as set forth in the IBM Option Agreement. The term of the option, as well as the purchase price, are defined in the IBM Option Agreement. The option was determined to have an immaterial value at the time of issuance. MPM is also currently in possession of certain inventory that MPM had ordered from IBM. IBM has not yet been paid for such inventory. The outstanding debt from the inventory is less than $150,000. In connection with the IBM transaction, MPM obtained a $3.2 million line of credit from DBS, which was fully utilized during 1995 to finance equipment purchases. F-11 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements In March 1997, the Board of Directors of the Company decided to discontinue the multilayer ceramics operations. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchasing multilayer ceramic products from the Company were the main reasons that the Board decided to discontinue the multilayer ceramics operations. All Singapore employees working on the multilayer ceramics operations have since been terminated. MPM is currently in receivership and liquidation, as defined under the laws of Singapore. The Company has assisted the Receiver and Manager for MPM in selling off all of the remaining tangible assets of MPM. The proceeds from the sale of MPM's assets have been used to retire a portion of MPM's debts (the proceeds are not sufficient to retire all outstanding MPM debt). The Company anticipates that the liquidation of MPM will be completed by the end of 1998 (see Note 5). Note 5 - Concentrations of Credit Risk and Sales to Major Customers The Company operates in one reportable business segment with multiple product lines within that segment, and primarily sells to a limited number of semiconductor manufacturers and related suppliers which results in concentrated credit risk with respect to the Company's accounts receivable. The Company performs ongoing credit evaluations of its customers but does not require collateral for credit purchases. The Company maintains allowances for potential credit losses, and such losses have been within management's expectations. During 1997, 1996 and 1995, the Company had only one major customer (customers accounting for 10% or more of total sales), which accounted for 89%, 76% and 76%, respectively, of the Company's total sales. Amounts due from this customer comprised 81% and 71% of accounts receivable at December 31, 1997 and 1996, respectively. In February 1997, one of these customers ceased business with the Company, which was a contributing factor to the liquidation of the pressed ceramics operations of MPS. The Company's CTM Electronics, Inc. subsidiary has purchased certain chips ("die") used in the assembly of multichip modules ("MCM's") sold to one of the Company's significant customers from that same customer. Effective July 25, 1997, this customer notified the Company that it will no longer sell die to the Company and instead is providing the die on consignment. The pro forma presentation below gives effect to this change in operations on selected line items from the Company's Condensed Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997, as if this change had been put into effect on January 1, 1995.
Historical Pro Forma Year Ended Pro Forma Year Ended December 31, 1997 Adjustments December 31, 1997 ================================================================================ (unaudited) Net sales $ 28,522,000 $(10,626,000) /(1)/ $ 17,896,000 Cost of goods sold 23,352,000 (10,942,000) /(2)/ 12,410,000 Gross profit 5,170,000 316,000 5,486,000 Net income (loss) $(11,496,000) 316,000 $(11,180,000) ================================================================================ Net income (loss) per common share $ (1.06) $ -- $ (1.06) ================================================================================
F-12 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements
Historical Pro Forma Year Ended Pro Forma Year Ended December 31, 1996 Adjustments December 31, 1996 ================================================================================ (unaudited) Net sales $ 19,044,000 $(8,266,000) /(1)/ $ 10,778,000 Cost of goods sold 15,774,000 (8,304,000) /(2)/ 7,470,000 Gross profit 3,270,000 38,000 3,308,000 Net income (loss) $(41,842,000) 38,000 $(41,804,000) ================================================================================ Net income (loss) per common share $ (7.68) $ -- $ (7.68) ================================================================================
Historical Pro Forma Year Ended Pro Forma Year Ended December 31, 1995 Adjustments December 31, 1995 ================================================================================ (unaudited) Net sales $15,181,000 $(5,622,000) /(1)/ $ 9,559,000 Cost of goods sold 11,980,000 (5,622,000) /(2)/ 6,358,000 Gross profit 3,201,000 -- 3,201,000 Net income (loss) $(1,386,000) -- $(1,386,000) ================================================================================ Net income (loss) per common share $ (0.30) $ -- $ (0.30) ================================================================================
(1) The cost of the die to be provided on consignment will be removed from the selling price of the MCMs. The amount of the 2% prompt payment discount offered to the customer, which is included in revenues, will be reduced by the lower selling prices for these MCMs. (2) The cost of the die to be provided on consignment will be removed from the cost of goods sold, corresponding to the reduction in selling prices of the MCM's. Until July 1997, the Company had a foreign exchange line of credit with the Development Bank of Singapore ("DBS") under which it may enter into forward currency contracts of up to S$30,000,000 (U.S. $21,436,000 at December 31, 1996) for contracts with a maturity of up to twelve months. Advances under the line of credit are guaranteed by MPI and secured by all the assets of MPS, including a second mortgage on MPS's leasehold land and facility. Subject to bank financing and consent, the Company had entered into forward foreign currency contracts to economically hedge foreign currency transactions on a continuing basis for periods consistent with the underlying exposures, generally ranging from one-to-nine months in duration. The Company does not engage in foreign currency speculation; however, the Company's previous use of forward foreign currency contracts does not qualify for hedge accounting treatment in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The Company's objective in entering into forward contracts was to minimize on a continuing basis the impact of foreign exchange rate movements on the Company's operating results. This line of credit was terminated on July 9, 1997 when the Bank appointed a Receiver and Manager for MPS. Note 6 - Notes Receivable The Company had loaned an aggregate of $880,000 to Contact International Corporation ("CIC"), a manufacturer of etched lead frames, in the form of short- and long-term notes receivable. The notes F-13 Microelectronic Packaging, Inc. Notes to the Consolidated Financial Statements receivable are secured by certain assets of CIC and bear interest at the prime rate plus 2%. During the fourth quarter of 1994, CIC defaulted on the above notes by failing to make required principal and interest payments. In August 1995, CIC filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. During the fourth quarter of 1995, the Company fully-reserved this receivable. In 1996, the Company was permitted by the Court to take possession of the equipment that CIC had provided as security for the notes described above. In March 1997, the Company received $195,000 from the sale of the equipment, net of fees and expenses necessary for the sale of the equipment. Note 7 - Debt of Discontinued Operations, In Default, Due on Demand
December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------ Debt of discontinued operations, in default, due on demand consists of: Line of credit facilities and short-term borrowings of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997 and "Line of credit, due on demand" for 1996, bear interest at the bank's prime rate plus 5% (total 13.75% at December 31, 1997) while in default, secured by substantially all of the assets of MPS, and is guaranteed by MPI $2,638,000 $5,201,000 Line of credit facilities and short-term borrowings of discontinued operations, which are currently in default and accordingly included in "Current liabilities of discontinued operations" for 1996, secured by substantially all of the assets of MPM, with the balance being repaid through the sale of collateral by the bank during 1997 1,317,000 3,298,000 8.5% debentures, related to discontinued operations, which are currently in default and thus, due on demand and accordingly included in the caption "Debt of discontinued operations, in default, due on demand" for 1997 and "Current liabilities of discontinued operations" for 1996, interest is due annually, principal due in March 2001, guaranteed by MPI 9,000,000 9,000,000 Term notes to, or guaranteed by, certain customers of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997 and "Long-term debt" for 1996, bearing interest at rates ranging from 3.5% to 18.0%, payable in quarterly installments commencing in March 1997, principal due in quarterly installments over a four-year term commencing in March 1998, secured by various assets including certain MPS production equipment, guaranteed by MPI 4,771,000 4,750,000 Term notes to, or guaranteed by, certain customers of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand," originally payable in various quarterly installments commencing in the second quarter of 1996, plus interest at rates ranging from 6.7% to 8.75%, secured by various assets including certain MPS production equipment, all of the domestic assets of MPI, MPA and CTM and all of the outstanding common stock of MPA, MPS and CTM 6,583,000 6,833,000
F-14 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements
December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Mortgage notes of discontinued operations due January 2000 and January 2005, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997 and "Line of credit borrowings, due on demand" for 1996, payable in monthly installments of S$22,000 (U.S. $14,000) plus interest, with interest at variable rates (13.75% at December 31, 1997), secured by MPS buildings and improvements, guaranteed by MPI 1,081,000 1,251,000 Note payable resulting from the deficiency balance of capital leases of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997 and "Current liabilities of discontinued operations" for 1996, bears interest at 7.25% and is guaranteed by MPI 1,601,000 1,968,000 Capital lease obligations of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997 and "Long-term debt" for 1996, consisting of various machinery and equipment financing agreements, payable in monthly installments of $10,000, including interest at rates ranging from 4% to 6% 160,000 289,000 Non interest bearing obligations, paid in July, 1997, secured by 121,372 shares of MPI common stock -- 291,000 8% convertible debentures, due October 1997, unsecured, converted during the first quarter of 1997 -- 1,900,000 Equipment leases -- 1996 balance matured in October 1997 - 1997 balance matures in January 2000 and July 2002, payable in monthly installments of $4,000, including interest at rates ranging from 21.6% to 25.9%, secured by various CTM production equipment and guaranteed by MPI 91,000 79,000 ---------------------------------------------- 27,242,000 34,860,000 Current portion of long-term debt (22,000) (2,527,000) Line of credit borrowings, due on demand -- (5,201,000) Long-term debt, less current portion (69,000) (4,782,000) Included in Current liabilities of discontinued operations, net -- (14,266,000) ---------------------------------------------- Debt of discontinued operations, in default, due on demand $27,151,000 $ 8,084,000 ==============================================
Certain of the above obligations are payable in Singapore dollars and the balances have been translated at an exchange rate of U.S.$1.00 = S$1.6825 at December 31, 1997 and U.S.$1.00 = S$1.4000 at December 31, 1996. Accordingly, actual settlement amounts of such obligations are subject to variances caused by changes in foreign exchange rates. The Company does not have the financial resources to meet its obligations or guarantees for most all of the above obligations, and thus is in default on all of these obligations (except for the Term notes). As a result, these obligations are due on demand and have been classified as current liabilities within the caption "Debt of discontinued operations, due on demand." The Company is currently negotiating with these lenders to discuss a possible restructuring of these debt obligations. If the Company is unsuccessful in its negotiations, the Company would not be able to repay the amounts outstanding under these obligations. This failure would materially adversely affect the Company's financial condition and F-15 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements ability to continue as a going concern, and could, as is the case with other debt defaults and failure to repay, require that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its U.S. subsidiaries. Maturities of principal balances are $22,000, $20,000, $16,000, $20,000 and $13,000 in 1998 through 2002, respectively. See Note 16 for debt of discontinued operations, due on demand. MPA and CTM are prohibited from paying dividends to MPI under the provisions of a term note that has been guaranteed by one of the Company's significant customers. MPI is directly liable, or is contingently liable based on guarantees of repayment provided, for effectively all of the above obligations. In October 1996, the Company issued $2.8 million in 8% convertible debentures to a group of offshore investors (collectively "Purchasers"). As of December 31, 1996, $900,000 of these debentures had been converted. As of February 20, 1997, holders of the remaining $1.9 million of debentures had elected to convert, resulting in the issuance of an additional 3,801,787 shares (see Note 10). Note 8 - Commitments And Contingencies Following is a schedule by year of estimated future minimum lease payments under capital and operating lease agreements.
Year ended Capital Operating December 31, Leases Leases - ------------------------------------------------------------------------------ 1998 $ 40,000 $ 214,000 1999 33,000 229,000 2000 25,000 231,000 2001 25,000 241,000 2002 14,000 211,000 Thereafter -- 1,125,000 - ------------------------------------------------------------------------------ Total minimum lease payments 137,000 $2,251,000 ========== Amount representing interest 46,000 - ------------------------------------------------------------------------------ Present value of net minimum lease payments 91,000 Current portion 22,000 - ------------------------------------------------------------------------------ Long-term portion $ 69,000 ==============================================================================
Certain machinery and equipment are subject to leases which are classified as capital leases for financial reporting purposes. At December 31, 1997 and 1996 $155,000 ($128,000 net) and $706,000 ($357,000 net) of such leased equipment are included in property, plant and equipment. Amortization expense related to assets under capital leases, for continuing operations was $83,000, $58,000 and $58,000 in 1997, 1996 and 1995, respectively. The Company is also committed under noncancelable operating agreements for the lease of buildings, machinery and equipment. Rent expense for continuing operations in 1997, 1996 and 1995 was approximately $336,000, $364,000 and $301,000, respectively. Certain of the Company's shareholders have been granted certain registration rights; the costs of any such offering, exclusive of any underwriting discount, would be borne by the Company. F-16 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements The Company previously shipped quantities of hazardous waste to a Whittier, California, hazardous waste treatment facility for recycling. The owner of that facility allegedly failed to recycle or dispose of the various wastes shipped to the site and has now filed for bankruptcy. The Company is one of more than four thousand generators, including numerous Fortune 500 corporations, identified by the State of California as having responsibility for cleanup at the site, and it is not ranked as one of the generators that has shipped a significant amount of hazardous waste. In May 1995, the United States Environmental Protection Agency ("EPA") issued written notice that it considers the Company to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The EPA determined that there may be an imminent and substantial endangerment to the public health, welfare, and environment because of a release and/or threat of a release of hazardous substances from the site located in Whittier, California. The notice requires the Company to take immediate actions to contain and prevent any further release of hazardous substances at the site. In response to the EPA notice, the Company and approximately 100 of the other named generators provided the necessary funding to effect the removal and destruction of the hazardous wastes stored at this site. In addition, the Company and such generators have provided the necessary funding to test the soil and ground water at this site, which testing is currently ongoing. Although the cost incurred by the Company to date of removing and destroying the hazardous waste stored at this facility was not significant, this effort does not address the cleanup of potential soil and/or ground-water contamination present at this site. There can be no assurance, therefore, that the costs and expenses associated with this action will not increase in the future to a level that would have material adverse effect upon the Company's operations. Based upon the Company's investigation to date, the Company is not able to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's financial position, results of operations or cash flows. The Company has also previously shipped small quantities of hazardous waste for recycling to a San Diego hazardous waste treatment facility operated by a third party operator ("Operator"). The owner of the property and the State of California have filed suits against the Operator and two of its officers and the owner of the property has obtained a mandatory injunction to compel the removal of hazardous waste on site. If the Operator does not comply, it is possible that the property owner or a government agency could also sue or bring enforcement proceedings against approximately 100 hazardous waste generators, including the Company, that shipped such wastes to the facility to pay for the removal and to participate in site cleanup if any contamination is discovered. Based upon the Company's investigation to date, the Company is not able to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's financial position, results of operations or cash flows. In November 1995, the Company reached an agreement to settle a consolidated class action lawsuit in exchange for $950,000. The settlement required the Company to contribute $525,000, with the remainder paid by the Company's insurance carrier. Final approval was received in May 1996, by the U.S. District Court for the Southern District of California. The Company provided for the full cost of the settlement of such litigation during 1995. Pursuant to the Company's decision to cease its multilayer and pressed ceramic operations and to liquidate MPM's and MPS's assets, MPM is currently in liquidation and MPS is in receivership in Singapore. "Current liabilities of discontinued operations, net" includes $15,446,000 of amounts due to unsecured creditors and $1,971,000 of assets which, if realized, will be used to reduce, but not eliminate, the amounts owing to secured creditors (see Note 15). As a result, management believes that there will be no funds available to repay unsecured creditors. Upon completion of the liquidation of MPM and MPS, the amounts owing to unsecured creditors may be relieved through the liquidation proceedings which has the potential of generating a significant gain. Since there can be no assurance that this gain F-17 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements will be recognized, and if recognized, the final amount could be different from the amount shown above, no accrual for this gain has been recorded in the consolidated financial statements included in this Form 10-K. This gain, if recorded, will not result in any cash payment to MPI from the discontinued operations. There may, however, be some future U.S. Federal income tax benefits resulting from the Company's payments under its loan guarantees to these Singapore subsidiaries. Numerous creditors have filed or threatened lawsuits against MPI and its subsidiaries for various defaults and violations of certain agreements entered into by MPI and its various subsidiaries. As a result of DBS Bank's decision to enforce its claims, MPM and MPS are in liquidation and receivership, respectively in Singapore. Should MPI be unable to restructure its debt obligations incurred through guarantees of MPM's and MPS's debts, MPI may be forced to seek protection under Chapter 7 or 11 of Title 11 the United States Code. On April 10, 1997, DBS sent to MPS a written demand for payment of the outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS imposed the default interest rate (an additional 3% interest rate) on the outstanding debt, which has been accrued through December 31, 1998. The Company is involved in various other claims arising in the ordinary course of business; none of these other claims, in the opinion of management, is expected to have a material adverse impact on the financial position, cash flows or overall trends in the results of operations of the Company. NOTE 9 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under the SFAS 109 asset and liability method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse.
