-----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, HWqtYNF2y4GXDPc4nTcla27FxyukoHW41QXoWd/ECD545YKof9xpwM8U101csX9Z K2ynHitIUUO/yIQuvFKhQw== 0001021408-99-001044.txt : 19990624 0001021408-99-001044.hdr.sgml : 19990624 ACCESSION NUMBER: 0001021408-99-001044 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990527 FILED AS OF DATE: 19990528 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: PRE 14A SEC ACT: SEC FILE NUMBER: 000-23562 FILM NUMBER: 99636485 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 PRE 14A 1 PRELIMINARY CONSENT SOLICITATION STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2)) [_] Definitive Consent Solicitation Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 Microelectronic Packaging, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------- (3) Filing Party: ------------------------------------------------------------------------- (4) Date Filed: ------------------------------------------------------------------------- Notes: MICROELECTRONIC PACKAGING, INC. 9577 Chesapeake Drive San Diego, California 92123 May 27, 1999 The Board of Directors ("Board") of Microelectronic Packaging, Inc. ("Company") is soliciting your consent to: (1) approve the conversion of approximately $27.56 million in debt owed to eight creditors into Series A Convertible Preferred Stock of the Company and the amendment of one of the creditor's warrants to purchase Common Stock; (2) approve the issuance of Series A Convertible Preferred Stock issued in connection with the debt conversion to 11 employees including officers, a director of the Company and third parties in exchange for their payment of a creditor claim; (3) approve various amendments to the Company's 1993 Stock Option/Stock Issuance Plan to: (i) increase the number of shares of Common Stock authorized for issuance over the term of such plan by an additional 2,309,368 shares; (ii) amend the number of shares available for issuance under such plan for each person participating in any one calendar year to 2,000,000 shares; and (iii) amend the Automatic Option Grant Program to increase the number of shares of Common Stock subject to automatic option grants to be made to new and continuing non-employee Board members; (4) approve the grant of options to purchase 3,758,003 shares of Common Stock to Company employees, officers and directors pursuant to the amended 1993 Stock Option/Stock Issuance Plan; and (5) approve the Certificate of Amendment of the Amended and Restated Articles of Incorporation to authorize the issuance of the Series A Convertible Preferred Stock to the creditors, employees, officers and a director of the Company and third parties in connection with the debt conversion. We ask that you return your written consent by ________, 1999. The Board believes it is in the best interest of the Company and its shareholders to approve Proposals 1-5. Before Proposals 1-5 can be effective, the holders of a majority of the Company's outstanding stock must give their written consent. IT IS IMPERATIVE THAT WE RECEIVE YOUR CONSENT TO THE ATTACHED PROPOSALS AS SOON AS POSSIBLE, BUT IN NO EVENT LATER THAN JUNE ___, 1999, BECAUSE YOUR BROKER CANNOT CONSENT TO PROPOSALS 1-5 WITHOUT YOUR WRITTEN CONSENT. The Board asks you to consent to Proposals 1-5. These consent solicitation materials provide you with detailed information about the Proposals. In addition, you may obtain information about the Company from documents we have filed with the Securities and Exchange Commission. We encourage you to read these consent solicitation materials carefully. PLEASE COMPLETE, SIGN AND RETURN THE ACCOMPANYING CONSENT CARD BY _________, 1999. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU CONSENT TO PROPOSALS 1-5 AS DESCRIBED IN THE ATTACHED CONSENT SOLICITATION STATEMENT. CONSENT SOLICITATION STATEMENT TABLE OF CONTENTS
Page ---- GENERAL INFORMATION............................................ 1 Voting Rights............................................. 1 Summary of the Proposals.................................. 1 Solicitation of Written Consents.......................... 2 Revocability of Consents.................................. 3 Expense of Consent Solicitation........................... 4 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 4 PROPOSAL 1 - APPROVAL OF CONVERSION OF APPROXIMATELY $27.56 MILLION IN DEBT OWED TO EIGHT CREDITORS INTO SERIES A CONVERTIBLE PREFERRED STOCK OF THE COMPANY AND THE AMENDMENT OF ONE OF THE CREDITOR'S WARRANTS TO PURCHASE COMMON STOCK..................................... 6 Description of and Reasons for Proposal 1............ 6 Summary of Debt to be Converted...................... 8 Summary of Principal Terms of Debt Conversion and Mutual Settlement and Release Agreement.......... 11 Prior Settlement Agreements Regarding Debt to Creditors........................................... 14 Summary of Principal Terms of Series A Convertible Preferred Stock.................................. 16 Registration Rights.................................. 18 Principal Terms of Transpac Warrant.................. 18 Opinion of Financial Advisor......................... 19 Vote Required and Recommendation for Approval........ 22 PROPOSAL 2 - APPROVAL OF THE ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION WITH THE DEBT CONVERSION TO 11 EMPLOYEES INCLUDING OFFICERS, A DIRECTOR OF THE COMPANY AND THIRD PARTIES IN EXCHANGE FOR THEIR PAYMENT OF A CREDITOR CLAIM......... 22 Description of and Reasons for Proposal 2............ 22 FI Financial Agreement with STMicroelectronics, Inc.. 23 Assignment of Portion of FI Financial's Interest in STMicroelectronics, Inc.'s Debt to Employees, Officers, a Director of the Company and Third Parties.......................................... 23 Conditions to Purchase of Series A Convertible Preferred Stock by Employees, Officers, a Director and Third Parties................................ 24 Vote Required and Recommendation for Approval........ 24
i Consent Solicitation Statement Table of Contents (cont'd)
Page ---- PROPOSAL 3 - APPROVAL OF VARIOUS AMENDMENTS TO THE COMPANY'S 1993 STOCK OPTION/STOCK ISSUANCE PLAN AS DESCRIBED HEREIN.......................................... 25 Description of and Reasons for Proposal 3............. 25 Plan Structure........................................ 25 Administration........................................ 26 Share Reserve......................................... 26 Eligibility........................................... 26 Valuation............................................. 26 Discretionary Option Grant Program.................... 26 Automatic Option Grant Program........................ 27 Stock Issuance Program................................ 27 Acceleration.......................................... 28 Financial Assistance.................................. 28 Special Tax Election.................................. 28 Amendment and Termination............................. 28 Federal Income Tax Consequences....................... 28 Accounting and Income Tax Treatment................... 29 Conditions to Approval of Amendments to 1993 Stock Plan.............................................. 30 Vote Required and Recommendation for Approval......... 30 PROPOSAL 4 - APPROVAL OF GRANT OF OPTIONS TO PURCHASE 3,758,003 SHARES OF COMMON STOCK TO COMPANY EMPLOYEES, OFFICERS AND DIRECTORS PURSUANT TO AMENDED 1993 STOCK OPTION/STOCK ISSUANCE PLAN............. 30 Description of and Reasons for Proposal 4............. 30 Conditions to Issuance of Additional Options to Employees, Officers and Directors................. 31 Vote Required and Recommendation for Approval......... 31 PROPOSAL 5 - APPROVAL OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION TO AUTHORIZE THE ISSUANCE OF THE SERIES A CONVERTIBLE PREFERRED STOCK TO THE CREDITORS, EMPLOYEES, OFFICERS AND A DIRECTOR OF THE COMPANY AND THIRD PARTIES IN CONNECTION WITH THE DEBT CONVERSION............ 32 Description of and Reasons for Proposal 5............. 32 Background............................................ 32 The Proposal.......................................... 32 Conditions to Approval of Amended and Restated Articles of Incorporation......................... 33 Vote Required and Recommendation for Approval......... 33 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 33
ii
Page ---- EXECUTIVE COMPENSATION AND RELATED INFORMATION.................. 35 Summary of Cash and Certain Other Compensation............. 35 Option Grants in Last Fiscal Year.......................... 36 Aggregated Option Exercises and Fiscal Year-End Values..... 36 Compensation Committee Interlocks and Insider Participation in Compensation Decisions................ 37 Employment Contracts and Termination of Employment and Change in Control Arrangements......................... 37 Board of Directors Report on Executive Compensation........ 38 ANNEX A RESOLUTION OF ACTIONS BY WRITTEN CONSENT................A-1 FINANCIAL INFORMATION...........................................F-1
EXHIBITS Exhibit A Form of Debt Conversion and Mutual Settlement and Release Agreement Exhibit B Form of Certificate of Amendment of Amended and Restated Articles of Incorporation Exhibit C Form of Registration Rights Agreement Exhibit D Form of Transpac Warrant and Amendment No. 1 Exhibit E Form of Assignment Agreement Exhibit F Form of IBM Proceeds Agreement Exhibit G Letter Agreement between the Company, FI Financial LLC and STMicroelectronics, Inc. Exhibit H Form of L.H. Friend, Weinress, Frankson and Presson, Inc. Opinion iii MICROELECTRONIC PACKAGING, INC. --------------------------------------- CONSENT SOLICITATION STATEMENT FOR SHAREHOLDER ACTION BY WRITTEN CONSENT ------------------------------------------- This Consent Solicitation Statement ("Consent Statement") has been prepared by the management of Microelectronic Packaging, Inc. ("Company" or "MPI") and is being furnished in connection with the solicitation by the Board of Directors of the written consent of the Company's shareholders. The Company intends to distribute this Consent Statement and the accompanying materials to its Shareholders on or about ________, 1999. The mailing address of the Company's principal executive offices is 9577 Chesapeake Drive, San Diego, California 92123. The Company is seeking Shareholder approval of Proposals 1-5. These matters are described in detail in this Consent Statement. Attached to the Consent Statement as Annex A is the Resolution of Actions by Written Consent of Shareholders (the "Consent Resolution"). The procedure for indicating approval of the proposals included in the Consent Resolution is described in detail in this Consent Statement. GENERAL INFORMATION Voting Rights The proposals being submitted for Shareholder approval are to be acted upon by written consent, without a meeting, rather than by a vote held at a meeting. The holders of the common stock of the Company ("Common Stock") are entitled to consent or withhold their consent in writing regarding each of the proposals being considered. Each outstanding share of Common Stock is entitled to one vote for or against each proposal. The written consent of a majority of the outstanding shares of Common Stock is required to approve each of the respective proposals contained in the Consent Resolution. Summary of the Proposals The Board of Directors has adopted a resolution which declares the advisability of, and submits to the Shareholders for authorization and approval, proposals to: 1. Approve the conversion of approximately $27.56 million in debt owed to eight creditors into Series A Convertible Preferred Stock of the Company and the amendment of one of the creditor's warrants to purchase Common Stock; 2. Approve the issuance of Series A Convertible Preferred Stock issued in connection with the debt conversion to 11 employees including officers, a director of the Company and third parties in exchange for their payment of a creditor claim; 1 3. Approve various amendments to the Company's 1993 Stock Option/Stock Issuance Plan to: (i) increase the number of shares of Common Stock authorized for issuance over the term of such plan by an additional 2,309,368 shares; (ii) amend the number of shares available for issuance under such plan for each person participating in any one calendar year to 2,000,000 shares; and (iii) amend the Automatic Option Grant Program to increase the number of shares of Common Stock subject to automatic option grants to be made to new and continuing non-employee Board members. 4. Approve the grant of options to purchase 3,758,003 shares of Common Stock to Company employees, officers and directors pursuant to the amended 1993 Stock Option/Stock Issuance Plan; and 5. Approve the Certificate of Amendment of the Amended and Restated Articles of Incorporation to authorize the issuance of the Series A Convertible Preferred Stock to the creditors, employees, officers, a director of the Company and third parties in connection with the debt conversion. One or more of the proposals may be abandoned by the Board at any time before the Certificate of Amendment of the Amended and Restated Articles of Incorporation with the amendments contained in Proposal 5 is filed with the California Secretary of State's office, if holders of a majority of the outstanding Common Stock do not approve the proposal, or if for any reason the Board deems it advisable to abandon a proposal. Only holders of record of shares of the Company's Common Stock at the close of business on June ___, 1999 ("Record Date") are entitled to execute the Consent Resolution. At the close of business on the Record Date, there were 10,856,890 shares of Common Stock issued and outstanding held by approximately 138 holders of record. The holders of the Common Stock as of the Record Date are referred to in this Consent Statement as the "Shareholders." Solicitation of Written Consents Under California law and under the Company's Bylaws, any action which may be taken at any annual or special meeting of the Shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The matters being considered by the Shareholders are being submitted for action by written consent, rather than by votes cast at a meeting. Attached to this Consent Statement as Annex A is the text of the Consent Resolution being submitted for Shareholder adoption by written consent. The Consent Resolution provides for the approval of each of the proposals, each of which were summarized above and are more fully described under the captions for each proposal below. In accordance with California law, notice of shareholder approval of the respective proposals without a meeting by less than unanimous written consent, 2 shall be given to the Shareholders at least 10 days before the date the Consent Resolution is effective. Consent Resolutions must be received by the Company on or before ________, 1999. Shareholders are requested to indicate approval of and consent to the adoption of the proposals contained in the Consent Resolution, or disapproval thereof, by executing the enclosed copy of the Consent Resolution and by checking the boxes which correspond to the approval or disapproval of the proposed action. Each proposal contained in the Consent Resolution may be considered separately. Failure to check any of the boxes will, if the Consent Resolution has been signed, constitute approval of and consent to the adoption of all of the proposals contained in the Consent Resolution. Signing and indicating approval or disapproval on the Consent Resolution will be deemed to be the granting or denial of written consent to the adoption of each proposal contained in the Consent Resolution. Approving a proposal contained in the Consent Resolution and execution of the Consent Resolution will constitute your approval of the proposal, as a Shareholder of the Company. Shareholders who do not approve a proposal or consent to the adoption of the Consent Resolution will nonetheless be bound by the Consent Resolution if written consents representing a majority of the outstanding shares of Common Stock are received by the Company approving the proposal. The Board requests that each Shareholder indicate their approval or disapproval of each proposal listed in the Consent Resolution and execute and date the Consent Resolution, indicate the number of Shares being voted, and deliver the Consent Resolution to the Company via regular mail, e-mail, fax or in person at the following address: Microelectronic Packaging, Inc. Attn: Denis Trafecanty, Senior Vice President and Chief Financial Officer 9577 Chesapeake Drive San Diego, CA 92123 Facsimile: (619) 292-7881 E-mail: denist@mpix.com A self-addressed stamped envelope is enclosed for your convenience in returning the Consent Resolution. Each Shareholder is requested to indicate on the Consent Resolution the number of shares which the Shareholder is voting. If the Shareholder wishes to vote any shares not registered in his/her name, a written consent of the registered Shareholder of record as of the Record Date must be received by the Company. The Consent Resolution should be returned as soon as possible for receipt no later than June ___, 1999. Under applicable law, Shareholders who abstain from voting with respect to any proposal, or who vote against any proposal to be considered in this Consent Statement, do not have the right to an appraisal of their shares or any similar dissenter's rights under applicable law. Revocability of Consents When the enclosed Consent Resolution is properly executed and returned, the shares it represents will be voted in accordance with the directions noted thereon, and if no directions are indicated, the shares it represents will be voted in favor of each proposal. Any person providing a Consent Resolution in the form accompanying this Consent Statement has the power to revoke it any time prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Company, but not thereafter. It may be revoked by filing with the Secretary of the 3 Company at the Company's principal executive office a writing revoking the Consent Resolution. Such revocation shall be effective upon its receipt by the Secretary of the Company. Expense of Consent Solicitation The Company will bear the entire cost of the solicitation of Shareholder approval of the Consent Resolution, including the preparation, assembly, printing and mailing of this Consent Statement, and any additional material furnished to Shareholders. In addition, the Company may reimburse certain persons for their cost of forwarding the solicitation material to Shareholders. The solicitation of consents by mail may be supplemented by telephone, telegram and/or personal solicitation by directors, officers or employees of the Company. No additional compensation will be paid for any of such services. To assist in the solicitation process, the Company has retained Beacon Hill Partners, Inc. The fee for such services will be approximately $_____ plus reasonable expenses incurred to distribute the solicitation materials. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information known to the Company regarding the ownership of the Company's Common Stock as of May 25, 1999 for (i) each Director and nominee who owns Common Stock, (ii) all persons or entities who were known by the Company to be beneficial owners of five percent (5%) or more of the Company's Common Stock, (iii) the Chief Executive Officer and other executive officers whose compensation for 1998 were each in excess of $100,000, and (iv) all executive officers and Directors of the Company as a group.
Number of Shares Percent of Total Shares Name and Address of Beneficial Owner Beneficially Owned/(1)/ Outstanding Beneficially Owned - ------------------------------------ ----------------------- ------------------------------- Entities that may be deemed to be affiliated with Transpac Capital Pte. Ltd./(2)/ 6 Shenton Way #2D-09 DBS Building, Tower Two Singapore 068809..................................... 1,342,013 11.8% Joost Tjaden/(3)/ c/o TBM Associates 3500 Oaklawn, #215 Dallas, Texas 75219.................................. 687,620 6.3% Cabot Ceramics, Inc./(4)/ c/o Cabot Corporation 75 State Street Boston, MA 02119-1806............................... 654,326 6.0% Counterpoint Master LLC 1301 Avenue of the Americas 40th Floor New York, NY 10019................................... 627,035 5.8% Anthony J.A. Bryan/(5)/.............................. 183,333 1.7% Frank Howland/(5)/................................... 145,000 1.3% Waldemar Heeb/(5)/................................... 15,000 0.1% Wong Lin Hong/(5)/................................... 15,069 0.1% James Waring/(6)/.................................... -- -- Andrew K. Wrobel/(5)/ c/o Microelectronic Packaging, Inc. 9577 Chesapeake Drive San Diego, California 92123......................... 600,000 5.2% Denis J. Trafecanty/(5)/............................. 300,000 2.7%
4 Timothy R. Sullivan/(5)/ 150,000 1.3% All directors and executive officers as a group (7 persons)............................... 1,408,402 11.4%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Percentage beneficially owned is based on a total of 10,856,890 shares of Common Stock issued and outstanding as of April 15, 1999. Shares of Common Stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of April 15, 1999 are deemed outstanding for computing the percentage of the person holding such options or warrants but are not outstanding for computing the percentage of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned. (2) The Transpac entities include Transpac Capital Pte. Ltd. (the "Manager"), a Singapore private limited company; Transpac Industrial Holdings Limited ("TIH"), a Singapore public listed company; Regional Investment Company Limited ("Regional"), a Singapore public limited company; Transpac Equity Fund ("TEF"), a British Virgin Islands trust; Transpac Venture Partnership II ("TVP"), a collective investment scheme; Transpac Manager's Fund ("TMF"), a British Virgin Islands international business company; and NatSteel Equity III Pte Ltd. ("NatSteel"), a Singapore private limited company. The Manager does not have any direct ownership interest in the Company's Common Stock. The Manager has, in its capacity as investment adviser to each of TIH, Regional, TEF and TVP, the power to control the voting and disposition of the 765,466 shares and warrants for 500,000 shares of Common Stock held in the aggregate by TIH, Regional, TEF and TVP and, therefore, may be deemed to be a beneficial owner of such shares. TIH has direct beneficial ownership of 334,069 shares and warrants for 198,500 shares of the Common Stock. TIH shares the power to control the voting and disposition of such 334,069 shares of Common Stock and warrants for 198,500 shares with the beneficial ownership of any shares of Common Stock and warrants for 198,500 shares with the Manager. The Manager further holds warrants to purchase 201,500 shares of Common Stock. TIH disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. Regional has direct beneficial ownership of 92,066 shares of the Common Stock and warrants for 54,500 shares. Regional shares the power to control the voting and disposition of such 92,066 shares of Common Stock and warrants for 54,500 shares with the Manager. Regional disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TEF has direct beneficial ownership of 197,285 shares of the Common Stock. TEF shares the power to control the voting and disposition of such 197,285 shares of Common Stock with the Manager. TEF disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TVP has direct beneficial ownership of 139,415 shares of 139,415 shares of the Common Stock. TVP shares the power to control the voting and disposition of such 139,415 shares of Common Stock with the Manager. TVP disclaims beneficial ownership of any shares of Common Stock held by any other Transpac entity. TMF has direct beneficial ownership of 2,631 shares of the Common Stock. NatSteel has direct beneficial ownership of 75,547 shares of the Common Stock and warrants for 45,500 shares. NatSteel and the Manager have no formal relationship, advisory or otherwise, in respect of the shares of Common Stock held by NatSteel. However, NatSteel anticipates that it may rely upon the advice of Transpac in connection with the voting and disposition of the shares of Common Stock held by it. NatSteel disclaims beneficial ownership of the shares of Common Stock held by any other Transpac entity. The preceding information was partially obtained from a Schedule 13D filed with the Securities and Exchange Commission on or about April 3, 1996. Mr. Wong Lin Hong is Director and Executive Vice President of Transpac Capital Pte. Ltd., and as such may be deemed to share voting and investment power with respect to the Transpac entities' shares. Mr. Wong disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (3) Includes shares owned by TBM Associates, Inc. ("TBM"), an investment management company in which Mr. Tjaden is a significant shareholder, and as such may be deemed to share voting and investment power. TBM exercises voting control over shares of MPI common stock held by Bostech Associates (1,719 shares), Ion Associates (33,685 shares) and N.V. Bever Holding (368,094 shares and a warrant to purchase 1,173 additional shares at an exercise price of $5.63). Also includes shares held by Janivo Fonds (99,307 shares) and Van Doorne 5 Group (99,285 shares), over which Mr. Tjaden exercises voting control. Mr. Tjaden disclaims beneficial ownership of all such shares. (4) Cabot Ceramics, Inc. is a corporation wholly owned by Cabot Corporation. The executive management of Cabot Corporation has voting and investment power over such shares and may be deemed to beneficially own such shares. (5) All shares in the form of stock options exercisable within 60 days of April 15, 1999. (6) Mr. Waring is a nominee to the Board and is not currently a Director. Mr. Waring's nomination to the Board is subject to completion of the debt conversion described in Proposal 1 below. Such debt conversion is subject to the completion of definitive agreements for all eight creditors and the approval of the debt conversion by the Company's Shareholders. PROPOSAL 1 APPROVAL OF CONVERSION OF APPROXIMATELY $27.56 MILLION IN DEBT OWED TO EIGHT CREDITORS INTO SERIES A CONVERTIBLE PREFERRED STOCK OF THE COMPANY AND THE AMENDMENT OF ONE OF THE CREDITOR'S WARRANTS TO PURCHASE COMMON STOCK. Description of and Reasons for Proposal 1 As of March 31, 1999, the Company is in default on approximately $27.56 million in debt plus accrued interest related to the Company's discontinued operations in Singapore. The entire amount including accrued interest is currently due and payable. The Company does not have the ability to pay the amounts due on this debt. The $27.56 million in debt resulted from (i) the construction by MPM Singapore Pte. Ltd. ("MPM"), an affiliate of the Company, of a multi-layer ceramic operations plant in Singapore, which ceased operations prior to the commencement of production; and (ii) the purchase in December, 1994 and installation of additional equipment at Microelectronic Packaging (S) Pte., Ltd. ("MPS") which was used to provide pressed ceramic products to integrated circuit manufacturers. As a result of what management believes was a slowdown in market demand, this equipment was no longer required to satisfy its customers' reduced requirements. In 1997, a receiver was appointed by the courts in Singapore to liquidate MPM's and MPS' assets. The Company believes the principal reasons which forced MPM to liquidate included changing market demand for multi-layer ceramic products and the failure of a potential major customer to commit to any product purchases. The Company also believes the principal reasons which forced MPS to liquidate was a decline in the market for pressed ceramics, as much of the additional equipment purchased by MPS represented excess capacity. Both of these subsidiaries have been in receivership since 1997, the receiver has completed the liquidation of MPM's assets and the receiver is in the process of completing the liquidation of MPS' assets, and the proceeds were used to retire a portion of MPM's and MPS debts. During 1998, the High Court of the Republic of Singapore ordered the winding up of MPM. The Company fully guaranteed the $27.56 million in debt incurred by MPM and MPS to eight creditors in connection with the operations in Singapore ("Singapore Creditors"). During 1998, the Company signed Restructuring, Mutual Release and Settlement Agreements ("Restructuring Agreements") with the Singapore Creditors, which called for settlement payments of approximately $9.3 million in satisfaction of the then $27.1 million in debt owed. The $9.3 million in settlement payments were generally due no later than May 1, 1999. During 1998 the Company explored various proposals to obtain additional financing to enable it to satisfy the $9.3 million in settlement obligations. Since the 6 Company was not able to obtain funding to pay this $9.3 million, the Company renegotiated the terms and entered into non-binding letter agreements with all of the Singapore Creditors (including a third party who agreed to purchase the creditor position of one of the Singapore Creditors) which called for the conversion of all debt and accrued interest obligations into shares of the Company's to be authorized Series A Convertible Preferred Stock ("Debt Conversion Transaction"). A summary of the principal terms of the Series A Convertible Preferred Stock is set forth under the heading "Summary of Principal Terms of Series A Convertible Preferred Stock" below. The letter agreements provided that the proposed Debt Conversion Transaction was subject to the completion of definitive agreements for all of the Singapore Creditors and the approval of the Debt Conversion Transaction by the holders of a majority of the Company's Common Stock. The Company has prepared Debt Conversion and Mutual Settlement and Release Agreements for each of the Singapore Creditors ("Conversion and Settlement Agreements"), which respectively include, as applicable, the following exhibits: Registration Rights Agreement; IBM Proceeds Agreement; Certificate of Amendment of Amended and Restated Articles of Incorporation; and Amendment No. 1 to the Warrants granted to Transpac. One of the Singapore Creditors, STMicroelectronics, Inc. ("STM") did not agree to participate in the Debt Conversion Transaction, and in lieu thereof, STM agreed to sell its creditor position to FI Financial, LLC ("FI Financial") pursuant to the terms and conditions of a written agreement that has been entered into between STM, FI Financial and the Company ("STM/FI Financial Agreement"). FI Financial has signed a non-binding letter agreement with the Company similar to those signed by the other Singapore Creditors, and with respect to STM's creditor position has agreed to enter into a Conversion and Settlement Agreement and participate in the Debt Conversion Transaction upon the approval by the Shareholders of the Debt Conversion Transaction, all as described in more detail in Proposal 2 below. In addition to the STM/FI Financial Agreement, as of May 25, 1999, the Company has received executed Conversion and Settlement Agreements from the following creditors: Transpac Capital Pte. Ltd. and related investors; Texas Instruments Singapore, Ltd.; Orix Leasing Singapore Ltd.; and NS Electronics Bangkok, Ltd. The names of the Singapore Creditors and a summary of the current debt amounts and transactions from which they resulted are summarized below. The Company believes the Conversion and Settlement Agreements are very advantageous for the Company and its Shareholders and will enable the Company to continue its operations and avoid the adverse prospect of an immediate bankruptcy filing. If the Company is unable to obtain the consent of the Shareholders to the Debt Conversion Transaction, or if all of the Singapore Creditors do not sign the Conversion and Settlement Agreements the Company will likely be required to institute immediate bankruptcy proceedings. The Board has approved the Debt Conversion Transaction and the related agreements which include the Form of Debt Conversion and Mutual Release and Settlement Agreement, Form of Certificate of Amendment of Amended and Restated Articles of Incorporation, Form of Registration Rights Agreement, Form of Transpac Warrant and Amendment No. 1 to the Warrants granted to Transpac, Form of Assignment Agreement, Form of IBM Proceeds Agreement, Letter Agreement between the Company, FI Financial LLC and STMicroelectronics, Inc. and Form of L.H. Friend, Weinress, Frankson and Presson, Inc. Opinion, all as respectively attached to this Consent Statement as Exhibits A, B, C, D, E, F, G and H ("Exhibits"). All statements contained in this Consent Statement with respect to such documents are qualified in their entirety by references to those Exhibits. The Company has also attached to this Consent Statement its Form 10-K Annual Report for the fiscal year ended December 31, 1998 and its Form 10-Q Quarterly Report for the quarter ended March 7 31, 1999 as filed with the Securities and Exchange Commission, which reports are included with the financial information beginning on page F-1 herein. Summary of Debt to be Converted During 1998, the Company signed Restructuring Agreements with each of the Singapore Creditors, which called for settlement payments of approximately $8.3 million to satisfy the then approximately $27.1 million in debt obligations owed to them if the $8.3 million was paid to the Singapore Creditors by May 1, 1999 and an additional $1.0 million paid to Transpac Capital Pte. Ltd. and related investors by December 31, 1999. The Company was not able to obtain funding to repay all or any part of the $8.3 million due on May 1, 1999 and renegotiated the terms with each creditor. All of the Singapore Creditors other than STM agreed to convert their debt and accrued interest into shares of the Company's Series A Convertible Preferred Stock. STM agreed to sell its creditor position to FI Financial in exchange for a cash payment of $500,000 ("STM Payment"). FI Financial is owned by James T. Waring, who has been nominated for election to the Board, subject to approval of the Debt Conversion Transaction by the Shareholders. FI Financial has deposited the STM Payment in escrow where it will remain pending the approval of the Debt Conversion Transaction by the Shareholders. Upon such approval, the STM Payment will be paid to STM, and FI Financial will enter into a Conversion and Settlement Agreement and receive the right to acquire 1,322,647 shares of Series A Convertible Preferred Stock, which is the number of shares STM would have received if STM had agreed to the Debt Conversion Transaction and entered into a Conversion and Settlement Agreement. FI Financial is entitled to assign its rights thereunder to 11 employees including officers and a director of the Company and four third parties, who have paid corresponding cash reimbursements to FI Financial. Prior to the approval by the Shareholders of the Debt Conversion Transaction, FI Financial will be entitled to and may assign further interests under the STM/FI Financial Agreement to additional parties. In addition, pursuant to the STM\FI Agreement, FI Financial will acquire ownership of the Warrant held by STM to purchase 200,000 shares of the Company's Common Stock for a purchase price of $1.00 per share ("STM Warrant"). As part of the Debt Conversion Transaction, FI Financial has agreed to surrender the STM Warrant to the Company without exercise, whereupon the STM Warrant will be terminated and will not have any further force or effect. As of March 31, 1999, which is the end of the Company's first quarter and for which the Company has filed with the Securities and Exchange Commission its most recent Form 10-Q Quarterly Report, the Company owed approximately $27.56 million to the Singapore Creditors, whose names are Transpac Capital Pte. Ltd. and related investors; STMicroelectronics, Inc.; Texas Instruments Singapore, Ltd.; Development Bank of Singapore; Motorola, Inc.; NS Electronics Bangkok Ltd.; Samsung Corning Co., Ltd.; and Orix Leasing Singapore Ltd. All of the principal and interest on these debts was due and payable by May 1, 1999 and is now in default. The following is a brief summary of the material terms and conditions of these debts. If Proposal 1 is approved by a majority of the holders of the Company's Common Stock, all of the $27.56 million in debt will be canceled and exchanged for the Series A Convertible Preferred Stock of the Company. Development Bank of Singapore ("DBS"). At March 31, 1999, the Company's subsidiaries, MPM and MPS, had outstanding borrowings due to DBS in the principal amount of $1,407,954 including accrued interest. The amount outstanding results from the remaining balance of various borrowings made by MPM and MPS under lines of credit, overdraft facilities and an accounts receivable financing line of credit originally made in 1996. The $1,407,954 debt represents the balance of the original debt remaining after the liquidation of the assets of MPM and MPS by the receivers and the application of the proceeds 8 from the sale of the assets. All of the assets of MPM and substantially all of the assets of MPS have been liquidated by the receivers of MPM and MPS. The remaining balances due to DBS are in default, are payable upon demand and bear interest at the bank's prime rate plus 5%. All of these amounts are guaranteed by the Company. In February 1999, the Company and DBS signed a non- binding letter agreement which calls for conversion of all of the Company's obligations into shares of Series A Convertible Preferred Stock. Transpac Capital Pte. Ltd. and Related Investors. At March 31, 1999, MPM had outstanding borrowings due to Transpac Capital Pte. Ltd. and related investors (collectively, "Transpac") in the principal amount of $9.0 million, plus accrued interest in the approximate amount of $2,356,633. On March 27, 1996, the Company and MPM completed a financing with Transpac pursuant to which the Company issued 842,013 shares of its Common Stock to Transpac for a total purchase price of $2.0 million, and MPM issued a convertible debenture to Transpac in the principal amount of $9.0 million. The debenture has a term of five years, bears interest at the rate of 8.5% per annum and is guaranteed by the Company. The outstanding principal on the debenture is due and payable in full at the end of the five-year term; however, from and after April 23, 1997, the debenture is convertible at Transpac's option to shares of Common Stock of MPM or Common Stock of the Company. The debenture was fully guaranteed by the Company. Neither MPM nor the Company have ever made any payments under the debenture. The debenture is currently in default and payable upon demand. In early 1999, the Company and Transpac signed a non-binding letter agreement which calls for the conversion of all of the Company's obligations to Transpac into shares of Series A Convertible Preferred Stock. In addition, Transpac has already signed a Conversion and Settlement Agreement. NS Electronics Bangkok Ltd. ("NSEB"). At March 31, 1999, the Company had outstanding a term note due to NSEB, a former customer of MPS with a principal balance of $1,250,000 and approximately $455,633 of accrued interest. This note is fully guaranteed by the Company and is secured by certain assets of the Company. This note is currently in default and payable upon demand. In 1995, the Company borrowed $1,500,000 from NSEB at an interest rate of 14% per annum. The Company has made no principal payments since September 1996. The NSEB promissory note is secured by all of the Company's domestic equipment and trade receivables that are not subject to liens or other encumbrances existing prior to May 30, 1995. In March 1997, the Company entered into an Amended Loan and Security Agreement and a Second Secured Promissory Note with NSEB pursuant to which NSEB agreed to waive any breach of the covenants, terms and conditions of the original Loan and Security Agreement and the original Secured Promissory Note (both dated May 30, 1995) and agreed to a revised (and extended) payment schedule. The interest rate on the outstanding balance, however, was raised from 14% per annum to 18% per annum and the Company is currently in default under the terms of the Second Secured Note. In February 1999, the Company and NSEB signed a non-binding letter agreement which calls for the conversion of all of the Company's agreed obligations to NSEB into shares of Series A Convertible Preferred Stock. In addition, NSEB has already signed a Conversion and Settlement Agreement. Texas Instruments Singapore, Ltd. ("TI"). At March 31, 1999, the Company's subsidiary, MPS, had an outstanding promissory note due to TI, a former customer of MPS. The principal balance due under the note is $3,500,000 and approximately $247,783 of accrued interest was due and payable as of March 31, 1999. The note bears interest at the rate of $3.5% per annum. The note is fully guaranteed by the Company and was secured by certain assets of MPS. The note is currently in default and payable upon demand. 9 In 1995, MPS borrowed $3,500,000 from TI at an interest rate of 7.25% per annum. The Company entered into several amended loan agreements during 1997 and 1998; however, the Company was unable to meet the terms of those agreements. In April 1999, the Company and TI signed a Conversion and Settlement Agreement. STMicroelectronics, Inc. ("STM"). At March 31, 1999, the Company's subsidiary, MPS, had outstanding a promissory note due to STM, a former customer of MPS. The principal balance due under the note is $4,000,000 and approximately $821,095 of accrued interest was due and payable as of March 31, 1999. The note is fully guaranteed by MPI and was secured by certain assets of MPS. The note is currently in default and payable upon demand. In 1995, MPS borrowed $4,000,000 from STM at an interest rate of 7.25% per annum. MPS did not make any principal payments, and only made limited interest payments. On April 14, 1999, STM and FI Financial entered into the STM/FI Financial Agreement, pursuant to which STM agreed to assign its creditor position to FI Financial in exchange for a cash payment of $500,000. The STM/FI Financial Agreement is subject to the approval of the Debt Conversion Transaction by the holders of a majority of the Company's Common Stock. In connection therewith, FI Financial has entered into a non-binding letter agreement with the Company which calls for the conversion of all of the Company's obligations to STM into shares of Series A Convertible Preferred Stock. Furthermore, upon approval of the Debt Conversion Transaction by the holders of a majority of the Company's Common Stock, FI Financial agreed to enter into a Conversion and Settlement Agreement and agreed to participate in the Debt Conversion Transaction with respect to the entire creditor position of STM. As part of FI Financial's participation in the Debt Conversion Transaction, FI Financial will surrender the STM Warrant without exercise, whereupon the STM Warrant will be terminated and will not have any further force or effect. Motorola, Inc. ("Motorola"). At March 31, 1999, the Company's subsidiary, MPS, had outstanding a term note due to Motorola, a former customer of MPS. The note bears interest at approximately 7% per annum. The principal balance on the note is $2,208,000 and approximately $201,474 of accrued interest was due and payable as of March 31, 1999. The note has been guaranteed by the Company and is secured by certain assets of the Company and all shares of CTM Electronics, Inc. ("CTM") and Microelectronic Packaging America, Inc. ("MPA"). The note is currently in default and payable upon demand. In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an interest rate of 7%. The loan was guaranteed by Motorola and was eventually paid in full by Motorola. This obligation to Motorola is secured by all of the assets of MPI, CTM and MPA not previously pledged to NSEB, as well as all capital stock of MPS, CTM and MPA. In January 1999, the Company and Motorola signed a non-binding letter agreement which calls for the conversion of all of the Company's obligations to Motorola into shares of Series A Convertible Preferred Stock. Samsung Corning Co., Ltd. ("Samsung"). In 1996, MPS borrowed $1,000,000 from DBS at the Singapore Interbank offer interest rate plus 1.5%, repayable in twelve monthly installments beginning in November 1996. The loan had been fully guaranteed by Samsung, and co-guaranteed by the Company. MPS made payments under the note totaling approximately $417,000 during 1996 and 1997. The remaining balance of approximately $583,000 plus interest was paid to DBS by Samsung after DBS called upon the guarantee of Samsung. Samsung has requested that MPI reimburse it for the amount paid under the guarantee. In March 1999, the Company and Samsung signed a non-binding letter agreement which calls for the conversion of all of the Company's obligations to Samsung into shares of Series A Convertible Preferred Stock. 10 Orix Leasing Singapore Ltd. ("Orix"). At March 31, 1999, the Company had outstanding a deficiency balance from capital leases due to Orix totaling $1,765,744. The amount outstanding is the remaining balance of various lease borrowings made by MPM and MPS. This balance remains after the liquidation of the leased assets of MPM and MPS by Orix and the application to these leases of the resulting proceeds from the sale of these assets. The remaining amount outstanding is represented by a note issued by the Company at an interest rate of 7.25%. The note is currently in default and is payable upon demand. In 1996 and earlier, MPM, and to a lesser extent MPS, borrowed approximately $2,600,000 under capital leases from Orix. Both MPM and MPS stopped making lease payments, and Orix foreclosed on the equipment and sold it at an auction in 1997. The balance remaining after the liquidation of the leased assets is guaranteed by the Company. In March 1999, the Company and Orix signed the Conversion and Settlement Agreement. Summary of Principal Terms of Debt Conversion and Mutual Settlement and Release Agreement The Conversion and Settlement Agreements generally provide that all of the debts owed by the Company to the Singapore Creditors would be terminated and the parties would release all of their respective rights and obligations under the agreements relating to the original and related debts, and the parties would further settle all other disputes of any kind that may or could exist between the parties in exchange for the Series A Convertible Preferred Stock to be issued in connection with the Debt Conversion Transaction. The Board has approved the Debt Conversion Transaction and the Conversion and Settlement Agreements. The following summary of the principal terms of the form of Conversion and Settlement Agreement attached hereto as Exhibit A is qualified in its entirety by reference to this exhibit which is representative of the Conversion and Settlement Agreements for all of the Singapore Creditors except that only Transpac and DBS will have an IBM Proceeds Agreement, and only Transpac will have the Amendment No. 1 to the Warrant previously issued to Transpac: Summary of Termination Provisions The Conversion and Settlement Agreements will remain in full force and effect until the date Transpac and the related investors convert their debt into Series A Convertible Preferred Stock, subject to the following termination provisions: (i) prior to June 30, 1999 no party has the right to terminate the Conversion and Settlement Agreement; (ii) as of and after the date Transpac and the related investors convert their debt, no party has the right to terminate the Conversion and Settlement Agreement; (iii) after June 30, 1999, so long as Transpac has not converted its debt into Series A Convertible Preferred Stock, Transpac has sole discretion on behalf of the related investor group to cancel the Conversion and Settlement Agreement by giving written notice to the Company; and (iv) if a voluntary or involuntary case against the Company is commenced under the United States Bankruptcy Code, or an assignment for the benefit of creditors by the Company is made, the Conversion and Settlement Agreement is terminated. 11 Conditions to Debt Conversion Before the debt conversion is completed, all of the following conditions must be complied with: (i) The completion of all of the Singapore Creditors conversions is subject to the completion of signed agreements between the Company and each of the Singapore Creditors upon terms and conditions which are not more favorable to any one creditor than the other creditors. Specifically, the effective price per share of the Series A Convertible Preferred Stock must not be less than $1.02 per share, and the terms and conditions of the settlement and release provisions for each of the Conversion and Settlement Agreements may not be different in any material respect for any of the Singapore Creditors. (ii) The Board must approve the material terms and conditions of the Conversion and Settlement Agreements for each of the Singapore Creditors. (iii) The holders of a majority of the Common Stock of the Company must approve the material terms and conditions of the Debt Conversion Transaction. (iv) The Certificate of Amendment of the Amended and Restated Articles of Incorporation must be approved by the Board and holders of a majority of the Common Stock of the Company. (v) L.H. Friend, Weinress, Frankson and Presson, Inc. must have issued the fairness opinion to the Company, which opinion must be satisfactory to the Company. Series A Convertible Preferred Stock to be Issued to Creditors The Conversion and Settlement Agreement sets forth the number of shares of Series A Convertible Preferred Stock of the Company each of the Singapore Creditors will receive upon the closing of the Debt Conversion Transaction which are set forth below: Transpac Capital Pte. Ltd. Transpac and the related investor group will receive 4,031,825 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 8,063,651 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment of the Amended and Restated Articles of Incorporation ("Certificate of Amendment"). Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of Transpac and of all other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999 (which would represent 18,725,555 shares of Common Stock for the Singapore Creditors as a group), and excluding Transpac and the related investors current stock ownership as set forth in the table "Security Ownership of Certain Beneficial Owners and Management" herein, Transpac and related the investor group would own approximately 27.26% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. Development Bank of Singapore, Ltd. DBS will receive 1,154,311 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 2,308,622 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of DBS and of all other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999 DBS would own approximately 7.80% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. 12 Motorola, Inc. Motorola will receive 869,932 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 1,739,865 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of Motorola and of all other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999, Motorola would own approximately 5.88% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. NS Electronics Bangkok, Ltd. NSEB will receive 271,176 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 542,353 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of NSEB and of all other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999, NSEB would own approximately 1.83% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. STMicroelectronics, Inc. Assuming the Debt Conversion Transaction is approved by the Shareholders, by virtue of the STM/FI Financial Agreement wherein FI Financial agreed to purchase the creditor position of STM for a cash payment of $500,000, FI Financial will own the creditor position of STM and has agreed to convert that creditor position into 1,322,647 shares of Series A Convertible Preferred Stock STM would have received if STM had participated in the Debt Conversion Transaction ("FI Financial Shares"). Because FI Financial has assigned portions of its interest under the STM/FI Financial Agreement to 11 employees including officers and a director and four other third parties, and may assign some or all of FI Financial's remaining interest under the STM/FI Financial Agreement to additional third parties (collectively "FI Financial Assignees"), the FI Financial Assignees will each receive a pro-rata share of the FI Financial Shares in proportion to their respective interests under the STM/FI Financial Agreement. The FI Financial Shares are initially convertible into 2,645,294 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the FI Financial Shares and all of the Series A Convertible Preferred Stock of all of the other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999, FI Financial and/or the FI Financial Assignees would own approximately 8.94% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. As explained in previous sections of this Consent Statement, as part of the Debt Conversion Transaction, FI Financial will surrender the STM Warrant without exercise, whereupon the STM Warrant will be terminated and will not have any further force or effect. Texas Instruments, Inc. TI will receive 1,056,026 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 2,112,053 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of TI and all of the other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999, TI would own approximately 7.14% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. Samsung Corning Co., Ltd. Samsung will receive 183,275 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 366,549 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of Samsung and all of the other Singapore Creditors in the Debt Conversion Transaction as of May 13 25, 1999, Samsung would own approximately 1.24% of the resulting total of 29,582,444 shares of outstanding Common Stock of the Company. Orix Leasing Singapore Ltd. Orix will receive 473,584 shares of Series A Convertible Preferred Stock of the Company. This Series A Convertible Preferred Stock is initially convertible into 947,169 shares of Common Stock of the Company, subject to adjustment as provided for in the Certificate of Amendment. Assuming conversion into Common Stock of all of the Series A Convertible Preferred Stock of Orix and all of the other Singapore Creditors in the Debt Conversion Transaction as of May 25, 1999, Orix would own approximately 3.20% of the resulting total of 29,582,444 shares of the outstanding Common Stock of the Company. Change in Control Assuming all of the Series A Convertible Preferred Stock of all of the Singapore Creditors is converted into Common Stock of the Company in connection with the Debt Conversion Transaction as of May 25, 1999, the Singapore Creditors (including FI Financial as the holder of the creditor position of STM) would collectively own approximately 63.29% of the resulting total of 29,582,444 outstanding shares of Common Stock of the Company. This percentage of Common Stock could enable the Singapore Creditors (including FI Financial as the holder of the creditor position of STM) to collectively exercise effective control over the business and affairs of the Company. As of May 25, 1999, the Company has no information which would lead it to believe that the Singapore Creditors intend to act collectively on matters concerning the business and affairs of the Company. The existing Shareholders of the Company will suffer substantial dilution to their respective share ownership positions of the Company if the Debt Conversion Transaction and the other proposals described herein are approved by the Shareholders. However, the Company strongly believes that approval of the Debt Conversion Transaction is the only way to avoid an imminent bankruptcy filing by the Company with the probable result that the Shareholders would not receive anything for their Common Stock because of the $27.56 million in Singapore Creditor claims. Release Provisions of Debt Conversion Transaction Once the Singapore Creditors (including FI Financial as the holder of the creditor position of STM) convert their debt, the debt owed by the Company in the aggregate amount of $27.56 million to the Singapore Creditors shall be deemed to be converted into the respective number of shares of the Company's Series A Convertible Preferred Stock set forth above. As of and after the date of conversion, the Company's debts to the Singapore Creditors shall be canceled, terminated and eliminated and the Company and the Singapore Creditors (including FI Financial) shall release and discharge each other from any and all claims, damages and causes of action relating to such debts. The releases do not apply to fraud or wilful misconduct. Also, the releases do not extend to the Conversion and Settlement Agreements, the Certificate of Amendment, the Registration Rights Agreement or the Warrants issued to Transpac. Prior Settlement Agreements Regarding Debt to Creditors During 1998, the Company negotiated the Restructuring Agreements with the Singapore Creditors, which generally provided that if certain sums of money were paid to the Singapore Creditors by certain dates, the Company would only have to pay a discounted percentage of the debts to each creditor to discharge and settle the debts. These Restructuring Agreements called for settlement payments of approximately $9.3 million to satisfy all debt obligations (approximately $27.1 million at the time) if substantially all of the full amount was paid by May 1, 1999. The Company was not able to pay the required amounts on the due dates and negotiated new 14 agreements with the Singapore Creditors, and the Conversion and Settlement Agreements replace these prior agreements. A summary of the terms of each of the prior Restructuring Agreements is provided below. Development Bank of Singapore, Ltd. On July 10, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with DBS ("DBS Agreement"). The DBS Agreement provided that the obligations of MPS guaranteed by the Company in the principal amount of $4.275 million for certain debt and $2.134 million under a credit facility, less other certain amounts, would be released and canceled upon the payment to DBS, within six calendar months of July 10, 1998, of $1,177,397, and also the payment of certain percentages of any net monetary proceeds from proposed litigation with IBM. Transpac Capital Pte. Ltd. and Related Entities. On April 22, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with Transpac Capital Pte. Ltd. and related entities ("Transpac Agreement") whereby the $9 million Transpac and the related investors had paid pursuant to a Convertible Loan Agreement dated March 26, 1996, which was guaranteed by the Company would be released and canceled upon certain payments and a stock issuance. These payments were: (1) the Company issued to Transpac warrants to purchase 500,000 shares of Common Stock at $1.00 per share; (2) within 6 calendar months of April 22, 1998, the Company would pay to the investors $3,112,462; (3) within 30 days of receiving any money from a proposed lawsuit against IBM, the Company would remit 30% of such proceeds to Transpac, net of expenses; (4) the Company also guaranteed Transpac, as agent for the investors, that it would receive certain additional amounts from the proposed IBM litigation subject to certain conditions. The agreement that Transpac and the related investors may receive certain monetary proceeds, if any, for a proposed lawsuit against IBM ("IBM Proceeds Agreement") is also a part of Transpac's and the related investors signed Conversion and Settlement Agreement. There can be no assurance any such lawsuit will be filed, or if filed that it would result in any monetary recovery for the Company. The IBM Proceeds Agreement is filed as Exhibit F to the Consent Statement, and the description of its terms and conditions is qualified in its entirety by Exhibit F. The joint release was subject to the payment of the above amounts. NS Electronics Bangkok Ltd. On July 9, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with NSEB ("NSEB Agreement"). The NSEB Agreement provided that the obligation of the Company in the original amount of $1.5 million plus interest, and the related loan and security agreements would be released and discharged upon the payment of $227,062 within six calendar months of July 9, 1998 and also provided a release of accounts receivable of $665,000 to MPS. Texas Instruments Singapore, Ltd. On April 24, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with TI ("TI Agreement"). The TI Agreement provided that the obligations of MPS guaranteed by the Company in the principal amount of $3.5 million, plus interest, and the related loan and security agreements would be released upon the payment by the Company to TI of $1,077,147 within six calendar months of April 24, 1998, as long as there were no proceedings for a voluntary or involuntary bankruptcy or an assignment for the benefit of creditors. In such event, TI would release MPI and its affiliates from the debt and MPI would release TI and its affiliates from any claims, damages and causes of action relating to the loan documents. CTM Electronics and Motorola, Inc. On July 1, 1998, the Company, CTM and Motorola signed a Forbearance, Restructure and Mutual Release Agreement ("Motorola Agreement"). Pursuant to the Motorola Agreement, the Company delivered to Motorola stock certificates representing all of the outstanding stock of MPA, CTM and MPS and proxies to vote. Also, MPI and Citicorp signed a Promissory Note pursuant to which Citicorp loaned $2,208,538 to Citibank N.A. Motorola has paid all amounts due to Citicorp and the Company is obligated under its indemnity to guarantee this amount. The note was amended four times between July, 1997 and January, 1998. As of March 28, 1998, the amount owed was $2,219,918 plus interest from that date. The Motorola Agreement provided that if the Company paid its obligations within six months of July 1, 1998 $887,331 both parties would release each other as long as the payment was made timely and no applicable bankruptcy proceeding had been commenced. Samsung Corning Co., Ltd. On May 19, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with Samsung ("Samsung Agreement"). The Samsung Agreement 15 provided that the $1 million loan plus interest, which was guaranteed by Samsung and co-guaranteed by the Company, would be released and canceled upon the payment of $150,000 within six calendar months of May 19, 1998. If such payment was not made within six calendar months of May 19, 1998, the payment required was $500,000. As long as there were no applicable proceedings for bankruptcy, then both parties would provide joint releases against the other for claims relating to the loan. Orix Leasing Singapore Ltd. On April 14, 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with Orix ("Orix Agreement"). The Orix Agreement provided that the obligations of the Company's affiliates which were guaranteed by the Company in the amount of $1,610,187 under the guarantees and related agreements would be released upon the payment of $483,056 within six calendar months of April 14, 1998, as long as there were no proceedings for a voluntary or involuntary bankruptcy or an assignment for the benefit of creditors. The Orix Agreement provided that upon timely payment joint releases for both parties would be executed. STMicroelectronics, Inc. In September 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement with STM ("STM Agreement"). The STM Agreement required the Company to pay STM $1,137,044 by May 1, 1999 to secure a joint release of all debts owed to STM, subject to the condition there be no bankruptcy proceedings pending or initiated against the Company. Summary of Principal Terms of Series A Convertible Preferred Stock The following is a summary of the rights, preferences and privileges of the Series A Convertible Preferred Stock and is qualified in its entirety by the Certificate of Amendment filed as Exhibit B to this Consent Statement. Voting Rights The holder of each share of Series A Convertible Preferred Stock has the right to one vote for each share of Common Stock into which the Series A Convertible Preferred Stock could be converted and shall have full voting rights equal to the holders of the Common Stock. In addition, as long as any shares of Series A Convertible Preferred Stock are outstanding, the holders of the Series A Convertible Preferred Stock voting as a separate series, with cumulative voting rights as among themselves, shall be entitled to elect one director. The holders of the Series A Convertible Preferred Stock and the Common Stock, voting together as a single class, shall be entitled to elect the remaining directors of the Company. Dividends The Series A Convertible Preferred Stock is entitled to dividends of $.0357 per share per annum out of assets legally available, when, as and if declared by the Board. The dividends are cumulative and are payable prior to the payment of any dividend or distribution on the Common Stock and participate in any dividends payable on the Common Stock. Under applicable California law, the Company must meet certain financial conditions before it can make any distributions of dividends. As of May 15, 1999, the Company could not legally make any distributions of cash dividends on the Series A Convertible Preferred Stock. Upon the conversion of the Series A Convertible Preferred Stock, any dividends payable with respect to the Series A Convertible Preferred Stock shall be converted into that number of shares of Common Stock determined by dividing the dividends payable by the conversion price. 16 Liquidation In the event of any liquidation, dissolution or winding up of the Company, the Series A Convertible Preferred Stock is entitled to receive at an amount per share equal to $1.02 for each outstanding share of Series A Convertible Preferred Stock, plus any declared but unpaid dividends before any distribution to the holders of the Common Stock. Redemption To the extent it may lawfully do so, the Company is entitled, in the sole discretion of the Board, to redeem all or any part of the outstanding shares of Series A Convertible Preferred Stock, upon not less than 20 and not more than 30 days prior notice, for the original issue price of $1.02 plus the amount of all declared but unpaid dividends. Any redemption for less than all of the outstanding Series A Convertible Preferred Stock shall be allocated pro rata among all the holders thereof. While any shares of the Series A Convertible Preferred Stock is outstanding, the Company cannot redeem any shares of Common Stock without the approval of a majority of the shares of Series A Convertible Preferred Stock. Conversion Each share of Series A Convertible Preferred Stock is convertible at the option of the holder at any time after the date of issuance and on or prior to the fifth day before the redemption date into such number of fully-paid and nonassessable shares of Common Stock as is determined by dividing the original issue price of $1.02 by the conversion price of $0.51 per share, as adjusted. Each share of Series A Convertible Preferred Stock is also automatically converted into shares of Common Stock at the conversion price then in effect, immediately upon the Company's receipt of the written consent of a majority of the shares of Series A Convertible Preferred Stock outstanding. The conversion price of the Series A Convertible Preferred Stock is subject to adjustment upon the occurrence of certain events and includes accrued and unpaid dividends. Protective Provisions So long as any shares of Series A Convertible Preferred Stock are outstanding, the Company will not, without first obtaining the approval of the holders of at least two-thirds of the then outstanding Series A Convertible Preferred Stock: (i) sell all or substantially all of the assets or merge into or consolidate with any corporation to effect any transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of; (ii) alter or change the rights, preferences or privileges of the Series A Convertible Preferred Stock; (iii) increase or decrease the number of authorized shares of Series A Convertible Preferred Stock; (iv) authorize or issue any other equity security senior to or on a par with the Series A Convertible Preferred Stock; 17 (v) redeem, purchase or otherwise acquire any share or shares of the capital stock of the Company, excluding the repurchase of Common Stock from employees, officers, directors, consultants or persons performing services pursuant to agreements providing for repurchase; (vi) amend or otherwise modify the Articles of Incorporation to change the rights, preferences or privileges of the Series A Convertible Preferred Stock; (vii) declare or pay any dividends on the Common Stock; (viii) declare or pay any dividends on the Series A Convertible Preferred Stock except for the fixed amount dividends; (ix) take any other action with respect to which holders of the Series A Convertible Preferred Stock are entitled to vote, as a separate class; or (x) reclassify any outstanding shares into shares having rights, preferences or privileges senior to or a parity with the Series A Convertible Preferred Stock. Registration Rights All of the eight creditors who are converting their debt into equity of the Company have been granted registration rights pursuant to Registration Rights Agreements which require the Company to register the underlying Common Stock with the Securities and Exchange Commission ("SEC"). The following summary of the applicable Registration Rights Agreements is qualified in its entirety by reference to the Form of Registration Rights Agreement which is set forth at Exhibit C to this Consent Statement. The Company is required to use its best efforts to register the Common Stock issuable upon conversion of the Series A Convertible Preferred Stock and any Common Stock issuable as a dividend or distribution subject to certain exceptions. The Company does not have to register the shares in the following situations: (1) if the holders propose to sell securities at an aggregate price of less than $1.5 million, provided the $1.5 million does not apply if the holders represent in writing they intend to dispose of at least 2 million shares of Common Stock of the Company; (2) within 120 days after the filing or effective date of any other registration statement filed pursuant to the Registration Rights Agreement; or (3) in any jurisdiction where the Company would have to execute a general consent to service of process. The Company is obligated to use its best efforts to file the registration statement no later than six months from the date of Shareholder approval of the Debt Conversion Transaction, to cause it to be effective within 45 days if it is a Form S-3 Registration Statement ("S-3"), and if it is not an S-3, to be effective within 90 days of the filing of another registration statement form. The Company must keep the registration statement effective for one year after it is declared effective by the SEC. The Company must pay all expenses of registration except for underwriting discounts and commissions. Principal Terms of Transpac Warrant In connection with the Restructuring Agreement dated April 24, 1998 with Transpac and the related investors, Transpac and the related investors received a warrant to purchase 500,000 shares of Common Stock of the Company ("Warrant") at an exercise price of $1.00 per share. The Warrant is exercisable on or after April 24, 1998 and until April 24, 2003. The number of shares purchasable under the Warrant is subject to adjustment upon certain events including stock splits, subdivisions or contributions of shares. Beginning April 24, 1999, holders of at least 50% of the shares of Common Stock issued or issuable 18 pursuant to the Warrant ("Warrant Shares") can demand the Company file a registration statement to register the Warrant Shares at the Company's expense. The Company, however, does not have to register the Warrant Shares if the holders sell the Warrant Shares for an aggregate price of less than $1.0 million; unless the holders sell at least 250,000 Warrant Shares. Upon completion of the Debt Conversion Transaction, the Company will amend the Warrant pursuant to the Conversion and Settlement Agreement with Transpac and the related investors to reduce the exercise price to $.50. Therefore, in addition to the 4,031,826 shares of Series A Convertible Preferred Stock which Transpac and the related investors will receive assuming the Debt Conversion Transaction is approved by the Shareholders, if Transpac elects to exercise the entire Warrant it could acquire an additional 500,000 shares of Common Stock of the Company. The Transpac Warrant and the amendment thereto are filed as Exhibit D to the Consent Statement and the foregoing description of its terms and conditions is qualified in its entirety by the Transpac Warrant at Exhibit D. Opinion of Financial Advisor At the meeting of the Microelectronic Packaging, Inc. ("MPI" or the "Company") Board on April 28, 1999, L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend") delivered its oral opinion, and later confirmed such opinion in writing that, as of April 28, 1999, the terms of the conversion of $27,556,801 of debt related to the Company's discontinued operations in Singapore as of March 31, 1999 (the "Debt") into shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") pursuant to the Debt Conversion and Mutual Settlement and Release Agreements (the "Agreements") between the Company and Transpac Capital Pte. Ltd., Texas Instruments Incorporated, Motorola, Inc., The Development Bank of Singapore Limited, FI Financial LLC, ORIX Leasing Singapore Limited, NS Electronics Bangkok (1993) Ltd. and Samsung Corning Co. Ltd. (the "Creditors") (collectively the "Transaction"), were fair, from a financial point of view, to the Company's shareholders. L.H. Friend did not materially participate in negotiations for the terms of the Transaction. No limitations were placed by the senior management of the Company with respect to the investigations made or the procedures followed by L.H. Friend in preparing or rendering its opinion. THE FULL TEXT OF THE OPINION OF L.H. FRIEND, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT H TO THIS CONSENT STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. MPI SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF L.H. FRIEND SET FORTH IN THIS CONSENT STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. L.H. FRIEND'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE TRANSACTION FROM A FINANCIAL POINT OF VIEW TO THE SHAREHOLDERS OF THE COMPANY AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW TO VOTE IN CONNECTION WITH THE CONSENT SOLICITATION. In rendering its opinion, among other things, L.H. Friend: (i) reviewed the Agreements between the Company and the Creditors; (ii) reviewed the draft Certificate of Amendment of Amended and Restated Articles of Incorporation dated April 29, 1999; (iii) reviewed the draft Registration Rights Agreements dated April 29, 1999 between the Company and the Creditors; (iv) reviewed the draft Transpac Warrant and Amendment No. 1 dated April 29, 1999; (v) reviewed the Agreement of Assignment of Interest under Letter Agreement with STMicroelectronics, Inc. between the employees and management of the Company and FI Financial LLC, dated April 21, 1999; (vi) reviewed the draft IBM Proceeds Agreement dated April 29, 1999; (vii) reviewed the Letter Agreement dated April 14, 1999 between FI Financial LLC and STMicroelectronics, Inc.; (viii) reviewed the Company's Annual Report to Stockholders on Form 10-K 19 for the fiscal years ended December 31, 1998, 1997 and 1996, and the Form 10-Q for the quarter ended March 31, 1999; (ix) examined certain operating and financial information and financial projections provided to L.H. Friend by the Company's management; (x) reviewed the historical market prices and trading volume of the Company's Common Stock; (xi) analyzed publicly available financial and market data regarding certain companies in the electronic component manufacturing industry and compared them to the Company's financial and market data; (xii) conducted limited interviews with certain members of the Company's management team; and (xiii) performed such other studies, analyses, inquires and investigations as L.H. Friend deemed appropriate. In rendering its opinion, L.H. Friend relied upon the accuracy and completeness of all financial and other information that was supplied to L.H. Friend and assumed that there has been no material change in the assets, financial condition and business prospects of the Company since the date of the most recent financial statements made available to L.H. Friend. With respect to financial projections for the Company, L.H. Friend assumed that such projections were reasonably prepared and reflect the best currently available estimates of the future financial results and conditions of the Company. The following is a summary of the analyses presented by L.H. Friend to the MPI Board on April 28, 1999 