Net loss is comprised of the following: Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Domestic operations $ 378,000 $ (1,631,000) $(1,640,000) Singapore operations (11,874,000) (40,211,000) 254,000 - --------------------------------------------------------------------------------------------- Total $(11,496,000) $(41,842,000) $(1,386,000) =============================================================================================
A reconciliation of the provision for income taxes to the amount computed by applying the statutory Federal income tax rate to income before income taxes follows:
Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Amounts computed at Federal statutory rate $(3,909,000) $(14,295,000) $(485,000) Foreign losses with no benefit 3,121,000 10,910,000 15,000 Taxes below the Federal rate on undistributed foreign earnings 831,000 2,829,000 20,000 Amortization of non-deductible intangible assets 37,000 38,000 43,000 Non-deductible expenses 6,000 247,000 184,000 Losses for which no current benefits are available - 271,000 223,000 Utilization of NOL carryforward (86,000) - - - --------------------------------------------------------------------------------------------------- Provision for income taxes $ - $ - $ - ===================================================================================================
F-18 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements The components of deferred income taxes:
Year ended December 31, 1997 1996 - --------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 3,951,000 $ 4,077,000 Accrued liabilities and reserves 2,804,000 2,644,000 Tax credit carryforwards 499,000 466,000 Deferred income 106,000 166,000 Book and tax depreciation differences 92,000 - Unrealized foreign exchange loss - 29,000 - --------------------------------------------------------------------------------------------------- 7,452,000 7,382,000 Deferred tax liabilities: Book and tax depreciation differences - (27,000) - --------------------------------------------------------------------------------------------------- 7,452,000 7,355,000 Valuation allowance (7,452,000) (7,355,000) - --------------------------------------------------------------------------------------------------- Deferred taxes $ - $ - ===================================================================================================
At December 31, 1997 and 1996, a 100% valuation allowance has been provided on the total deferred income tax assets as they are not more likely than not to be realized. The Company has not recorded provisions for any United States income taxes in 1997, 1996 and 1995. During 1995, taxable income at the Company's domestic operations was offset by the utilization of net operating loss carryforwards. At December 31, 1997, the Company had Federal net operating loss carryforwards of approximately $11,445,000 for Federal tax reporting purposes and approximately $1,025,000 for California tax purposes. The net operating loss carryforwards for tax purposes expire between 2000 and 2013. As of December 31, 1997, the Company also has approximately $431,000 and $37,000 in Federal and state research and development credit carryforwards, respectively. These credits expire between 2000 to 2008. Additionally, the Company has approximately $31,000 of investment tax credits which expire in 2001. The Company believes that it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. During 1997 and 1996, the Company's Singapore operations generated operating losses for both financial reporting and income tax purposes. During 1995, taxable income at the Company's Singapore operations was offset by the utilization of net operating loss and capital allowance carryforwards. NOTE 10 - SHAREHOLDERS' EQUITY In October 1996, the Company issued $2.8 million in 8% convertible debentures (see Note 7). As of December 31, 1996, holders of $900,000 of these debentures had elected to convert, under the terms of the debentures, into 1,306,996 shares of common stock. As of February 20, 1997, holders of the remaining $1.9 million of debentures had elected to convert, resulting in the issuance of an additional 3,801,787 shares. Under the terms of two non-interest bearing obligations, the Company was required to issue and place into escrow 121,372 shares of common stock as collateral to ensure the Company's performance under F-19 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements those obligations (see Note 7). Upon the Company's successful performance under those obligations, the shares are to be returned to the Company. During 1996, employees exercised options to purchase 61,019 shares of the Company's common stock. In March 1996, the Company and MPM consummated the Transpac Financing, in which the Company issued 842,013 shares of its Common Stock for $2,000,000. In order to provide for the convertibility of the Transpac Debenture, the Shareholders approved an amendment to the Company's Amended and Restated Articles of Incorporation to increase the authorized shares of Common Stock from 10 million shares to 15 million shares at a Special Meeting on May 29, 1996. In order to permit the Company to issue additional options to employees, the Shareholders approved an amendment to the Company's 1993 Stock Option/Stock Issuance Plan, which reserved an additional 4 million shares for the plan (see Note 12) on August 21, 1997. As of March 10, 1998, shareholders approved an amendment to the Company's Amended and Restated Articles of Incorporation to increase the authorized shares of Common Stock from 15 million shares to 50 million shares and to add 10 million shares of undesignated preferred stock, pursuant to a written consent solicitation (see Note 7). NOTE 11 - EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution retirement savings plan which is intended to qualify under section 401(k) of the Internal Revenue Code. The Plan covers substantially all full-time U.S. employees. Participants may contribute a percentage of their salaries subject to statutory annual limitations. The Company matches a percentage of the employee contributions as specified in the plan agreement. Contributions by the Company totaled $48,000, $65,000 and $54,000 in 1997, 1996 and 1995, respectively. NOTE 12 - STOCK OPTION/STOCK ISSUANCE PLAN AND STOCK PURCHASE WARRANTS Stock Option/Stock Issuance Plan - The Company maintains a stock option/stock issuance plan under which incentive stock options may be granted to employees of the Company and nonqualified stock options may be granted to consultants and non-employee directors of the Company. Under the terms of the plan, nontransferable options may be granted for terms of up to 10 years and are generally exercisable at the rate of 33% per year, although vesting terms are determined at the discretion of the Board of Directors. Options are generally granted with an exercise price not less than the fair market value of the common stock shares at the date of grant. A total of 4,690,632 shares of common stock have been reserved for issuance under the plan. The plan expires in December 2000. On August 21, 1997, the Company cancelled and regranted substantially all existing options (other than options granted pursuant to the Automatic Option Grant Program). Based in part upon the delisting of the Company's Common Stock from the Nasdaq National Market, the financial condition of the Company, the stock price and the necessity of retaining its employees, the Company believes that this program would be in the best interests of the shareholders. As such, the Board of Directors and the Stock Option Plan Administration Committee cancelled and regranted substantially all options outstanding under the Discretionary Option Grant Program of the Plan (and grant additional options to persons who have received options under the Automatic Option Grant Program) with an exercise price in excess of the fair market value of the Common Stock of the Company as traded on the OTC Bulletin Board on the Grant Date. Pursuant to such program, each such outstanding option was cancelled and a new replacement option F-20 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements granted for the same number of shares, with an exercise price of $0.19875 (the fair market value of the Common Stock on the new grant date). The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for this plan. Under APB Opinion 25, when the exercise price of options granted under the Company's plan is equal to the market price of the underlying stock on the date of grant, no compensation cost is recognized. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if such compensation cost for the Company's stock option and issuance plans had been determined in accordance with the fair value based method prescribed in SFAS 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: 0% dividend yield; expected volatility of 19% - 23%%, 16% and 11%, risk free interest rates of 5.75% - 6.22%, 6.10% and 5.85%; and expected lives of 3 to 6 years (determined on an option-by-option basis). Under the accounting provisions of SFAS 123, the Company's net loss per share would have been increased to the pro forma amounts indicated below:
1997 1996 1995 -------------------------------------------------------------------- Net loss: As reported................................... $(11,496,000) $(41,842,000) $(1,386,000) Proforma...................................... (11,583,000) (41,858,000) (1,392,000) Earnings per common share: As reported................................... (1.11) (7.68) (0.30) Proforma...................................... (1.12) (7.69) (0.30) Earnings per common share assuming dilution: As reported................................... (1.06) (7.68) (0.30) Proforma...................................... (1.07) (7.69) (0.30)
A summary of the status of the Company's stock option plan as of December 31, 1997 and 1996, and changes during the years ending on those dates is presented below:
1997 1996 1995 ------------------------ ---------------------- ---------------------- Weighted- Weighted- Weighted- Shares Average Shares Average Shares Average (000) Exercise Price (000) Exercise Price (000) Exercise Price ------------------------ ---------------------- ---------------------- Outstanding at beginning of year 1,547 $2.22 550 $2.62 386 $3.30 Granted 4,264 0.32 1,117 2.03 188 1.87 Exercised - - (61) 1.35 - - Forfeited (1,941) 1.75 (59) 3.28 (23) 7.90 Outstanding at end of year 3,870 0.36 1,547 2.22 551 2.62 Options exercisable at year-end 1,202 0.37 867 2.14 255 2.23 Weighted-average fair value of options granted during the year $0.10 $0.53 $0.21
F-21 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements The following table summarizes information about fixed stock options outstanding at December 31, 1997.
Options Outstanding Options Exercisable --------------------------------------------------------------- --------------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Exercise Outstanding at Remaining Average Exercisable at Average Prices 12/31/97 Contractual Life Exercise Price 12/31/96 Exercise Price - ----------------------------------------------------------------------------------- --------------------------------------- $ 0.20 to $ 0.26 2,039,187 9.6 years $0.20 700,000 $0.20 $ 0.43 to $ 0.51 1,775,000 9.9 $0.48 483,335 $0.50 $ 1.75 to $ 1.91 45,900 8.9 $1.90 11,700 $1.90 $ 4.19 to $ 5.13 9,900 6.6 $5.04 6,975 $5.09 ------------- -------------- $ 0.20 to $ 5.13 3,869,987 1,202,010 ============= ==============
Stock Purchase Warrants - On November 19, 1997, the Company entered into an Investment Banking Agreement for a term of two years. Pursuant to the Investment Banking Agreement, the Company is to receive business development services including the review of the Company's managerial and financial requirements, review of the Company's budgets and business plans, analysis of alternative methods by which the Company can raise capital and certain other related services in exchange for the issuance of 1,000,000 common stock purchase warrants. This warrant has a term of five years, an exercise price of $1.00 per share, and has certain registration rights. The fair market value of the Company's Common Stock on the grant date was $0.625. The exercise of the warrant was contingent on shareholder approval of an increase in the number of authorized shares necessary to provide a sufficient number of shares underlying the warrant. Shareholders subsequently granted such approval effective March 10, 1998. The Company issued 50,000 common stock purchase warrants at an exercise price of $1.00 per share in November 1997, pursuant to an agreement whereby the Company will receive investment consulting services for a period of two years. The warrants become exercisable over the first two years of the agreement and expire in November 2002. In connection with the issuance of $2.8 million of convertible debentures on October 23, 1996 (see Note 7) the Company issued 75,421 common stock purchase warrants to the lead investor at an exercise price of $0.55 (the average conversion price of the debentures). These warrants, which were exercisable 45 days after issuance, expired on October 23, 1997. In connection with its IPO (see Note 10), the Company issued 160,000 common stock purchase warrants to its underwriter at an exercise price of $6.50. These warrants, which were exercisable upon issuance, expire in April 1999. The Company issued 17,693 common stock purchase warrants at an exercise price of $5.63 per share in August 1993. These warrants expire in August 1998. No stock purchase warrants have been exercised during the three years ended December 31, 1997. NOTE 13 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS Cash paid for interest during 1997, 1996 and 1995 totaled $688,000, $1,731,000 and $1,034,000, respectively. In 1996, the Company entered into capital lease obligations to acquire property, plant and equipment totaling $1,784,000. As discussed in Notes 7 and 10, holders of $1,900,000 and $900,000 of convertible debentures had elected to convert their debentures into 1,306,926 shares of common stock, as of December 31, 1997 and 1996, respectively. NOTE 14 - RELATED PARTY TRANSACTIONS In exchange for management, marketing, advisory, strategic planning and technical services, the Company paid $626,000 and $91,000 in 1997 and 1996 to the Company's Board Members or entities which are affiliated with three of the Company's Board members. F-22 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements NOTE 15 - DISCONTINUED OPERATIONS On July 10, 1997, The Development Bank of Singapore Limited, one of the Company's and its subsidiaries largest creditors ("DBS"), appointed a Receiver and Manager to liquidate the assets of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is a wholly owned subsidiary of the Company which manufactured primarily pressed ceramics products. DBS exercised its option to appoint a Receiver and Manger under the terms of a Deed of Debenture dated November 27, 1984 (as amended) between DBS and MPS. The Company anticipates that the Receiver and Manager will complete the liquidation of MPS by December 31, 1998. The Company has guaranteed all of MPS's obligations to DBS of which approximately $2.6 million was outstanding as of December 31, 1997. These loans which are included in the caption "Debt of discontinued operations, due on demand" in the Consolidated Balance Sheet. There can be no assurance that such debt will be fully paid through the liquidation of the assets of MPS. If insufficient , DBS could demand repayment of the shortfall from the Company through the guarantee. The Company does not have adequate resources to repay such debt if the guarantee is called. The Company recorded the effect of the receivership as of June 30, 1997, and the results of operations of MPS have been classified as "Loss from discontinued operations" on the Consolidated Statement of Operations for the year ended December 31, 1997, 1996 and 1995. As a result of the appointment of a Receiver and Manager, MPS is no longer able to manufacture its pressed ceramic products and has ceased generating revenue since July 10, 1997. The Company has also evaluated the net realizable value of the assets of its MPS subsidiary. The effect of this is to reduce the carrying value of certain assets by $6.4 million in 1997 and $6.2 million in 1996. These charges are included on the Consolidated Statement of Operations in the caption "Estimated loss on disposal of pressed ceramics operations." On March 18, 1997, a Receiver was appointed to handle the liquidation of the multilayer ceramics operations of MPM (S) Pte. Ltd. As of December 31, 1997, essentially all of the assets of MPM had been sold. Final resolution of the remaining liabilities will come only after the liquidation of MPS, since MPS has guaranteed the DBS bank loan and the equipment leases entered into by MPM. The portion of these liabilities remaining after any reduction available from the sale of MPS and MPM assets will then be transferred to MPI, as MPI also guaranteed these loans and leases. As of October 8, 1997, the Company (as guarantor) reached an agreement with MPM's lessor for the repayment of the balance remaining after the sale of the leased equipment, over a five-year term (interest only during the first year, with principal due quarterly thereafter). The loan balance will be reduced by excess funds available from the liquidation of MPS, in the event that any funds are available. The holders of the debentures issued to Transpac and related parties still retain $9.0 million of debt securities issued by MPM which are guaranteed by the Company. The Company and MPM are in default thereunder. The Company's MPC subsidiary was informed in April 1997 that Carborundum Corporation ("Carborundum"), its sole customer, was immediately cancelling the manufacturing and related agreements with MPC as a result of Carborundum's sale of its assets to a third party. On April 5, 1997, a fire at the Company's MPC facility caused damage to the building and certain equipment. The Company is insured against the fire, and believes that it will incur minimal losses from the fire. The Company has closed the MPC operation and has terminated all of its MPC employees. The Company expects that there will be minimal impact from the disposition of the assets of MPC. Most costs of closure of the MPC operations will be borne by the former customer or the Company's business interruption insurance. The Company has recorded the effect of the closure of this business as of F-23 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements June 30, 1997, and the results of operations of MPC have been classified as "Loss from discontinued operations" in the Consolidated Statement of Operations. Based on the information above, the results of operations of the MPS, MPC and MPM segments have been reported separately as discontinued operations as of December 31, 1997, and for the year then ended. Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 have been restated to present MPS, MPC and MPM segments as discontinued operations. Discontinued operations include management's best estimates of the amounts expected to be realized on the sale of its assets associated with these discontinued operations and the expenses to be incurred through the disposal date. The amounts the Company will ultimately realize and incur could differ materially in the near term from the amounts assumed in arriving at the loss on disposal of the discontinued operation. Management anticipates that the foreign operations will be fully dissolved in 1998. The components of "Current liabilities of discontinued operations, net" included in the Consolidated Balance Sheets are as follows (only MPM was included in net liabilities of discontinued operations as of December 31, 1996 - MPS and MPC are included, along with MPM, as of December 31, 1997). Consistent with the 1997 presentation, all debt obligations have been reclassified to the caption "Debt of discontinued operations, due on demand" and are included in the discussion at Note 7.
December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------- Cash $ 572,000 $ 391,000 Other current assets - 225,000 Property, net 1,399,000 1,500,000 - -------------------------------------------------------------------------------------------------------- Total restricted assets, held by Receiver 1,971,000 2,116,000 Accounts payable and accrued liabilities 15,446,000 7,113,000 - -------------------------------------------------------------------------------------------------------- Current liabilities of discontinued operations, net $(13,475,000) $(19,263,000) ========================================================================================================
NOTE 16 - GEOGRAPHIC INFORMATION
Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $28,522,000 $19,044,000 $ 15,181,000 Singapore -- -- -- - -------------------------------------------------------------------------------------------------------- Net sales as reported in the accompanying consolidated statements of operations $28,522,000 $19,044,000 $ 15,181,000 ======================================================================================================== Income (loss) from operations: United States $ 206,000 $(1,749,000) $ (1,888,000) Singapore -- -- -- - -------------------------------------------------------------------------------------------------------- Income (loss) from operations as reported in the accompanying consolidated statements of operations $ 206,000 $(1,749,000) $ (1,888,000) ========================================================================================================
F-24 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements
December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------- Identifiable assets: United States $ 9,911,000 $ 9,640,000 Singapore and Indonesia -- 15,254,000 - -------------------------------------------------------------------------------------------------------- Total assets as reported in the accompanying consolidated balance sheets $ 9,911,000 $24,894,000 ======================================================================================================== Identifiable liabilities: United States $ 9,517,000 $11,912,000 Singapore 40,626,000 43,596,000 - -------------------------------------------------------------------------------------------------------- Total liabilities as reported in the accompanying consolidated balance sheets $50,143,000 $55,508,000 ========================================================================================================
F-25 NOTE 17 - EARNINGS PER SHARE
For the Year Ended December 31, 1997 ---------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------------- -------------------- --------------- Income from continuing operations $378,000 BASIC EPS Income available to common stockholders 378,000 10,360,841 $0.04 =============== Effect of Dilutive Securities Stock Options -- 525,478 Warrants -- -- ------------------- -------------------- Diluted EPS Income available to common stockholders + assumed conversions $378,000 10,886,319 $0.03 =================== ==================== ===============
Options to purchase 55,800 shares and warrants to purchase 1,227,693 shares of common stock at prices ranging from $1.75 to $6.50 were outstanding during the second half of 1997 but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares. The options and warrants, which expire between August 1998 and November 2006 were still outstanding as of December 31, 1997. F-26 MICROELECTRONIC PACKAGING, INC. Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1996 --------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------------- -------------------- -------------- Loss from continuing operations $(2,437,000) BASIC EPS Income available to common stockholders (2,437,000) 5,445,380 $(0.45) ============== Effect of Dilutive Securities Stock Options -- -- Warrants -- -- ------------------- -------------------- DILUTED EPS Income available to common stockholders + assumed conversions $(2,437,000) 5,445,380 $(0.45) =================== ==================== ==============
Options and warrants to purchase shares of common stock which outstanding during the second half of 1996 were not included in the computation of diluted EPS because the options' and warrants' effect on EPS would be anti-dilutive.
For the Year Ended December 31, 1995 --------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------------- -------------------- -------------- Loss from continuing operations $(1,891,000) BASIC EPS Income available to common stockholders (1,891,000) 4,660,000 $(0.41) ============== Effect of Dilutive Securities Stock Options -- -- Warrants -- -- ------------------- -------------------- DILUTED EPS Income available to common stockholders + assumed conversions $(1,891,000) 4,660,000 $(0.41) =================== ==================== ==============
Options and warrants to purchase shares of common stock which outstanding during the second half of 1995 were not included in the computation of diluted EPS because the options' and warrants' effect on EPS would be anti-dilutive. F-27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULES Board of Directors Microelectronic Packaging, Inc. San Diego, California The audits referred to in our report dated March 16, 1998 relating to the consolidated financial statements of Microelectronic Packaging, Inc., which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered a net loss in the amount of $11,496,000 which included a loss from discontinued operations of $11,874,000 in 1997, has a working capital deficiency of $41,657,000 and an accumulated deficiency of $80,248,000 as of December 31, 1997, is in default of most of its loan agreements, is economically dependent on a single customer, has three foreign subsidiaries in receivership and/or liquidation under Singapore law, has various claims and lawsuits filed against the Company and its subsidiaries and may be forced to seek protection for the Company and certain subsidiaries under United States bankruptcy law. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. Continuation of the Company thereafter is dependent on the Company's ability to negotiate arrangements with its lenders, raise sufficient capital and achieve sufficient cash flow to meet its restructured debt obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO SEIDMAN, LLP Costa Mesa, California March 16, 1997 F-28 MICROELECTRONIC PACKAGING, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1997 SCHEDULE II
Balance At Additions Transfers to Beginning Of Charged To Costs Discontinued Balance At End Period And Expenses Operations Deductions Of Period ------------------------------------------------------------------------------------------------ Allowance For Doubtful Accounts for the Year Ended: December 31, 1995 $ 136,000 $ 77,000 $ -- $ (14,000) $ 199,000 December 31, 1996 199,000 99,000 -- -- 298,000 December 31, 1997 298,000 -- -- (63,000) 235,000 Inventory Valuation Reserves for the Year Ended: December 31, 1995 $ 663,000 $ 460,000 $ -- $ (93,000) $ 1,030,000 December 31, 1996 1,030,000 606,000 -- (312,000) 1,324,000 December 31, 1997 1,324,000 49,000 (909,000) (220,000) 244,000 Other Valuation Reserves (1) for the Year Ended: December 31, 1995 $ 157,000 $ 916,000 $ -- $ (90,000) $ 983,000 December 31, 1996 983,000 1,817,000 -- -- 2,800,000 December 31, 1997 2,800,000 -- (2,526,000) -- 274,000 Property, Plant And Equipment - Continuing Operations for the Year Ended: December 31, 1996 $ -- $ 6,163,000 $ -- $ -- $ 6,163,000 December 31, 1997 6,163,000 -- (6,163,000) -- -- Property, Plant And Equipment - Discontinued Operations for the Year Ended: December 31, 1996 $ -- $14,943,000 $ -- $ -- $14,943,000 December 31, 1997 14,943,000 755,000 6,163,000 -- 21,861,000
(1) Pertains To Other Receivables, Including Innoventure Receivable for 1996. F-29 EX-3.1 2 AMENDED & RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MICROELECTRONIC PACKAGING, INC., a California Corporation The undersigned Andrew Wrobel 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 two classes of -------------- stock to be designated, respectively, "Common Stock," no par value and "Preferred Stock," no par value. The total number of shares that the Corporation is authorized to issue is sixty million (60,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock and ten million (10,000,000) shares shall be Preferred Stock. B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. 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. 2 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 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 10,793,279 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. 3 IN WITNESS WHEREOF, the undersigned has executed this certificate on March 4, 1998. - - /s/ A. Wrobel ------------------------------------ Andrew Wrobel, President /s/ W. Lazarow ------------------------------------ Warren T. Lazarow, Assistant Secretary 4 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 March 4, 1998. ------- /s/ A. Wrobel ------------------------------------- Andrew Wrobel /s/ W. Lazarow ------------------------------------- Warren T. Lazarow 5 EX-4.4 3 WARRANTS ISSUED TO THE SEIDLER COMPANIES - 11-3-97 EXHIBIT 4.4 [LETTERHEAD OF THE SEIDLER COMPANIES, INC.] The Seidler Companies Incorporated November 3, 1997 PRIVILEGED AND CONFIDENTIAL - --------------------------- Mr. Andrew K. Wrobel President & Chief Executive Officer Microelectronic Packaging, Inc. 9350 Trade Place San Diego, CA 92126 Dear Andrew: This letter agreement (the "Agreement") will confirm the understanding between Microelectronic Packaging, Inc. (the "Company") and The Seidler Companies Incorporated ("TSC" or the "Advisor") pursuant to which the Company has retained TSC to act as Advisor, on the terms and subject to the conditions set forth herein, in connection with financial consulting services provided to the Company by TSC in matters relating to possible merger and acquisition transactions, capital market financings, investment opportunities, investor relations and such services as the Company may request from time to time and TSC may agree to provide in writing (the "Services"). The Services shall not include any underwriting or broker-dealer related activities, and the Company agrees to bear sole responsibility for the negotiation, preparation, filing, amending and distribution of any offering materials of transaction documents, in connection with any of the foregoing investments or transactions. Retention. The Company hereby retains TSC on a nonexclusive basis to act as its - --------- financial advisor for a period of two years, subject to earlier termination as hereinafter provided, from the date hereof in connection with the Services to be provided to the Company. TSC agrees to act as Advisor to the Company and to perform the Services to the best of its ability. Subject to the terms and conditions of this Agreement, the nature and scope of the Advisor's efforts shall be limited solely to that of advisor to the Company on matters including but not limited to those defined above, and within such limits TSC shall engage such activities as it deems appropriate and which are acceptable to the Company. The Company agrees to retain its own legal counsel and accountants for any necessary legal and tax advice, including any such service or related services in connection with the Services to be provided by the Advisor. Compensation. In consideration of the above services the Advisor agrees to - ------------ accept at a future date (issuance date) to be mutually agreed upon by Company and Advisor, within twelve months of the date of this agreement, Warrants representing the right to purchase a total of 50,000 shares of thc Company's Common Stock, al an exercise price equal to $1.00 per share of the Common Stock on the date of issuance. The Warrants shall be registered in two tranches of Warrants to purchase 25,000 shares each, and represented by two Warrant Certificates, having thc following terms, among other terms and conditions usually contained in such instruments: (i) Warrants representing the right to purchase the first 25,000 shares of the Company's Common Stock shall be exercisable for a period of five years from the date of issuance, but not within thc first year from date of issuance, and (ii) Warrants representing thc right to purchase the additional 2S,000 shares of the Company's Common Stock shall be exercisable for a period of five years from the date of issuance, hut not prior to two years from the date of issuance, except that these Warrants shall be automatically revoked and cancelled without any action whatever by the Company if this Agreement is terminated by either the Advisor or the Company for any reason whatever prior to the expiration. (iii) If permitted under the applicable rules and regulations of the Securities and Exchange Commission ("SEC") then in effect and any Company Agreement in effect, the Company shall include the shares of the Company's Common Stock issuable upon exercise of any Warrants issued to Advisor pursuant to this Agreement in any registration statement filed with the SEC during the period of time while any Warrants of Advisor are outstanding and exercisable. The Company will use its best efforts to cause such registration efforts to be declared effective and to remain effective for one hundred twenty days or, if earlier, until all outstanding Warrants of Advisor shall have been exercised except that the second 25,000 Warrants shall not have thc above registration rights in any event until one year after the issuance. Compliance with Laws. In performing Services for the Company pursuant to this - -------------------- Agreement, TSC shall comply with all applicable laws, including, but not limited to, federal and state securities laws and the rules and regulations of the NASD. TSC represents and warrants to the Company that TSC has, or shall obtain prior to any performances of services hereunder, any and all licenses, registrations and permits necessary for the performance of TSC's Services pursuant to this Agreement. Relationship. For any and all purposes whatever, Advisor is, and shall remain, - ------------ solely and independent contractor responsible for all obligations and liabilities which Advisor may incur in connection with performance of this Agreement. Nothing herein shall constitute Advisor as an employee or agent of the Company. Advisor shall not have the authority to bind or commit the Company to any legal obligation or otherwise obligate or commit the Company in any manner whatsoever. 2 Indemnity. As partial consideration for the services to be rendered by TSC, the - --------- Company agrees to indemnify TSC and the other Indemnified Persons and TSC agrees to indemnify the Company as set forth in Exhibit I hereto, which is incorporated herein and made a part hereof. Representations, Warranties and Covenants of the Company. The Company as of the - --------------------------------------------------------- date hereof, represents, warrants and agrees for TSC's benefits as follows: This agreement is duly authorized and validly executed and delivered by the Company, and constitutes a legal, valid and binding agreement of the Company. In connection with the Advisor's activities hereunder, the Company agrees to furnish the Advisor and any prospective investor or other party introduced to the Company by TSC ("Third Party") with all material public information concerning the Company and its business, prospects, operations, and financial results and condition, including any information that the Advisor or Third Party reasonably deems appropriate. Such information will include various corporate reports and any other materials used in connection with the provision of any Services. All documents supplied to TSC or any Third Party in connection with the services shall have been prepared, reviewed and approved by the Company and shall be accurate and complete in all material respects. In addition, the Company agrees to provide the Advisor or Third Party with access to the Company's accountants, counsel, consultants and other appropriate agents and representatives. The Company acknowledges that the Advisor or Third Party may rely upon the completeness and accuracy of information and data furnished to it by the Company's officers, directors, employees, agents and representatives without an independent verification of such information and data or an appraisal of the Company's assets. Confidentiality. Except to the extent authorized by the Company or required by - ---------------- any Federal or state law, rule or regulation or any decision or order of any court or regulatory authority, the Advisor agrees that it will not disclose and will refrain from disclosing to any person, other than to any agents, attorneys, accountants, employees, officers, and directors engaged by the Advisor or the Company in connection with any Services to be provided hereunder, each and all of whom shall have signed a confidentiality and non-disclosure agreement or be subject to an enforceable non-disclosure obligation, any confidential information which has not become public about the Company or its agents, attorneys, accountants in connection with the services rendered hereunder. Any advice rendered by TSC hereunder shall not be disclosed publicly in any manner without TSC's written approval and will be treated by the Company and TSC as confidential, except in a SEC filing. In addition, TSC's advice is not intended for, and should not be relied upon by, other third parties. The Company also agrees that any reference to the Advisor or any affiliate of the Advisor in any release or communication to any party outside the Company is subject to the Advisor's approval, which approval shall not be unreasonably withheld or delayed. If the Advisor resigns or is terminated prior to any release or communication, no reference shall be made therein to the Advisor without the Advisor's prior written permission. Termination. This Agreement may be terminated by the Company at any time prior - ------------ to the expiration of this Agreement upon 30 days written notice to TSC. TSC may terminate the Agreement prior to the expiration of this Agreement upon 30 days written notice to the Company 3 but only for cause, which shall mean only: (i) the misconduct or bad faith of any officer, director or employee of the Company with respect to the Company's performance of its duties under this Agreement, (ii) the Company's breach of any of the provisions of this Agreement of (iii) the voluntary or involuntary bankruptcy of the Company. Unless earlier terminated as set forth above this Agreement shall terminate on September 1, 1999. In either event, the Company shall continue to be liable to TSC for any unpaid compensation earned by TSC pursuant to this Agreement together with any reimbursable expenses incurred through the date of termination, and the indemnity, contribution and expense reimbursement provisions contained in this Agreement shall remain operative and in full force and effect regardless of termination, expiration or consummation of Services. If terminated, Advisor, TSC and all related parties shall return all non-public information above to the Company or its affiliates to the Company. Notices. Notices hereunder shall be given in writing and shall be mailed or delivered if to the Company at: Microelectronic Packaging, Inc. 9350 Trade Place San Diego, CA 92126 Attn: Andrew Wrobel if to the Advisor at: The Seidler Companies Incorporated 515 South Figueroa Street, 11th Floor Los Angeles, California 90071-3396 Attn: Jon Merriman Advertisements. The Company agrees that the Advisor shall have the right to - --------------- place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder; provided that the Advisor shall have submitted a copy of any such proposed advertisement to the Company for its prior approval, which approval shall not be unreasonably withheld or delayed. Construction. The Agreement incorporates the entire understanding of the - ------------- parties and shall be governed by, and construed in accordance with, the laws of the State of California as applied to contracts made and performed in such State, without regard to principles of conflicts of laws. Severability. Any determination that any provision of this Agreement may be, or - ------------- is, unenforceable shall not affect the enforceability of the remainder of this Agreement. Headings. The section headings in this Agreement have been inserted as a matter - --------- of convenience for reference and are not an effective part of this Agreement. 