in connection with the rendering of the opinion: (i) Liquidation Analysis. L.H. Friend performed a Liquidation Analysis for the Company. The Liquidation Analysis is based on the latest available book value information provided by the Company's management with regards to assets and liabilities of its Singapore subsidiaries ("Singapore Entities"), CTM Electronics, Inc. ("CTM") and Corporate, San Diego ("MPI") (together, the "Subsidiaries"). In the Liquidation Analysis, L.H. Friend reviewed each major asset or liability category and assumed that, during a liquidation event, the Company would receive full book value on all trade accounts receivable and deposits, $500,000 on fixed assets and very minimal value for inventory and other miscellaneous assets. L.H. Friend further assumed that the Company would be liable for the full amount of its outstanding liabilities such as accounts payable, accruals and debt of discontinued operations. L.H. Friend also assumed the cost of liquidation to be $500,000. L.H. Friend calculated the Net Liquidation Proceeds (Shortfall) for the Subsidiaries and for the combined Company by subtracting the liquidation value of all outstanding liabilities from the liquidation value of all assets. The Net Liquidation Proceeds (Shortfall) for the Subsidiaries and for the combined Company are as follows: Singapore Entities -($29,183,000), CTM - $1,015,000, MPI - ($4,488,000) and total combined Company - ($33,156,000). (ii) Stock Trading History. L.H. Friend examined the history of the trading prices and volume of the Company's Common Stock for the period from January 1, 1998 to April 28, 1999. The analysis indicated that during the period from January 1, 1998 to April 28, 1999, the Company's Common Stock never closed above $0.88 per share, which is significantly below the price per share of Common Stock implied in the Transaction. (iii) Comparison with Selected Companies. L.H. Friend reviewed and compared selected historical stock market data and financial statistics for the Company to the corresponding data and statistics of four publicly traded companies in the electronic component manufacturing industry; including Flextronics International Ltd. ("Flextronics"), Aeroflex Incorporated ("Aeroflex"), HEI Inc. ("HEI") and Irvine Sensors Corporation ("ISC") (together, the "L.H. Friend Comparable Companies"). L.H. Friend also compared the Pro Forma data and statistics of the Company, giving effect to the 18,725,554 shares of the Company's Common Stock issuable under the Preferred Stock, to the corresponding data and statistics of the L.H. Friend Comparable Companies (the "Pro Forma Basis"). L.H. Friend examined certain publicly available financial data and statistics of the L.H. Friend Comparable Companies and the Company, including revenues, earnings before interest and taxes plus depreciation and amortization 20 ("EBITDA"), earnings before interest and taxes ("EBIT"), net income, earnings per share and the multiples of Total Enterprise Value (defined as the market value of the common equity, plus total debt, less cash and equivalents) to revenues, EBITDA and EBIT. In addition, L.H. Friend examined the Equity Value to Net Income multiples ("P/E Multiple"). All of the multiple comparisons were performed for the latest 12 months of reported results. The P/E Multiples were analyzed for the latest 12 months of reported results as well as for publicly available brokerage analysts' estimates of earnings per share for fiscal year 2000 for each company. The indicated mean and median Total Enterprise Value multiple ranges for the L.H. Friend Comparable Companies were 2.1 times and 1.5 times revenues, 13.9 times and 13.9 times EBITDA, and 21.3 and 21.3 times EBIT. The P/E Multiple mean and median values for the L.H. Friend Comparable Companies were 35.2 times and 35.2 times latest 12 months earnings per share and 19.8 and 15.0 times the fiscal year 2000 earnings per share. L.H. Friend then compared these multiples to Company's current multiples based upon actual Equity Value as of the date of the opinion as well as multiples derived on the Pro Forma Basis. Total Enterprise Value multiple ranges based on the Company's current stock price and the Pro Forma Basis were 1.5 times and 2.2 times revenues, 26.3 times and 38.1 times EBITDA and 50.1 and 72.5 times EBIT, respectively. The P/E Multiples base on current stock price and the Pro Forma Basis were 3.5 times and 58.8 times earnings per share for Fiscal Year 1998. With respect to the comparison with selected public companies, L.H. Friend noted that the Company was trading at multiples of profitability, including EBITDA, EBIT and earning per share, which were consistent with those of the L.H. Friend Comparable Companies as of the date of this opinion. In addition, L.H. Friend further noted that on the Pro Forma Basis, the same profitability multiples at the share price implied by the Transaction were significantly higher than those of the L.H. Friend Comparable Companies. (iv) Discounted Cash Flow Analysis. L.H. Friend performed a Discounted Cash Flow Analysis of the Company based on the projections provided by the management. L.H. Friend calculated the present values of the estimated free cash flows of the Company through the Fiscal Year ending December 31, 2003 and the estimated terminal value of the Company at the end of such date. In calculating the estimated terminal value, L.H. Friend utilized the mean and median EBITDA multiples of 4.0 times, 5.0 times, 6.0 times and 7.0 times EBITDA which were deemed reasonable by L.H. Friend for the purpose of this opinion. In calculating the present values of the estimated free cash flows and estimated terminal value, L.H. Friend assumed reasonable discount rates of 15.0%, 17.5%, 20.0% and 22.5%. The results from the Discounted Cash Flow Analysis implied a present Equity Value of between $11.8 million and $22.6 million, or $0.40 and $0.76 per share. The summary of the L.H. Friend presentation set forth above does not purport to be a complete description of the presentations made by L.H. Friend to Company management or its Board of Directors. L.H. Friend notes its belief that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all factors and analyses, could create a misleading view of the process underlying its opinion. In its analyses, L.H. Friend made certain assumptions with respect to industry performance, general business and economic conditions, and other matters, many of which are beyond the control of the Company. Any estimates contained therein are not necessarily indicative of actual values, which may vary significantly. Estimates of the relative financial values of the Company do not purport to be appraisals or necessarily reflect the prices at which the Company may actually be sold. L.H. Friend was selected by the Company's Board of Directors based on its qualifications, experience, expertise and reputation. As part of its investment banking business, L.H. Friend is regularly 21 engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other transactions. Pursuant to a letter agreement dated December 8, 1998, the Company has paid L.H. Friend a fee of $50,000 for rendering this opinion, and has agreed to reimburse L.H. Friend for its reasonable expenses incurred in connection with its engagement by the Company. The Company has also agreed to indemnify L.H. Friend and its directors, officers, agents, employees, affiliates and controlling persons against any losses, claims or liabilities to which L.H. Friend becomes subject to in connection with its rendering of services, except those that arise from L.H. Friend's gross negligence or willful misconduct. Vote Required and Recommendation for Approval The affirmative vote of a majority of the outstanding Common Stock is required to approve the Debt Conversion Transaction. The Board of Directors recommends the Shareholders vote FOR the approval of the Debt Conversion Transaction. See also "Certain Relationships and Related Transactions" for a discussion of any conflicts of interest that may have existed with respect to certain members of the Board of Directors during the time the board negotiated and approved the Debt Conversion Transaction. If the Company is unable to obtain Shareholder approval of the Debt Conversion Transaction at Proposal 1, it would result in a breach of one of the principal conditions to the Singapore Creditors' obligations to complete the Debt Conversion Transaction. The Conversion and Settlement Agreement contains a number of conditions which must happen before the Singapore Creditors must close and convert their debts, including that "...The material terms and conditions of the Transpac Conversion and other creditor conversions shall have been approved by MPI Shareholders, which approval shall be sought and obtained by MPI in accordance with all applicable laws." The failure of the Shareholders to approve the Debt Conversion Transaction would constitute a failure of a condition precedent to the performance of the Singapore Creditors, who would not be obligated to proceed under the current Conversion and Settlement Agreement. In that case, it is very likely the Company would seek protection under applicable bankruptcy laws. PROPOSAL 2 APPROVAL OF THE ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION WITH THE DEBT CONVERSION TO 11 EMPLOYEES INCLUDING OFFICERS, A DIRECTOR OF THE COMPANY AND THIRD PARTIES IN EXCHANGE FOR THEIR PAYMENT OF A CREDITOR CLAIM. Description of and Reasons for Proposal 2 As of March 31, 1999, the Company owed STM the principal amount of $4,000,000 and approximately $821,095 of accrued interest pursuant to a term note incurred in 1995 by MPS and guaranteed by the Company. In September 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement which required the Company to pay $1,137,044 to STM by May 1, 1999 in full satisfaction of all obligations owed. The Company was unable to raise the funding necessary to pay off the required amount by May 1, 1999 and attempted to renegotiate the debt and have STM convert the $4,000,000 principal amount plus accrued interest into the Series A Convertible Preferred Stock along with the other Singapore Creditors. STM would not agree to a debt conversion and required that a negotiated cash payment be made to eliminate their debt. 22 The Company located an investor, FI Financial, which agreed to purchase STM's creditor position for $500,000, subject to certain conditions described herein. FI Financial also agreed to allow employees of the Company including a director, officers and third parties to contribute toward the purchase of the STM creditor claim and to receive a pro-rata share of the Series A Convertible Preferred Stock that would otherwise be issued to STM in the Debt Conversion Transaction. FI Financial may also assign some or all of its remaining interest in the STM creditor position to additional third parties. FI Financial Agreement with STMicroelectronics, Inc. The Company negotiated with several parties during late 1998 and early 1999, and on April 14, 1999 STM signed the STM/FI Financial Agreement with FI Financial, which is principally owned by James Waring, a nominee for director of the Company, to assign its creditor position to FI Financial for $500,000. Mr. Waring is also a member of the law firm of Ross, Dixon & Bell, outside lawyers for the Company. Three members of Ross, Dixon & Bell have also agreed to contribute payments to FI Financial in exchange for their pro-rata share of the Series A Convertible Preferred Stock. Under the letter agreement, FI Financial must pay out of an escrow account $500,000 to STM by June 30, 1999 in exchange for a complete assignment of all of STM's rights, title, claims and interests under the agreements which gave rise to the original $4.0 million principal debt, plus accrued interest. The STM/FI Financial Agreement is filed as Exhibit G to the Consent Statement, and the description of its terms and conditions is qualified in its entirety by Exhibit G. STM and FI Financial also agreed pursuant to another letter agreement with the Company to the assignment of certain percentages of FI Financial's interest in STM's debt to employees, officers and a director of the Company, and to certain third parties. Principal Conditions to FI Financial's Obligations FI Financial's obligations to pay STM the $500,000 by June 30, 1999 under the agreement with STM is subject to the following principal conditions: (i) The Company has obtained Board of Director approval for the FI Financial transactions and the other Singapore Creditor debt conversions, and the issuance to FI Financial and its assigns of 1,322,647 shares of the Company's Series A Convertible Preferred Stock. (ii) STM has executed the Assignment Agreement with FI Financial and delivered a signed copy to the escrow agent. (iii) STM has delivered to the escrow agent the signed Warrant, a settlement agreement and the original debt agreements. In the event STM does not receive the $500,000 prior to June 30, 1999, the escrow account and the terms and conditions of the FI Financial letter agreement shall automatically terminate unless STM and FI Financial agree in writing to extend the term. Assignment of Portion of FI Financial's Interest in STMicroelectronics, Inc.'s Debt to Employees, Officers and a Director of the Company and Third Parties FI Financial agreed, pursuant to an Assignment of Interest Agreement in April and May, 1999 to assign a percentage interest in its interest in STM's debt to employees, officers and a director of the Company and other third parties. The assignees can obtain a pro-rata interest in the Series A Convertible Preferred Stock to be issued depending on their cash contributions. 23 Pursuant to the assignment, the assignees agree to authorize FI Financial to act as their agent in connection with the escrow account. The Assignment of Interest Agreement is filed as Exhibit E to the Consent Statement, and the description of its terms and conditions is qualified in its entirety by Exhibit E. To assist in enabling the Company to go forward with the Debt Conversion Transaction and demonstrate their commitment to the Company's future, the following employees, officers and a director and members of the Company's outside business law firm have agreed to contribute the amounts and to receive the number of shares of Series A Convertible Preferred Stock set forth below opposite their names:
Name Amount Relationship Number of Shares ---- ------ ------------ ---------------- 1. Andrew Wrobel $ 15,000 Chairman, President and 39,679 Chief Executive Officer 2. Denis Trafecanty $ 35,000 Senior Vice President and 92,585 Chief Financial Officer 3. Pete Hudson $ 15,000 Vice President, Technology 39,679 4. Dudley Westlake $ 5,000 Vice President, Sales and Marketing 13,226 5. Tim Sullivan $ 5,000 Vice President and Controller 13,226 6. Dale Feine $ 5,000 Director, New Business Development 13,226 7. Craig Iwami $ 20,000 Director, Operations 52,906 8. Don Hayashigawa $ 5,000 Manager, Design and Test 13,226 9. Ha Tran $ 40,000 Production Manager 105,812 10. Billy Nguyen $ 15,000 Test Supervisor 39,679 11. Mimie Doetkott $ 5,000 Production Manager 13,226 12. Van Haynie $ 25,000 Partner, Ross, Dixon & Bell 66,132 13. Miller, Boyko & Bell 401(k) Plan, FBO Van Tengberg $ 25,000 Partner, Ross, Dixon & Bell 66,132 14. Miller, Boyko & Bell 401(k) Plan, FBO Fletcher Paddison $ 25,000 Partner, Ross, Dixon & Bell 66,132 ======== ======= Total: $240,000 634,871 Shares
The shares of Series A Convertible Preferred Stock issued to the parties listed above also have the registration rights granted in the Registration Rights Agreement, Exhibit C, which is discussed in Proposal 1 under the heading "Registration Rights." Conditions to Purchase of Series A Convertible Preferred Stock by Employees, Officers, a Director of the Company and Third Parties Before FI Financial will purchase STM's debt and before the employees, officers, a director and the third parties will purchase any Series A Convertible Preferred Stock from FI Financial in connection with this Proposal 2, the Shareholders must approve the Debt Conversion Transaction at Proposal 1. In the event the Debt Conversion Transaction at Proposal 1 is not approved by the Shareholders pursuant to this Consent Statement, the Company will very likely seek protection under applicable bankruptcy laws. Vote Required and Recommendation for Approval The affirmative vote of a majority of the outstanding Common Stock is required to approve the purchase of the Series A Convertible Preferred Stock from FI Financial by the employees, officers, a director of the Company and third parties. If such Shareholder approval is not obtained, FI Financial may be unwilling to purchase the entire $500,000 creditor claim of STM, in which event the Company may 24 have to declare bankruptcy since it appears highly unlikely based on the Company's past dealings with STM that STM would be willing to renegotiate the debt owed. The Board of Directors recommends the Shareholders vote FOR the approval of Proposal 2. The Board believes that the employees', officers' and a director's contribution of their own money toward the purchase of the STM creditor claim to receive Series A Convertible Preferred Stock demonstrates a strong commitment to the Company and is in the best interests of the Company. The Board also believes that the purchase of such Series A Convertible Preferred Stock will encourage such individuals to remain as employees of the Company. PROPOSAL 3 APPROVAL OF VARIOUS AMENDMENTS TO THE COMPANY'S 1993 STOCK OPTION/STOCK ISSUANCE PLAN AS DESCRIBED HEREIN. Description of and Reasons for Proposal 3 On May 17, 1999, the Board of Directors approved, subject to Shareholder approval, amendments to the Company's 1993 Stock Option/Stock Issuance Plan ("1993 Plan") to effect the following changes: (i) increase the maximum number of shares of Common Stock authorized for issuance over the term of the 1993 Plan from 4,690,632 to 7,000,000 shares; (ii) increase the maximum number of options, stock appreciation rights and direct stock issuances to any one person per calendar year to 2,000,000 shares of Common Stock from 500,000 shares of Common Stock; and (iii) amend the Automatic Option Grant Program to increase the number of shares of Common Stock for which option grants are to be made to each new non-employee Board member from 15,000 to 40,000 shares and to increase the number of shares for which option grants are to be made annually to each continuing non-employee Board member from 10,000 to 30,000 shares. The 1993 Plan was adopted by the Board of Directors on December 9, 1993 and subsequently approved by the Company's Shareholders. The 1993 Plan is the successor to the Company's 1988 Stock Option Plan (the "Predecessor Plan"). As of May 25, 1999, options covering an aggregate of 2,178,853 shares of Common Stock were outstanding under the 1993 Plan, no shares of Common Stock had been issued under such plan, and 4,821,147 shares of Common Stock remained available for future option grants and stock issuances, assuming Shareholder approval of the increase to 7,000,000 shares of Common Stock underlying the 1993 Plan which forms part of this Proposal. The following is a summary of the principal features of the 1993 Plan, including the amendments which will become effective upon Shareholder approval of this Proposal 3. The summary, however, does not purport to be a complete description of all the provisions of the 1993 Plan. Any Shareholder of the Company who wishes to obtain a copy of the actual plan document may do so upon written request to the Chief Financial Officer of the Company at the Company's principal executive offices in San Diego, California. Plan Structure The 1993 Plan contains three separate equity incentive programs: (i) a Discretionary Option Grant Program, (ii) at an Automatic Option Grant Program and (iii) a Stock Issuance Program. The principal features of these programs are described below. 25 Administration As of March 31, 1999, the 1993 Plan is administered by the Board. The Board, as Plan Administrator, has complete discretion (subject to the provisions of the 1993 Plan) to authorize option grants and direct stock issuances under the 1993 Plan. In addition, the Board may appoint a committee, comprising two or more Board members, to act as Plan Administrator of the 1993 Plan with respect to individuals other than officers and directors of the Company who are subject to the short-swing profit trading restrictions of Section 16 of the Securities Exchange Act of 1934. All grants under the Automatic Option Grant Program are made in strict compliance with the provisions of that program and no administrative discretion is exercised by the Plan Administrator with respect to the grants made thereunder. Share Reserve A total of 7,000,000 shares of Common Stock (including the 2,309,368 shares subject to approval under this Proposal) has been reserved for issuance over the ten-year period of the 1993 Plan. Also proposed to be amended is the current provision which provides that, in no event may any one participant in the 1993 Plan be granted stock options and direct stock issuances for more than 500,000 shares in the aggregate per calendar year. In the event any change is made to the outstanding shares of Common Stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without the Company's receipt of consideration, appropriate adjustments will be made to the securities issuable (in the aggregate and to each participant) under the 1993 Plan and to each outstanding option. Eligibility Employees (including officers), non-employee Board members and consultants and independent advisors of the Company and its parent and subsidiaries are eligible to participate in the Discretionary Grant and Stock Issuance Programs of the 1993 Plan. Only non-employee members of the Board are eligible to participate in the Automatic Option Grant Program. As of March 31, 1999, three executive officers, four non-employee Board members and approximately 25 other employees were eligible to participate in the 1993 Plan. Valuation The fair market value per share on any relevant date under the 1993 Plan will be the average of the highest bid and lowest ask trading price per share on that date on the Nasdaq Electronic Bulletin Board, provided the Company timely files all reports required under the Securities Exchange Act of 1934, as amended. On March 31, 1999, the average of the highest bid and lowest ask trading prices per share was $0.355. Discretionary Option Grant Program Options may be granted under the Discretionary Option Grant Program at an exercise price per share not less than 85% of the fair market value per share of Common Stock on the option grant date. No granted option will have a term in excess of ten (10) years. Upon cessation of service, the optionee will have a limited period of time in which to exercise any outstanding option to the extent such option is exercisable for vested shares. The Plan Administrator will have complete discretion to extend the period following the optionee's cessation of service during which 26 such optionee's outstanding options may be exercised and/or to accelerate the exercisability or vesting of such options in whole or in part. Such discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee's actual cessation of service. The Plan Administrator is authorized to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) which have exercise prices in excess of the then-current market price of the Common Stock and to issue replacement options with an exercise price based on the market price of the Common Stock at the time of the new grant. The Plan Administrator does not intend to effect such a cancellation and regrant of outstanding options immediately following this Consent Solicitation. Automatic Option Grant Program Under the amended provisions of the Automatic Option Grant Program, each individual who is serving as a non-employee Board member and each individual who was appointed by the Board each year as a new non-employee Board member on such date, is granted on such date a non-statutory option to purchase 40,000 shares of Common Stock. Each individual who first becomes a non-employee Board member, whether through election by the Shareholders or appointment by the Board, will automatically be granted, at the time of such initial election or appointment, a non-statutory option to purchase 40,000 shares of Common Stock. On the date of each Annual Meeting, each individual who is to continue to serve as a non-employee Board member will automatically be granted a non- statutory option to purchase 30,000 shares of Common Stock. There will be no limit to the number of such 30,000-share option grants any one non-employee Board member may receive over his or her period of Board service. Each option will have at an exercise price per share equal to 100% of the fair market value per share of Common Stock on the option grant date and a maximum term of ten (10) years measured from the option grant date. Each option will become vested for the option shares in four (4) equal annual installments over the optionee's period of Board service, with the first such installment to become vested upon the completion of one year of Board service measured from the option grant date. The vesting of each automatic option grant will immediately accelerate upon the optionee's death or permanent disability or upon certain changes in the ownership or control of the Company. Upon cessation of Board service, the non-employee Board member will have a limited time to exercise his or her automatic options, but in no event may the option be exercised after the expiration date of the option term. Any shares not exercisable at the time of such cessation of Board service will terminate and cease to be outstanding. Stock Issuance Program Shares may be sold under the Stock Issuance Program at a price per share not less than 85% of the fair market value per share of Common Stock, payable in cash or through a promissory note payable to the Company. Shares may also be issued solely as a bonus for past services. The issued shares may either be immediately vested upon issuance or subject to a vesting schedule tied to the performance of service or the attainment of performance goals. The Plan Administrator will, however, have the discretionary authority at any time to accelerate the vesting of any unvested shares. 27 Acceleration In the event the Company is acquired by a merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation or replaced with a comparable option to purchase shares of the capital stock of the successor corporation will automatically accelerate in full, and all unvested shares under the Stock Issuance Program will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. Any options assumed or replaced in connection with such acquisition may, in the Plan Administrator's discretion, be subject to immediate acceleration, and any unvested shares which do not vest at the time of such acquisition may be subject to full and immediate vesting, in the event the individual's service is subsequently terminated within a specified period following the acquisition. The acceleration of vesting in the event of a change in the ownership or control of the Company may be seen as at an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of the Company. Financial Assistance The Plan Administrator may permit one or more participants to pay the exercise price of outstanding options or the purchase price of shares under the 1993 Plan by delivering a promissory note payable in installments. The Plan Administrator will determine the terms of any such promissory note. However, the maximum amount of financing provided any participant may not exceed the cash consideration payable for the issued shares plus all applicable taxes incurred in connection with the acquisition of the shares. Any such promissory note may be subject to forgiveness in whole or in part, at the discretion of the Plan Administrator, over the participant's period of service. Special Tax Election The Plan Administrator may provide one or more holders of options or unvested shares with the right to have the Company withhold a portion of the shares otherwise issuable to such individuals in satisfaction of the tax liability incurred by such individuals in connection with the exercise of those options or the vesting of those shares. Alternatively, the Plan Administrator may allow such individuals to deliver previously-acquired shares of Common Stock in payment of such tax liability. Amendment and Termination The Board may amend or modify the 1993 Plan in any or all respects whatsoever subject to any required Shareholder approval. The Board may terminate the 1993 Plan at any time, and the 1993 Plan will in all events terminate on December 8, 2003. Federal Income Tax Consequences Option Grants Options granted under the 1993 Plan may be either incentive stock options which satisfy the requirements of Section 422 of the Internal Revenue Code or non-statutory options which are not intended to meet such requirements. The Federal income tax treatment for the two types of option differs as follows: 28 Incentive Options. No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is generally recognized at the time the option is exercised. The optionee will, however, recognize taxable income in the year in which the purchased shares are sold or otherwise disposed of. For Federal tax purposes, dispositions are divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale or other disposition is made after the optionee has held the shares for more than two years after the option grant date and more than one year after the exercise date. If either of these holding periods is not satisfied, then a disqualifying disposition will result. If the optionee makes a disqualifying disposition of the purchased shares, then the Company will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal to the excess of (i) the fair market value of such shares on the option exercise date over (ii) the exercise price paid for the shares. In no other instance will the Company be allowed a deduction with respect to the optionee's disposition of shares purchased under incentive options. Non-Statutory Options. No taxable income is recognized by at an optionee upon the grant of a non-statutory option without a readily ascertainable fair market value. The optionee will in general recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and the optionee will be required to satisfy the tax withholding requirements applicable to such income. If the shares acquired upon exercise of the non-statutory option are unvested and subject to repurchase by the Company in the event of the optionee's termination of service prior to vesting in those shares, then the optionee will not recognize any taxable income at the time of exercise but will have to report as ordinary income, as and when the Company's repurchase right lapses, at an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses over (ii) the exercise price paid for the shares. The optionee may, however, elect under Section 83(b) of the Internal Revenue Code to include as ordinary income in the year of the exercise of the option at an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date over (ii) the exercise price paid for such share. If the Section 83(b) election is made, the optionee will not recognize any additional income as and when the repurchase right lapses. The Company will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the optionee with respect to the exercised non- statutory option. The deduction will in general be allowed for the taxable year of the Company in which such ordinary income is recognized by the optionee. Direct Stock Issuances The tax principles applicable to direct stock issuances under the 1993 Plan will be substantially the same as those summarized above for the exercise of non-statutory option grants. Accounting and Income Tax Treatment Deductibility of Executive Compensation. The Company anticipates that any compensation deemed paid by it in connection with disqualifying dispositions of incentive stock option shares or exercises of non-statutory options granted with an exercise price equal to the fair market value of the option shares at the time of grant will qualify as performance-based compensation for purposes of Internal Revenue Code Section 162(m) and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers of the 29 Company. Accordingly, all compensation deemed paid with respect to those options will remain deductible by the Company without limitation under Internal Revenue Code Section 162(m). Option grants or stock issuances with exercise or issue prices less than the fair market value of the shares on the grant or issue date will result in a compensation expense to the Company's earnings equal to the difference between the exercise or issue price and the fair market value of the shares on the grant or issue date. Such expense will be accruable by the Company over the period that the option shares or issued shares are to vest. Option grants or stock issuances made under the 1993 Plan with exercise or issue prices equal to 100% of the fair market value of the Common Stock will not result in any charge to the Company's earnings, but the Company must disclose, in footnotes to the Company's financial statements, the impact those options would have upon the Company's reported earnings where the value of those options are treated as a compensation expense. Whether or not granted at a discount, the number of outstanding options may be a factor in determining the Company's earnings per share. Conditions to Approval of Amendments to 1993 Stock Plan Before the amendments to the 1993 Stock Plan are effective, the Shareholders must approve the Debt Conversion Transaction at Proposal 1 and the purchase of the Series A Convertible Preferred Stock from FI Financial by the Company's employees and management at Proposal 2. In the event Proposals 1 and 2 are not approved by the Shareholders, Proposal 3 will be withdrawn. Vote Required and Recommendation for Approval The affirmative vote of a majority of the outstanding Common Stock is required to approve the amendments to the 1993 Plan. If such Shareholder approval is not obtained, then only the original 2,511,779 shares of Common Stock will be available for issuance under the 1993 Plan. In addition, if such Shareholder approval is not obtained, then the current limitation of grants of options and direct share issuances in any one year to one person of 500,000 shares will remain as well as the lesser number of shares to non-employee directors upon appointment and each year thereafter. In that event, the current management and employees will be unable to be granted options in excess of the currently-authorized number. The Board of Directors recommends the Shareholders vote FOR the approval of the amendments to the 1993 Plan. The Board believes that it is in the best interests of the Company to continue to have a comprehensive equity incentive program for the Company which will provide a meaningful opportunity for officers, employees and non-employee Board members to acquire a substantial proprietary interest in the Company and thereby encourage such individuals to remain in the Company's service and more closely align their interests with those of the Shareholders. PROPOSAL 4 APPROVAL OF GRANT OF OPTIONS TO PURCHASE 3,758,003 SHARES OF COMMON STOCK TO COMPANY EMPLOYEES, OFFICERS AND DIRECTORS PURSUANT TO AMENDED 1993 STOCK OPTION/STOCK ISSUANCE PLAN. Description of and Reasons for Proposal 4 On May 17, 1999, the Board of Directors approved, subject to Shareholder approval, the grant of options to purchase a total of 3,758,003 shares of Common Stock to approximately 33 employees, officers and directors under the 1993 Stock Plan as it is proposed to be amended in Proposal 3 herein. 