4 Counterparts. This Agreement may be executed simultaneously in two or more - ------------- counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Third Party Beneficiaries. This Agreement has been and is made solely for the - -------------------------- benefit of the Company, the Advisor and the other Indemnified Persons referred to in this Agreement and their respective successors and assigns, and no other person shall acquire or have any rights under or by virtue of this Agreement. Succession. This Agreement shall be binding upon and inure to the benefit of - ----------- the Company, TSC, the Indemnified Persons and their respective successors, assigns, heirs and personal representatives. If the foregoing terms correctly set forth our Agreement, please confirm this by signing and returning to the Advisor the duplicate copy of this letter. Thereupon this letter, as signed in counterpart, shall constitute our Agreement on the subject matter herein. THE SEIDLER COMPANIES INCORPORATED By: /s/D. Jonathan Merriman ------------------------ D. Jonathan Merriman Managing Director Confirmed and Agreed to: MICROELECTRONIC PACKAGING, INC. By: /s/Denis J. Trafecanty ---------------------- Title: SVP-CFO ------------------- Dated: 11/19/97 ------------------ 5 EXHIBIT A Indemnification =============== Subject to the following paragraphs, in consideration for the agreement of TSCI to render the services described in the letter agreement to which this exhibit is attached (the "Letter Agreement"), the Company ("Indemnitor") agrees to indemnify, defend and hold harmless TSCI and its officers, directors, stockholders, employees, agents and affiliates, including, without limitation, each person who controls TSCI within the meaning of the Securities Act of 1933 or the Securities Exchange Act of 1934 (each, an "indemnified party" and collectively, the "indemnified parties") from and against any and all loss, cost, claim, damage, liability and expense whatsoever (including, without limitation, costs of any investigation, legal and other fees and expenses incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), joint or several, to which the indemnified parties, or any of them, may become subject under the Federal securities laws, any other applicable foreign, Federal or State statute or regulation or common law (whether in tort, contract, or on any other basis), or otherwise, insofar as such losses, costs, claims, damages, liabilities or expenses arise out of or are based upon or related to, in whole or in part: (i) the Letter Agreement; (ii) any use (whether authorized or not) by the Indemnitor of TSCI's name; (iii) the performance by the indemnified parties, or any of them, of the services contemplated hereby; or (iv) any claims relating to or involving any of the possible transactions contemplated by the Letter Agreement; provided, however, that such indemnity shall not extend to any loss, claim, damage, liability or cost to the extent it is determined by final adjudication by a court of competent jurisdiction to have resulted from the negligence or willful misconduct of TSCI. If the indemnity provided above shall be unenforceable for any reason whatsoever, the indemnified parties shall be entitled to receive from the Indemnitor, or its successors and assigns, contribution for all such losses, costs, claims, damages, liabilities and expenses (including, without limitation, all costs of any investigation, legal or other fees and expenses incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), joint or several, so that the indemnified parties ultimately bear, in the aggregate, only an amount equal to the aggregate amount of such losses, costs, claims, damages, liabilities and expenses multiplied by a fraction, the numerator of which is the expenses and any fees actually paid to TSCI by the Company, and the denominator of which is the value of the Company (based on the present market value of all of its outstanding equity securities); provided, however, that in no event shall the indemnified -------- parties' share of such losses, costs, claims, damages, liabilities and expenses exceed the expenses and cash fees actually paid to TSCI by the Company; and provided further, that no person found liable for fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. 6 The Indemnitor agrees to pay, as soon as practicable, all legal fees and expenses submitted by one law firm, (i) incurred by the indemnified parties, or any of them, in defending any claim of the type set forth in the preceding paragraphs, or (ii) incurred by the indemnified parties in producing documents, assisting in answering any interrogatories, giving any deposition testimony or otherwise becoming involved (at the request of the Company, by reason of discovery in proceedings instituted by any third party or otherwise) in any litigation or claim relating to the engagement of TSCI under the Letter Agreement, or any of the matters enumerated in the preceding paragraphs, even though no claim is made against the indemnified parties and the indemnified parties are not named parties to any litigation. The indemnified parties will consult with the Company with respect to the defense of any claim or lawsuit and will not settle or otherwise enter into any agreements with any claimants involving any payment by any indemnified party without the prior written consent of the Company, which consent shall not be unreasonably withheld. The indemnification provided herein will include advance payment (if requested by TSCI) or the prompt reimbursement of any payments made or required to be made by any indemnified party for any settlement, any damages awarded, costs of suit and all reasonable legal fees and other expenses, and shall include prompt payment to TSCI for the time reasonably required to be expended by any officers or employees of TSCI at their then-current hourly consulting rates, regardless of the legal theories advanced or the results of any such claim or litigation. Notwithstanding the foregoing, the Indemnitor will not be liable to any indemnified party hereunder in any such case unless the Company is given the opportunity to defend, with counsel reasonably acceptable to TSCI, such indemnified party at the Indemnitor's own cost and expense (unless TSCI shall have reasonably concluded that counsel selected by the Indemnitor has a conflict of interest because of the availability of different or additional defenses, or for any other reason, in which case an indemnified party need not afford the Indemnitor such opportunity) and in no event shall the Indemnitor be liable to any indemnified party to the extent that any such loss, cost, claim, damage, liability or expense arises out of or is based upon the fact that such indemnified party committed an intentional fraud or was negligent in connection with the rendering of services under the Letter Agreement but only if and when such fact shall be determined by final adjudication by a court of competent jurisdiction; until such adjudication is made, the Indemnitor shall be obligated to advance, pay or reimburse costs and expenses as if this paragraph did not exist and if such an adjudication is made, such indemnified party shall repay to the Indemnitor any costs and expenses advanced, paid or reimbursed by the Indemnitor hereunder to the extent that the court affirmatively determines that such costs and expenses were directly related to such fact. The indemnity and contribution provisions herein provided shall not be exclusive, but shall be cumulative and in addition to any other remedies which any indemnified party may otherwise have, at law or in equity. 7 EX-4.5 4 WARRANTS ISSUED TO H.J. MEYERS & CO. - 11/19/97 EXHIBIT 4.5 H.J. MEYERS & CO., INC. Investment Bankers 125 Half Mile Road, Red Bank, New Jersey 07701-5622 908-842-1110. Fax 908-576-1500. 806673-5852 Member NASD SIPC INVESTMENT BANKING AGREEMENT This Agreement is made as of this 19 day of November 1997 by and between MICROELECTRONIC PACKAGING, having its business offices at 9350 Trade Place, San Diego, CA 92126 (the "Company") and H.J. MEYERS & CO., INC. with principal offices at 1895 Mt. Hope Avenue, Rochester, New York 14620 (the "Consultant"). WITNESSETH WHEREAS, the Company desires to retain the consultant and the Consultant desires to be retained by the Company, all pursuant to the terms and conditions hereinafter set forth: NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants herein contained, it is agreed as follows: 1. Retention. The Company hereby retains the Consultant to perform non-exclusive consulting services related to corporate finance and other matters, and the Consultant hereby accepts such retention and shall undertake it's best efforts to perform for the Company the duties described herein. In this regard, subject to paragraph 7 hereof, the Consultant shall devote such time and attention to the business of the Company, as shall be determined by the Consultant, subject to the approval of the Chairman of the Company. a) The Consultant agrees, to the extent reasonably required in the conduct of the business of the Company, and at the Company's request, to place at the disposal of the Company its judgment and experience and to provide business development services to the Company including the following: (i) review the Company's managerial and financial requirements; (ii) review budgets and business plans; (iii) analyze and assess alternatives for the Company, presented by the Company for raising capital, public or private offerings of the Company's securities; and (iv) prepare and disseminate a "Corporate Profile" report in compliance with applicable state and federal securities laws. (v) Maintain all legal and ethical Standards of Conduct necessary and required to provide aforesaid service. b) At the Consultant's request, the Company will provide "due diligence" presentations to Registered Representatives of the Consultant and other brokerage firms. 2. Term. The Consultant's retention hereunder shall be for a term of two (2) years Commencing on the date of this Agreement. After six months from the date hereof, this Agreement may be terminated by either party upon 60 days prior written notice to the other with or without cause and for any reason. 3. Compensation. 1,000,000 warrants. Such warrants shall have term of five (5) years from the date of issuance with in exercise price of one dollar ($1.00) per share of the Company's Common Stock. Each warrant will entitle the holder to convert into one (1) common share with an exercise price of one dollar ($1.00) per share of the Company's Common Stock on the date in which the shareholders approve an increase in the number of shares sufficient to provide for all of the underlying warrant shares. The Company agrees to solicit its shareholders to increase the number of authorized shares of the company within 90 days of the date of this agreement. However, such shareholder approval cannot be guaranteed. These warrants will include demand/piggyback registration rights reasonably acceptable to both parties. The exercise of the Warrants are contingent on shareholder approval for an increase in the number of authorized shares necessary to provide a sufficient number of shares underlying the warrant. The Consultant's Warrant shall have non-priced based anti-dilution provisions for stock dividends and splits. In lieu of any cash payment required by the Consultant in connection with exercise of the Consultant's Warrant, the Holder(s) of the Consultant's Warrant shall have the right at any time and from time to time to exercise the Consultant's Warrant in full or in part by surrendering the Warrant Certificate as payment of the aggregated Exercise Price. The number of shares within the Consultant's Warrant to be surrendered in payment of the aggregate Exercises Price for the shares within the Consultant's Warrant to be exercised shall be determined by multiplying the number of shares within the Consultant's Warrant to be exercised by the Exercise Price per share, and then dividing the product thereof by the amount equal to the Market Price per share minus the Exercise Price. Solely for the purposes of this paragraph, Market Price shall be calculated either (i) on the date which the form of election is deemed to have been sent to the Company ("Notice Date") or (ii) as the average of the Market Prices for each of the five trading days preceding the Notice Date, whichever of (i) or (ii) is greater. Subject to the 3rd immediately preceding paragraph, the Company will reserve and at all times have available a sufficient number of shares of its Common Stock to be issued upon the exercise of the Consultant's Warrant. The Company also agrees to grant to the Consultant, subject to the conditions listed below, the right to demand registration of the Common Stock issuable upon exercise of the Warrant referred to above, on up to two (2) occasions with all expenses of the first registration to be borne by the Company and all expenses of the second registration to be borne by the Consultant; provided, however, that such demand registration right shall be exercisable commencing no earlier than one (1) year from the date of this Agreement. Other selling Shareholders can also piggyback pro rata subject to their proportional percentage ownership in the number of shares to be sold by all selling shareholders. In addition, the Company shall, subject to the conditions listed below, grant "piggy back" registration rights to include the shares of Common Stock issuable upon exercise of the Warrant in any registration statement filed by the Company under the Securities Act of 1933 relating to an underwriting of the sale of shares of common stock or other security, other than for registrations of securities in a merger or acquisition or pursuant to employee benefit plans. Inclusion of such shares is subject to the willingness of the managing underwriter(s) to include said shares of Common Stock and the rules of the NASD and SEC. In the event that the Company grants registration rights to any other shareholder on terms and conditions the Consultant deems to be more favorable than these granted hereunder, the Company agrees to grant the same rights to the Consultant. 4. Expenses. The Company agrees to reimburse the Consultant for reasonable expenses incurred by the Consultant in connection with the services rendered hereunder, including but not limited to the Consultant's due diligence activities with respect to the Company. Any such expenses shall require the prior written approval of the Company. 5. Indemnification. The Company agrees to indemnify and hold harmless the Consultant and its affiliates, the respective directors, officers, partners, agents, and employees and each other person, if any, controlling the Consultant or any of its affiliates (collectively the "Consultant Parties"), to the full extent lawful, from and against all losses, claims, damages, liabilities and expenses incurred by them (including reasonable attorneys' fees and disbursements) that result from actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company, its agents or employees except no indemnifications shall be provided by the Company if any Consultant Parties act in bad faith or negligently or perform willfull misconducts. The Consultant will indemnify and hold harmless the Company and the respective directors, officers, agents and employees of the Company (the "Company Parties") from and against all losses, claims, damages, liabilities and expenses that result from bad faith, negligence or unauthorized representations or willful misconduct of the Consultant. Each person or entity seeking indemnification hereunder shall promptly notify the Company, or the Consultant as applicable, of any loss, claim, damage or expense for which the Company or the Consultant as applicable, may become liable pursuant to this section, shall not pay, settle or acknowledge liability under any such claim without consent of the party liable for indemnification, and shall permit the Company or Consultant as applicable a reasonable opportunity to cure any underlying problem or to mitigate actual or potential damages. The scope of this indemnification between the Consultant and the Company shall be limited to, and pertain only to certain transactions contemplated or entered into pursuant only to this Investment Banking Agreement. The Company or the Consultant, as applicable, shall have the opportunity at each owns expense to defend any claim for which it may be liable hereunder, provided it notifies the party claiming the right to indemnification within 15 days of notice of the claim. The rights stated pursuant to the preceding two paragraphs shall be in addition to any rights that the Consultant, the Company, or any other person entitled to indemnification may have in common law or otherwise, including, but now limited to, any right to contribution. 6. Status of Consultant. The Consultant shall be deemed to be an independent contractor and, shall have no authority to act for or represent the Company. 7. Other Activities of Consultant. The Company recognizes that the Consultant now renders and may continue to render financial consulting and other investment banking services to other companies which may or may not conduct business and activities similar to those of the Company. The Consultant shall devote so much of its time and attention as it deems reasonable or necessary for such purposes, in its sole but reasonable discretion. 8. Control. Nothing contained herein shall be deemed to require the Company to take any action contrary to its Articles of Incorporation or By-Laws, or any applicable statute or regulation, or to deprive its Board of Directors of their responsibility for any control of the conduct of the affairs of the Company. 9. Notices. Any notices hereunder shall be sent to the Company and the Consultant at their respective addresses above set forth. Any notice shall be given by registered or certified mail, postage prepaid, and shall be deemed to have been given when deposited in the United States mail. Either party may designate any other address to which notice shall be given, by giving written notice to the other of such change of address in the manner herein provided. 10. Governing Law; Venue and Jurisdiction. This Agreement has been made in the State of New York and shall be construed and governed in accordance with the laws thereof without regard to conflicts of laws. 11. Entire Agreement. This Agreement contains the entire agreement between the parties, may not be altered or modified, except in writing and signed by the party to be charged thereby and supersedes any and all previous oral or written agreements between the parties. Consultant is an "Accredited Investor" as defined under the Securities Act of 1933, as amended. If a conflict arises from interpretation of any part of this agreement, the parties hereby agree to use an independent mediator mutually agreed upon to resolve the issue. 12. Binding Effect; Assignment. This Agreement shall be binding upon the parties hereto and their respective heirs, administrators, successors and assigns. The Company may not assign this Agreement without the prior written consent of the Consultant. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written MICROELECTRONIC PACKAGING, INC. By: /s/ Denis J. Trafecanty Denis J. Trafecanty Senior Vice President, Chief Financial Officer H.J. MEYERS & CO., INC. /s/ Tom Parigian Tom Parigian Director of Private Banking EX-10.73 5 AMENDMENT DATED 12/8/97 TO PROMISSORY NOTE EXHIBIT 10.73 THIRD AMENDMENT --------------- This Third Amendment, dated as of December 8, 1997, is made and entered into between Microelectronic Packaging America (the "Borrower") and Citicorp USA, Inc. (the "Lender"). WITNESSETH ---------- WHEREAS, the Borrower has executed that certain Promissory Note dated May 13,1997, as amended by Amendment dated July 11, 1997 and by Second Amendment dated as of September 9, 1997 (as so amended, the "Note"); and WHEREAS, the Borrower and Lender desire to amend the Note in certain respects; NOW THEREFORE, in consideration of the premises and of the mutual agreements, representations and warranties herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Amendments. As of September 9, 1997, the Note is amended as ---------- follows: (a) The third line of the first paragraph of the Note is amended by deleting the date "December 8, 1997" and substituting therefore the date "January 30, 1998". (b) The sixth line of the first paragraph of the Note is amended by adding the words "December 8, 1997 and on" immediately after the words "payable on September 9, 1997 and on". (c) The seventh line of the first paragraph of the Note is amended by deleting the interest rate "6. 71875" and substituting therefor the interest rate "6.9375". (d) The penultimate line of the first paragraph of the Note is amended by deleting the interest rate "8.71875" and substituting therefor the interest rate "8.9375". SECTION 2. Legal Obligation. The Borrower represents and warrants to the ---------------- Lender that this Amendment has been duly authorized, executed and delivered on its behalf, and that the Note, as amended hereby, constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. SECTION 5. Ratification. Except as expressly amended hereby, the Note ------------ shall remain in full force and effect. The Note, as amended hereby, and all rights and powers created thereby or thereunder, are in all respects ratified and confirmed. 1 SECTION 6. Miscellaneous. ------------- (a) The Note and this Third Amendment shall be read, taken and construed as one and the same instrument. (b) This Third Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. (c) Any references in the Note to "this Promissory Note", "hereunder", "herein" or words of like import referring to the Note, shall mean and be a reference to the Note as amended hereby. (d) This Third Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. MICROELECTRONIC PACKAGING AMERICA By /s/ Denis J. Trafecanty ------------------------------ Title: Senior Vice President CITICORP USA, INC. By /s/ James J. Sheridan ------------------------------ Title: Vice President 2 EX-10.74 6 AMENDMENT DATED 1-30-98 TO PROMISSORY NOTE EXHIBIT 10.74 FOURTH AMENDMENT ---------------- This Fourth Amendment, dated as of January 30, 1998, is made and entered into between Microelectronic Packaging America (the "Borrower") and Citicorp USA, Inc. (the "Lender"). WITNESSETH ---------- WHEREAS, the Borrower has executed that certain Promissory Note dated May 13,1997, as amended by: Amendment dated July 11, 1997, Second Amendment dated September 9, 1997, and Third Amendment dated December 8, 1997 (as so amended, the "Note"); and WHEREAS, the Borrower and Lender desire to amend the Note in certain respects; NOW THEREFORE, in consideration of the premises and of the mutual agreements, representations and warranties herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Amendments. As of January 30, 1998, the Note is amended as ---------- follows: (a) The third line of the first paragraph of the Note is amended by deleting the date "January 30, 1998" and substituting therefore the date "February 27, 1998". (b) The sixth line of the first paragraph of the Note is amended by adding the words "January 30, 1998 and on" immediately after the words "payable on December 8, 1997 and on". (c) The seventh line of the first paragraph of the Note is amended by deleting the interest rate "6.9375" and substituting therefor the interest rate "6.625". (d) The penultimate line of the first paragraph of the Note is amended by deleting the interest rate "8.9375" and substituting therefor the interest rate "8.625". SECTION 2. Legal Obligation. The Borrower represents and warrants to the ---------------- Lender that this Amendment has been duly authorized, executed and delivered on its behalf, and that the Note, as amended hereby, constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 1 SECTION 3. Ratification. Except as expressly amended hereby, the Note ------------ shall remain in full force and effect. The Note, as amended hereby, and all rights and powers created thereby or thereunder, are in all respects ratified and confirmed. SECTION 4. Miscellaneous. ------------- (a) The Note and this Fourth Amendment shall be read, taken and construed as one and the same instrument. (b) This Fourth Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. (c) Any references in the Note to "this Promissory Note", "hereunder", "herein" or words of like import referring to the Note, shall mean and be a reference to the Note as amended hereby. (d) This Fourth Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. MICROELECTRONIC PACKAGING AMERICA By /s/ Denis J. Trafecanty ----------------------- Denis J. Trafecanty Title: Senior Vice President and CFO CITICORP USA, INC. By /s/ James M. Walsh ------------------- James M. Walsh Title: Attorney-in-Fact 2 EX-10.75 7 AGREEMENT AMONG SCHLUMBERGER TECH / ATE / MPI EXHIBIT 10.75 Agreement among Schlumberger Technologies, Inc. ATE Division, Microelectronic Packaging, Inc., and CTM Electronics, Inc. 1. RECITALS This Agreement amends, restates and replaces the Schlumberger/Microelectronic Packaging Agreement (Agreement Number 092796-1) signed on behalf of Schlumberger Technologies, Inc., a Delaware Corporation, acting through its ATE Division, with offices at 1601 Technology Drive, San Jose, CA 95110, hereinafter referred to as "Buyer" and Microelectronic Packaging, Inc., a California Corporation, with offices at 9577 Chesapeake Drive, San Diego, CA 92123, hereinafter referred to as "MPI". This Agreement does not address arrangements for repayment of amounts owed to Buyer for materials purchased from Buyer for orders under Agreement Number 092796-1 which is the subject of other communications between the parties. 2. TERM OF AGREEMENT (a) This agreement is entered into by and among Buyer, MPI and CTM Electronics, Inc., a California corporation with offices at 9577 Chesapeake Drive, San Diego, CA 92123, hereinafter referred to as "Seller", and is effective upon execution by all three parties. (b) The term of this Agreement shall expire on October 31, 2000. Buyer, MPI and Seller may elect to extend or amend this Agreement at any time by mutual written agreement. 3. GENERAL This Agreement and its Exhibits constitute the sole understanding between Buyer and Seller with respect to the subject of this Agreement (other than the repayment arrangements referred to in the second recital above). All prior and contemporaneous communications between the parties on this subject are superseded by this Agreement. Additional or different terms as contained in Seller's quotations, acknowledgment and invoices are superseded by this Agreement. 4. PURCHASE ORDER/ORDER OF PRECEDENCE (a) This Agreement is not a commitment to purchase any services or products nor does this Agreement grant to Seller any right to exclusivity of purchases by or supplies to Buyer. Buyer will issue purchase orders or releases against blanket purchase orders. (b) Subject to the foregoing, [*] when determining purchases of its custom multi-chip module requirements for which Seller is an approved source. (i) Qualification as an approved source shall include, without limitation, [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]. (ii) [*] [*] [*] [*] [*] [*] [*] [*]. Where Seller's multi-chip module related services and products meet the above-mentioned conditions, [*] [*] [*] [*] [*] for services and products meeting those conditions from Seller based on capacity commitments from Seller corresponding to Buyer's forecasted procurements. Seller shall have [*] [*] of any particular module related service or product, [*] [*] [*] [*] [*] [*]. (iii) Following periods of [*] [*] [*] , and, as regards specific multi- chip module related services and products, following periods where multi-chip modules or services [*] [*] [*] [*] [*] [*] shall not be under any obligation to do so within a particular period of time, and the actual timing will be determined in good faith by Buyer's needs [*] [*] [*]. [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 2 (iv) To the extent Seller is generally qualified as an approved source and has the appropriate engineering resources, Buyer will involve Seller sufficiently early in new design projects to permit Seller to carry out module design concurrent with Buyer system design (subject to the non- disclosure agreement executed and delivered by Buyer and Seller in connection herewith in substantially the form attached hereto as Exhibit A (the "Confidentiality Agreement")). (c) [*] [*], Buyer hereby commits to allocate at least the following percentages of its purchase orders for the following products for delivery in the first quarter of calendar year 1998 subject to product and service qualification under subsection (b)(ii) above: Device Percentage [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] 5. COMPONENTS SUPPLIED BY BUYER (a) Components or other items to be supplied to Seller by Buyer pursuant to purchase orders or releases against blank purchase orders for multi-chip module related services and/or products ("Consigned Items") shall be held by Seller in trust on behalf of Buyer as Buyer's property. In the event of uncertainty regarding the status of any components or other items received from Buyer, all such items received from Buyer during any period during which Seller or MPI is in arrears on payment obligations to Buyer for materials purchased under Agreement Number 092796-1 shall be considered Consigned Items subject to this Section of this Agreement. Seller shall receive Consigned Items and shall store them carefully and properly, without any charge to Buyer, in such manner as shall keep their ownership by Buyer at all times clear and shall perform all acts required by law to protect the rights of Buyer to such items. Seller accepts responsibility for management and care of Consigned Items while they are in Seller's possession to the same extent as though they were Seller's own, including, but not limited to, maintenance of records of quantity, removal, return, and location. [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 3 (b) All Consigned Items shall remain Buyer's property while in Seller's possession, and shall not cease to be Buyer's property through any action of Seller, including assembly into a multi-chip module. (c) Consigned Items shall at all times be subject to Buyer's direction and control, and upon demand by Buyer for return of any Consigned Items not incorporated into multi-chip module related services or products, Seller shall promptly return, at Buyer's expense, such Consigned Items under this Agreement if requested by Buyer. Where practical, Consigned Items shall be segregated from other similar property. (d) Seller shall be responsible to and shall reimburse Buyer for all loss and expense to Buyer resulting from (i) damage to, loss of or destruction of the Consigned Items except loss or damage by fire or other normally insurable perils or earthquakes, other natural disasters or Acts of God regardless of insurability, (ii) improper workmanship (subject to the five percent allowance described in the following sentence) or (iii) levy or attachment of any court process or lien thereon while in Seller's possession. Seller shall not be liable for (i) electronically defective die, (ii) die that does not pass incoming inspection upon arrival at Seller's premises, or (iii) up to a five percent defective rate for die of a particular specification (e.g. ELIC2 or DIC2), regardless of the number of die in a given product, that pass incoming inspection and are defective for reasons other than electronic defects. Buyer shall assume the risk of loss or damage to Consigned Items by fire or other normally insurable perils or earthquakes, other natural disasters or Acts of God regardless of insurability, while in possession of Seller. If Seller requires consigned components from Buyer to replace or repair product under this Agreement, Buyer shall supply such consigned components to Seller at Buyer's cost for supplying such consigned components. (e) Seller and MPI shall severally indemnify Buyer against any material loss or damage to Consigned Items caused by acts of Seller or MPI not authorized by this Agreement. 6. SCOPE (a) Buyer and Seller have resolved to enter into this Agreement for Seller to provide services and supply product as defined in Exhibit B for use in Buyer's systems. (b) Product and service must meet the specifications (acceptance criteria) set forth in Exhibit B (the "Specifications"). Any changes in the Specifications must be agreed in advance in writing by Buyer and Seller. (c) Payment will be made only in respect of products meeting the Specifications and being accepted by Buyer. 