30 Among other conditions, the grant of the options to these employees, officers and a director is subject to Shareholder approval of the amendments to the 1993 Stock Plan as discussed in Proposal 3 above. The reason for the grant of the additional options to the employees, officers and directors is to encourage them to remain in the employ of the Company if the Debt Conversion Transaction is approved because of the substantial dilution in their share ownership which will result from the Debt Conversion Transaction. As of May 25, 1999 and before the Debt Conversion Transaction, the Company had 10,856,890 shares of Common Stock outstanding. If the Debt Conversion Transaction is approved, and assuming conversion of the Series A Convertible Preferred Stock to Common Stock, there will be approximately 29,582,444 shares of Common Stock outstanding, or approximately 2.72 times the number of previously-outstanding shares. Accordingly, the employees, officers and directors of the Company who have continued to work with the Company, notwithstanding that it has faced bankruptcy, will be subject to substantial dilution of their stock ownership. Management believes that valuable employees may leave the Company if their options are not adjusted as set forth in this Proposal 4. To enable the employees, officers and directors to maintain their percentage interest in the Company after the Debt Conversion Transaction, each of the 33 employees, officers and directors who has been issued options will be issued an option to acquire Common Stock of the Company in an amount equal to 2.72 times the number of currently-outstanding shares subject to options. The options will be granted to the employees, officers and directors in accordance with the terms and conditions of the amended 1993 Plan. Based on the 1,913,853 shares of Common Stock which underlie options granted to employees, options to purchase an additional 3,758,003 shares of Common Stock will be issued to the employees if Proposal 4 is approved. Conditions to Issuance of Additional Options to Employees, Officers and Directors Before the grant of the options to purchase 3,758,003 shares of Common Stock to the 33 employees, officers and directors is effective, the Shareholders must approve the Debt Conversion Transaction at Proposal 1 and it must be completed, and the Shareholders must also approve Proposal 2 and the amendments to the 1993 Stock Plan as discussed in Proposal 3. In the event the Debt Conversion Transaction at Proposals 1 and 2 is not approved by the Shareholders pursuant to this Consent Statement, the grant of additional options to purchase 3,758,003 shares of Common Stock to the employees, officers and directors as set forth in this Proposal 4 will be withdrawn. Vote Required and Recommendation for Approval The affirmative vote of a majority of the outstanding Common Stock is required to approve the grant of options to purchase an additional 3,758,003 shares of Common Stock under the 1993 Plan to the 33 employees, officers and directors of the Company. If such Shareholder approval is not obtained, then only the original 2,511,779 shares of Common Stock available for issuance under the 1993 Plan before the proposed increase described in Proposal 3 will be available to be granted to the employees, officers and directors. In that event, the current management and employees will be substantially diluted by the shares of Common Stock which could be converted in connection with the Debt Conversion Transaction, which management believes is very likely to result in the loss of valuable employees. The Board of Directors recommends the Shareholders vote FOR the approval of the amendments to the 1993 Plan. The Board believes that it is in the best interests of the Company to continue to have a comprehensive equity incentive program for the Company which will provide a meaningful opportunity for officers, employees and non-employee Board members to acquire a substantial proprietary interest in 31 the Company and thereby encourage such individuals to remain in the Company's service and more closely align their interests with those of the Shareholders. PROPOSAL 5 APPROVAL OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION TO AUTHORIZE THE ISSUANCE OF THE SERIES A CONVERTIBLE PREFERRED STOCK TO THE CREDITORS, EMPLOYEES, AND A DIRECTOR OF THE COMPANY AND THIRD PARTIES IN CONNECTION WITH THE DEBT CONVERSION. Description of and Reasons for Proposal 5 The Articles of Incorporation currently authorize the Company to issue up to 50,000,000 shares of Common Stock and up to 10,000,000 shares of Preferred Stock. The Debt Conversion Transaction requires the authorization of the Series A Convertible Preferred Stock to be issued to the creditors in accordance with the Conversion and Settlement Agreement. This amendment to the Articles of Incorporation creates the Series A Convertible Preferred Stock to be issued to the creditors with the rights, preferences and privileges required by the creditors. The Proposal would cause 9,362,777 authorized shares of Preferred Stock to be designated as Series A Convertible Preferred Stock. The holders of shares of the Series A Convertible Preferred Stock would be entitled to voting rights, preferential dividends, preferences on liquidation and conversion rights as described in Proposal 1 under the heading "Summary of Principal Terms of Series A Convertible Preferred Stock" and as fully set forth in Exhibit B. In addition the Series A Convertible Preferred Stock is subject to redemption as provided in Exhibit B. The Company is limited by the proposed amendment of the Articles of Incorporation in its authority to sell substantially all of the assets of the Company, enter into any merger or consolidation, alter the rights of Series A Convertible Preferred Stock holders, issue additional stock with priority over or equal preference to the Series A Convertible Preferred Stock holders, or undertake certain other transaction, all as specifically described in Exhibit B. Background The Company currently has 60,000,000 authorized shares of stock, consisting of 50,000,000 shares of Common Stock, no par value and 10,000,000 shares of undesignated preferred stock. The proposed amendment of the Articles of Incorporation ("Proposal") would create a new class of 9,362,777 shares of preferred stock, no par value designated "Series A Convertible Preferred Stock." Assuming Proposal 5 is approved by the Shareholders, the 10,000,000 shares of undesignated preferred stock which is currently authorized will be eliminated. Series A Convertible Preferred Stock will be senior as to dividends and upon liquidation, dissolution or winding up to the Common Stock. The holders of Series A Convertible Preferred Stock will have voting rights equal to one vote for each share of Common Stock into which such Series A Convertible Preferred Stock could then be converted. Each share of Series A Convertible Preferred Stock is initially convertible into two (2) shares of Common Stock. However, the conversion ratio is subject to adjustment under specified circumstances. The Proposal The Company's Certificate of Incorporation shall be amended as set forth in Exhibit B, which has the effect of amending in full and restating Article III of the Amended and Restated Articles of Incorporation of the Company. 32 The full text of Article III as proposed to be amended is attached as Exhibit B to this Consent Statement. A Certificate of Amendment reflecting the foregoing amendments shall be filed with the Secretary of State of the State of California after the adoption of the Proposal by Shareholders. Conditions to Approval of Amended and Restated Articles of Incorporation Before the Certificate of Amendment of the Amended and Restated Articles of Incorporation is effective, the Shareholders must approve Proposal 1, the Debt Conversion Transaction, and Proposal 2, the purchase of the Series A Convertible Preferred Stock from FI Financial by the employees, officers and a director of the Company. In the event Proposals 1 and 2 are not approved by the Shareholders, Proposal 5 will be withdrawn and the Company will likely seek protection under applicable bankruptcy laws. Vote Required and Recommendation for Approval The affirmative vote of a majority of the outstanding Common Stock is required to approve the Certificate of Amended and Restated Articles of Incorporation authorizing the issuance of the Series A Convertible Preferred Stock. If Shareholder approval is not obtained, the Company will be unable to complete the Debt Conversion Transaction and will likely be forced to declare bankruptcy since the Company believes it is highly unlikely the Singapore Creditors will proceed without Shareholder approval. The Board of Directors recommends the Shareholders vote FOR the approval of the Certificate of Amendment of the Amended and Restated Articles of Incorporation. The Board believes that the issuance of the Series A Convertible Preferred Stock to the Sinagpore Creditors in exchange for such debts is in the best interests of the Company and the only viable way to avoid bankruptcy. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In November 1996, the Company entered into an agreement for consulting services with G&L Investments ("G&L") which established a consulting relationship with, among others, Lewis Solomon (former Chairman of the Board of Directors) and Gary Stein (a former Director). In exchange for consulting services, G&L, through an affiliate, received $15,000 plus reasonable expenses for each month that G&L provided services to the Company. On July 14, 1998, the Company notified G&L that their agreement for consulting services was terminated. In November 1996, the Company also entered into an agreement for consulting services with The Watley Group, LLC ("Watley") which employed Mr. Anthony Bryan (a Director), among others, pursuant to which Watley received $15,000 plus reasonable expenses for each month that it provided services to the Company. On January 16, 1998, the Company notified Watley that their agreement for consulting services was terminated. The Company has entered into an indemnification agreement with each of its directors. The Company and certain of its Shareholders entered into a registration rights agreement pursuant to which entities that may be deemed affiliated with greater than a five percent Shareholder were granted certain registration rights. Such agreement provides for indemnification by the Company for such persons. 33 In March 1996, pursuant to a subscription agreement, the Company consummated the sale and issuance of 842,013 shares of Common Stock (the "Transpac Shares") to Transpac at the purchase price of $2.37526 per share, for a total purchase price of $2,000,000 (the "Transpac Financing"). Transpac has board observer rights and the right to appoint a representative of Transpac to the Company's Board of Directors. Such right was exercised in August 1998 with the appointment of Mr. Wong to the Board of Directors of the Company. Mr. Wong is also a director and Executive Vice President of Transpac. In connection with the Company's subsidiaries in Singapore, which ceased operations in 1997, the Company fully guaranteed certain debt obligations. During 1998, the Company signed Restructuring Agreements with each of the Singapore Creditors, which called for settlement payments of approximately $9.3 million to satisfy all debt obligations. This included an agreement with Transpac which requires the Company to pay to Transpac $3.1 million by May 1, 1999, issue warrants to purchase 500,000 shares of the Company's Common Stock at $1.00 per share, and other provisions. Under the terms of the agreements, the indebtedness due to Transpac returns to the full $11.357 million if the payment of $3.1 million is not made by May 1, 1999. Because the Company has not been able to obtain funding to satisfy the settlement payment obligations, the Company renegotiated the terms and has executed a Conversion and Settlement Agreement with Transpac which calls for the conversion of all debt and accrued interest obligations into shares of the Company's Series A Convertible Preferred Stock, each share of which will be convertible into two shares of the Company's Common Stock. Such Series A Convertible Preferred Stock is ultimately convertible into 8,063,651 shares of the Company's Common Stock. The Conversion and Settlement Agreement further stipulates that the warrants issued to Transpac to purchase 500,000 shares of the Company's Common Stock at $1.00 per share be amended to reduce the exercise price to $0.50 per share. The Debt Conversion Transaction is subject to the completion of definitive agreements for all of the Singapore Creditors and the approval of the Debt Conversion Transaction by a majority of the outstanding Common Stock of the Company. The Company entered into the STM/FI Financial Agreement on April 14, 1999 with STM and FI Financial. Mr. Waring, a nominee to the Company's Board of Directors, is an officer of FI Financial. Under the terms of the STM/FI Financial Agreement, STM, a creditor of the Company, assigned its rights to a series of agreements with the Company to FI Financial. FI Financial, for consideration paid to STM of $500,000, will receive shares of the Company's Series A Convertible Preferred Stock, which shares would be convertible into 2,645,294 shares of the Company's Common Stock. The STM/FI Financial Agreement provides that the funds to be paid to STM are held in escrow until the completion of definitive agreements for all of the Singapore Creditors and the approval of the Debt Conversion Transaction by a majority of the outstanding Common Stock of the Company. The issuance of the Series A Convertible Preferred Stock is also subject to the same conditions. FI Financial subsequently entered into a series of Assignment of Interest agreements with a group of employees, officers, and a director of the Company and other parties, whereby these parties have collectively agreed to pay to FI Financial a total of $240,000 toward the purchase of the STM creditor claim in exchange for the right to receive a pro-rata portion of the Company's Series A Convertible Preferred Stock to be received by FI Financial. Under the terms of the Assignment of Interest agreements, this group of parties would receive shares of the Company's Series A Convertible Preferred Stock, which would be convertible into 1,269,741 shares of the Company's Common Stock. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, between the Company and its officers, directors, principal Shareholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 34 EXECUTIVE COMPENSATION AND RELATED INFORMATION Summary of Cash and Certain Other Compensation The following table provides certain summary information concerning compensation earned, for services rendered in all capacities to the Company and its subsidiaries, for the fiscal years ended December 31, 1998, 1997 and 1996, by all persons who served as the Company's Chief Executive Officer during 1998, and each of the other four (4) most highly compensated executive officers of the Company who earned more than $100,000 in compensation for the 1998 fiscal year (hereafter referred to as "Named Executive Officers").
Annual Compensation Long Term Compensation Awards Payouts Other Restricted Securities LTIP All Other Name and Salary Bonus Annual Stock Underlying Payouts Comp. Principal Position Year ($) ($) Comp./(1)/($) Award(s)($) Options (#) ($) ($)/(2)/ - ---------------------------------------------------------------------------------------------------------------------------------- Andrew K. Wrobel/(3)/ 1998 220,898 133,980 --- --- --- --- 3,015 Chairman, President and 1997 46,664 25,000 --- --- 600,000 --- 99 Chief Executive Officer 1996 --- --- --- --- --- --- --- Denis J. Trafecanty/(4)/ 1998 158,154 80,000 46,723/(5)/ --- --- --- 11,858 Senior Vice President 1997 149,414 35,000 28,798/(5)/ --- 300,000/(6)/ --- 5,102 and Chief Financial 1996 37,736 --- --- --- 50,000 --- --- Officer Timothy R. Sullivan/(7)/ 1998 117,335 59,583 --- --- --- --- 4,559 Vice President and 1997 97,741 20,000 --- --- 150,000 --- 21,612/(7)/ Controller 1996 --- --- --- --- --- --- --- Pete H. Hudson, Ph.D./(8)/ 1998 98,414 52,708 --- --- 75,000 --- 2,230 Vice President of 1997 --- --- --- --- --- --- --- Technology 1996 --- --- --- --- --- --- --- Dale Feine/(9)/ 1998 99,200 7,000 --- --- --- --- 3,984 Director of New 1997 107,800 25,000 --- --- 125,000 --- 4,481 Business Development 1996 --- --- --- --- --- --- ---
____________ (1) Other Annual Compensation for all other employees listed in the table is less than $50,000 and 10% of the total of annual salary and bonus for such individual. (2) All other compensation if comprised of (i) matching contributions made by the Company on behalf of the Named Executive Officer to its Section 401 (k) Plan and (ii) annual premiums paid for group term life insurance policies. Under such policies, the Named Executive Officer may designate the beneficiary of the insurance proceeds payable upon death. The amounts of the Company's matching contribution to its Section 401 (k) Plan and the life insurance premiums are set forth below: 35
Matching 401(k) Life Insurance Contribution ($) Premium ($) -------------------------------------- Andrew K. Wrobel.......... 1998 ---- 3,015 1997 ---- 99 Denis J. Trafecanty....... 1998 4,748 7,110 1997 4,360 742 Timothy R. Sullivan....... 1998 3,594 965 1997 1,650 112 Pete H. Hudson, Ph.D. .... 1998 1,652 578 1997 ---- ---- Dale Feine................ 1998 3,372 612 1997 3,744 737
(3) Mr. Wrobel was appointed as Chairman of the Board of Directors in January 1999. Mr. Wrobel was appointed President and Chief Executive Officer of the Company in October 1997. (4) Mr. Trafecanty was appointed as Chief Financial Officer of the Company in August 1996. (5) The Company provided a car allowance to Mr. Trafecanty of $6,000 for each of the 1998 and 1997, living expenses totaling $9,291 and $10,926 for 1998 and 1997 respectively, and reimbursed Mr. Trafecanty for the income tax impact of these and other benefits, which totaled $18,637 and $8,147 for 1998 and 1997 respectively. (6) Includes options for 50,000 shares granted on August 21, 1997 in exchange for the cancellation of an option for 50,000 shares originally granted on August 26, 1996 with an exercise price $4.00 per share. (7) Mr. Sullivan was appointed as Vice President and Controller of the Company in March 1997. The Company paid Mr. Sullivan $19,850 in connection with consulting services rendered to the Company during January and February 1997. These fees are included in the caption All Other Compensation. (8) Dr. Hudson became and employee of the Company on February 2, 1998. (9) Mr. Feine became an employee of the Company of January 3, 1997. Option Grants in Last Fiscal Year There were no stock option grants made to the company's Chief Executive Officer or any of the other Named Executive Officers during the fiscal year ended December 31, 1998. No stock appreciation rights were granted or exercised during such fiscal year. Aggregated Option Exercise and Fiscal Year-End Values No options were exercised by the Company's Chief Executive Officer or the other Named Executive Officers during the fiscal year ended December 31, 1998. The following table sets forth information concerning option holdings for such fiscal year with respect to the Company's Chief Executive Officer and each of the other Named Executive Officers. The fair market value of the Common Stock as the December 31, 1998 fiscal year-end was $0.15 per share, based on the average of the highest bid and lowest ask price as quoted on the OTC Bulletin Board. No stock appreciation rights were exercised or outstanding during such fiscal year. 36
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal Year-End (#) at Fiscal Year-End($) -------------------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------ Andrew K. Wrobel.......... 233,334 366,666 ----- ----- Denis J. Trafecanty....... 147,500 152,500 ----- ----- Timothy R. Sullivan....... 75,000 75,000 ----- -----
Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Company does not have a compensation committee, and the Board of Directors currently performs the functions of a compensation committee. No current executive officer of the Company has ever served as a member of the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of the company's Board of Directors. Mr. Wong is a director of the Company and Executive Vice President of Transpac. Transpac has entered into a Conversion and Settlement Agreement with the Company which calls for the conversion of all of its debts and accrued interest obligations to the Company into shares of the Company's Series A Convertible Preferred Stock, each share of which will be convertible into two shares of the Company's Common Stock. Such Series A Convertible Preferred Stock is ultimately convertible in 8,063,651 shares of the Company's Common Stock. The Debt Conversion Transaction is subject to the completion of definitive agreements for all of the Singapore Creditors and the approval of the Debt Conversion Transaction by a majority of the holders of the Company's Common Stock. Employment Contracts and Termination of Employment and Change in Control Arrangements Employment Agreement with Andrew K. Wrobel. Effective October 6, 1997, the Company entered into a one (1)-year employment agreement ("Agreement") with Andrew K. Wrobel. The terms of this Agreement shall automatically be extended, unless not less than one (1) year prior to the expiration date the Company shall have given written notice to Mr. Wrobel that the term of this Agreement shall terminate on the expiration date; or Mr. Wrobel, not less than thirty (30) days prior to the expiration date, elects to terminate this Agreement by delivering written notice of such desire to terminate to the Company. Under the terms of this Agreement, Mr. Wrobel is entitled to a base salary of not less than $220,000 per year, plus a minimum increase of six (6) percent of his base salary on each anniversary of the agreement. Mr. Wrobel is also entitled to receive a bonus equal to sixty percent (60%) of his then existing base salary, payable quarterly pro-rata upon the Company's achievement of the performance criteria set forth in the business plan to be prepared by Mr. Wrobel for the Company and approved by the Board. The Agreement also guaranteed Mr. Wrobel a stock option for 500,000 shares of the Company's Common Stock at the fair market value on the date of the Agreement ($0.43 per share). The options will become exercisable on an accelerated basis in the event of any acquisition of the Company by merger or asset sale, unless the options are assumed by the acquiring entity. Mr. Wrobel participates in all of the Company's employee benefit plans. In the event of his termination other than for cause, Mr. Wrobel is entitled to full acceleration of his options and a severance payment equal to one (1) year of his then current salary within five (5) business days of his termination plus twelve (12) months additional coverage under the Company's health, medical and dental plans. Change in Control Arrangements. The Board of Directors has the authority as Plan Administrator of the 1993 Plan to provide for the accelerated vesting of the shares of the Common Stock subject to outstanding options held by the Chief Executive Officer and the Company's other executive officers under 37 that plan in the event their employment were to be terminated (whether involuntarily or through a forced resignation) following an acquisition of the Company by merger or asset sale. In connection with a hostile change in control of the Company effected through a successful tender offer for more than 50% of the Company's outstanding voting stock or through a proxy contest for the election of Board members, the Plan Administrator has the discretionary authority to provide for automatic acceleration of outstanding options under the Discretionary Option Grant Program of the 1993 Plan and the automatic vesting of outstanding shares under the Stock Issuance Program. Board of Directors Report on Executive Compensation For the 1998 fiscal year, the Board of Directors was responsible for establishing the base salary and incentive cash bonus programs for the Company's executive officers and other key employees and administering certain other compensation programs for such individuals, subject in each instance to review and final approval by the full Board. The Board of Directors also had the exclusive responsibility during such year for the administration of the Company's 1993 Plan under which grants may be made to executive officers and other key employees. General Compensation Policy. The fundamental policy of the Board of Directors is to provide the Company's executive officers and other key employees with compensation opportunities based upon their contribution to the financial success of the Company and their personal performance. It is the Board of Directors's objective to have a substantial portion of each officer's compensation contingent upon the Company's performance as well as upon his own level of performance. Accordingly, the compensation package for each executive officer and key employee is comprised of three elements: (i) base salary which reflects individual performance, (ii) annual variable performance award payable in cash and tied to the Company's achievement of financial performance targets, and (iii) long-term stock-based incentive award which strengthen the mutuality of the interest between the executive officers and the Company's Shareholders. As an executive officer's level of responsibility increases, it is the intent of the Board of Directors to have a greater portion of his total compensation be dependent upon Company performance and stock price appreciation rather than base salary. Factors. For Andrew K. Wrobel, the Board of Directors followed the terms of his employment agreement with the Company in determining his compensation for 1998. That agreement specifies the compensation, subject to Board adjustment, that was paid to Mr. Wrobel during 1998. Several of the more important factors which the Board of Directors considered in establishing the components of the compensation packages for executive officers who do not have an employment agreement with the Company for the 1998 fiscal year are summarized below. Additional factors were also taken into account and the Board of Directors may, in its discretion, apply entirely different factors, particularly different measures of financial performance, in setting executive compensation for the future fiscal years. Base Salary. The base salary for each officer who does not have employment agreement with the Company is determined on the basis of the following factors: experience, personal performance and internal comparability considerations. The weight given to each of these factors differs from individual to individual, as the Board of Directors deems appropriate. Annual Incentive Compensation. Annual bonuses are earned by each executive officer primarily on the basis of the Company's achievement of certain corporate financial performance targets established for each fiscal year combined with the individual performance of such individual. Long-Term Incentive Compensation. Long-term incentives are provided through stock option grants. The grants are designed to align the interests of each executive officer with those of the 38 Shareholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant allows the individual to acquire shares of the Common Stock at a fixed price per share (the market price on the grant date) over a specified period of time (up to ten years). Each option generally becomes exercisable in installments over a two and one-half (2 1/2) or three (3)-year period, contingent upon the executive officer's continued employment with the Company or a subsidiary. Accordingly, the option will provide a return to the executive officer only if the executive officer remains employed by the Company during the vesting period, and then only if the market price of the underlying shares appreciates over the option term. The number of shares subject to each option grant is set at a level intended to create a meaningful opportunity for stock ownership based on the officer's current position with the Company, the base salary associated with that position, the size of comparable awards made to individuals in similar positions within the industry, the individual's potential for increased responsibility and promotion over the option term, and the individual's personal performance in recent periods. The Board of Directors also takes into account the number of vested and unvested options held by the executive officer in order to maintain an appropriate level of equity incentive for that individual. However, the Board of Directors does not adhere to any specific guidelines as to the relative option holdings of the Company's executive officers. In 1998, no Named Executives received an option grant. Such options are described in the Summary Compensation Table, in the column entitled "Long Term Compensation Awards--Securities Underlying Options" and in the "Option Grants in Last Fiscal Year" table. CEO Compensation. In setting the compensation payable to the Company's Chief Executive Officer, Mr. Wrobel, the Board of Directors followed the terms of the employment agreement that was previously negotiated between Mr. Wrobel and the Company and subsequently executed. In accordance with the terms of his employment agreement, Mr. Wrobel received a base salary of $220,898 in 1998. A cash bonus was earned by Mr. Wrobel for the 1998 fiscal year of $133,980 and on October 6, 1997, Mr. Wrobel was granted an option to purchase 500,000 shares of Common Stock (see "Employment Contracts and Termination of Employment and Change in Control Arrangements--Employment Agreement with Andrew K. Wrobel") to make a portion of his total compensation contingent on increased value for the Company's Shareholders; the option will have no value unless there is appreciation in the value of the Company's Common Stock over the option term. On November 4, 1997, Mr. Wrobel received an option to purchase an additional 100,000 shares of Common Stock. Compliance with Internal Revenue Code Section 162(m). As a result of Section 162(m) of the Internal Revenue Code, the Company will not be allowed a federal income tax deduction for compensation paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any fiscal year. This limitation applies to all compensation paid to the covered executive officers, which is not considered to be performance-based. Compensation that does qualify as performance-based compensation will not have to be taken into account for purposes of this limitation. Non-performance based compensation paid to the Company's executive officers for the 1997 fiscal year did not exceed the $1 million limit per officer, and the Board of Directors does not anticipate that the non-performance based cash compensation to be paid to the Company's executive officers for fiscal 1999 will exceed that limit. In addition, option grants and other awards made under the 1993 Plan prior to January 1, 1998 were structured so that any compensation deemed paid to an executive officer in connection with those awards will qualify as performance- based compensation which will not be subject to the $1 million limitation. However, any compensation deemed paid by the Company in connection with transactions relating to options or other awards granted during the 1999 fiscal year will have to be taken into account for purposes of the $1 million limitation. Because it is very unlikely that the compensation payable to any of the Company's executive officers in the foreseeable future will approach the $1 million limit, the Board of 39 Directors has decided at this time not to take any action to limit or restructure the elements of compensation payable to the Company's executive officers. The Board of Directors will reconsider this decision should the individual compensation of any executive officer ever approach the $1 million level. Dated as of April 20, 1999 Mr. Anthony J.A. Bryan Mr. Wong Lin Hong Mr. Andrew Wrobel Mr. Waldemar Heeb Mr. Frank L. Howland The Board of Directors report on executive compensation is not deemed filed with the Securities and Exchange Commission and is not incorporated by reference to any filing of the Company under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, whether made before or after the date of the Consent Statement and irrespective of any general incorporation language in any such filing. THE BOARD OF DIRECTORS DATED MAY __, 1999 40 ANNEX A RESOLUTION OF ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS OF MICROELECTRONIC PACKAGING, INC. WHEREAS, pursuant to the California Corporations Code, the Bylaws of this corporation and the attached Consent Solicitation Statement which is incorporated by this reference, it is deemed desirable and in the best interests of this corporation that the following actions be taken by the Shareholders of this corporation pursuant to this Written Consent: NOW, THEREFORE, BE IT RESOLVED that the undersigned Shareholders of this corporation hereby consent to, approve and adopt the following: 1. RESOLVED, the Shareholders approve the conversion of approximately $27.56 million in debt owed to eight creditors into Series A Convertible Preferred Stock of the Company and the amendment of one of the creditor's warrants to purchase Common Stock. [_] FOR [_] AGAINST [_] ABSTAIN 2. RESOLVED, the Shareholders approve the issuance of Series A Convertible Preferred Stock issued in connection with the debt conversion to 11 employees including officers, a director of the Company and third parties in exchange for their payment of a creditor claim. [_] FOR [_] AGAINST [_] ABSTAIN 3. RESOLVED, the Shareholders approve various amendments to the Company's 1993 Stock Option/Stock Issuance Plan to: (i) increase the number of shares of Common Stock authorized for issuance over the term of such plan by an additional 2,309,368 shares; (ii) amend the number of shares available for issuance under such plan for each person participating in any one calendar year to 2,000,000 shares; and (iii) amend the Automatic Option Grant Program to increase the number of shares of Common Stock subject to automatic option grants to be made to new and continuing non- employee Board members. [_] FOR [_] AGAINST [_] ABSTAIN 4. RESOLVED, the Shareholders approve the grant of options to purchase 3,758,003 shares of Common Stock to Company employees, officers and directors pursuant to the amended 1993 Stock Option/Stock Issuance Plan. [_] FOR [_] AGAINST [_] ABSTAIN A-1 5. RESOLVED, the Shareholders approve the Certificate of Amendment of the Amended and Restated Articles of Incorporation to authorize the issuance of the Series A Convertible Preferred Stock to the creditors, employees, officers, a director of the Company and third parties in connection with the debt conversion. [_] FOR [_] AGAINST [_] ABSTAIN RESOLVED FURTHER, that the officers of this corporation are, and each acting alone is, hereby authorized to do and perform any and all such acts, including execution of any and all documents and certificates, as said officers shall deem necessary or advisable, to carry out the purposes of the foregoing resolutions. RESOLVED FURTHER, that any actions taken by such officers prior to the date of the foregoing resolutions adopted hereby that are within the authority conferred thereby are hereby ratified, confirmed and approved as the acts and deeds of this corporation. This Written Consent shall be filed in the Minute Book of this corporation and become a part of the records of this corporation. THIS WRITTEN CONSENT, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS WRITTEN CONSENT WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5. DATED: _______________________________________ _______________________________________ Signature _______________________________________ Signature if Held Jointly _______________________________________ Number of Shares Please sign exactly as your name appears on your stock certificate. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee or guardian, please give full title as such. If the shares are owned by a corporation, sign in the full corporate name by the President or other authorized officer. If the shares are owned by a Partnership, sign in the name of the Partnership name by an authorized person. PLEASE MARK, SIGN, DATE AND RETURN THE WRITTEN CONSENT PROMPTLY USING THE ENCLOSED ENVELOPE OR FAX YOUR CONSENT TO DENIS TRAFECANTY AT MICROELECTRONIC PACKAGING, INC., (619) 292-7881, OR E-MAIL TO THE COMPANY AT DENIST@MPIX.COM. A-2 FINANCIAL INFORMATION OF MICROELECTRONIC PACKAGING INC. INDEX
Page(s) ------- Introduction.......................................................................... F-2 Pro Forma Unaudited Condensed Consolidated Balance Sheet as of March 31, 1999......... F-3 Pro Forma Unaudited Condensed Consolidated Statement of Operations for the Three Month Period Ended March 31, 1999 and the Fiscal Year Ended December 31, 1998...... F-4 Notes to Pro Forma Unaudited Consolidated Financial Statements........................ F-4 Financial Statements and Supplementary Data: Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998............. F-6 Quarterly Report on Form 10-Q for the Three Month Period Ended March 31, 1999...... F-33
F-1 PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements (the "Pro Forma Financial Statements") are based upon the historical consolidated financial statements of the Company. The historical financial information included in the Pro Forma Financial Statements represents the financial position and operations of the Company as previously reported by the Company in its Annual Report on Form 10-K for the year ended December 31, 1998 and its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. The Pro Forma Financial Statements reflect the effect of issuing 9,362,777 shares of Series A Preferred Stock in exchange for cancellation of debt and accrued interest totaling $27,557,000 as of March 31, 1999, and the recording of the gain on the forgiveness of such debt and certain related transactions. The pro forma unaudited condensed consolidated statements of operations for the year ended December 31, 1998 and for the three months ended March 31, 1999 give effect to this transaction as if it were consummated on January 1, 1998 and January 1, 1999, respectively. The pro forma unaudited condensed consolidated balance sheet as of March 31, 1999 gives effect to this transaction as if it were consummated on March 31, 1999. The pro forma adjustments are described more fully in the accompanying notes. The Pro Forma Financial Statements are presented for informational purposes only and do no purport to be indicative of the results of operations that actually would have been achieved had such transactions been consummated on the date or for the periods indicated and do not purport to be indicative of the results of operations for any future period. The Pro Forma Financial Statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. F-2 MICROELECTRONIC PACKAGING, INC. PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999
Amounts in Thousands ------------------------------------------------ Proforma After Adjustments Adjustment Historical (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 129 $ --- $ 129 Accounts receivable, net 1,130 --- 1,130 Inventories 2,742 --- 2,742 Other current assets 166 --- 166 - ---------------------------------------------------------------------------------------------- Total current assets 4,167 --- 4,167 Property, plant and equipment, net 1,654 --- 1,654 Other non-current assets 144 --- 144 - ---------------------------------------------------------------------------------------------- $ 5,965 $ --- $ 5,965 - ---------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 19 --- 19 Accounts payable 3,932 --- 3,932 Accrued liabilities 669 238/(1)(2)(3)/ 907 Debt and accrued interest of discontinued operations, in default, due on demand 27,557 (27,557)/(1)/ --- - ---------------------------------------------------------------------------------------------- Total current liabilities 32,177 (27,319) 4,858 Long-term debt, less current portion 45 --- 45 Commitments and Contingencies Shareholders' Equity (Deficit) Series A Preferred Stock --- 9,450/(1)/ 9,450 Common stock, no par value 40,162 121/(4)/ 40,283 Accumulated deficit (66,419) 17,748 (48,671) - ---------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) (26,257) 27,319 1,062 - ---------------------------------------------------------------------------------------------- $ 5,965 --- 5,965 - ----------------------------------------------------------------------------------------------
See accompanying notes for an explanation of the Proforma Adjustments. F-3 MICROELECTRONIC PACKAGING, INC. PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in Thousands Three Months Ended March 31, 1999 Year Ended December 31, 1998 --------------------------------------------------------------------------------------------------- Proforma After Proforma After Adjustments Adjustment Adjustments Adjustment Historical (Unaudited) (Unaudited) Historical (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- Net Sales $ 1,743 --- $ 1,743 $ 19,271 --- $ 19,271 Cost of goods sold 1,584 --- 1,584 14,714 --- 14,714 Gross profit 159 --- 159 4,557 --- 4,557 Selling, general and 546 --- 546 2,915 --- 2,915 administrative Engineering and product development 191 --- 191 1,060 --- 1,060 ------------------------------------------------------------------------------------------------------- Income (loss) from operations (578) --- (578) 582 --- 582 Other income (expense) Interest (expense), net (506) 502/(2)/ (4) (18) --- (18) Other income, net --- --- --- 179 17/(2)/ 196 ------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (1,084) 502 (582) 743 17 760 Provision for income taxes --- --- --- 18 --- 18 Estimated gain on disposal of discontinued operations --- --- --- 3,961 --- 3,961 ------------------------------------------------------------------------------------------------------- Income (loss) before (1,084) 502 (582) 4,686 17 4,703 extraordinary item Extraordinary item - gain on debt forgiveness --- $17,246/(1)(2)(3)(4)/ 17,246 --- 17,235/(1)(2)(3)(4)/ 17,235 ------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,084) $17,748 $ 16,664 $ 4,686 17,252 $ 21,938 Pro forma preferred stock dividends (84) (84) (334) (334) ------------------------------------------------------------------------------------------------------- Pro forma net income (loss) available to common shareholders $ (1,084) $17,664 $ 16,580 $ 4,686 16,918 $ 21,604 ======================================================================================================= Earnings per common share: Income (loss) from continuing operations $ (0.10) $ (0.06) $ 0.07 $ 0.04 Discontinued operations 0.36 0.37 Extraordinary item 1.59 1.58 ------------------------------------------------------------------------------------------------------- Net Income $ (0.10) $ 1.53 $ 0.43 $ 2.00 ======================================================================================================= Weighted average shares outstanding 10,857,000 10,857,000 10,818,000 10,818,000 ======================================================================================================= Earnings per common share- assuming dilution Income (loss) from continuing operations $ (0.10) $ (0.06) $ 0.07 $ 0.01 Discontinued operations 0.36 0.13 Extraordinary item 1.59 1.58 ------------------------------------------------------------------------------------------------------- Net Income $ (0.10) $ 1.53 $ 0.43 $ 0.72 ======================================================================================================= Weighted average shares outstainding 10,857,000 10,857,000 10,968,000 30,035,000 =======================================================================================================
F-4 Notes to Proforma Adjustments. 1. Reflects the issuance of 9,362,777 shares of Series A Convertible Preferred Stock in exchange for the cancellation of debt and accrued interest totaling $27,557 as of March 31, 1999, net of estimated expenses of issuance of such Preferred Stock of $100. 2. To reverse interest expense recorded for debt to be forgiven in exchange for the issuance of Series A Convertible Preferred Stock. 3. Reflects the gain on forgiveness of such debt, totaling $17,246 and $17,235 for the three months ended March 31, 1999 and December 31, 1998, respectively, net of income taxes of $154 and $148, respectively. 4. Reflects the cost of issuing stock options to non-employee directors, and repricing a warrant for 500,000 shares of Common Stock to one of the debt holders as part of their debt forgiveness, and the corresponding increase in common stock value. F-5 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1998 ----------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________________ to _____________________ Commission file number: 0-23562 MICROELECTRONIC PACKAGING, INC. (Exact name of Registrant as specified in its charter) California 94-3142624 ---------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 9577 Chesapeake Drive, San Diego, California 92123 -------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (619) 292-7000 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, no par value. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 26, 1999 was approximately $3,691,000 (based upon the closing price for shares of the Registrant's Common Stock as quoted by the OTC Bulletin Board for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On March 26, 1999, 10,856,890 shares of the Registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S ---------------------------------------------------------------------------- ANNUAL MEETING TO BE FILED WITH THE SEC ON OR BEFORE APRIL 30, 1999, -------------------------------------------------------------------- ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT ---------------------------------------------------------- ON FORM 10-K. ------------- F-6 PART I ------ ITEM 1. BUSINESS The following Business section contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K. Microelectronic Packaging, Inc. ("MPI") and its wholly-owned subsidiaries (collectively, the "Company") provide electronic manufacturing services (EMS) including surface mount, chip-on-board and mixed assembly microelectronic design, manufacturing, and testing capabilities. To support the requirements of electronic systems and integrated circuit manufacturers ("IC" or "semiconductor" manufacturers) the Company offers both turnkey manufacturing and kitted subassembly services featuring value added interconnect design and test capabilities in addition to contract assembly. MPI was incorporated in California in 1984. Headquartered in San Diego, California, with on-site manufacturing facilities, the Company designs, develops, manufactures, markets and sells to customers in the commercial, medical, military/aerospace, wireless/telecommunications, automatic test equipment and other electronics- related industries. MPI is a holding company with CTM Electronics, Inc. ("CTM") a California corporation, the primary operating unit. The Company's other US subsidiary, Microelectronic Packaging America ("MPA") is inactive. The Company's focus has been to expand its surface mount and chip-on board contract assembly business in San Diego. The Company has expanded its manufacturing capabilities and relocated to a larger facility that resulted in a doubling of production space. A new management team has been recruited and the Company has repositioned itself to more effectively serve what it believes is the large and growing contract assembly market to capitalize on the trends for electronic companies to outsource manufacturing. The Company's Singapore subsidiaries are in various stages of liquidation and are not consolidated in the Company's financial statements beginning in 1998. They are as follows: Microelectronic Packaging (S) Pte., Ltd. ("MPS"), MPC (S) Pte., Ltd. ("MPC"), Furnace Technology ("FT"), MPM (S) Pte., Ltd. ("MPM") and Microelectronic Packaging Asia Pte. Ltd. ("MP Asia"). MPS and MPM are currently being managed by a receiver and are in receivership. MPC ceased operations during 1997 and is in liquidation. FT is in liquidation. MP Asia was formed in 1997, has had no operating activities, and is being liquidated. The Company has not employed any persons in Singapore since July 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results -- Repayment of Debt Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on MPI -- Certain Obligations of MPS High Leverage." INDUSTRY OVERVIEW The Company believes that the electronic manufacturing services market is a very large and growing market. General industry trends for companies of all sizes are to outsource manufacturing and this, in the opinion of management, is resulting in growth rates for contract assembly being significantly higher than the growth rates for the electronic industries themselves. In recent years, advances in interconnection technology has allowed semiconductor companies and systems designers to increase the speed and complexity and reduce the size, power and prices of their products. Until recently, interconnection technology has not been considered a limiting factor in systems design and development. However, emerging electronic products in all market segments including wireless/telecommunication, medical, consumer, semiconductor related automatic test equipment and F-7 military aerospace telecommunications equipment require designs that the Company believes cannot always be done with conventional interconnection technology offered by internal manufacturing operations or traditional through-hole/surface mount contract assemblers. The increased reliance by IC and systems designers on interconnection solutions has created a new challenge and opportunity for the electronic packaging and interconnection industry to develop products that can effectively respond to customers' new requirements. Today's IC and system designers work together with interconnection designers and manufacturers in the early stages of product development. These products must accommodate constant reductions in size, increases in speed and complexity and the ability to handle the increased heat generated by more powerful systems. Today's conventional electronic systems are comprised of printed circuit boards ("PCBs") and single chip packages. The size, weight and speed of the electronic system is a function of the size, weight and performance of the fully assembled PCB. The PCB and the IC packages generally account for the majority of the size, weight and the limitations on speed of the system. Efforts to develop smaller, lighter and faster electronic assemblies have recently focused on improvements in IC packaging and interconnection technology. Manufacturers in the interconnection industry are evaluating technologies to support market driven requirements for reduced size and increased performance. Improvements in semiconductor and electronic interconnection technologies enable this continued reduction in size and cost with increasing performance for electronic systems. The convergence of market forces that include a general trend to outsource contract manufacturing at the same time that microelectronic technologies are replacing traditional through-hole/surface mount assembly technologies has created what the Company believes to be substantial business opportunities for those companies positioned to take advantage of these market trends. THE MPI SOLUTION The Company has expanded its focus in 1998 by offering products and services in direct response to both what it believes is the growing trend to outsource manufacturing and also the offering of design services that provide added value in terms of addressing smaller size, higher performance, improved thermal characteristics, plus lower materials and assembly costs. The Company differentiates itself from much larger competitors by offering "mixed assembly" services utilizing both surface mount and chip-on board electronic assembly. Chip-on-board (COB). The Company provides single or multi chip assembly services that mount IC die directly to laminate or ceramic substrates with passive components. The Company has historically derived the majority of its revenue from these activities. These services are offered to both the semiconductor integrated circuit suppliers (IC) and electronic systems companies. The Company designs and manufactures these assemblies that replace entire PCBs which are designed to reduce overall system size and increase performance. The Company also designs and manufactures multi-chip-modules (MCM) to interconnect multiple ICs, which the Company encloses in an advanced IC package. The advanced IC package with the enclosed MCM is then mounted onto a PCB. All of the Company's MCM products are designed to provide its customers with increased speed and performance and decreased size and weight. Surface Mount Technology (SMT). The Company provides SMT assembly including design for manufacturability that assists the Company's customers to better utilize their internal resources. Ball Grid Array (BGA), Flip chip, Chip Scale Packaging (CSP). The Company has acquired a license from Motorola to supply BGA packages and is developing capabilities for flip chip, CSP and other microelectronic packaging technologies based upon market demand. F-8 TURNKEY CONTRACT MANUFACTURING AND DESIGN SERVICES The Company offers complete Turnkey design, assembly and test services as a total solution for outsourced manufacturing. The Company believes these services provide customers with a cost-effective alternative to existing product design processes from internal operations or competitors of the company. To facilitate awareness of the company's manufacturing services. QuickTurn Turnkey manufacturing(TM) and QTM(TM) were established as unregistered trademarks. CUSTOMERS, APPLICATIONS AND MARKETS The Company believes the serviceable markets for the Company's services are extremely broad as the electronic content of nearly everything that is manufactured increases. Highly visible markets include wireless/telecommunications, medical, commercial/consumer, computer, automated test equipment (ATE), military/aerospace, and instrumentation. In 1998 the Company increased its investment in Sales and Marketing with the goal of expanding its customer base and participating in markets not previously served such as wireless, medical and automotive markets. The Company doubled the number of customers in 1998 from 5 to 12 and is focused on reducing its dependence on its largest customer, Schlumberger. There can be no assurance the Company will be successful in reducing its dependence on Schlumberger. Sales to Schlumberger accounted for 87%, 89% and 76% of the Company's net sales in 1998, 1997 and 1996 respectively. The majority of the Company's 1998 third and fourth quarter's sales were repair of Schlumberger's products rather than the manufacture of new products. This repair work continued into 1999. The Company furnishes chip-on- board multi chip modules (MCM) to this customer for automated test equipment usage. The Company's primary geographical market is North America for COB and SMT products. In 1998 95% of the Company's sales were to customers in North America. During 1998, 1997 and 1996 the Company had foreign net sales of $0, $90,000 and $1,785,000, respectively. In 1998, the Company began supplying to National Semiconductor in Singapore and Japan. Also in 1998, the Company launched a sales effort in Europe. The Company currently sells its services through a combination of its own direct sales for selected key accounts and use of independent sales representatives located in 18 field sales offices in North America and Europe. The Company can provide engineering, design and technical support to its sales staff and potential customers. LICENSE AND OTHER SIGNIFICANT AGREEMENTS The Company seeks to obtain licenses to technologies that complement and expand the current technologies that the Company owns. These agreements, along with certain other significant agreements of the Company, are discussed below. Motorola. In July 1998, the Company signed an agreement with Motorola for Ball Grid Array (BGA) and flip chip interconnect technologies. The company views this as a significant technology license that has already been instrumental in securing business from a new customer. The Company believes general industry chip packaging trends show substantial growth for BGA and flip chip packaging that replaces throughhole, PQFP and other forms of IC packaging. Schlumberger. In January 1998, the Company signed an agreement with Schlumberger. Pursuant to the terms of the agreement, MPI supplies MCM products to Schlumberger. The agreement includes warranty provisions, protection for raw materials purchased by MPI against production demand forecasts supplied by Schlumberger but subsequently changed, and pricing provisions. After March 31, 1998, there is no commitment from Schlumberger to purchase from the Company any amount or a minimum amount of MCM products. The pricing provisions of the agreement provide for periodic review of the selling prices of the Company's products. Such reviews can be requested by either the Company or Schlumberger. In 1998, the Company agreed to several pricing reviews and anticipates further declines in unit selling prices of selected products provided by the Company to Schlumberger. The agreement expires in October 2000. See "Liquidity and Capital Resources Reliance on Schlumberger-Legal Proceedings." International Business Machines Corporation. In August 1994, the Company entered into a multilayer technology transfer and licensing agreement with IBM (the "IBM Agreement") pursuant to which the Company was granted a license to specific technology developed by IBM for the manufacture of F-9 multilayer ceramic products. Under the terms of the IBM Agreement, the Company and MPM acquired a nonexclusive, nontransferable right to use the licensed technology to manufacture and sell certain specified products on a worldwide basis. In exchange for the license, the Company paid an up-front non-refundable royalty of $2,000,000, and was obligated to pay additional royalties based on sales of products incorporating the licensed technology during the term of the IBM Agreement, which was to remain in effect for a period of ten years from the date of execution and thereafter from year to year unless terminated by either party. Commencing in August 1996, the IBM Agreement was to be terminable by either party without cause upon six months prior written notice. In March 1997, the Company ceased its multilayer ceramic operations prior to the commencement of production and a Receiver appointed by the courts began the liquidation of MPM's assets. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchasing multilayer ceramic products from the Company were the principal reasons that the Company decided to liquidate MPM. All of MPM's Singapore employees have been terminated. MPM has been in receivership since March 1997, as defined under the laws of Singapore. The receiver for MPM has completed the liquidation of all of the MPM assets, and the proceeds therefrom have been used to retire a portion of MPM's debts. During 1998, the High Court of the Republic of Singapore ordered the Winding up of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the Company. As a result of this decision, MPM cannot continue as an operating business, and it cannot be allowed to dispose of its assets or incur further liabilities. In addition, the Company does not have any control over the management of MPM. This function is undertaken by the Receiver and Manager appointed by DBS Bank. Asian Creditor Loan Agreements Guaranteed by MPI. In connection with the Company's subsidiaries in Singapore, which ceased operations in 1997, the Company fully guaranteed the debt obligations listed below. During 1998, the Company signed agreements with each of these creditors, which called for settlement payments of approximately $9.3 million to satisfy all debt obligations. Because the Company has not been able to obtain funding to satisfy the settlement payment obligations, which are all due on May 1, 1999, the Company renegotiated the terms and, has recently entered into non-binding letter agreements with all eight creditors which call for the conversion of all debt and accrued interest obligations into shares of the Company's Series A Preferred Stock (See "Liquidity and Capital Resources" for general description of Series A Preferred Stock), each share of which will be convertible into two shares of MPI Common Stock. For the aggregate debt of $27,055,000, which is all the Discontinued Operations debt, the Company has agreed to convert this debt into shares of Series A Preferred Stock which is immediately convertible into shares of MPI Common Stock. This debt conversion into equity is subject to the completion of definitive agreements for all eight creditors and the approval of the debt conversion to equity by a majority of the Company's shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Future Operating Results -- Future Capital Needs; Need for Additional Financing -- Repayment of Debt Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on MPI -- High Leverage -- Status as a Going Concern." F-10 Transpac. On March 27, 1996, the Company and MPM consummated a financing with Transpac Capital Pte. Ltd. and other related investors (collectively, "Transpac") pursuant to which the Company issued 842,013 shares of its Common Stock to Transpac for the aggregate purchase price of $2,000,000 and MPM issued a debenture (the "Debenture") to Transpac in the principal amount of $9.0 million. The Debenture has a term of five years and bears interest at the rate of 8.5% per annum and is guaranteed by MPI. Accrued and unpaid interest is due and payable in annual installments at the end of each year of the term of the Debenture. The principal outstanding under the Debenture will be due and payable in full at the end of the five year term. However, from and after April 23, 1997 and through the term of the Debenture, the Debenture will be convertible at Transpac's option into shares of Common Stock of MPM or Common Stock of MPI. The Company has not made any payments under the Debenture. In February 1999, the Company and Transpac signed a non-binding letter agreement which calls for the conversion of all the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. STMicroelectronics, Inc. In 1995, MPS borrowed $4,000,000 from STMicroelectronics ("ST") at an interest rate of 7.25% per annum. MPS did not make any principal payments, and only made limited interest payments. The note was fully guaranteed by MPI. In September 1998, the Company signed a Restructuring, Settlement and Mutual Release Agreement which requires the Company to pay $1,137,044 by May 1, 1999 as full satisfaction of all obligations to STMicroelectronics. And, on April 14, 1999, ST signed a Letter of Intent with a group of outside investors ("Investor") to assign its creditor position for undisclosed consideration. This Letter of Intent is subject to the Company obtaining approval of the debt conversion to equity by a majority of the Company's shareholders. In anticipation that this assignment will be completed, the Investor has signed a non-binding letter agreement which calls for the conversion of all the Company's obligations to ST into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. Texas Instruments ("TI"). In 1995, MPS borrowed $3,500,000 from TI at an interest rate of 7.25% per annum. The note is fully guaranteed by MPI. The Company entered into several amended loan agreements during 1997 and 1998; however, the Company was unable to meet the terms of those agreements. In January 1999, the Company and TI signed a non-binding letter agreement which calls for the conversion of all of the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. Development Bank of Singapore ("DBS Bank"). In 1997 and prior, MPS, MPM and MPC made various borrowings from DBS Bank under lines of credit, overdraft facilities and accounts receivable financing. Substantially all of the assets of MPS and MPM have been liquidated by the Receivers and Managers, and the proceeds from those liquidations were used to reduce the balances owed to DBS Bank. MPC has paid its loan to DBS Bank and is in voluntary liquidation. The remaining balances due to DBS Bank are in default, are payable upon demand, and bear interest at the banks prime rate plus 5%. All of these amounts are guaranteed by MPI. In February 1999, the Company and DBS Bank signed a non- binding letter agreement which calls for conversion of all of the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. Motorola, Inc. In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an interest rate of 7%. The loan was guaranteed by Motorola and was eventually paid in full by Motorola. This obligation to Motorola is secured by all of the assets of MPI, CTM and MPA not previously pledged to NSEB, as well as all capital stock of MPS, CTM and MPA. In January 1999, the Company and Motorola signed a non- binding letter agreement which calls for the conversion of all the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. F-11 ORIX Leasing ("ORIX"). In 1996 and earlier, MPM, and to a lesser extent MPS, borrowed approximately $2,600,000 under capital leases from ORIX. Both MPM and MPS stopped making lease payments, and ORIX foreclosed on the equipment and sold it at an auction in 1997. The balance remaining after the liquidation of the leased assets is guaranteed by the Company. In January 1999, the Company and ORIX signed a non-binding letter agreement which calls for the conversion of all the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. NS Electronics ("NSEB"). In 1995, MPI borrowed $1,500,000 from NSEB at an interest rate of 14% per annum. The Company has made no principal payments since September 1996 and the loan is in default. The NSEB note is secured by all of MPI's domestic equipment and trade receivables that are not subject to liens or other encumbrances existing prior to May 30, 1995. In March 1997, the Company entered into an Amended Loan and Security Agreement and a Second Secured Promissory Note with NSEB pursuant to which NSEB agreed to waive any breach of the covenants, terms and conditions of the original Loan and Security Agreement and the original Secured Promissory Note (both dated May 30, 1995) and agreed to a revised (and extended) payment schedule. The interest rate on the outstanding balance, however, was raised from 14% per annum to 18% per annum and MPI is currently in default under the terms of the Second Secured Note. In February 1999, the Company and NSEB signed a non-binding letter agreement which calls for the conversion of all of the Company's agreed obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. Samsung Corning Co., Ltd ("Samsung"). In 1996, MPS borrowed $1,000,000 from DBS Bank at the Singapore Interbank offer interest rate plus 1.5%, repayable in twelve monthly installments beginning in November 1996. The loan had been fully guaranteed by Samsung, and co-guaranteed by MPI. MPS made payments under the note totaling approximately $417,000 during 1996 and 1997. The remaining balance of approximately $583,000 plus interest, was paid to DBS by Samsung Corning after DBS has called upon the guarantee of Samsung. Samsung has requested that MPI reimburse it for the amount paid under the guarantee. In March 1999, the Company and Samsung agreed to a non-binding settlement of all of the Company's obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this section. ENGINEERING AND PRODUCT DEVELOPMENT The Company provides design, assembly and test services and features engineering and product development as a differentiating service over its competitors. In 1998, the Company added the position of Vice President of Technology and increased its expenditures for engineering and product development. The Company works closely with its customers to develop expertise in new electronic assembly and packaging technologies based upon market demand. Primary focus in 1998 was on process engineering for chip-on-board and surface mount technologies including ball grid array and "flip chip" interconnect processes. In addition, the Company invested in flexible substrate and low temperature cofired ceramic substrate packaging technology, projected to be of increased demand in 1999 for commercial and wireless products. The Company also uses outside services for x-ray, surface analysis and ultrasonic imaging, as well as specialized design such as ASIC design, to supplement its internal capabilities. Engineering and product development expenditures were approximately $1,060,000, $760,000 and $666,000 in 1998, 1997 and 1996, respectively. MANUFACTURING, SUPPLIERS AND TOTAL QUALITY PROGRAM The Company believes that its ability to manufacture its products in a timely and cost effective manner at the highest quality level is essential in order to be competitive in its markets and achieve its growth objectives. The Company's manufacturing facilities in San Diego, California include design and prototype facilities and a production capability. The Company intends to support high volume requirements for its MCM products partially through offshore subcontract manufacturing and assembly agreements. F-12 The Company believes that total quality management is a vital component of customer satisfaction and internal productivity. The Company maintains a system of quality control and documentation with respect to each of its manufacturing processes. The Company maintains a supplier quality program that includes qualification, performance measurement and corrective action requirements. The Company chooses its suppliers based on quality, delivery, service and price. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. In particular, MCMs that are provided to Schlumberger contain components which are provided solely by Schlumberger to the Company on a consignment basis. Under the Company's current arrangement with Schlumberger, the Company would be unable to supply Schlumberger with MCMs if Schlumberger were to cease supplying the Company with such components. In such event, the Company's ability to continue as a going concern would be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results and -- Sole or Limited Sources of Supply." The Company is subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. To date, compliance with such regulations has not had a material adverse effect on the Company's capital expenditures or results of operations. The Company is currently a party to certain ongoing environmental matters. See "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Operating Results and -- Environmental Regulations." BACKLOG In the first quarter of 1998, the Company experienced a "bubble" in demand from its primary customer, Schlumberger, resulting in a backlog. As of December 31, 1997, the Company's backlog was $11.3 million. During 1998, there was a substantial drop in demand for ATE equipment caused by a very weak semiconductor market. As of December 31, 1998, the Company has a backlog of approximately $1.5 million. Because the Company generally ships products within 60 to 120 days of receipt of the order, and because of possible changes in delivery schedules, cancellations or rescheduling of orders and potential delays in product shipments, the Company's backlog at any particular date is not representative of actual sales for any succeeding period. COMPETITION The top ten competitors in the electronic manufacturing services ("EMS") market represented an aggregate annualized revenue of $17.5B in 1997 with projected growth in 1998 to exceed 20% (sources: Manufacturing Market Insider and Technology Forecasters, Inc., respectively). These global companies are primarily focused on services the needs of the very large international electronics companies that do not require chip-on-board thus MPI does not believe these large companies are direct competition. The Company strives to differentiate itself from other EMS competitors by focusing on flexibility and customer service based upon concurrent engineering to provide design expertise to meet physical size, thermal management, and solve performance issues that may be beyond the internal capabilities of the customer resources. In 1998, MPI's primary customer (Schlumberger) developed second sources for the products previously provided exclusively by MPI. As a result the Company faces intense competition for the Schlumberger business from Natel Engineering and VLSI Packaging. In response, the Company launched programs aimed at quality improvement, manufacturing cycle time reduction, and cost reduction and believes that it provides equal or superior services that should enable the Company remain as a qualified supplier to this key customer. Since the Company believes there is such a large market (estimated to be as large as $95B), there are a large number of companies that are potential competitors of the Company. These include Flextronics, AVEX, Maxtek, F-13 Aeroflex, HEI, SCI, and others. There are also "off shore" competitors such as AMKOR in Korea and Tong Tshing in Taiwan. For any particular customer, small local companies offer potential competition. Halcyon, a very small privately held company, became a competitor as a second source in 1998. See "Management's Discussion and Analysis -- Future Operating Results -- Highly Competitive Industry; Significant Price Competition." INTELLECTUAL PROPERTY RIGHTS The Company believes that the success of its business depends more on the technical competence, creativity and marketing abilities of its employees, rather than on patents, trademarks and other intellectual property rights. Nevertheless, the Company has a policy of seeking patents as appropriate on inventions resulting from its ongoing engineering and product development activities. In addition, the Company has acquired intellectual property rights through business acquisitions and technology licenses. The Company owns five United States patents. The Company has permitted two of these to lapse through non-payment of renewal fees. The other three expire beginning in February 2002 through July 2010. In addition, the Company owns three foreign patents, which expire beginning in May 1999 through March 2009, and eleven foreign patent applications are currently pending. The Company owns one registered United States trademark. The Company continuously seeks to protect its intellectual property through proper documentation and protective marketing of designs and concepts. The Company views trademarks as an element of a marketing strategy to increase awareness for the Company's services. The first marketing trademark adopted is "QuickTurn Turnkey Manufacturing" and "QTM". These are being used as unregistered trademarks at this time and therefore the Company does not have certain presumptive legal rights granted by a federal trademark registration. The Company will continue to seek opportunities to differentiate itself with the use of trademarks. There can be no assurance that any of the Company's issued patents will provide it with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design around the patents issued to the Company. In addition, the Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets. EMPLOYEES As of December 31, 1998, the Company had a total of 98 employees, including 71 engaged in manufacturing, 10 in engineering and product development, and 17 in sales, marketing and administration (including its executive officers). All of the Company's employees are located in the United States. None of the Company's employees are represented by a labor union, and the Company has not experienced any work stoppages. The Company considers its employee relations to be good. EXECUTIVE OFFICERS AND KEY EMPLOYEES The Company's executive officers and key employees, and their ages as of March 23, 1999, are:
Name Age Position - ---- --- -------- Andrew K. Wrobel 47 Chairman of the Board, President and Chief Executive Officer Denis J. Trafecanty 56 Senior Vice President and Chief Financial Officer and Secretary Timothy R. Sullivan 42 Vice President and Controller Dudley E. Westlake 53 Vice President, Sales and Marketing Pete Hudson, Ph.D. 58 Vice President, Technology Craig Iwami 36 Director of Operations