4 7. DELIVERABLES (a) On execution of this Agreement, Seller will deliver to Buyer (or place in escrow) all documents, data and information sufficient to allow performance of manufacturing services and manufacture of the products if Seller fails to deliver products including, without limitation, copies of product drawings, schematics, diskettes, and contracts with vendors relied upon by Seller for essential components of the products. For the avoidance of doubt, by delivery of the foregoing, Seller does not relinquish any rights of ownership of process or design it otherwise has. Subject to Buyer's right to use such documents, data and information to obtain manufacturing services and products pursuant hereto, Buyer shall make reasonable efforts to protect the confidentiality of said documents, data and information, in accordance with the Confidentiality Agreement, to the extent confidential or proprietary or otherwise meriting such protection. (b) On execution of this Agreement, Seller will provide to Buyer written details setting out Seller's manufacturing plan to ensure consistent supply of products covered by this Agreement, indicating where the products will be manufactured and including a list of all vendors supplying parts, components or raw materials for multi-chip modules. Subject to Buyer's compliance with its major customers' operational oversight programs, Buyer shall make reasonable efforts to protect the confidentiality of said information, in accordance with the Confidentiality Agreement, to the extent confidential or proprietary or otherwise meriting such protection. (c) Buyer may, from time to time, request upgrades to the products and the Specifications requiring modification or redesign of some or all of the products in accordance with this Agreement. Seller shall be given first refusal to undertake such modification or redesign. In the event that Seller refuses, such modification may be offered to a third party and Seller agrees to provide any necessary information to allow such party to proceed with the desired upgrade under a royalty-free license subject to such conditions of confidentiality and other terms and conditions upon which Seller, Buyer and the third party may reasonably agree. 8. PRICING (a) Temporary prices for products supplied under this Agreement are set forth in Exhibit C. As a condition to the continuance of this agreement, Buyer and Seller will have to agree on a new Price list no later than January 31, 1998. Thereafter, Buyer and Seller will meet periodically to review forward pricing with the goal of arriving at prices that will give Buyer a cost competitive multi-chip module and Seller an acceptable profit margin. Either Buyer or Seller can request a meeting. 5 (b) Where appropriate, Buyer and Seller shall enter into further agreements dealing with non-recurring engineering, payments for modifications or upgrades being paid at the time of design approval, and meeting new specifications agreed between the parties. (c) Seller warrants that the prices to be charged for products or services identified herein do not exceed prices charged to other customers for similar quantities and delivery requirements of the same products or services. Any lower price charged to such other customers and all price decreases applicable to products or services which are similar under all relevant circumstances to the products or services ordered under this Agreement shall automatically reduce the unit price of unshipped products and services not yet rendered by a comparable percentage. (d) In connection with the discount, if any, offered by Seller for prompt payment, time will be computed from the latest of: (i) the scheduled delivery date; and (ii) the actual delivery date. 9. GENERAL TERMS OF DELIVERY Seller commits to delivery of new orders based on the terms outlined in Sections 13 and 14 and Exhibit C for individual purchase orders based on this Agreement. 10. INVOICES Invoices shall be submitted in duplicate and shall include the following information: purchase order number, product number, description of products, sizes, quantities, unit prices, and extended totals in addition to any other information specified elsewhere therein. Bills of lading or express receipts shall accompany each invoice. Payment of invoice shall not constitute acceptance of products and shall be subject to adjustment for errors, shortages, defects in the products, and other failure of Seller to meet the specific and unambiguous requirements of the applicable order. 11. TAXES AND EXPENSES The prices set forth in Exhibit C do not include applicable Federal, State or local taxes, but they do include all miscellaneous charges including, but not limited to, duties, customs, tariffs, and surcharges. All such charges shall be stated separately on Seller's invoice. Seller warrants that all applicable duties, tariffs, customs, and miscellaneous charges incurred by Seller due to component purchases which are Sellers' responsibility have been satisfied and that no resulting liabilities pass through to Buyer. 6 12. OVERSHIPMENTS Buyer reserves the option to return at Seller's expense any shipment of products either significantly in excess of the amount ordered pursuant to this Agreement, or significantly in advance of the agreed upon schedule. Such shipments will be held at Seller's risk and expense including reasonable storage charges while awaiting shipping instructions. 13. PACKING AND SHIPMENT (a) Unless otherwise specified, all products shall be packed, marked and otherwise prepared for shipment in a manner which is: (i) in accordance with good commercial practice, (ii) acceptable to common carriers for shipment at the lowest rate for the particular product and in accordance with I.C.C. and similar regulations; and (iii) adequate to insure safe arrival of the product at the named destination and for storage and protection against foreseeable weather. (b) Seller shall mark all containers with necessary lifting, handling, and shipping information, and purchase order numbers, date of shipment, and the names of Seller and Buyer. An itemized packaging sheet must accompany each shipment unless otherwise specified. (c) No partial or complete delivery shall be made prior to the dates shown on the applicable order or separately scheduled unless Buyer has given prior written permission. 14. F.O.B. POINT Unless otherwise specifically provided herein, the products shall be delivered on an F.O.B. Origin basis to Buyer's designated location. Freight will be paid by Buyer on a prepay and bill basis, or as indicated on Buyer's purchase order as to which Seller agrees in writing. Buyer shall be responsible for all duties, customs, tariffs, and surcharges which may be incurred due to any Buyer requested export shipments. Seller will provide, with Buyer's reasonable cooperation, all necessary documentation required in the process of exporting Products covered under this Agreement. Failure to provide such documentation in a timely manner would constitute a breech of this Agreement. Buyer and Seller agree to comply with all applicable U.S. export laws. 7 15. WARRANTY (a) Subject to the warranty period specified in Exhibit C, Seller warrants that all products and services delivered (including all incorporated components and raw materials that have not been directly or indirectly supplied by or through Buyer) shall be free from defects in workmanship, materials, and manufacture, shall comply with the specifications of this Contract (including compliance with any drawings or the Specifications and to any samples furnished by Seller), shall be new unless otherwise agreed, and, where design is Seller's responsibility, shall be free from defects in design. Seller further warrants all products shall be fit and suitable for the purposes reasonably understood by Seller to be intended by Buyer except where Buyer's design or specifications, or Buyer-supplied components, cause the products to be otherwise. The foregoing warranties are in addition to all other express warranties in this Agreement or in writing from Seller and shall survive any delivery, inspection, acceptance and payment by Buyer. (b) If any product does not meet the warranties specified herein for reason other than Buyer's design or specification or components supplied by or on behalf of Buyer, Buyer may at its election: (i) require Seller promptly to correct, at no cost to Buyer, any defective or non-conforming products by repair or replacement, at Seller's location; or (ii) return such defective or non-conforming products at Seller's expense to Seller, and receive from Seller the order price thereof. The foregoing remedies are in addition to all other remedies at law or in equity or under this Agreement, for damages or otherwise, and shall not be deemed to be exclusive. All warranties shall run to Buyer only. (c) Buyer's approval of Seller's product or design shall not relieve Seller of the above warranties, nor shall waiver by Buyer of any drawing or specification requirement for one or more of the products constitute a waiver of such requirements for the remaining products unless so stated by Buyer in writing. The provisions of this section shall not limit or affect the rights of Buyer under the section entitled "Inspection". (d) Claims by Buyer under this warranty shall be made after final acceptance by Buyer and prior to the end of the warranty period, as defined in Exhibit D, unless specifically agreed otherwise in writing. 8 16. INSPECTION (a) All products purchased pursuant hereto shall be subject to inspection and test by Buyer to the extent practicable at all times and places during and after the period of manufacture and, in any event, prior to final acceptance. If inspection or test is made by Buyer on Seller's premises, Seller without additional charge shall provide all reasonable facilities and assistance for the safety and convenience of Buyer's inspectors. No inspection or test made prior to final acceptance shall relieve Seller from responsibility for defects or other failure to meet the requirements of this Agreement. (b) In case any product is materially defective in materials or workmanship, that have not been directly or indirectly supplied by or through Buyer, or otherwise not in conformance with the requirements of this Agreement through no fault of Buyer, Buyer shall, in addition to its rights under subsection 15(b), have the right to conditionally accept it. Buyer reserves the right to return such conditionally accepted products for credit within a reasonable period of time in the event Buyer determines that such products are unsuitable for its purposes expressed in writing by Buyer to Seller at or prior to the time of the applicable order. With respect to any product which has been rejected or required to be corrected, Seller shall incur all cost associated with replacement of rejected or returned items (so as to include shipping costs and freight costs). If, after request by Buyer, Seller fails promptly to replace or correct any defective product within the delivery schedule (unless such failure is the result of Buyer's failure to provide the necessary Consigned Items on a timely basis or other delay caused Buyer), Buyer may: (i) without further notice, terminate this Agreement for default in accordance with the section entitled "Termination for Default"; or (ii) utilize the deficient product and require an appropriate reduction in price. (c) Notwithstanding any prior inspection or payments, all products shall be subject to final inspection and acceptance by Buyer's location within a reasonable time after delivery, as defined in Exhibit B. (d) Seller shall provide and maintain its own inspection system which is acceptable to Buyer as agreed between Buyer and Seller. Records of all inspection work shall be available to Buyer during the performance of this Agreement and for such further period as Buyer reasonably may require. 9 (e) Buyer may accept or reject shipments in accordance with its established lot inspection procedures. Where rejection of shipment is appropriately based on Buyer's normal inspection level, then after consultation with Seller regarding Buyer's lot inspection procedures and proposed test procedures, Buyer may elect, at Seller's sole cost, to conduct 100% testing of such shipment (provided that Seller will not be charged if it becomes clear that the problem is not with Seller's products or services). (f) Where such rejection endangers Buyer's production schedule by reason of the fact that at least some of the products are necessary to meet such production schedules, then Buyer at its option may charge Seller for the reasonable costs of an above normal level of inspection up to and including 100% inspection of such shipment and shall consult with Seller regarding test procedures (provided that Seller will not be charged if it becomes clear that the problem is not with Seller's products or services). 17. CHANGES (a) Buyer may at any time, by a written change order, and without notice to sureties or assignees, suspend performance under an order, increase or decrease the order quantities, or make changes in any one or more of the following: (i) applicable drawings, designs, and specifications; (ii) method of shipment or packing; and (iii) place of delivery. (b) If any such change causes an increase or decrease in the cost of or the time required for performance of this Agreement or the applicable order, an equitable adjustment shall be made in the price or delivery schedule, or both, and this Agreement or the applicable order, or both, shall be modified in writing accordingly. No claim by Seller for adjustment hereunder shall be valid unless (i) accepted in writing by Buyer, which acceptance shall not be unreasonably withheld, and (ii) accompanied by an estimate of costs within thirty (30) days from the date of receipt by Seller of the written change order and, in any event, Seller must submit its final claim in writing with supporting documentation within thirty (30) days following Buyer's payment of Seller's final invoice. Failure of Seller to timely assert such a claim shall constitute an unconditional and absolute waiver by Seller of any right to make a claim for adjustment. Changes required to comply with new or amended safety regulations shall be made at Seller's cost in accordance with a timetable to be agreed upon by Buyer and Seller so as to ensure substantially uninterrupted supply of the product. If new or amended safety regulations impose a significant cost increase on Seller, Buyer agrees to re-negotiate the applicable pricing structure due to changed regulations. 10 (c) Any changes required to address recurring design or reliability problems due to Seller's design or workmanship and noted by Buyer in a written notice to Seller shall be undertaken at Seller's cost. Seller will also be responsible to present a plan to retroactively repair, under the terms of the "Warranty" section, all products previously delivered to Buyer to prevent failures due to Seller's design or workmanship defects, at Seller's cost. (d) To the extent that failure of Buyer to deliver or arrange delivery of die results in [*] [*] if (i) Seller notifies Buyer of its intention to [*] [*] [*] [*] [*] [*] [*] [*], then Buyer agrees to [*] [*] [*] [*] [*] [*]. (e) Buyer may verify claims hereunder and Seller shall make available to Buyer upon its reasonable request all relevant books, records, inventories, and facilities for its inspection. Subject to Buyer's right to use such documents, data and information to verify Seller's claims and defend its interests pursuant hereto, Buyer shall make reasonable efforts to protect the confidentiality of said documents, data and information, in accordance with the Confidentiality Agreement, to the extent confidential or proprietary or otherwise meriting such protection. 18. REPAIR Seller undertakes to maintain the ability to repair product or part of a product supplied by Seller (excluding components purchased from Buyer) under this Agreement such that any product so repaired shall meet the Specifications. Responsibility for returning the product or part to be repaired shall be with Buyer. Seller undertakes to dispatch repaired products or parts within the period as defined in Exhibit C, after receipt of the product or part to be repaired. Seller may, at its choice, replace a product or part returned for repair with an equivalent new product or part which meets specification. [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 11 19. PROTECTION IN CONNECTION WITH WORK DONE AT OTHER PARTY'S PLANT Seller shall take such steps as may be reasonably necessary to prevent personal injury or property damage during any work hereunder that may be performed by any employees, agents or subcontractors of Seller at Buyer's location(s) and Seller shall defend, indemnify and hold harmless Buyer from and against all loss, liability, and damages arising from, or caused directly or indirectly by an act or omission of such employees, agents or subcontractors of Seller. Seller shall maintain such insurance against public liability and property damage, and such Employees' Liability and Compensation Insurance as will protect Buyer against the aforementioned risks and against any claims under any Workman's Compensation and occupational disease and injury Acts. Buyer will take similar steps to protect Buyer's employees, agents or subcontractors at Seller's location. 