F-14 Andrew K. Wrobel, age 47, has served as the Chairman, President and Chief Executive Officer of the Company since January 1999. Prior to that, Mr. Wrobel was President, Chief Executive Officer and Director of the Company since October 1997. From 1988 to 1997, Mr. Wrobel served as Chairman, President and Chief Executive Officer of GIGATEK Memory Systems, Inc., a manufacturer of computer disk drives. Prior to 1988, Mr. Wrobel was Vice President of Technology for Carlisle Memory Products Group and Vice President of Engineering for Data Electronics, and held various management positions in Marketing and Engineering at Texas Instruments and BASF. Mr. Wrobel holds a Masters degree from the Massachusetts Institute of Technology. Denis J. Trafecanty, age 56, joined the Company in August 1996 as its Vice President and Chief Financial Officer and Secretary. In March 1997, he was promoted to Senior Vice President, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Trafecanty was the Vice President and Chief Financial Officer for Tandon Magnetics/Tandon USA, a manufacturer and distributor of personal computers and a distributor of computer hard disk drives, from September 1995 to August 1996. From December 1984 to August 1995, he was Vice President and Chief Financial Officer for Tandon Corporation (renamed TSL Holdings, Inc. in 1993), a manufacturer and distributor of personal computers and peripheral equipment. Mr. Trafecanty holds a B.A. degree in Accounting from Loyola-Marymount University. Timothy R. Sullivan, age 42, has served as Vice President and Controller of the Company since March 1997. Prior to joining the Company and since 1995, Mr. Sullivan was Chief Financial Officer of InteleTravel International, a wholesale provider of consumer travel-related products. From 1987 to 1995, Mr. Sullivan was Chief Financial Officer of Uni-Vite, Inc., a distributor of consumer products. Mr. Sullivan holds a B.S. degree in business administration from University of Southern California. Craig Iwami, age 36, joined the Company in May, 1998 as Manufacturing Engineering Manager. In September, 1998 he was promoted to Director of Operations. Prior to joining the Company, Mr. Iwami served as Department Manager at the Microelectronics Circuits Division of Raytheon Defense Systems, formerly known as Hughes Aircraft Company, from June, 1987 to May, 1998. Mr. Iwami received B.S. degree in engineering at California State University Long Beach. Pete H. Hudson, Ph.D., age 58, joined the Company in February, 1998 as Vice President of Technology. Prior to joining the Company, Dr. Hudson held various management positions in Manufacturing, Engineering and Assembly at Hughes Aircraft Corporation from June, 1984 to January, 1998. Dr. Hudson holds a Ph.D. in Electrical Engineering from Stanford University, B.S. and M.S. degrees in Electrical Engineering from University of Arizona. Dudley E. Westlake, age 53, joined the Company in April, 1998 as Vice President of Sales and Marketing. Prior to joining the company, Mr. Westlake was President and CEO of MSR Development Corporation since 1994. He previously served as Director of Marketing at Iomega Corporation from 1991 to 1994 and has prior sales and marketing experience with Rockwell International Semiconductor Division. Mr. Westlake holds an MBA and a B.S. in Engineering from California State Polytechnic University, Pomona, California. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in San Diego, California. This leased facility totals approximately 25,000 square feet and is used for corporate administration, design, engineering, manufacturing and sales operations. The lease on this facility expires in November 2002 and the Company F-15 has an option to renew for five years at the then fair market rent. The Company pays approximately $18,000 per month with respect to this facility. ITEM 3. LEGAL PROCEEDINGS In May 1995, the United States Environmental Protection Agency ("EPA") issued written notice to all known generators of hazardous waste shipped to a Whittier, California treatment facility. The EPA notice indicated that these generators (including the Company) were potentially the responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The notice requires all of the generators of this waste to take immediate actions to contain and prevent any further release of hazardous substances at the site. In response to the EPA notice, the Company and approximately 100 of the other named generators provided the necessary funding to effect the removal and destruction of the hazardous wastes stored at this site. At present, the Company believes its percentage of responsibility for this site is less than one half of one percent; and that percentage is expected to decrease substantially as additional generators are determined. In addition, the Company and such generators have provided certain funding to test the soil and groundwater at this site, which testing is currently ongoing. Although the cost incurred by the Company to date of removing and destroying the hazardous waste stored at this facility was not significant, this effort does not address the cleanup of potential soil and/or ground-water contamination present at this site. There can be no assurance, therefore, that the costs and expenses associated with this action will not increase in the future to a level that would have a material adverse effect upon the Company's business, financial condition, results of operations or cash flows. The Company also previously shipped small quantities of hazardous waste for recycling to a San Diego hazardous waste treatment facility operated by a third party operator ("Operator"). The owner of the facility and the State of California have filed suits against the Operator and two of its officers and the owner of the facility has obtained a mandatory injunction to compel the removal of hazardous waste on site. If the Operator does not comply, it is possible that the property owner or a government agency could also sue or bring enforcement proceedings against approximately 100 hazardous waste generators, including the Company, that shipped such wastes to the facility to pay for the removal and to participate in site cleanup if any contamination is discovered. Based on its limited investigation to date, the Company is unable to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. However, the Company has received no further communication regarding this site since 1994. The possibility exists that the Asian creditors (See "License and Other Significant Agreements") may file or threaten lawsuits against MPI and its subsidiaries for the respective various defaults and violations of certain agreements including debt obligations entered into by MPI and its various subsidiaries. If such creditors choose to enforce their claims and are successful in doing so, the Company may be forced to seek protection under Chapter 7 or 11 of Title 11 the United States Code. The Company's MPM and MPS subsidiaries are currently in receivership and liquidation in Singapore. The Company's MPC subsidiary is also currently in liquidation in Singapore. Two of the Company's former directors, Lewis Solomon and Gary Stein ("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New York against the Company and its major customer, Schlumberger. This filing was made one day after Gary Stein resigned from the Company's Board of Directors. Lewis Solomon previously resigned in August 1998 from the Company's Board of Directors. In the complaint, Plaintiffs have charged that the Company failed to pay them for alleged consulting services, expense reimbursements and other forms of compensation aggregating $101,250. Further, Plaintiffs allege that they were wrongfully terminated, thereby preventing them from exercising stock options, and that the Company interfered with the Plaintiffs prospective economic relationships and business advantages as F-16 consultants and directors of public corporations. The total of other alleged damages claimed by Plaintiffs are $5.5 million plus additional damages to be determined at trial. The Company believes that the Plaintiffs' claims are without merit and will vigorously oppose these allegations. In addition, the Company has made substantial counterclaims against Plaintiffs for damages of $829,020, attorneys fees and additional damages to be proven at trial. In the counterclaim, the Company alleged that Mr. Solomon and Mr. Stein, as directors, voted to approve an agreement between themselves and the Company which would compensate them as consultants in addition to director fees that Mr. Solomon and Mr. Stein were then being paid, which agreement was not approved by a majority of disinterested directors in accordance with California Corporations Code 310(a). In addition, the counterclaim alleges Mr. Solomon and Mr. Stein voted themselves various options in violation of the same Code, and that the agreement was not signed by a Company officer with requisite authority to approve such an agreement. And finally,the counterclaim alleges that in approving the agreement, Mr. Solomon and Mr. Stein breached their fiduciary duties and they did not provide any services of material benefit to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS None. F-17 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock was traded on the Nasdaq National Market under the symbol MPIX from April 21, 1994 until March 12, 1997. On March 13, 1997, the Company was delisted from the Nasdaq National Market; subsequently, the Company's Common Stock has been quoted on the OTC Bulletin Board. The following table sets forth the range of high and low per share bid information, as reported on the Nasdaq National Market (through March 12, 1997) and the OTC Bulletin Board (from March 12, 1997) for each quarter for the last two years through December 31, 1998. These over-the-counter quotations reflect inter- dealer prices, without retail mark-up, mark-down, or commission and may necessarily represent actual transactions. On March 24, 1999, the average of the highest and lowest trading price per share was $0.33. On March 24, 1999, the Company had 138 holders of record of its Common Stock and 10,856,890 shares outstanding. QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 1997 $1.250 $0.280 June 30, 1997 $0.406 $0.156 September 30, 1997 $0.500 $0.156 December 31, 1997 $0.820 $0.360 March 31, 1998 $0.730 $0.520 June 30, 1998 $0.930 $0.370 September 30, 1998 $0.480 $0.140 December 31, 1998 $0.350 $0.110 During the past year, the Company did not declare or pay any cash dividends on its Common Stock. The Company currently plans to retain all of its earnings to support the development and expansion of its business and has no present intention of paying any dividends on the Common Stock in the foreseeable future. The Company is prohibited by certain agreements from paying cash dividends. MPS is a party to a line of credit facility with DBS that requires MPS to obtain the consent of DBS prior to declaring dividends, repaying creditors or transferring funds to MPI. In addition, an agreement relating to the guarantee by Motorola of a bank loan to MPS grants Motorola the right to prohibit payment of dividends on the stock of MPI, CTM and MPA. The Transpac agreements also contain similar restrictions. In connection with the Company's efforts to restructure its debt obligations in 1998, warrants to purchase 500,000 shares of the Company's Common Stock at an exercise price of $1.00 per share were issued to Transpac, and warrants to purchase 200,000 shares of the Company's Common Stock at an exercise price of $1.00 per share were issued to STMicroelectronics. The Company relied upon the exemption provided by Section 4(2) of the Securities Act for the issuance of these warrants. F-18 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- --------- -------- ------- (In thousands, except per share amounts) Consolidated Statements of Operations Data: Net sales (4).................................... $19,271 $ 28,522 $ 19,044 $ 15,181 $10,445 Cost of goods sold............................... 14,714 23,352 15,774 11,980 9,512 ------- -------- --------- -------- ------- Gross profit..................................... 4,557 5,170 3,270 3,201 933 Selling, general and administrative.............. 2,915 4,204 4,353 4,524 3,042 Engineering and product development.............. 1,060 760 666 565 406 ------- -------- --------- -------- ------- Income (loss) from operations.................... 582 206 (1,749) (1,888) (2,515) Other income (expense): Interest expense.............................. (18) (37) (787) (69) (90) Royalty revenue............................... -- -- -- 153 Other income.................................. 179 120 10 66 235 ------- -------- --------- -------- ------- Income (loss) from continuing operations before income taxes.............................. 743 289 (2,526) (1,891) (2,217) Provision for income taxes 18 -- -- -- -- Discontinued operations.......................... 3,961 (11,785) (39,316) 505 (722) Net income (loss) (1)(3)......................... $ 4,686 $(11,496) $ (41,842) $ (1,386) (2,939) ======= ======== ========= ======== ======= Net income (loss) per common share:(2) Historical.................................... $ 0.07 $0.03 $ (0.46) $ (0.41) -- Pro forma before change in accounting -- principle (unaudited)......................... -- -- -- (0.53) Discontinued operations....................... 0.36 (1.14) (7.22) 0.11 (0.17) ------- -------- --------- -------- ------- Net profit (loss)............................. $ 0.43 $ (1.11) $ (7.68) $ (0.30) $ (0.70) ======= ======== ========= ======== ======= Shares used in pro forma per share calculation... 10,818 10,361 5,445 4,660 4,174 ======= ======== ========= ======== =======
FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- ---------- --------- --------- (In thousands) Consolidated Balance Sheet Data: Working capital (deficiency)..................... $(27,120) $ (41,657) $ (30,015) $ (4,883) $ (368) Total assets..................................... 6,885 9,911 24,894 42,427 27,635 Current liabilities.............................. 32,028 50,074 50,726 25,438 16,603 Long-term debt, less current portion............. 49 69 4,782 9,573 2,230 Accumulated deficit (65,335) (80,248) (68,752) (26,910) (25,524) Total shareholders' equity (deficit)............. (25,192) (40,232) (30,614) 7,416 8,802
_________ (1) See discussion of effects of income taxes in Note 9 to Notes to Consolidated Financial Statements. (2) Historical net income (loss) per share has been omitted for 1994 since it is not considered meaningful due to the automatic conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock upon the closing of the Company's initial public offering in April 1994. The calculation of the number of shares used in computing pro forma net income per share in 1994 includes the effect of the conversion of all Series A and B Preferred Stock into 1,774,808 shares of Common Stock upon the closing of the Company's initial public offering as if such Preferred Stock had been converted into Common Stock on January 1, 1994. (3) See discussion of discontinued operations in Notes 14 and 15 to Notes to Consolidated Financial Statements. (4) 1998 net sales were higher when compared to a pro forma net sales for 1997. See Note 5 of Notes to Consolidated Financial Statements for a proper comparison of net sales for the years 1995 through 1998. F-19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of Financial Conditions and Results of Operations contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Annual Report on Form 10-K. RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data of the Company expressed as a percentage of net sales for the periods indicated: YEAR ENDED DECEMBER 31, 1998 1997 1996 ------ ------ ------- Net sales........................................ 100.0% 100.0% 100.0% Cost of goods sold............................... 76.4 81.9 82.8 Gross profit..................................... 23.6 18.1 17.2 Selling, general and administrative.............. 15.1 14.7 22.9 Engineering and product development.............. 5.5 2.7 3.5 Income (loss) from operations.................... 3.0 0.7 (9.2) Other income (expense): Interest expense............................... (0.1) (0.1) (4.1) Other income................................... 0.9 0.4 0.0 Income (loss) from continuing operations......... 3.8 1.0 (13.3) Income (loss) from discontinued operations..... 20.5 (41.3) (206.4) Net income (loss)................................ 24.3 (40.3) (219.7) YEARS ENDED 1998, 1997 AND 1996 Net sales. For the year ended December 31, 1998 ("1998"), net sales were $19,271,000, representing a decrease of $9,251,000 or 32% from net sales of $28,522,000 for the year ended December 31, 1997 ("1997"). Sales for 1997 increased by 50% from $19,044,000 for the year ended December 31, 1996 ("1996"). The Company's CTM subsidiary has purchased certain chips ("die") used in the assembly of multichip modules sold to the Company's principal customer from that same customer (see Note 5 of Notes to Consolidated Financial Statements). Effective July 25, 1997, this customer notified the Company that it will no longer sell die to the Company and instead is providing the die on consignment. This change has resulted in a reduction in selling prices for products sold to this customer. After removing the effect of the change to consignment basis, revenues on a comparative basis increased from $17,896,000 for 1997, an increase of $1,375,000 or 7%. This increase is the result of increased unit sales to the Company's principal customer offset by decreased average selling price per unit. The average unit selling price of sales to the Company's principal customer decreased by 26% from 1997 to 1998 due to product mix changes and downward competitive pressure on selling prices. The increase in net sales from 1996 to 1997 is primarily due to increased unit sales to the Company's principal customer, partially offset by lower average selling prices, a reduction of revenue of $2,100,000 from the closure of the Company's former MPA subsidiary, as well as the reduction of $1,694,000 in revenues derived under an equipment and technology transfer agreement. F-20 Net sales to the Company's principal customer comprised 87%, 89% and 76% of net revenues for 1998, 1997 and 1996. Cost of goods sold. For 1998, cost of goods sold were $14,714,000, representing a decrease of $8,638,000 or 37% from cost of goods sold for 1997. Cost of goods sold for 1997 increased by $7,578,000 or 48% over cost of goods sold for 1996. The decrease in cost of goods sold for 1998 over 1997 is the result of a decrease in the average per unit cost of units sold to the Company's principal customer. The decrease in average per unit cost resulted from CTM's principal customer deciding, effective July 25, 1997, to provide certain die on consignment, rather than selling them to the Company (see Note 5 to the Consolidated Financial Statements). This change in the provision of die to the Company has resulted in a decrease of approximately one half as compared to the previous cost of such unit before the change to consignment. If the cost of die were to be excluded from cost of goods sold for 1997, then cost of goods sold for 1998 on a comparative basis increased by $2,304,000 from $12,410,000 for 1997. While costs to manufacture declined somewhat in 1998 due to lower material costs and shorter process manufacturing times, selling prices to the Company's principal customer were lowered more than this decline in costs. This lowering of average selling prices had the effect of therefore increasing the cost of sales percentage to a percentage higher in 1998 than in 1997. This increase in percentage cost of goods sold was partially mitigated by increased activities which utilize little direct material in the manufacture of the particular product. The increase in cost of goods sold for 1997 as compared to 1996 is the result of an increase of $10,136,000 for cost of multi-chip module products sold at CTM, comprised primarily of increased unit sales to the Company's principal customer. This was offset by a reduction at MPA due to the sale and closure of the MPA operation in September 1996. Additionally, cost of goods sold for "other sales" decreased by $1,480,000 from 1996 to 1997 due to the completion in 1997 of an equipment and technology transfer agreement. Gross profit. Gross profit for 1998 was $4,557,000, a decrease of $613,000 or 12% from 1997. Gross profit for 1997 increased by $1,900,000 or 58% over gross profit of $3,270,000 in 1996. Gross profit for 1998 represents 24% of net sales, as compared to 18% for 1997 and 17% for 1996. If the effect of the change to customer-supplied material as described above in Net Sales had been made effective as of the beginning of each year and the sales to, and attendant cost of, the customer-supplied material was eliminated from the period, then gross profit as a percentage of sales would have been 29% in 1997 and 30% in 1996. Upon comparing 1997 gross profit as a percentage of sales without customer-supplied material, to 1998 gross profit, the decrease is primarily the result of lower average selling prices per unit of sales to the Company's principal customer. This was partially offset by decreases in costs of material and shorter process manufacturing times. The increase in gross profit for 1997 as compared to 1996 is principally the result of the increase in the Company's sales for that same period. The increase in gross profit when expressed as a percentage of sales for 1997 as compared to 1996 is primarily due to the efficiencies of higher sales volumes and improved overhead absorption at CTM as well as differing product mix. Selling, General and Administrative. Selling, general and administrative expenses were $2,915,000 for 1998, a decrease of $1,289,000 or 31% as compared to 1997. Selling, general administrative expenses were $4,204,000 for 1997, a decrease of $149,000 or 3% as compared to 1996. The decreases in expenses for both years are primarily the result of the Company's reduction of the additional legal and consulting fees which had been incurred in connection with the restructuring of the Company's U.S. operations and the winding up of its Singapore operations. Engineering and Product Development. Engineering and product development expenses were $1,060,000 for 1998, an increase of $300,000 or 40% as compared to 1997. Engineering and product F-21 development expenses were $760,000 in 1997, an increase of $94,000 or 14% as compared to 1996. The increases for both years result primarily from the increase in the engineering staff employed by the Company, which is part of the Company's commitment to improvement in quality and processes in its manufacturing facility. Interest expense. Interest expense totaled $18,000 for 1998, a decrease of $19,000 or 51% from 1997. Interest expense was $37,000 for 1997, a decrease of $750,000 or 95% from 1996. Interest expense for 1997 and 1996 included interest on the $2.8 million of convertible debentures issued by the Company in October 1996. These debentures were converted into common shares of the Company by the end of February 1997, thus no such interest was incurred in 1998 and only incurred for two months of 1997. Interest on customer loans that are related to the discontinued operations in Singapore have been included in the Discontinued Operations section of the Consolidated Statements of Operations. Other income. Other income was $179,000 for 1998, an increase of $59,000 or 49% from 1997. Other income was $120,000 in 1997, an increase of $110,000 or 111% as compared to 1996. Other income for 1998 and 1997 consists primarily of the settlement of a note receivable which had been previously written-off. Effects of income taxes. The Company believes that it has sufficient losses to offset any taxable income that was generated during 1998. However, the Company's use of these losses may result in alternative minimum taxes for Federal income tax purposes. As a result, the Company has recorded a small provision for income taxes for 1998. During 1997, taxable income at the Company's domestic and foreign operations was offset by the utilization of net operating loss and other carryforwards. During 1996, the Company's operations generating operating losses for both financial reporting and income tax purposes and no tax was due. The Company believes that it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code, and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. Discontinued operations. The net operating results of the activities of MPM, MPS, MPC and Furnace Tech ("FT") for 1997 and 1996 have been included as income or loss from discontinued operations on the Consolidated Statements of Operations. Amounts recorded as estimated losses on disposal of assets of the discontinued operations reflect management's best estimates of the amounts expected to be realized on the sale of the assets associated with these discontinued operations and the expenses to be incurred through the disposal date. Such expenses include $3.5 million of interest expense relating to the indebtedness of the discontinued operations through the expected completion of the liquidation process for those debts guaranteed by MPI, which was anticipated to be December 31, 1998. Such interest expense was recorded as of June 30, 1997. Since such indebtedness has not been repaid or restructured by the beginning of the first quarter of 1999, the Company will again begin recording interest expense on that outstanding indebtedness. Interest of approximately $563,000 would be accrued beginning in the first quarter of 1999 and would continue until the indebtedness is repaid or restructured. Beginning in 1998, the Company has discontinued the consolidation of the assets and liabilities of MPM, MPS, MPC and FT. Those liabilities and accrued interest guaranteed by MPI have continued to be included in the Consolidated Balance Sheets of the Company. The effect of the deconsolidation of these entities was to reduce current liabilities and improve shareholders' deficit by $10.2 million as of June 30, 1998. During 1998, the High Court of the Republic of Singapore ordered the Winding up of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the Company. As a result of this decision, MPM cannot F-22 continue as an operating business, and it cannot be allowed to dispose of its assets or incur further liabilities. In addition, the Company does not have any control over the management of MPM. This function is undertaken by the Receiver and Manager appointed by DBS Bank. In September 1997, the High Court of the Republic of Singapore ordered the Winding Up of "Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly owned subsidiary of the Company. As with MPM, MPS cannot continue as an operating business, and the Company does not have any control over the management of MPS. This function is undertaken by the Receiver and Manager appointed by DBS Bank. Due to the circumstances as described in the previous two paragraphs, management, effective for 1998, will not consolidate MPS and MPM, into the consolidated financial statements for MPI and subsidiaries. For MPM, the decision was based upon the Singapore High Court's decision to Wind Up this company. For MPS, the Singapore High Court had already ordered the Winding Up in September 1997, however, due to the material amount of assets remaining to be liquidated and also due to requests made by MPS' Receiver and Manager for the Company to assist them in the realization and disposal of MPS' remaining assets, Management elected to consolidate until there was a clearer determination of the control of the subsidiary and realization of its assets. In November 1998, Management was informed of the sale of the two buildings owned by MPS. In addition, it became more evident during 1998 that any remaining realization of accounts receivable on the books of MPS was highly questionable. Accordingly the decision was made to not consolidate MPM and MPS. LIQUIDITY AND CAPITAL RESOURCES During 1998 and 1997, the Company financed its operations from operating cash flow. In 1996, the Company financed its operations through a combination of bank and other borrowings, equipment lease financings and certain other debt and equity financings. During 1998, operating activities of continuing operations provided $304,000. Investing activities, consisting principally of sales of assets of discontinued operations, provided $2,201,000, and financing activities used $3,321,000 during 1998. At December 31, 1998, the Company had a working capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000. The Company had outstanding at December 31, 1998 approximately $27,055,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and this debt is in default and due on demand. During 1998, the Company had no significant additions of liquidity from outside the Company. During 1996, the Company completed two financings. The Company completed in March 1996 an equity financing of $2,000,000 with Transpac and also issued to Transpac $9,000,000 of convertible debentures. The Company completed in October 1996 an additional $2,800,000 financing by issuing a series of convertible debentures to various investors. The Company's sole source of liquidity at December 31, 1998 consisted of $469,000 of cash from operations. The Company has no borrowing arrangements available to it. The Company is currently in default on substantially all of its debt obligations which are classified as "discontinued operations" in the Consolidated Balance Sheet. It is currently attempting to convert these debt obligations into the Company's equity. There can be no assurance that the Company will be successful in converting these debt obligations to equity or, if converted, that the conversion will be on favorable terms and conditions. In connection with the Company's subsidiaries in Singapore, which ceased operations in 1997, the Company fully guaranteed the debt obligations listed below. These obligations are classified as "Discontinued Operations" in the accompanying financial statements for MPI and its consolidated subsidiaries. F-23 During 1998, the Company signed agreements with each of these creditors, which called for settlement payments of approximately $9.3 million to satisfy all debt obligations if the amount is paid by May 1, 1999. Because the Company has not been able to obtain funding to satisfy the settlement payment obligations which are all due on May 1, 1999, the Company renegotiated the terms and has recently entered into non-binding letter agreements with all eight creditors which call for the conversion of all debt and accrued interest obligations into shares of the Company's Series A Preferred Stock, each share of which is convertible into two shares of MPI Common Stock. For the aggregate debt of $27,055,000, which is all the Discontinued Operations debt, the Company has agreed to convert this debt into shares of Series A Preferred Stock which is immediately convertible into shares of MPI Common Stock. This debt conversion into equity is subject to the completion of definitive agreements for all eight creditors and the approval of the debt conversion to equity by a majority of the Company's shareholders. The Series A Preferred Stock contemplated to be used by the Company in connection with this debt-for-equity exchange will be convertible immediately into MPI Common Stock. Other proposed features will be a 3.5% per annum cumulative dividend rate, senior privileges over Common Stock, liquidation preferences, registration rights and protective provisions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Future Operating Results Future Capital Needs; Need for Additional Financing Repayment of Debt Obligations by MPM and MPS Adverse Impact of MPM and MPS Liquidations on MPI High Leverage Status as a Going Concern." At December 31, 1998, the Company's subsidiaries' MPM and MPS had outstanding borrowings due to DBS totaling $1,364,000. The amount outstanding is the remaining balance of various borrowings made by MPM and MPS under lines of credit, overdraft facilities, and an accounts receivable financing line of credit. This balance remains after the liquidation of assets of MPM and MPS by the receivers and the application to these debts of the resulting proceeds from those assets of those entities. All assets of MPM and substantially all assets of MPS have been liquidated by the receivers of MPM and MPS. The receiver for MPS is attempting to collect approximately $2,400,000 payable by a former customer of MPS. The amount has been unpaid since June 1997 and has been fully reserved for by MPS. If the receiver is successful in collecting all or a portion of this receivable, the proceeds will be used to retire these borrowings. These amounts are currently in default, payable upon demand, and bear interest at the bank's prime rate plus 5%, which is equal to the rate of XXXX% as of December 31, 1998. All of these amounts are secured by the remaining assets of MPM and MPS and are guaranteed by MPI. At December 31, 1997, the Company's subsidiary MPM had borrowings of $9,000,000 under the Transpac debentures (see Note 6 to Consolidated Financial Statements). The debentures bear interest at the rate of 8.5%. As of December 31, 1998, approximately $2,165,000 of accrued interest was due and payable under the Transpac debentures. The debenture has been fully guaranteed by MPI. The debentures are currently in default and payable upon demand. At December 31, 1998, the Company had outstanding a term note due to NS Electronics, a former customer of MPS, a discontinued Singapore operation. The note bears interest at 18% per annum. The F-24 balance due under the note is $1,250,000 and approximately $399,000 of accrued interest was also due and payable as of December 31, 1998. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At December 31, 1998, the Company's subsidiary MPS had outstanding a term note due to TI, a former customer of MPS. The note bears interest at the rate of 3.5% per annum. The balance due under the note is $3,521,000 and approximately $195,000 of accrued interest was due and payable as of December 31, 1998. The note has been fully guaranteed by MPI. The note is currently in default and payable upon demand. At December 31, 1998, the Company's subsidiary MPS had outstanding a term note due to STMicroelectronics (formerly SGS-Thomson Microelectronics), a former customer of MPS. The note bears interest at the rate of 7.25% per annum. The balance due under the note is $4,000,000 and approximately $703,000 of accrued interest was due and payable as of December 31, 1998. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At December 31, 1998, the Company's subsidiary MPS had outstanding a term note due to Motorola, a former customer of MPS. The note bears interest at approximately 7% per annum. The balance due under the note is $2,208,000 and approximately $164,000 of accrued interest was due and payable as of December 31, 1998. The note has been guaranteed by MPI and is secured by certain assets of the Company as well as all shares of CTM and MPA. The note is currently in default and payable upon demand. At December 31, 1997, the Company's subsidiary MPS had outstanding an amount due to Samsung Corning. Samsung Corning had guaranteed a $1,000,000 loan from DBS to MPS. The remaining balance due to DBS under the loan, approximately $583,000, was paid by Samsung Corning to DBS in December 1997. The Company has accordingly recorded the $583,000 as a liability to Samsung Corning, as well as $101,000 of accrued and unpaid interest as of December 31, 1998. At December 31, 1998, the Company had outstanding a deficiency balance from capital leases due to ORIX Leasing totaling $1,610,000. The amount outstanding is the remaining balance of various lease borrowings made by MPM and MPS. This balance remains after the liquidation of the leased assets of MPM by ORIX Leasing and the application to these leases of the resulting proceeds from those assets of those entities. The remaining amount outstanding is represented by a note issued by MPI at an interest rate of 7.25%. The note is currently in default and is payable upon demand. The Company also has various capitalized leases for equipment utilized in the US operations, with a total balance of approximately $69,000 at December 31, 1998. These lease obligations are being serviced currently by CTM. The Company's inventories declined by $1,157,000 or 27% at 1998 as compared to 1997. This decline is due to the lower sales volume in 1998 as compared to 1997, and the corresponding lower need to have inventory on hand to support sales volume. Accounts payable also declined, by $3,405,000 or 45% as compared to 1997, again due to lower sales volume. The Company previously purchased raw materials from its principal customer, Schlumberger. As of July 25, 1997, the material was supplied by the customer on consignment. As of December 31, 1998, the Company owes to that customer approximately $2,900,000 from purchases previously made before the change to consignment. The Company is making periodic payments to Schlumberger under an informal repayment plan. FUTURE OPERATIONS Status as a Going Concern. The Company's independent certified public accountants have included an explanatory paragraph in their audit report with respect to the Company's 1998, 1997, 1996 and 1995 consolidated financial statements related to a substantial doubt with respect to the Company's ability to continue as a going concern. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and assuming the Company is successful in restructuring its debt, F-25 the Company currently anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations in the ordinary course throughout 1999. Any significant increase in planned capital expenditures or other costs or any decrease in or elimination of anticipated sources of revenue or the inability of the Company to restructure its debt could cause the Company to restrict its business and product development efforts. There can be no assurance that the Company will be successful in restructuring its debt on acceptable terms, or at all. If adequate revenues are not available, the Company will be unable to execute its business development efforts and may be unable to continue as a going concern. There can be no assurance that the Company's future consolidated financial statements will not include another going concern explanatory paragraph if the Company is unable to restructure its debt and maintain profitability. The factors leading to and the existence of the explanatory paragraph will have a material adverse effect on the Company's ability to obtain additional financing. See "Future Capital Needs; Need for Additional Financing -- Liquidity and Capital Resources -- Consolidated Financial Statements." Risk of Bankruptcy. If the Company is not able to restructure its debt to the eight creditors referenced above, the Company will need to be reorganized under Chapter 11 of Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of the United States Code. There can be no assurance that if the Company decides to reorganize under the applicable laws of the United States that such reorganizational efforts would be successful or that shareholders would receive any distribution on account of their ownership of shares of the Company's stock. Similarly, there can be no assurances that if the Company decides to liquidate under the applicable laws of the United States that such liquidation would result in the shareholders receiving any distribution on account of their ownership of shares of the Company's stock. In fact, if the Company were to be reorganized or liquidated under the applicable laws of the United States, the bankruptcy laws would require (with limited exceptions) that the creditors of the Company be paid before any distribution is made to the shareholders. Future Capital Needs; Need for Additional Financing. The Company's future capital requirements will depend upon many factors, including the extent and timing of acceptance of the Company's products in the market, requirements to restructure and retire its substantial debt, requirements to construct, transition and maintain existing or new manufacturing facilities, commitments to third parties to develop, manufacture, license and sell products, the progress of the Company's research and development efforts, the Company's operating results and the status of competitive products. If the Company is successful in restructuring its debt obligations, absent debt or equity financing and excluding significant expenditures required for the Company's major projects, the Company anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations through 1999. There can be no assurance, however, that the Company will not require additional financing prior to such date to fund its operations. In addition, the Company may require substantial additional financing to fund its operations in the ordinary course, particularly if the Company is unable to restructure its debt obligations. Furthermore, the Company may require additional financing to fund the acquisition of selected assets needed in its production facilities. There can be no assurance that the Company will be able to obtain such additional financing on terms acceptable to the Company, or at all. The Company is in breach of substantially all of its debt obligations and is in default under each of such agreements. If the Company cannot reach an agreement with its creditors to repay its obligations, the Company will not be able to continue as a going concern. The Company's high level of outstanding indebtedness and the numerous restrictive covenants set forth in the agreements covering this indebtedness and its default position prohibit the Company from obtaining additional bank lines of credit and from raising funds through the issuance of debt or other securities without the prior consent of DBS and Transpac. The Company is currently in default on its guarantee and loan obligations to DBS as a result of the Company's liquidation of the assets of MPM and MPS. These liquidations have also resulted in the Company's default under a number of other agreements, and certain creditors have informed the Company they intend to accelerate outstanding payments due to them under various credit agreements because of such defaults. There F-26 can be no assurance that other creditors of the Company will not also choose to accelerate the Company's debt obligations and the Company will not able to repay such accelerated obligations as they become due and immediately payable. If either a sufficient number of creditors or any of the substantial creditors choose to accelerate payments or to place MPI or one or more of its subsidiaries under judicial reorganization, the Company may be forced to seek protection under Chapter 11 of Title 11 of the United States Code. If the Company were to seek additional financing, such additional financing may not be available to the Company on acceptable terms, or at all. If additional funds are raised by issuing equity or convertible securities, further dilution to the existing shareholders will result. Since adequate funds are not currently available, the Company has been required to delay, scale back or eliminate programs which could continue to have a material adverse effect on the Company's business, prospects, financial condition and results of operations. In addition, the Company has been forced to delay, downsize or eliminate other research and development, manufacturing, construction or transitioning programs or alliances or obtain funds through arrangements with third parties pursuant to which the Company has been forced to relinquish rights to certain of its technologies or to other assets that the Company would not otherwise relinquish. The delay, scaling back or elimination of any such programs or the relinquishment of any such rights could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. See "Status as a Going Concern", "Future Capital Needs; Need for Additional Financing" and "Liquidity and Capital Resources". Future Operating Results. The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future depending upon a variety of factors, including corporate and debt restructurings, creditor relationships, conversions of significant amounts of debt into a significant amount of equity, downward pressure in gross margins, losses due to low shipping volume, delayed market acceptance, if any, of new and enhanced versions of the Company's products, delays, cancellations or reschedulings of orders, delays in product development, defects in products, integration of acquired businesses, political and economic instability, natural disasters, outbreaks of hostilities, variations in manufacturing yields, changes in manufacturing capacity and variations in the utilization of such capacity, changes in the length of the design-to-production cycle, relationships with and conditions of customers, subcontractors, and suppliers, receipt of raw materials, including consigned materials, customer concentration, price competition, cyclicality in the semiconductor industry and conditions in the personal computer industries. In addition, operating results will fluctuate significantly based upon several other factors, including the Company's ability to retain present management and to attract new customers, changes in pricing by the Company, its competitors, subcontractors, customers or suppliers, and fluctuations in manufacturing yields. The absence of significant backlog for an extended period of time will also limit the Company's ability to plan production and inventory levels, which could lead to substantial fluctuations in operating results. Accordingly, the failure to receive anticipated orders or delays in shipments due, for example, to unanticipated shipment reschedulings or defects or to cancellations by customers, or to unexpected manufacturing problems may cause net sales in a particular quarter to fall significantly below the Company's expectations, which would materially adversely affect the Company's operating results for such quarter. The impact of these and other factors on the Company's net sales and operating results in any future period cannot be forecasted with certainty. In addition, the significant fixed overhead costs at the Company's facilities, the need for continued expenditures for research and development, capital equipment and other commitments of the Company, among other factors, will make it difficult for the Company to reduce its expenses in a particular period if the Company's sales goals for such period are not met. A large portion of the Company's operating expenses are fixed and are difficult to reduce or modify should revenues not meet the Company's expectations, thus magnifying the material adverse impact of any such revenue shortfall. Accordingly, there can be no assurance that the Company will not incur losses in the future or that such losses will not have a material adverse effect on the Company's business, financial condition and results of operations. Repayment of Debt Obligations by MPM and MPS. As of December 31, 1998, MPM and MPS had combined outstanding borrowings of approximately $27,000,000. Most of the assets of MPM and MPS F-27 have been liquidated by receivers appointed by DBS. The Company currently anticipates that the remaining proceeds from the liquidation of assets will be insufficient to fully repay its outstanding debt. Since the borrowings have been guaranteed by MPI, the Company is currently attempting to negotiate a conversion of the remaining indebtedness to MPI equity. The failure of the Company to complete this conversion on favorable terms would materially adversely affect the Company's financial condition and the ability of the Company to continue as a going concern. Certain Secured Obligations of MPS. In connection with an MPS borrowing from Citibank N.A., Motorola guaranteed (and subsequently satisfied MPS' obligation) of $2.2 million in borrowings from Citibank N.A. Under the terms of the agreement relating to Motorola's guarantee, MPI granted Motorola a security interest in all of the issued and outstanding capital stock of MPS, CTM and MPA. While in default, Motorola may have the right to vote and give consents with respect to all of the issued and outstanding capital of MPS, CTM and MPA . As a result, during the continuation of any such event of default, MPI may be unable to control at the shareholder level the direction of the subsidiaries that generate substantially all of the Company's revenues and hold substantially all of the Company's assets. Any such loss of control would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. The other Asian debt agreements contain numerous restrictions and events of default that have been triggered by the aforementioned actions and would, if they became effective and operative, materially adversely affect the Company's business, prospects, results of operations, condition and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. In January 1999, the Company and Motorola signed a non-binding letter agreement which calls for the conversion of all the Company's obligations into MPI's equity subject to certain conditions. See "License and Other Significant Agreements." There can be no assurance that the Company will be successful in its efforts to reduce this non-binding agreement reached with Motorola to a binding written agreement. High Leverage. The Company is highly leveraged and has substantial debt service requirements. The Company has $32,077,000 in liabilities as of December 31, 1998. On December 31, 1998, the Company had a total shareholders' deficit of approximately $25,192,000. Based on current operations, the Company cannot service the existing debt. The Company's ability to meet its debt service requirements will be dependent upon the Company's future performance, which will be subject to financial, business and other factors affecting the operation of the Company, many of which are beyond its control and on the willingness of the Company's creditors to participate in restructuring the Company's debt to MPI equity. There can be no assurance that the Company will be able to meet the capital requirements described above or, if the Company is able to meet such requirements, that the terms available will be favorable to the Company. See "Liquidity and Capital Resources". Highly Competitive Industry; Significant Price Competition. The electronic interconnection technology industry is intensely competitive. The Company experiences intense competition worldwide from a number of manufacturers, including Maxtek Components Corporation, Natel Engineering, VLSI Packaging, Raytheon Electronic Systems, Hewlett-Packard Company, Advanced Packaging Technology of America and MicroModule Systems, all of which have substantially greater financial resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell their products. The Company faces competition from certain of its customers that have the internal capability to produce products competitive with the Company's products and may face competition from new market entrants in the future. In addition, corporations with which the Company has agreements are conducting independent research and development efforts in areas which are or may be competitive with the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new F-28 products or new technologies that provide improved performance characteristics. New product introductions by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's existing products which could materially adversely affect the Company's business, financial condition and results of operations. The Company is also experiencing significant price competition, which may materially adversely affect the Company's business, financial condition and results of operations. The Company believes that to remain competitive in the future it will need to continue to develop new products and to invest significant financial resources in new product development. There can be no assurance that such new products will be developed or that sales of such new products will be achieved. There can be no assurance that the Company will be able to compete successfully in the future. Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for 87% of the Company's net sales in 1998 and is expected to continue to account for a significant part of the Company's net sales. Under the agreement between Schlumberger and the Company entered into in January 1998, the Company is obligated to provide Schlumberger with its requirements for MCM product. Given the Company's anticipated continued reliance on its MCM business as a percentage of overall net sales, the failure to meet Schlumberger's requirements will materially adversely affect the Company's ability to continue as an ongoing concern. In addition, under the terms of the agreement, Schlumberger is entitled to request repricing of the Company's products. Schlumberger has requested repricing on several occasions in the past. Such repricing in the future may result in the Company being unable to produce the products made for Schlumberger with an adequate operating profit, and the Company may be unable to compete with the prices of other vendors who supply the same or similar products to Schlumberger. The failure to satisfy the terms of the agreement, or the failure of the Company to achieve an operating profit under the contract, would have a material adverse impact on the Company's business, financial condition, and results of operation. Significant Customer Concentration. Historically, the Company has sold its products to a very limited number of customers. Any reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions in the semiconductor, personal computer or electronic industries or in other industries that manufacture products utilizing semiconductors or MCMs, could materially adversely affect the Company's business, financial condition and results of operations. The supply agreements with certain of the Company's customers do not obligate them to purchase products from the Company. The Company's ability to increase its sales in the future will also depend in part upon its ability to obtain orders from new customers. There can be no assurance that the Company's sales will increase in the future or that the Company will be able to retain existing customers or to attract new ones. Failure to develop new customer relationships could materially adversely affect each such subsidiary's results of operations and would materially adversely affect the Company's business, financial condition and results of operations. Dependence on Semiconductor and Personal Computer Industries. The financial performance of the Company is dependent in large part upon the current and anticipated market demand for semiconductors and products such as personal computers that incorporate semiconductors. The semiconductor industry is highly cyclical and historically has experienced recurring periods of oversupply The Company believes that the markets for new generations of semiconductors will also be subject to similar fluctuations. The semiconductor industry is currently experiencing rapid growth. A reduced rate of growth in the demand for semiconductor component parts due, for example, to competitive factors, technological change or otherwise, may materially adversely affect the markets for the Company's products. From time to time, the personal computer industry, like the semiconductor industry, has experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions. Accordingly, any factor adversely affecting the semiconductor or the personal computer industry or particular segments within the semiconductor or personal computer industry may materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially adversely affected if downturns or slowdowns in the semiconductor, personal computer industry or other industries utilizing the Company's products continue or again occur in the future. F-29 Technological Change; Importance of Timely Product Introduction; Uncertainty of Market Acceptance and Emerging Markets. The markets for the Company's products are subject to technological change and new product introductions and enhancements. Customers in the Company's markets require products embodying increasingly advanced electronics interconnection technology. Accordingly, the Company must anticipate changes in technology and define, develop and manufacture or acquire new products that meet its customers' needs on a timely basis. A general decline in the technology industry, which began in 1997, had a significant impact on the Company's sales in the third and fourth quarter of 1998. The Company anticipates that technological changes could cause the Company's net sales to decline in the future. There can be no assurance that the Company will be able to identify, develop, manufacture, market, support or acquire new products successfully, that any such new products will gain market acceptance, or that the Company will be able to respond effectively to technological changes. If the Company is unable for technological or other reasons to develop products in a timely manner in response to changes in technology, the Company's business, financial condition and results of operations will be materially adversely affected. There can be no assurance that the Company will not encounter technical or other difficulties that could in the future delay the introduction of new products or product enhancements. In addition, new product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's products, which could materially adversely affect the Company's business, financial condition and results of operations. Even if the Company develops and introduces new products, such products must gain market acceptance and significant sales in order for the Company to achieve its growth objectives. Furthermore, it is essential that the Company develop business relationships with and supply products to customers whose end-user products achieve and sustain market penetration. There can be no assurance that the Company's products will achieve widespread market acceptance or that the Company will successfully develop such customer relationships. Failure by the Company to develop products that gain widespread market acceptance and significant sales or to develop relationships with customers whose end-user products achieve and sustain market penetration will materially adversely affect the Company's business, financial condition and results of operations. The Company's financial performance will depend in significant part on the continued development of new and emerging markets such as the market for MCMs. The Company is unable to predict with any certainty any growth rate and potential size of emerging markets. Accordingly, there can be no assurance that emerging markets targeted by the Company, such as the market for MCMs, will develop or that the Company's products will achieve market acceptance in such markets. The failure of emerging markets targeted by the Company to develop or the failure by the Company's products to achieve acceptance in such markets could materially adversely affect the Company's business, financial condition and results of operations. Sole or Limited Sources of Supply. Certain raw materials essential for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. There are a limited number of qualified suppliers of laminate substrates and die which are of critical importance to the production of the Company's MCM products. In the manufacturing process, the Company also utilizes consigned materials supplied by certain of its customers. The Company's reliance on sole or a limited group of suppliers and certain customers for consigned materials involves several risks, including a potential inability to obtain an adequate supply of required materials and reduced control over the price, timely delivery, and quality of raw materials. There can be no assurance that problems with respect to yield and quality of such materials and timeliness of deliveries will not continue to occur. Disruption or termination of these sources could delay shipments of the Company's products and could have a material adverse effect on the Company's business, financial condition and operating results. Such delays could also damage relationships with current and prospective customers, including customers that supply consigned materials. Product Quality and Reliability; Need to Increase Production. The Company's customers establish demanding and time-consuming specifications for quality and reliability that must be met by the Company's products. From initial customer contact to actual qualification for production, which may take as long as three years, the Company typically expends significant resources. Although the Company has generally met its customers' quality and reliability product specifications, the Company has in the past experienced and is currently experiencing difficulties in meeting some of these standards. Although the Company has addressed F-30 past concerns and has resolved a number of quality and reliability problems, there can be no assurance that such problems will not continue or recur in the future. If such problems did continue or recur, the Company could experience delays in shipments, increased costs, delays in or cancellation of orders and product returns, any of which would have a material adverse effect on the Company's business, financial condition or results of operations. The manufacture of the Company's products is complex and subject to a wide variety of factors, including the level of contaminants in the manufacturing environment and the materials used and the performance of personnel and equipment. The Company has in the past experienced lower than anticipated production yields and written off defective inventory as a result of such factors. The Company must also successfully increase production to support anticipated sales volumes. There can be no assurance that the Company will be able to do so or that it will not experience problems in increasing production in the future. The Company's failure to adequately increase production or to maintain high quality production standards would have a material adverse effect on the Company's business, financial condition and results of operations. Expansion of Operations. In order to be competitive, the Company must implement a variety of systems, procedures and controls. The Company expects its operating expenses to continue to increase. If orders received by the Company do not result in sales or if the Company is unable to sustain net sales at anticipated levels, the Company's operating results will be materially adversely affected until operating expenses can be reduced. The Company's expansion will also continue to cause a significant strain on the Company's management, financial and other resources. If the Company is to grow, it must expand its accounting and other internal management systems, and there can be no assurance that the Company will be successful in effecting such expansion. Any failure to expand these areas in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's results of operations. Moreover, there can be no assurance that net sales will increase or remain at or above recent levels or that the Company's systems, procedures and controls will be adequate to support the Company's operations. The Company's financial performance will depend in part on its ability to continue to improve its systems, procedures and controls. Intellectual Property Matters. Although the Company attempts to protect its intellectual property rights through patents, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise, manufacturing efficiency and marketing and sales abilities of its employees. There can be no assurance that others will not independently develop similar proprietary information and techniques or gain access to the Company's intellectual property rights or disclose such technology or that the Company can meaningfully protect its intellectual property rights. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company, or that third parties will not assert intellectual property infringement claims against the Company. In addition there can be no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. Environmental Regulations. The Company is subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject to the Company to significant liabilities, including joint and several liability under certain statutes. The imposition F-31 of such liabilities could materially adversely affect the Company's business, financial condition or results of operations. The Company has been notified by the United States Environmental Protection Agency that it considers the Company to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986. See "Legal Proceedings." Growth Strategy Through Acquisitions. As part of its growth strategy, the Company has in the past sought and may in the future continue to seek to increase sales and achieve growth through the acquisition of comparable or complementary businesses or technologies. The implementation of this strategy will depend on many factors, including the availability of acquisitions at attractive prices and the ability of the Company to make acquisitions, the integration of acquired businesses into existing operations, the expansion of the Company's customer base and the availability of required capital. Acquisitions by the Company may result in dilutive issuances of equity securities, and in the incurrence of debt and the amortization of goodwill and other intangible assets that could adversely affect the Company's profitability. Any inability to control and manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will successfully expand or that growth and expansion will result in profitability or that the Company's growth plans through acquisitions will not be inhibited by the Company's current lack of resources. Dependence on Key Personnel. The Company's financial performance depends in part upon its ability to attract and retain qualified management, technical, and sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The loss of any key employee, the failure of any key employee to perform in his current position or the Company's inability to attract and retain skilled employees, as needed, could materially adversely affect the Company's business, financial condition and results of operations. Nasdaq National Market Listing Requirements. The Company was delisted from the Nasdaq National Market on March 13, 1997, at which date the Company's Common Stock began trading on the OTC Electronic Bulletin Board. The Company may in the future be subject to continuing requirements to be listed on the OTC Electronic Bulletin Board. There can be no assurance that the Company could continue to meet such requirements. The price and liquidity of the Common Stock may be materially adversely affected if the Company is unable to meet such requirements in the future. There can be no assurance that the Company will be able to requalify for listing on the Nasdaq National Market. Disclosures Relating to Low Priced Stocks; Restrictions on Resale of Low Price Stocks and on Broker-Deal Sale; Possible Adverse Effect of "Penny Stock" Rules on Liquidity for the Company's Securities. Since the Company's securities were delisted from the NASDAQ SmallCap Market and the Company has net tangible assets of less than $2,000,000, transactions in the Company's securities are subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by this Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Consequently, this Rule may affect the ability of broker-dealers to sell the Company's securities, and may affect the ability of purchasers in this offering to sell any of the securities acquired hereby in the secondary market. The Commission has adopted regulations which generally define a "penny stock" to be any non-NASDAQ equity security of a small company that has a market price (as therein defined) less than $5.00 per share, or with an exercise price of less than $5.00 per share subject to certain exceptions, and which is not traded on any exchange or quoted on NASDAQ. For any transaction by broker-dealers involving a penny stock (unless exempt), the rules require delivery, prior to a transaction in a penny stock, of a risk disclosure document relating to the penny stock market. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in an account and information on the limited market in penny stocks. Volatility of Stock Price. The Company believes that factors such as the conversion of the Company's Asian debt to Series A Preferred Stock at a significant dilution to current shareholders (See " Liquidity and Capital Resources"), announcements of developments related to the Company's business, fluctuations in the Company's financial results, general conditions or developments in the semiconductor and personal computer industry and the general economy, sales of the Company's Common Stock into the marketplace, the ability of the Company to sell its stock on an exchange or over-the-counter, an outbreak of hostilities, natural disasters, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in the Company's relationships with its customers and suppliers, or a shortfall or changes in revenue, gross margins or earnings or other financial results which are different from analysts' expectations could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In recent years the stock market in general, and the market for shares of small capitalization stocks in particular, including the Company, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the F-32 Company's Common Stock will not continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. Recurring net operating losses. The Company's decision to discontinue its multilayer ceramic operations was the primary factor contributing to its 1996 net loss of $41,842,000. The decision by the principal secured creditors of the Company's pressed ceramic operations to liquidate that operation's assets was the primary factor contributing to the 1997 net loss of $11,496,000, as well as additional loss provisions made in 1997 relating to the discontinuance of the multilayer ceramic operations. At December 31, 1998, the Company had a working capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000. The Company had outstanding at December 31, 1997 approximately $27,055,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and most of which debt is in default and due on demand. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry and in other industries concerning the potential effects associated with such compliance. Although the Company currently offers products that are designed to be Year 2000 compliant, there can be no assurance that the Company's products and the software products used by the Company contain all necessary date code changes. As of December 31, 1998, the Company has partially completed an analysis of its readiness for compliance with the Year 2000 change. Its assessment of its manufacturing systems and company products reveals that no known Year 2000 issues currently exist either in the products, their raw materials, or their relationship as components to larger systems produced by its customers; its financial systems software is currently being upgraded to a newer replacement system which will be complete in early 1999, and which system is Year 2000 compliant; documentation systems that currently use fixed dating are Year 2000 compliant, while those that require revision dating are currently under review; and approximately 50% of the Company's computing hardware systems have been upgraded to be Year 2000 compliant. The Company's costs to become Year 2000 compliant as of December 31, 1998 have been $235,000 for computer software and $48,000 for computer hardware. The Company has not yet completed its analysis of its readiness for compliance with the Year 2000 change. Based upon the partial analysis described above, the Company believes its exposure to Year 2000 risks is limited because the majority of the Company's recordkeeping systems are new and compliant and have been installed within the last eighteen months. The Company utilizes no custom-programmed "legacy" software or hardware systems known to need Year 2000 upgrading or conversion. The Company believes it should be fully compliant with its Year 2000 issues by the end of the second quarter of 1999 when it believes it will have completed due diligence of its internal systems and supplier compliance requirements, as well as completed the remaining 50% of its computing hardware upgrades needed. However, there can be no assurance that conditions or events may occur during the course of the completion of this analysis which will have an adverse impact on the Company's readiness for compliance with the Year 2000 change. The Company believes that the purchasing patterns of customers and potential customers and the performance of vendors may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by the Company or the inability to render services or provide supplies to the Company. Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products, and disruption of supply patterns. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers and vendors, to spend significant resources upgrading their internal systems, and as a result consider switching to F-33 other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no derivative financial instruments. The Company has outstanding indebtedness at December 31, 1998 to DBS denominated in Singapore dollars of approximately Singapore $737,000 (US equivalent $445,000). All of the Company's other indebtedness is denominated in US dollars, and all other Singapore-based assets have been liquidated by the receiver of MPM and MPS and used to retire outstanding indebtedness. Accordingly, the Company believes its exposure to foreign currency rate movements is extremely limited. ITEM 8. FINANCIAL STATEMENTS See Item 14(a) for an index to the financial statements and supplementary financial information which are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. F-34 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item relating to the Company's directors and nominees and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by this item relating to the Company's executive officers and employees is included under the caption "Executive Officers" in Part I of the Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included under the caption "Executive Compensation and Related Information" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included under the caption "Certain Transactions" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein by reference. F-35 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Index to Consolidated Financial Statements. FORM 10K Page Number ----------- Report of Independent Certified Public Accountants.......... F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997................................ F-2 Consolidated Statements of Operations for the three-year period ended December 31, 1998......................................... F-3 Consolidated Statements of Cash Flows for the three-year period ended December 31, 1998......................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three-year period ended December 31, 1998................................... F-5 Notes to Consolidated Financial Statements.................. F-6 2. Consolidated Financial Statement Schedules. The following financial statement schedules of Microelectronic Packaging, Inc. and its subsidiaries are included in this annual report on Form 10-K. FORM 10K Page Number ----------- Report of Independent Certified Public Accountants on Financial Statement Schedules............................. F-27 Schedule II -- Valuation and Qualifying Accounts and Reserves..................................... F-28 Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter ended December 31, 1998. (c) Exhibits F-36 The following exhibits are referenced or included in this report. Exhibit Description - ------- ----------- 3.1(13) Amended and Restated Articles of Incorporation of the Company filed March 23, 1998. 3.2(1) Amended and Restated Bylaws of the Company. 4.1(1) Specimen Certificate of Common Stock. 4.2(1) Form of Warrant to purchase 160,000 shares of Common Stock of the Company issued by the Company to Thomas James Associates, Inc. entered into upon the closing of the offering made pursuant to the Company's Registration Statement on Form S-1. 4.3(1) Form of Warrant to Purchase Common Stock dated August 31, 1993 issued by the Company to certain investors. 4.4(13) Warrants issued to The Seidler Companies dated November 3, 1997. 4.5(13) Warrants issued to H.J. Meyers & Company, Inc. dated November 19, 1997. 10.1(1) Second Amended and Restated Registration Rights Agreement, Waiver Agreement and Conversion Agreement entered into among the Company and certain investors named therein. 10.2(1) Letter Agreement for General Banking Facilities dated October 9, 1993 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company ("MPS"), and Development Bank of Singapore, as revised by Letter Agreement dated November 19, 1993. 10.3(1) Guaranty dated August 24, 1990 between the Company and Development Bank of Singapore, as confirmed by Letter of Confirmation dated April 29, 1992. 10.4(1) Term Loan between MPS and Development Bank of Singapore. 10.5(1) Mortgages dated August 16, 1989 among MPS, DBS Finance Limited, a Singapore company, and Development Bank of Singapore. 10.6(1) Escrow Agreement dated October 11, 1993 between the Company and Innoventure (S) Pte. Ltd., a Singapore company. 10.7(1) Collaborative Manufacturing Agreement dated July 29, 1993 between the Company and Innoventure (S) Pte. Ltd., a Singapore company. 10.8(1) Lease Agreement dated February 6, 1991 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for the industrial premises at 31 Tuas Avenue 8, Jurong Town, Singapore, as renewed by a Lease Renewal Letter dated August 26, 1993. 10.9(1) Lease Agreement dated February 11, 1993 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for a portion of the premises at 1003 Bukit Merah Central, Singapore. 10.10(1) Lease Agreement dated November 21, 1984 between Microelectronic Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town Corporation for the premises at 28 Tuss, Jurong Town, Singapore. 10.11(1) Form of Indemnification Agreement between the Company and each of its officers and directors. 10.12(1) Letter Agreement dated December 21, 1993, by and between the Company and Samsung. 10.13(1) Letter Agreement, dated December 16, 1993, by and between the Company and Samsung. 10.14(1) Consent to Certain Corporate Actions dated February 11, 1994 between the Company and Development Bank of Singapore. 10.15(1) Consent to Certain Corporate Actions dated April 12, 1994 between the Company and Development Bank of Singapore. 10.16(3) Letter Agreement, dated May 27, 1994, by and between the Company and Development Bank of Singapore. 10.17(3)+ Purchase Option Agreement dated August 4, 1994 by and between International Business Machines ("IBM") and the Company. F-37 10.18(3)+ Multilayer Technology Transfer and Licensing Agreement, dated August 4, 1994, by and between the Company and IBM. 10.19(3) Tenancy Agreement relating to Private Lot A14698 at 9 Tuas Basin Link between Jurong Town Corporation and MPM Singapore Pte. Ltd. dated November 18, 1994. 10.20(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot A14698(A) at 5 Tuas Basin Link, Jurong Industrial Estate, Singapore 2263 from Jurong Town Corporation dated December 2, 1994. 10.21(3) Offer of Tenancy for an Extended C8 Type Factory Building on Lot A14698(B) at 7 Tuas Basin Link, Jurong Industrial Estate, Singapore 2263 from Jurong Town Corporation dated January 26, 1995. 10.22(3) Offer Letter from DBS Bank of Term Loan/Short Term Advances Facilities dated December 15, 1994. 10.23(3) Sale and Purchase Agreement for CERDIP Manufacturing Equipment and Alumina Powder Equipment between the Company and Samsung Corning Company, Ltd., dated December 19, 1994. 10.24(3) Letter dated March 31, 1995 from Development Bank of Singapore. 10.25(4) Loan and Security Agreement, dated May 16, 1995, between the Company, MPS and Texas Instruments. 10.26(4) Loan and Security Agreement, dated May 30, 1995, between the Company, and NSEB. 10.27(4) Supply Guarantee and Preferred Allocation Agreement dated August 17, 1995 between Registrant, MPS and SGS-Thomson Microelectronics Pte. Ltd. (the "Supply Guarantee"). 10.28(4) Agreement Relating to Guarantee among Registrant, MPA, CTM, MPS and Motorola. 10.29(4) Supplemental Agreement to the Supply Guarantee dated October 19, 1995. 