20. TERMINATION FOR DEFAULT (a) It is understood and agreed that TIME IS OF THE ESSENCE under this Agreement and any extension affected by any change order. Buyer may, by written notice stating the reasons for termination, terminate this Agreement or any order hereunder in whole or in part if Seller: (i) repeatedly fails to make delivery of the products or to perform the services within the time specified or any extension thereof by written change order or amendment (unless such failure is the result of Buyer's failure to provide the necessary consigned items on a timely basis or other delay caused by Buyer); (ii) fails to replace or correct defective products in accordance with the provisions of the "Warranty" and "Inspection" sections (unless such failure is the result of Buyer's failure to provide the necessary consigned items on a timely basis or other delay caused by Buyer); or overall quality is determined to be below standard as demonstrated by repeated failures of the products to pass inspection, and failures during the Warranty period; (iii) fails to perform any of the other material provisions of this Agreement or so fails to make progress as to endanger performance in accordance with the terms hereof, including delivery schedules (unless such failure is the result of Buyer's failure to provide the necessary consigned items on a timely basis or other delay caused by Buyer or is otherwise caused by Buyer); or 12 (iv) files for receivership under applicable Federal or State law, files or has filed against it a petition for bankruptcy which is not dismissed or stayed within thirty (30) days, or makes an assignment for the benefit of creditors. (b) Buyer may, by written notice, terminate this Agreement in whole or in part if MPI files for receivership under applicable Federal or State law, files or has filed against it a petition for bankruptcy which is not dismissed or stayed within thirty (30) days, or makes an assignment for the benefit of creditors. (c) If this Agreement is terminated pursuant to subsection 20(a), Buyer, in addition to any other rights provided herein, may upon payment by Buyer of any amount due to Seller hereunder require Seller to transfer title (under subsections (i) or (ii)) and deliver to Buyer, in the manner, time, and to the extent reasonably directed by Buyer in accordance with this Agreement: (i) any completed products and Consigned Items; or (ii) any partially completed products and materials, parts, tools, designs, fixtures, plans, drawings, information, and contract rights as Seller has produced or acquired for the performance of the terminated part of the applicable order; and (iii) Seller shall grant Buyer an assignable, non-exclusive license to use and license others to use, Seller's designs, processes, drawings, and technical data to permit Buyer's completion of the terminated part of an order under this Agreement. The aforementioned license shall be royalty-free where and to the extent it pertains to Seller's designs, processes, drawings, and technical data developed under contract with Buyer, unless the total cost to Buyer of completing terminated parts of the applicable order is less than Buyer's total cost would have been if Seller had completed the order. Seller shall, upon direction of Buyer, protect and preserve Consigned Items encompassed in this section in the possession of Seller. Subject to Buyer's rights to use and assign the foregoing to obtain manufacturing services and products pursuant hereto, Buyer shall make reasonable efforts to protect the confidentiality of said documents, data and information, in accordance with the Confidentiality Agreement, to the extent confidential or proprietary or otherwise meriting such protection. 13 (iv) Payment for completed products delivered to and accepted by Buyer shall be in an amount reasonably and promptly agreed upon by Seller and Buyer; provided, however, such amount shall not exceed the order price per unit, and Seller's obligation hereunder to carry out Buyer's direction as to delivery, protection, and preservation shall not be contingent upon prior agreement as to such amount. (d) If Buyer issues a notice of termination for default and it is subsequently determined that Buyer's termination under this section is inappropriate, the termination shall, unless Buyer otherwise specifically indicates in writing, be deemed by Buyer and Seller to have been originally issued under the section entitled "Termination for Convenience", and the rights and liabilities of the parties shall be governed by such section. (e) Failure of Buyer, MPI or Seller to enforce any right under this section shall not be deemed a waiver of any other right hereunder. The rights and remedies of Buyer under this section shall not be exclusive and are in addition to any other right and remedies provided by law or equity or under this Agreement. In the event Buyer reasonably anticipates any default under subsection 20(a), Buyer may, in its sole discretion, require adequate assurance of future performance in such form as Buyer may reasonably specify, and if such assurance is not given to Buyer promptly, Buyer shall have the right to terminate this agreement in whole or in part forthwith. 21. TERMINATION FOR CONVENIENCE (a) Buyer may terminate this Agreement upon one hundred twenty (120) days written notice to Seller or MPI without cause and without any legally binding commitments other than those specific obligations created through the use of formal purchase orders or other agreements with their respective terms and conditions. (b) Buyer may terminate work under a purchase order for production units in whole, or from time to time in part, by giving written notice to Seller specifying the extent to which performance of work is terminated and the time at which such termination becomes effective. (c) In the event Buyer elects to terminate only a portion of such order, Seller shall continue the performance of that order to the extent not terminated. (d) Within thirty (30) days after receipt of the notice of termination, Seller shall submit to Buyer its written termination claim. Failure of Seller to timely submit its termination claim shall constitute an unconditional and absolute waiver by Seller of any claim arising from Buyer's notice of termination. 14 (e) Seller shall reasonably assess costs of raw materials, work in process and subassemblies as may be included within its termination claim to determine whether or not such items may be used by Seller for the manufacture of associated products or diverted for any other purpose, and to correspondingly reduce its termination claim by the value of such items. When settlement has been made, title to any such items determined not usable by Seller and charged to Buyer in the termination claim shall vest in Buyer upon payment of the claim and shall forthwith be delivered to Buyer. (f) Seller's termination claim shall consist solely of the following: (1) completed products accepted by Buyer and not theretofore paid for, the sum determined by multiplying the number of such products by the unit price as specified in Exhibit C or in the applicable order, (2) the total of (i) the cost of work in process not to exceed the average unit cost multiplied by the number of units in process (provided, however, that such number of units in process shall not exceed that amount which has been previously placed on firm release by Buyer (such amounts shall not exceed any costs attributable to Seller's products paid or to be paid under subsection (f)(1) above)) and (ii) a sum as profit on subsection (f)(2)(i) at a rate not to exceed the rate used in establishing the original purchase price (provided, however, if Seller would have sustained a loss on the purchase order had it been completed, no profit shall be included or allowed, and an appropriate adjustment shall be made reducing the amount of settlement to reflect fifty percent (50%) of the indicated rate of loss), (3) the cost (book value on a first-in-first-out basis) of safety stock as determined in Exhibit C hereto, and (4) in the case of partial termination, economies of scale reflected in direct manufacturing costs (no overhead absorption to be taken into consideration). (g) The total sum to be paid to Seller under subsections (f)(1) and (f)(2) above, shall not exceed the total order price reduced by the amount of payments otherwise made and as further reduced by the price of work not terminated under the order. (h) Upon payment by Buyer to Seller of any such claims, all material, whether completed or not, shall become property of Buyer and be shipped to Buyer as Buyer shall indicate within thirty (30) days of payment, or if Seller is not notified by Buyer, be disposed of at Seller's discretion. (i) In no event shall Seller be entitled to incidental or consequential damages, anticipated or projected profits (except as provided in subsection (f)(2)) costs or prepaid claims, attorneys' fees, costs of tooling or equipment (except as required specifically by Buyer) or sales or agents' commissions on the terminated quantity. 15 (j) Buyer reserves the right to verify claims hereunder, and Seller shall make available to Buyer upon its request all relevant books, records, inventories and facilities for its inspection. Subject to Buyer's right to use such information to verify and defend its claims hereunder, Buyer shall protect the confidentiality of Seller's proprietary data and information acquired pursuant to this section, in accordance with the Confidentiality Agreement, to the extent confidential or proprietary or otherwise meriting such protection. In the event Seller fails reasonably to afford Buyer its rights under this subsection, Seller shall be deemed to have relinquished its claim asserted under the provisions of this section. 22. AVAILABILITY ASSURANCE (a) The products described herein shall be available for purchase from Seller for a minimum of seven (7) years from the date of this Agreement or such shorter term as Buyer's customer for the associated product shall impose on Buyer, as notified in writing by Buyer to Seller, unless this Agreement is terminated earlier by Buyer. Seller agrees to maintain availability of the number of fully functional products, spares and parts (commonly referred to herein as safety stock) specified in Exhibit C for the term of this Agreement. In the event that Seller is notified by its vendor(s) of the discontinuance of any subcomponent(s), Seller agrees to immediately notify Buyer of this change and propose, as quickly as practicable, possible substitute subcomponents and appropriate changes in process or method of manufacturing in accordance with the provisions of section 37 below as regards notification and approval (provided however that the one month notice period referred to therein may be accelerated as appropriate under the circumstances). In the event Seller is unable or unwilling to continue production of the products described herein, Seller agrees to give Buyer six months notice prior to ceasing production. At the time Seller notifies Buyer of any such cessation, Buyer shall be permitted to place additional orders for such product in order to satisfy Buyer's anticipated post- cessation requirements. At this time, Seller will also make available to Buyer -- subject to the Confidentiality Agreement, reasonable confidentiality undertakings (substantially in the form of the confidentiality agreement attached hereto as Exhibit A) by any third party and appropriate licenses and permissions for the manufacture of the products -- complete and updated manufacturing details of the products, including the documents, data and information mentioned in sections 7(a) and 20(c)(iii), for the purpose of appointing another manufacturer to proceed on Buyer's behalf. (b) Buyer will have the first right of refusal in the event Seller wishes to or must dispose of its manufacturing facilities for multi-chip modules. Seller shall notify Buyer in advance of any serious discussions with any third party regarding the possible transfer of said facilities, and shall notify any such third party of Buyer's first right of refusal hereunder before receiving any offer from such party regarding such a transfer. Buyer's first right of refusal shall be subject to Buyer's willingness, after a reasonable notice and reasonable time for analysis and due diligence, to match the price quoted in any irrevocable cash offer from a third party with the financial wherewithal to carry out such a transaction. 16 (c) Buyer will have the right to operate the multi-chip module manufacturing facilities, under the license specified below and subject to the Confidentiality Agreement, in the event Seller is financially unable to do so or is prevented from doing so by MPI under circumstances associated with financial difficulties of MPI. Should Buyer wish to exercise that right, MPI will provide a royalty free license allowing Buyer to use the documents, data and information mentioned in subsections 7(a) and 20(c)(iii) in the conduct of the factory operations. The right to operate the factory will revert to Seller when it is able to reassume that responsibility. 23. EXCLUSIVITY (a) Seller covenants that the specific services and products ordered by Buyer under this Agreement and based upon unique proprietary specifications or drawings, or other data or know-how furnished by Buyer, will be supplied to Buyer on an exclusive basis for the term of this Agreement. (b) Seller shall not act as a selling agent of specific products based upon unique proprietary specifications or drawings, or other data or know-how furnished by Buyer or otherwise produced for Buyer pursuant to this Agreement, to any existing or impending customers or competitors of Buyer. Seller shall notify Buyer if Seller is requested to provide such product directly to any end user, and shall obtain written authorization from Buyer to begin acting as a selling agent of the product, as contained in this Agreement. 24. WAIVER The failure of any party hereto at any time to enforce any of the provisions of this Agreement, or to exercise any election or option provided herein, or to waive or require performance by any other party hereto of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions or such party's rights, nor in any way to affect the validity of this Agreement or any part hereof, or the right of such party thereafter to enforce each and every such provision. 25. PATENTS, ROYALTIES AND ENCUMBRANCES All products and Consigned Items supplied shall be free from claims of others with respect to royalties, liens, patent rights and other encumbrances and charges. Buyer and Seller/MPI agree to defend, indemnify, and hold harmless the other party from and against all claims, demands, expenses, costs, and actions for actual or alleged infringements of patent rights in the use, sale or resale of its product or Consigned Item, as applicable. 17 26. COMPLIANCE WITH LAWS Seller warrants that no law, rule or ordinance of the United States, any State or any other governmental agency has been violated in the manufacture or sale of the products or in the performance of services covered by this Agreement and will defend, indemnify and hold Buyer harmless from and against any loss, expense, cost or damage as a result of any such actual or alleged violation. Upon reasonable written request by Buyer, Seller agrees to execute and furnish a certification of compliance, which may be on Buyer's form and which shall certify Seller's compliance with all applicable Federal, State or local laws or regulations, including but not limited to FLSA, EEO, OSHA, and any economic control statutes or regulations. 27. FEDERAL EMPLOYMENT OPPORTUNITY Seller agrees not to discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. Applicable provisions of Executive Order 11246 issued September 24, 1965, as amended and the rules and regulations of the Secretary of Labor thereunder, including exceptions therein, govern this Agreement and are incorporated herein by reference. 28. AFFIRMATIVE ACTION FOR HANDICAPPED WORKER The Affirmative Action clause in 41 CFR 60, subsection 741.4 and the implementation rules and regulations of the Department of Labor associated therewith are incorporated herein by reference, unless an applicable order is under $2,500. As used in said clause, "Contractor" means Seller. 29. AFFIRMATIVE ACTION FOR SPECIAL DISABLED VETERANS AND VETERANS OF THE VIETNAM-ERA The Affirmative Action clause of 41 CFR 60 subsection 250.4 and the implementing rules and regulations of the Department of Labor associated therewith are incorporated herein by reference, unless an applicable order is under $10,000. As used in said clause, "Contractors" means Seller, and "Contract" means an order. 30. GRATUITIES Seller warrants that it has not offered or given and will not offer or give to any employee, agent or representative of Buyer any gratuity with a view toward securing any business from Buyer or influencing such person with respect to the terms, conditions or performance of any contract with or order from Buyer. Any breach of this warranty shall be a material breach of each and every contract between Buyer and Seller. 18 31. NONDISCLOSURE OF CONFIDENTIAL MATTER AND PUBLICITY Buyer's unique proprietary specifications or drawings, or other data furnished by Buyer in connection with products or services contemplated by this Agreement shall be treated as confidential information by Seller, shall remain Buyer's property and shall be promptly returned to Buyer upon request. Seller will take all reasonable measures necessary to protect such confidential information as is done protecting their own confidential information; provided, however, that such information will not be considered confidential if (i) legitimately possessed or known to Seller on a non-confidential basis prior to its disclosure to Seller by Buyer, or (ii) generally available to the trade or public through any reasons except disclosure by Seller, or (iii) received by Seller from a third party in good faith without breach of a confidential relationship between the third party and Buyer. Any publicity regarding this Agreement (pictures, descriptions or samples thereof) is prohibited except with Buyer's written approval. Seller may disclose the terms of this Agreement if such disclosure is required, in Seller's opinion, by its reporting obligations under the Securities Exchange Act of 1934, as amended; provided that Seller shall take reasonable actions to seek confidential treatment for those terms and provisions for which Buyer reasonably requests confidential treatment. 32. ASSIGNMENTS AND SUBCONTRACTS No right or obligation under this Agreement (including the right to receive money due hereunder) shall be assigned by Seller, and Seller shall not enter into any subcontracts with respect to this Agreement without the prior written consent of Buyer. Any purported assignment, without such consent, shall be null and void and Buyer shall not be obligated to recognize any claim from Seller resulting from a subcontract except as previously consented to by Buyer. Buyer may assign its rights hereunder to any affiliate. 33. BUYER-FURNISHED TOOLS All tools and other materials furnished by Buyer for use in the performance of this Agreement and not covered by section 5 of this Agreement shall remain the property of Buyer, shall be used by Seller in the performance of this Agreement only in accordance with the requirements of the applicable order relating to such use, and shall be returned to Buyer upon the completion or termination of the order. Seller agrees to exercise reasonable care in safeguarding and preserving all Buyer-furnished property and assumes all responsibility for loss, damage or destruction while such property is within Seller's possession or control. 19 34. SPECIAL TOOLING If special tooling used in the performance of an order has been charged to the applicable order, or to other orders placed by Buyer, title to such special tooling shall vest in Buyer at the option of Buyer. Such tooling is to be used only in the performance of such orders unless otherwise approved by Buyer. Seller agrees that it will follow normal industrial practice in the identification and maintenance of the property control records on all such tooling, and will make such records available for inspection by Buyer or any local, state or federal governmental body or instrumentality lawfully demanding said records, at all reasonable times. After the termination or completion of such order(s) and upon the request of Buyer, Seller shall furnish a list of such tooling in the form reasonably requested and shall make such tooling available for disposition to Buyer. 35. GOVERNMENT CONTRACTS If Buyer informs Seller that an order is issued for any purpose which is either directly or indirectly connected with the performance of a prime contact with a government or a subcontract thereunder, each of the clauses set forth in the federal acquisition regulations (or similar procurement regulations) applicable to the prime or subcontract is incorporated herein by reference and applies to Seller as though Seller were a prime contractor and in such manner as will enable Buyer to meet its obligations arising out of the government prime or subcontract. Buyer shall use reasonable efforts to assist Seller in obtaining copies of applicable rules and regulations not otherwise applicable to Seller's operations, provided, however, that Seller shall at all times be solely responsible for obtaining appropriate legal guidance as to its obligations and agrees that Buyer shall bear no responsibility whatsoever in that regard. 36. FORCE MAJEURE In the event of an actual or potential delay or failure of performance because of acts of God, or other causes beyond Seller's reasonable control, Seller shall immediately give notice thereof to Buyer. In the event of the foregoing, Buyer has the option of (i) extending the time of performance or (ii) terminating the uncompleted portion of the order as described under termination for convenience. 20 37. CHANGES IN PROCESS OR METHOD OF MANUFACTURING Seller agrees that it will not invoke any changes in process or method of manufacturing or use of vendors specified in any agreed manufacturing plan applicable to the products or services being supplied pursuant to this Agreement or during the term of this Agreement without Buyer's written consent. Seller further agrees that any contemplated changes to this plan shall not be made unless Buyer has been informed in writing at least one month in advance of such change and has indicated approval of the change in writing. Buyer agrees not to withhold approval unless there are concerns about the ability of Seller to maintain consistency and reliability of supply of products meeting specification and an ability to support installed systems at Buyer's customers under the new plan. 38. NOTICE All notices to be given or served hereunder shall be given or served in writing either in person, by U.S. Mail, postage prepaid, by telegram or by Federal Express or another reputable overnight carrier. All such notices shall be effective upon receipt and addressed as follows: To Buyer at SCHLUMBERGER TECHNOLOGIES 1601 TECHNOLOGY DRIVE SAN JOSE, CALIFORNIA 95110 UNITED STATES ATTN: BRUCE TARBOX To Seller and MPI at MICROELECTRONIC PACKAGING, INC. 9577 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA 92123 UNITED STATES ATTN: ANDREW WROBEL or such other address that Buyer, MPI or Seller may designate by notice to the other from time to time in accordance with this section. 39. SEVERABILITY The invalidity in whole or in part of any provision shall not affect the validity of any other provision. 21 40. INTERPRETATION This Agreement shall be governed by, subject to, and construed in accordance with the laws of the State of California. The United Nations Convention for the international Sale of Goods does not apply to this Agreement. This Agreement shall not be modified, supplemented, qualified or interpreted by any trade usage or prior course of dealing not made a part of this Agreement by its express terms. SCHLUMBERGER TECHNOLOGIES, INC. By /s/ Dieter Kraemer ------------------------- Name Dieter Kraemer ------------------------- Title Director Global Materials ------------------------- Date 1/15/98 ------------------------- CTM ELECTRONICS, INC. By /s/ Denis J. Trafecanty ----------------------- Name Denis J. Trafecanty ------------------- Title Chief Financial Officer ----------------------- Date January 14, 1998 ---------------- MICROELECTRONIC PACKAGING, INC. By /s/ A. Wrobel ------------------ Name Andrew K. Wrobel ------------------ Title President & C.E.O. ------------------ Date 1/14/98 ------------------ 22 EXHIBIT A CONFIDENTIALITY AGREEMENT This Confidentiality Agreement (this "Agreement") is entered into as of this __ day of January, 1998, by and between Schlumberger Technologies, Inc., a Delaware corporation (including its successors, transferees and permitted assigns, "Schlumberger"), Microelectronic Packaging, Inc., a California corporation (including its successors, transferees and permitted assigns, "MPI"), and CTM Electronics, Inc., a California corporation (including its successors, transferees and permitted assigns, "CTM"). In connection with an Agreement, of even date herewith, among Schlumberger, MPI and CTM regarding the production of custom multi-chip modules and services in connection therewith (the "Stated Purpose"), each of the parties to this Agreement may disclose certain of its proprietary and confidential information concerning its business, affairs and technology to another party. In consideration of the mutual agreements, undertakings and covenants set forth in this Agreement, for other good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, and as a condition to the furnishing by one party (in such capacity, the "Disclosing Party") of such information as the Disclosing Party, in its sole and absolute discretion, may determine to furnish to another party (in such capacity, the "Recipient"), the parties hereto, intending to be legally bound, agree to comply with the terms and conditions set forth below: 1. Confidential Information. All "Confidential Information" (defined ------------------------ below) that the Disclosing Party or any of its "Representatives" (defined below) furnishes to the Recipient or any of its Representatives (including without limitation any such information furnished prior to the date of this Agreement) shall be used by the Recipient and its Representatives solely in connection with the Stated Purpose and not for any other purpose without the prior written permission of the Disclosing Party. The Recipient shall take reasonable steps to ensure that all Confidential Information of the Disclosing Party is kept confidential; provided, however, that such information may be disclosed to those representatives, counsel, directors, officers, employees and agents (each, a "Representative," and collectively, the "Representatives'') of the Recipient who have a need to know such information in connection with the Stated Purpose only if each such Representative is informed by the Recipient of the confidential nature of such information and of the confidentiality undertakings of the Recipient contained herein. The Recipient shall be responsible for any breach of this Agreement by its Representatives and will, at its sole expense, take all reasonable steps (including but not limited to court proceedings) to restrain its Representatives from prohibited or unauthorized disclosure of the Confidential Information. As used herein, "reasonable steps" means the steps that the Recipient takes to protect its own, similar confidential and proprietary information, which shall not be less than a reasonable standard of care. As used herein, "Confidential Information" means any of the Disclosing Party's proprietary or confidential information, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products, service plans, services, customer lists and customers, markets, software, developments inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information, and any notes, analyses, compilations, studies, or other documents that contain or reflect in whole or in part any such information, disclosed to the Recipient or its Representatives by or on behalf of the Disclosing Party or its Representatives, either directly or indirectly, in writing, orally, by drawings or inspection of documents or other tangible property or by any other form of communication, regardless of whether such information is conspicuously marked as being confidential. However, "Confidential Information" does not include any of the foregoing items which the Recipient can prove: (i) prior to disclosure, is known to the public; (ii) after disclosure, becomes known to the public or otherwise ceases to be a trade secret, through no act or omission of the Recipient or its Representatives in violation of this Agreement; (iii) is required to be disclosed pursuant to applicable laws, rules or regulations or government requirement or court order (provided, however, that the Recipient shall promptly advise the Disclosing Party of its notice of any such requirement or order); (iv) is already rightfully in the Recipient's possession at the time of disclosure (provided, however, that the source of such information was not known by the Recipient to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Disclosing Party or any other party with respect to such information); (iv) is independently developed by or for the Recipient; or (vi) is received by the Recipient from a source other than the Disclosing Party whom the Recipient reasonably believes is not obligated to the Disclosing Party to keep the same confidential. 2. Ownership and Return of Confidential Information. All ------------------------------------------------- Confidential Information shall remain the property of the Disclosing Party. Any Disclosing Party may request at any time in writing the return of any Confidential Information, and the Recipient of such Confidential Information shall promptly deliver to the Disclosing Party all Confidential Information of the Disclosing Party, in whatever medium, including any and all copies thereof, and shall cause all summaries or synopses thereof and notes, analyses, compilations, studies and other such documents which constitute Confidential Information to be either delivered to the Disclosing Party or destroyed. Such destruction shall be confirmed in writing by the Recipient to the 2. Disclosing Party. Nothing in this Agreement shall be construed as granting any rights, by license or otherwise, to any Confidential Information disclosed. 3. Remedies. Each party agrees that it would be impossible or --------- inadequate to measure and calculate the another party's damages from any breach of the covenants set forth in this Agreement. Accordingly, the parties agree that if either party breaches any of such covenants, the non-breaching party will have available, in addition to any other right or remedy available, the right to obtain an injunction from a court of competent jurisdiction restraining such breach or threatened breach and to specific performance of any such provision of this Agreement. The parties further agree that no bond or other security shall be required in obtaining such equitable relief and each party hereby consents to the issuance of such injunction and to the ordering of specific performance. Such remedies will not be deemed to be the exclusive remedies for a breach of this Agreement but will be in addition to all other remedies available at law or in equity. In the event of litigation relating to this Agreement, if a court of competent jurisdiction determines that either party or any of its Representatives has willfully breached this Agreement, then that party will be liable for, and will pay to the non-breaching party, the reasonable attorneys' fees incurred by the non-breaching party in connection with such litigation, including any appeal therefrom. 4. Severability. If any court determines that any provision of this ------------ Agreement is invalid, such determination will not affect the validity of any other provision of this Agreement, which will remain in full force and effect, and will be construed so as to be valid under applicable law. 5. Compelled Disclosure. In the event that the Recipient or any of -------------------- its Representatives becomes legally compelled to disclose any of the Confidential Information, it will (a) provide the Disclosing Party with prompt written notice so that the Disclosing Party may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement; (b) disclose only that portion of the Confidential Information which its legal counsel advises that it is legally required to disclose; and (c) endeavor to obtain assurances that confidential treatment will be accorded the Confidential Information so disclosed. 3. 6. Miscellaneous. It is understood and agreed that no failure or ------------- delay by the Disclosing Party in exercising any right, power, or privilege under this Agreement will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or future exercise thereof or the exercise of any other right, power or privilege hereunder. It is further understood and agreed that this Agreement may not be amended except by an instrument signed by the party against whom enforcement is sought. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, without giving effect to any conflict of laws provisions. Neither party may assign this Agreement without the prior written consent of the other, and any purported assignment in violation of this Agreement will be void. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, shall bear the signatures of Schlumberger, MPI and CTM. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Confidentiality Agreement to be duly executed and delivered as of the day and year first written above. SCHLUMBERGER TECHNOLOGIES, INC. By: /s/ Dieter Kraemer --------------------------------- Name: Dieter Kraemer Title: Director Global Materials MICROELECTRONIC PACKAGING, INC. By: /s/ Andrew K. Wrobel --------------------------------- Name: Andrew K. Wrobel Title: President and CEO CTM ELECTRONICS, INC. By: /s/ Denis J. Trafecanty --------------------------------- Name: Denis J. Trafecanty Title: Chief Financial Officer 4. EXHIBIT B GOODS AND SERV[CES TO BE PROVIDED BY SELLER - ------------------------------------------- Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Assembly of [*] Repair of any module assembled by Seller TECHNICAL SPECIFICATIONS FOR PRODUCTS AND SERVICES - -------------------------------------------------- Assembly MPA# Rev SLB# Rev - ----------- ---- --- ---- --- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] Note: These are top level drawings and it is understood that all sub-drawings are a part of the technical specifications for products and services. INSPECTION PERIOD BY BUYER - -------------------------- Thirty days from receipt of goods. [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. EXHIBIT C PRICING - ------- Product Name Selling Price - ------------ ------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] Unreparable after evaluation [*] Minor repair (replace component, smashed wire) [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace memory chips [*] Replace Ric2, Dic2 die [*] Replace Elic2, Essmic, Lcmic die [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace memory chips [*] Replace Ric2, Dic2 die [*] Replace Elic2, Essmic, Lcmic die [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace one Ldl die [*] Each additional Ldl on same unit [*] Replace Tgic die [*] [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. [*] Unreparable after evaluation [*] Minor repair (replace relay, replace components, smashed wires) [*] Replace Edge die [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace Essmic die [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace Essmic die [*] [*] Unreparable after evaluation [*] Minor repair (replace up to 10 edge pins, replace components, smashed wires) [*] Replace all edge pins [*] Replace Dic, Ric, Elic die [*] DELIVERY TERMS - -------------- Four weeks from receipt of material WARRANTY PERIOD - --------------- [*] [*]. REPAIR DISPATCH TIME BY SELLER - ------------------------------ Thirty days SAFETY STOCK DEFINITION - ----------------------- Safety stock is the sum of (1) a lead time worth of material for a particular part, and (2) two additional weeks of time for shipping, receiving and inspection. The lead time will vary depending upon the particular part. [*] Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. EX-23.1 8 CONSENT - BDO SEIDMAN LLP EXHIBIT 23.1 Consent Of Independent Certified Public Accountants Microelectronic Packaging, Inc. San Diego, California We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-06677) of our report dated March 16, 1998 relating to the consolidated financial statements of Microelectronic Packaging, Inc., and of our report dated March 16, 1998 relating to the schedule, appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. /s/BDO Seidman, LLP BDO SEIDMAN, LLP Costa Mesa, California March 30, 1998 EX-27.1 9 FDS FOR (CURRENT) FISCAL YEAR ENDED DEC-31-1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS EQUITY FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,296 0 2,739 235 4,230 8,417 2,061 849 9,911 50,074 27,242 0 0 40,016 (80,248) (40,232) 28,432 28,522 23,309 23,352 43 0 37 206 0 206 (11,874) 0 0 (11,496) (1.11) (1.06)
EX-27.2 10 RESTATED FDS FOR FISCAL YEAR ENDED DEC-31-1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS EQUITY FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,954 0 6,147 298 10,072 20,711 17,823 14,344 24,894 50,726 20,594 0 0 38,138 (68,752) 24,894 17,259 19,044 14,251 15,774 0 99 787 (2,437) 0 (2,437) (39,405) 0 0 (41,842) (7.68) (7.68)
EX-27.3 11 RESTATED FDS FOR FISCAL YEAR ENDED DEC-31-1995
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 0 0 0 0 0 0 0 0 0 0 0 0 0 34,326 (29,910) 0 15,181 15,181 11,980 11,980 0 77 69 (1,888) 0 (1,888) 505 0 0 (1,386) (0.30) (0.30)
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