10.30(4) $1,000,000 Term Loan Financing between Citibank N.A. and MPS. 10.31(7) Subscription Agreement by and among MPI, Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd. 10.32(7) Convertible Loan Agreement by and among MPI, MPM, Transpac Capital Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company Ltd. and Natsteel Equity III Pte Ltd. 10.33(7) Guarantee issued by MPI. 10.34(5) Form of Offshore Securities Subscription Agreement dated October 22, 1996 by and among MPI, Purchaser and Loselle Greenawalt Kaplan Blair & Adler. 10.35(5) Form of 8% Convertible Debenture issued to the Purchasers. 10.36(5) Form of Common Stock Purchase Warrant dated October 22, 1995 issued by MPI to Dusseldorf Securities Limited. 10.37(6) Form of Amendment to 8% Convertible Debenture. 10.38(8) Amended Loan and Security Agreement dated January 2, 1997 by and between NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging, Inc. 10.39(8) Second Secured Promissory Note dated January 2, 1997 by and between NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging, Inc. 10.40(8) Amended Loan and Security Agreement dated February 16, 1997 by and between Texas Instruments Singapore (Pte) Limited and Microelectronic Packaging (S) Pte. Ltd. 10.41(8) Consulting Agreement dated November 21, 1996, as amended, by and between the Company and The Watley Group, LLC. 10.42(8) Consulting Agreement dated November 21, 1996, as amended, by and between the Company and G&L Investments. 10.43(10) Loan and Security Agreement dated May 13, 1997, between the Company and Texas Instruments (Pte) Limited. 10.44(10) Promissory Note dated May 13, 1997, between the Company and Citicorp USA, Inc. 10.45(10) Amendment (to Promissory Note) dated July 11, 1997, between the Company and Citicorp USA, Inc. 10.46(11) Building lease dated September 2, 1997. 10.47(11) Employment agreement with Andrew K. Wrobel, dated October 6, 1997. 10.48(11) Amendment dated September 9, 1997 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. F-38 10.49(11) Agreement dated October 8, 1997 between ORIX Leasing and Microelectronic Packaging, Inc. 10.50(13) Amendment dated December 8, 1997 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. 10.51(13) Amendment dated January 30, 1998 to Promissory Note issued by Microelectronic Packaging, Inc. in favor of Citicorp USA. 10.52(13)+ Agreement among Schlumberger Technologies, Inc. ATE Division and Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective January 5, 1998. 10.53(14) Restructuring, Settlement and Mutual Release Agreement between ORIX Leasing Singapore Limited and the Company dated April 14, 1998. 10.54(14) Restructuring, Settlement and Mutual Release Agreement between Texas Instruments Singapore (Pte.) Ltd. and the Company dated April 24, 1998. 10.55(14) Restructuring, Settlement and Mutual Release Agreement between Samsung-Corning Co., Ltd. and the Company dated May 19, 1998. 10.56(14) Restructuring, Settlement and Mutual Release Agreement between Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd., and the Company dated April 22, 1998. 10.57(14) Forbearance, Restructure and Mutual Release Agreement between Motorola, Inc. and the Company dated July 1, 1998. 10.58(14) Restructuring, Settlement and Mutual Release Agreement between NS Electronics Bangkok (1993) Ltd. and the Company dated May 29, 1998. 10.59(14) Restructuring, Settlement and Mutual Release Agreement between the Development Bank of Singapore Limited and the Company dated July 10, 1998. 10.60(14) Form of Warrant to Purchase Common Stock dated April 24, 1998 issued to Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd. 10.61(15) Restructuring, Settlement and Mutual Release Agreement between STMicroelectronics, Inc. and the Company dated September 24, 1998. 10.62(15) Amendment to Restructuring, Settlement and Mutual Release Agreement between Texas Instruments Singapore (Pte.) Ltd. and the Company dated August 11, 1998. 10.63(15) Amendment to Restructuring, Settlement and Mutual Release Agreement between Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd., and the Company dated September 1, 1998. 10.64(15) Amendment to Restructuring, Settlement and Mutual Release Agreement between ORIX Leasing Singapore Limited and the Company dated August 11, 1998 . 10.65(15) Amendment to Forbearance, Restructure and Mutual Release Agreement between Motorola, Inc. and the Company dated November 5, 1998. 10.66 Amendment to Restructuring, Settlement and Mutual Release Agreement between The Development Bank of Singapore Limited and the Company dated November 24, 1998. 10.67 Amendment to the Restructuring, Settlement and Mutual Release Agreement between Samsung Corning Co. Ltd. And the Company dated November 18, 1998. 10.68 Nonbinding Letter Agreement between The Development Bank of Singapore Limited and the Company dated January 19, 1999. 10.69 Nonbinding Letter Agreement between Motorola Inc. and the Company dated January 19, 1999. F-39 10.70 Nonbinding Letter Agreement between NS Electronics Bangkok Ltd.and the Company dated January 20, 1999. 10.71 Nonbinding Letter Agreement between ORIX Leasing Singapore Ltd. and the Company dated January 19, 1999. 10.72 Nonbinding Letter Agreement between Texas Instruments Incorporated and the Company dated January 19, 1999. 10.73 Nonbinding Letter Agreement between Transpac Capital Pte. Ltd. and the Company dated January 25, 1999. 10.74 Immunity from Suit Agreement between Motorola, Inc. and the Company dated July 21, 1998. 21.1(3) Subsidiaries of the Company. 24.1 Power of Attorney (see page 38). 27.1 Financial Data Schedule 1998 27.2 Financial Data Schedule 1997 27.3 Financial Data Schedule - 1996 99.1(12) Amended 1993 Stock Option/Stock Issuance Plan dated April 10, 1997 and filed in the state of California on March 23, 1998. 99.2(2) Form of Notice of Grant of Stock Option and Stock Option Agreement. 99.3(2) Addendum to Stock Option Agreement (Special Tax Elections). 99.4(2) Addendum to Stock Option Agreement (Financial Assistance). 99.5(2) Form of Notice of Grant of Stock Option with Stock Option Agreement (Non-Employee Director Automatic Grant). 99.6(2) Form of Stock Issuance Agreement. 99.7(1) Form of Director Automatic Option Grant Agreement. - --------------------- (1) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-72890) declared effective by the Securities and Exchange Commission on April 21, 1994. (2) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 33-78452) filed with the Securities and Exchange Commission on April 29, 1994. (3) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 1995 as amended. (4) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1995 fiscal year filed with the Securities and Exchange Commission. (5) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 1996. (6) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 1997. (7) Incorporated by reference from an exhibit filed with the Company's current report on Form 8-K dated March 27, 1996 and filed with the Securities and Exchange Commission on April 5, 1996. (8) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1996 fiscal year filed with the Securities and Exchange Commission on April 15, 1997, as amended. (9) Not used. (10) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 1997. (11) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997. (12) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 25, 1998. (13) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1997 fiscal year filed with the Securities and Exchange Commission. F-40 (14) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 1998. (15) Incorporated by reference from an exhibit filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 1998. + Confidential Treatment has been granted for the deleted portions of this document. F-41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 14, 1999. MICROELECTRONIC PACKAGING, INC. Date: April 14, 1999 By: /s/ Andrew K. Wrobel ---------------------- Andrew K. Wrobel Chairman, President and Chief Executive Officer, Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew K. Wrobel and Denis J. Trafecanty, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 14, 1999 By: /s/ ANDREW K. WROBEL --------------------- Andrew K. Wrobel Chairman of the Board of Directors of the Company President and Chief Executive Officer, Director Date: April 14, 1999 By: /s/ DENIS J. TRAFECANTY ------------------------ Denis J. Trafecanty Senior Vice President, Chief Financial Officer and Secretary Date: April 14, 1999 By: /s/ ANTHONY J. A. BRYAN ------------------------ Anthony J. A. Bryan Director of the Company Date: April 14, 1999 By: /s/ FRANK L. HOWLAND --------------------- Frank L. Howland Director of the Company Date: April 14, 1999 By: /s/ WALDEMAR HEEB ------------------ Waldemar Heeb Director of the Company F-42 Date: April 14, 1999 By: /s/ WONG LIN HONG ------------------ Wong Lin Hong Director of the Company F-43 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Microelectronic Packaging, Inc. San Diego, California We have audited the accompanying consolidated balance sheets of Microelectronic Packaging, Inc. as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Microelectronic Packaging, Inc. at December 31, 1998 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a working capital deficiency of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31, 1998, is in default of most of it's loan agreements, is economically dependent on a single customer, has three foreign subsidiaries in receivership and/or liquidation under Singapore law, has various claims and lawsuits filed against the Company and it's subsidiaries and may be forced to seek protection for the Company and certain subsidiaries under United States bankruptcy law. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. Continuation of the Company is dependent on the Company's ability to negotiate arrangements with its lenders, raise sufficient capital, achieve sufficient cash flow to meet its debt obligations and profitability. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO SEIDMAN, LLP Costa Mesa, California March 11, 1999 except for Note 14, paragraph 14, which is as of April 14, 1999. F-44 MICROELECTRONIC PACKAGING, INC. CONSOLIDATED BALANCE SHEETS December 31, 1998 1997 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 469,000 $ 1,296,000 Accounts receivable, net 1,306,000 2,504,000 Inventories 3,073,000 4,230,000 Other current assets 60,000 387,000 - ------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 4,908,000 8,417,000 - ------------------------------------------------------------------------------- Property, plant and equipment, net 1,806,000 1,212,000 Other non-current assets 171,000 282,000 - ------------------------------------------------------------------------------- $ 6,885,000 $ 9,911,000 =============================================================================== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Current portion of long-term debt $ 20,000 $ 22,000 Accounts payable 4,045,000 7,450,000 Accrued liabilities 908,000 1,711,000 Deferred revenue -- 265,000 Debt and accrued interest of discontinued operations, in default, due on demand 27,055,000 30,344,000 Current liabilities of discontinued operations, net -- 10,282,000 TOTAL CURRENT LIABILITIES 32,028,000 50,074,000 - ------------------------------------------------------------------------------- Long-term debt, less current portion 49,000 69,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT Common stock, no par value: Authorized shares - 50,000,000 Issued and outstanding 10,856,890 at 1998 and 10,793,279 at 1997 40,143,000 40,016,000 Accumulated deficit (65,335,000) (80,248,000) - ------------------------------------------------------------------------------- (25,192,000) (40,232,000) $ 6,885,000 $ 9,911,000 =============================================================================== See accompanying notes to consolidated financial statements. F-45 MICROELECTRONIC PACKAGING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Net Sales Product sales $ 19,271,000 $ 28,432,000 $ 17,259,000 Other sales -- 90,000 1,785,000 - ------------------------------------------------------------------------------------------------------------------ 19,271,000 28,522,000 19,044,000 - ------------------------------------------------------------------------------------------------------------------ Cost of goods sold Product sales 14,714,000 23,309,000 14,251,000 Other sales -- 43,000 1,523,000 - ------------------------------------------------------------------------------------------------------------------ 14,714,000 23,352,000 15,774,000 - ------------------------------------------------------------------------------------------------------------------ Gross profit 4,557,000 5,170,000 3,270,000 Selling, general and administrative 2,915,000 4,204,000 4,353,000 Engineering and product development 1,060,000 760,000 666,000 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 582,000 206,000 (1,749,000) Other income (expense): Interest expense (18,000) (37,000) (787,000) Other income, net 179,000 120,000 10,000 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 743,000 289,000 (2,526,000) Provision for income taxes 18,000 -- -- Net income (loss) from continuing operations before provision for income taxes 725,000 289,000 (2,526,000) Discontinued operations: Loss from operations, including a 1996 provision of $6,163,000 for impairment of long-lived assets -- (4,523,000) (10,060,000) Estimated gain (loss) on disposal of discontinued operations, including provision of $3,500,000 in 1997 and $1,580,000 in 1996 for operating losses through disposal date 3,961,000 (7,262,000) (29,256,000) - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,686,000 $ (11,496,000) $ (41,842,000) =================================================================================================================== Earnings per common share: Income (loss) from continuing operations $ 0.07 $ 0.03 $ (0.46) Discontinued operations 0.36 (1.14) (7.22) - ------------------------------------------------------------------------------------------------------------------ Net income (loss) per common share $ 0.43 $ (1.11) $ (7.68) Weighted average number of shares outstanding 10,818,000 10,361,000 5,445,000 ================================================================================================================== Earnings per common share assuming dilution: Income (loss) from continuing operations $ 0.07 $ 0.03 $ (0.46) Discontinued operations 0.36 (1.09) (7.22) - ------------------------------------------------------------------------------------------------------------------ Net income (loss) per share $ 0.43 $ (1.06) $ (7.68) Weighted average number of shares outstanding 10,968,000 10,886,000 5,445,000 ================================================================================================================== See accompanying notes to consolidated financial statements.
F-46 MICROELECTRONIC PACKAGING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) $ 4,686,000 $ (11,496,000) $ (41,842,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 527,000 324,000 2,607,000 Discontinued operations (3,345,000) 11,874,000 39,405,000 Provision for revaluation of long-lived assets -- -- 6,163,000 Non-employee stock-based compensation 114,000 177,000 332,000 Discount on conversion of debentures -- -- 700,000 (Gain) Loss on sale of fixed assets (11,000) 8,000 12,000 Realized benefit forward foreign currency contracts -- -- (292,000) Changes in assets and liabilities, net of effects of discontinuance in 1997 and 1996: Accounts receivable 1,199,000 (1,066,000) 966,000 Inventories 1,157,000 375,000 (3,354,000) Other current assets 327,000 (242,000) 1,731,000 Other non-current assets 111,000 108,000 1,303,000 Accounts payable, accrued liabilities and deferred revenue (4,472,000) 1,033,000 3,641,000 - ------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities of: Continuing operations 293,000 1,095,000 11,372,000 Discontinued operations -- 3,200,000 (15,529,000) Net cash provided (used) by operating activities 293,000 4,295,000 (4,157,000) - ------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of fixed assets Continuing operations (1,102,000) (973,000) (1,284,000) Discontinued operations -- -- (8,852,000) Proceeds from sale of fixed assets Continuing operations 14,000 49,000 310,000 Discontinued operations 3,289,000 2,805,000 -- Realized benefit from forward foreign currency contracts -- -- 292,000 Net cash provided (used) by investing activities 2,201,000 1,881,000 (9,534,000) - ------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in short-term notes payable Continuing operations -- -- (847,000) Discontinued operations -- (6,500,000) 101,000 Borrowings under long-term debt and promissory notes Continuing operations -- 109,000 5,128,000 Discontinued operations -- -- 9,000,000 Principal payments on long-term debt and promissory notes Continuing operations (45,000) (386,000) (1,200,000) Discontinued operations (3,289,000) (1,057,000) (340,000) Issuance of common stock, net 13,000 -- 1,880,000 Net cash provided (used) by financing activities (3,321,000) (7,834,000) 13,722,000 - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (827,000) (1,658,000) 31,000 Cash at beginning of year 1,296,000 2,954,000 2,923,000 Cash at end of year $ 469,000 $ 1,296,000 $ 2,954,000 =================================================================================================================== See accompanying notes to consolidated financial statements.
F-47 MICROELECTRONIC PACKAGING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock ------------------------------ Accumulated Shares Amount Deficit Total - ----------------------------------------------------------------------------------------------------------------- BALANCE, January 1, 1996 4,660,093 34,326,000 (26,910,000) 7,416,000 Common stock issued 2,331,400 3,480,000 -- 3,480,000 Non-employee stock compensation -- 332,000 -- 332,000 Net loss -- -- (41,842,000) (41,842,000) - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 6,991,493 38,138,000 (68,752,000) (30,614,000) Common stock issued 3,801,786 1,701,000 -- 1,701,000 Non-employee stock compensation -- 177,000 -- 177,000 Net loss -- -- (11,496,000) (11,496,000) - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 10,793,279 40,016,000 (80,248,000) (40,232,000) Common stock issued 63,611 13,000 -- 13,000 Non-employee stock compensation -- 114,000 -- 114,000 De-consolidation of Discontinued -- -- 10,227,000 10,227,000 subsidiaries Net income -- -- 4,686,000 4,686,000 Balance, December 31, 1998 10,856,890 $ 40,143,000 $ (65,335,000) $ (25,192,000) ================================================================================================================= See accompanying notes to consolidated financial statements.
F-48 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES Microelectronic Packaging, Inc. ("MPI" or the "Company") is an electronic interconnect solutions company with design, manufacturing and sales services to support the requirements of electronic systems companies. The Company develops, manufactures, markets and sells multichip modules ("MCMs") and, until July 1997 pressed ceramic packages, to customers in the integrated circuit, telecommunications, automatic test equipment and other electronics related industries. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of MPI and its wholly-owned subsidiaries, CTM Electronics, Inc. ("CTM") and Microelectronic Packaging America, Inc. ("MPA") which is dormant. For years prior to 1998, the consolidated financial statements also included Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is in receivership (including its wholly-owned subsidiary Furnace Technology (S) Pte. Ltd.) which was dissolved in 1998, MPC (S) Pte. Ltd. ("MPC") which is in voluntary liquidation and MPM (S) Pte. Ltd. ("MPM") which is in receivership. All significant intercompany accounts, transactions and profits have been eliminated. CASH AND CASH EQUIVALENTS - For the purpose of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. INVENTORIES - Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. A substantial portion of the Company's December 31, 1998 inventory (approximately $2.3 million) was purchased for the Company's primary customer. See Note 4. Under terms of an agreement dated January 5, 1998 between the Company and the customer the Company has been and continues to be required to maintain certain inventory levels as defined by the agreement. The agreement stipulates that the cost of such inventory will be paid to the Company should the customer terminate the business relationship. Terms of the agreement have been used in determining the carrying value of the Company's December 31, 1998 inventory. The customer can terminate the agreement with 120 days notice, the agreement is not enforceable should the Company file bankruptcy, and notice expires in October 2000. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally ranging from three to five years. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful lives of the assets or the life of the lease. IMPAIRMENT OF LONG-LIVED ASSETS - As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 prescribes that an impairment loss is recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on an estimate of future discounted cash flows. Adoption of SFAS No. 121 did not have a material impact on the Company's financial statements. LONG-TERM PREPAID AND INTANGIBLE ASSETS - Long-term prepaid and intangible assets are comprised of prepaid royalties, deferred facility start-up costs and certain other intangible assets. The amortization of such amounts is included in the operating results of the period of expected benefit. The Company periodically assesses the recoverability of these assets and records an impairment of such assets when the projected gross cash flows are no longer estimated to be sufficient to recover such assets. DEFERRED FACILITY START-UP COSTS - The Company has incurred costs associated with establishing a production facility to manufacture product utilizing the technology licensed from IBM (see Note 4). Such deferred facility start-up costs primarily consisted of direct incremental employee and employee related costs and pre-operating rent for new facilities which were included in other non- current assets at December 31, 1995. These costs, which totaled $8,921,000, were expensed in 1996 as a result of the discontinuance of the multilayer ceramics operations. INTANGIBLE ASSETS - Intangible assets consist of an acquired customer base and purchased technology licenses and are classified as other non-current assets. Intangible assets are amortized using the straight-line method over F-49 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS estimated useful lives of 7 years. In 1996, the Company determined that the purchased technology is of no further benefit to the Company, and wrote-off the remaining net book value in 1996. REVENUE RECOGNITION - The Company recognizes revenue from product sales at the time of shipment. Non-refundable license fees are recognized as revenue when the Company has no material remaining performance obligations under the associated license agreement. Other sales in 1997 and 1996 include the revenue arising from the resale of certain production equipment and related production supplies. The equipment and supplies were purchased by the Company on behalf of, and sold to, a third party pursuant to purchase orders. Revenues from these transactions were recognized at the time the Company had satisfied all of its significant performance obligations. INCOME TAXES - The domestic parent Company and its U.S. subsidiaries file consolidated returns for U.S. federal income tax purposes. For California income tax purposes, the domestic parent company files on a unitary basis with all subsidiaries. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. This requires that the Company record a deferred tax asset related to the future income tax benefits associated with tax loss and credit carryforwards, and certain temporary differences for which tax benefits have not previously been recognized. Deferred tax assets are to be reduced by a valuation allowance when it is more likely than not that a portion or all of the deferred tax asset will not be realized. In addition, under SFAS 109, the tax benefit associated with the utilization of operating loss carryforwards is included in the regular provision for income taxes. STOCK-BASED COMPENSATION - The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost is recognized for its employee stock option plans, unless the exercise price of options granted is less than fair market value on the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (see Note 12). FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's formerly consolidated Singapore subsidiaries were maintained in U.S. dollars and the U.S. dollar is considered to be the functional currency of all consolidated subsidiaries. Transaction gains/(losses) resulting from transactions denominated in foreign currencies (primarily related to certain raw material purchases denominated in Japanese yen and other costs of production and administration denominated in Singapore dollars) are included in the results of operations for the period in which the exchange rates change. FORWARD FOREIGN CURRENCY CONTRACTS - Subject to bank financing and consent, the Company's formerly consolidated Singapore subsidiaries entered into forward foreign currency contracts to minimize the short-term impacts of exchange rate fluctuations related to certain raw material purchases denominated in Japanese yen and other costs of production and administration denominated in Singapore dollars. The cost of the contracts and any resulting gains and losses on the contracts are included in the results of operations in the period in which the exchange rates change. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The F-50 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS carrying amounts of the Company's short-term credit facilities and mortgage notes approximate fair value because the interest rates on these instruments are subject to change with market interest rates. As the majority of the Company's long-term obligations are classified as current liabilities (due on demand, due to defaults under debt covenants), the Company believes that their carrying amounts approximate their fair value. ENGINEERING AND PRODUCT DEVELOPMENT COST - Engineering and product development costs are expensed as incurred. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including the inventory obsolescence provision, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is calculated pursuant to Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of the Company. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - OPERATING RESULTS, CAPITAL RESOURCES AND GOING CONCERN The Company's decision to discontinue its remaining operations in Singapore, which produced pressed ceramic packages and aluminum nitride components, was the primary cause of the 1997 net loss of $11.5 million. The discontinuation of these operations resulted in a reduction in the carrying amount of inventories by $2.3 million, production consumables by $0.8 million and property, plant and equipment by $0.8 million and the accrual of interest expense through the anticipated completion of the liquidation process of $3.5 million. Other factors contributing to the Company's 1997 loss was the operating loss of $4.1 million generated by the Company's Singapore operations (primarily the MPS pressed ceramics operations) from the beginning of 1997 up until the time they were discontinued in July 1997, and the Company incurring significant overhead expenses in the US in connection with the restructuring of the Company's operations. The Company's decision to discontinue its multilayer ceramics operations was the leading cause of the 1996 net loss of $41.8 million. The discontinuation of this operation resulted in the write-off of $8.9 million of pre-production costs, $2.0 million of prepaid royalties, a reduction in the carrying amount of property, plant and equipment by $14.9 million, the accrual of certain miscellaneous costs of $1.9 million, and the accrual of estimated losses to be incurred through the disposal date totaling $1.6 million. Other factors contributing to the Company's 1996 loss were: (1) a $6.2 million reduction in the carrying amount of pressed ceramic equipment at the MPS facility in Singapore and in Indonesia, and a $1.6 million allowance against MPS's receivable for inventory advanced to the Company's joint venture partner in Indonesia and (2) a significant decline in sales of pressed ceramic products by MPS, due to an industry-wide over-supply of pressed ceramic products. A receiver was appointed to handle the liquidation of the pressed ceramics operations on July 10, 1997, and on March 18, 1997, a receiver was appointed to handle the liquidation of the multilayer ceramics operations. Certain other factors, including, but not limited to, the majority of the Company's debt which is currently in default, cross default provisions specified in most of the Company's borrowing arrangements, various claims and lawsuits filed against the Company and its subsidiaries, dependence on primarily one customer who is also the Company's major vendor, the high debt service costs of the Company, and the Company's scarcity of working F-51 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS capital have the potential to have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. The accompanying financial statements have been prepared assuming the Company (MPI along with its only operating subsidiary - CTM) will continue as a going concern. A number of factors, including the Company's history of significant losses, the debt service costs associated with the Company's high level of existing indebtedness, the Company's reliance on one customer, the need to restructure debt which is currently in default, various claims and lawsuits, and the Company's Singapore operations in receivership and liquidation raise substantial doubts about the Company's ability to continue as a going concern. As of December 31, 1998, the Company has an accumulated deficiency of $65.3 million and a working capital deficiency of $27.1 million, which includes $27.1 million of debt of discontinued operations, due on demand. The Company does not possess sufficient cash resources to repay these obligations, and the Company would be unable to repay these loans in the event that such demand was made by the Company's creditors (see Note 15). Because the Company has not been able to obtain funding to satisfy the settlement payment obligations, the Company renegotiated the terms and, has recently entered into non-binding letter agreements with all eight creditors which call for the conversion of all debt and accrued interest obligations into the Company's equity. For the aggregate debt of $27,055,000, which is all the Discontinued Operations debt, the Company has agreed to convert this debt into equity (see Note 14). The conversion to equity is subject to the agreement of STMicroelectronics to sign a document similar to the other signed non-binding letter agreements, completion of definitive agreements for all eight creditors, and approval of such conversion by a majority of the Company's shareholders. The Company does not have the financial resources to meet its obligations or guarantees for all of its debt obligations, and thus is in default on all of these obligations. (See Note 7.) The Company is currently negotiating with these lenders about a possible restructuring of these debt obligations. If the Company is unsuccessful in its negotiations, the Company would not be able to repay the amounts outstanding under these obligations. This failure would materially adversely affect the Company's financial condition and ability to continue as a going concern, and could, as is the case with other debt defaults and failure to repay, require that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its U.S. subsidiaries. NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS December 31, 1998 1997 - ---------------------------------------------------------------------------- Accounts receivable consist of: Trade receivables.............................. $ 1,541,000 $ 2,739,000 Allowance for doubtful accounts................ (235,000) (235,000) ----------- ----------- $ 1,306,000 $ 2,504,000 =========== =========== Inventories consist of: Raw materials.................................. $ 2,203,000 $ 2,689,000 Work-in-progress............................... 1,531,000 1,654,000 Finished goods................................. 38,000 131,000 Obsolescence reserve........................... (699,000) (244,000) ----------- ----------- $ 3,073,000 $ 4,230,000 =========== =========== Property, plant and equipment consist of: Machinery and equipment........................ $ 2,564,000 $ 1,757,000 Leasehold improvements......................... 568,000 263,000 Furniture and fixtures......................... 47,000 41,000 ----------- ----------- 3,179,000 2,061,000 Accumulated depreciation........................ (1,373,000) (849,000) ----------- ----------- $ 1,806,000 $ 1,212,000 =========== =========== Accrued liabilities consist of: Accrued employee compensation.................. $ 443,000 $ 406,000 Other.......................................... 465,000 1,305,000 ----------- ----------- $ 908,000 $ 1,711,000 =========== =========== F-52 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Significant Agreements SCHLUMBERGER TECHNOLOGIES, INC. ATE DIVISION - In January 1998, the Company signed an agreement with Schlumberger Technologies, Inc. The agreement delineated the terms pursuant to which MPI supplies products to Schlumberger. The agreement includes warranty provisions, protection for raw materials purchased by MPI against production demand forecasts supplied by Schlumberger but subsequently changed, and pricing provisions. The agreement expires in October 2000. Effective July 26, 1997, Schlumberger informed the Company that it would no longer sell die to the Company, but instead would provide the die on consignment. The die supplied by Schlumberger is used in the assembly of MCMs sold to Schlumberger. This change to providing die on consignment has had the effect of reducing sales revenue and corresponding cost of sales to Schlumberger by approximately 60%, although the change has no impact on the units sold by the Company to Schlumberger. INTERNATIONAL BUSINESS MACHINES CORPORATION - In August 1994, the Company entered into a technology transfer and licensing agreement (the "IBM Agreement") with International Business Machines Corporation ("IBM") pursuant to which the Company was granted a license to specific technology developed by IBM for the manufacture of multilayer ceramic products. Under the terms of the IBM Agreement, the Company and its wholly-owned subsidiary, MPM, acquired a nonexclusive, nontransferable right to use the licensed technology to manufacture and sell certain specified products on a worldwide basis. In exchange for the license, the Company paid an up-front non-refundable royalty of $2,000,000, and is obligated to pay additional royalties based on sales of products incorporating the licensed technology during the term of the IBM Agreement, which shall remain in effect for a period of ten years from the date of execution and thereafter from year to year unless terminated by either party. The technology agreement also requires the Company to reach certain specified production levels at specified dates. In the event the Company fails to achieve these specified milestones, IBM has the right to terminate the technology agreement. Commencing in August 1996, the IBM Agreement was terminable by either party without cause upon six months prior written notice. In March 1997, the Board of Directors of the Company decided to discontinue the multilayer ceramics operations. Changing market demand for multilayer ceramic products and IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit to purchasing multilayer ceramic products from the Company were the main reasons that the Board decided to discontinue the multilayer ceramics operations. All Singapore employees working on the multilayer ceramics operations have since been terminated. MPM is currently being managed by a Receiver and is in liquidation, as defined under the laws of Singapore. The Company has assisted the Receiver and Manager for MPM in selling off all of the remaining tangible assets of MPM. The proceeds from the sale of MPM's assets have been used to retire a portion of MPM's debts (the proceeds are not sufficient to retire all outstanding MPM debt). The Company anticipates that the liquidation of MPM will be completed by the end of 1999. NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS The Company operates in one reportable business segment with three product lines within that segment, and primarily sells to a limited number of semiconductor manufacturers and related suppliers which results in concentrated credit risk with respect to the Company's accounts receivable. The Company performs ongoing F-53 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS credit evaluations of its customers but does not require collateral for credit purchases. The Company maintains allowances for potential credit losses, and such losses have been within management's expectations. During 1998, 1997 and 1996, the Company had only one major customer (customers accounting for 10% or more of total sales), which accounted for 87%, 89% and 76%, respectively, of the Company's total sales. Amounts due from this customer comprised 90% and 81% of accounts receivable at December 31, 1998 and 1997, respectively. The Company's CTM Electronics, Inc. subsidiary has purchased certain chips ("die") used in the assembly of multichip modules ("MCM's") sold to the Company's significant customer from that same customer. Effective July 25, 1997, this customer notified the Company that it will no longer sell die to the Company and instead is providing the die on consignment. The unaudited pro forma presentation below gives effect to this change in operations on selected line items from the Company's Consolidated Statements of Operations for each of the two years in the period ended December 31, 1997, as if this change had been put into effect on January 1, 1996.
================================================================================================= Historical Pro Forma Year Ended Pro Forma Year Ended December 31, 1997 Adjustments December 31, 1997 - ------------------------------------------------------------------------------------------------- (unaudited) (unaudited) Net sales $ 28,522,000 $ (10,626,000) (1) $ 17,896,000 Cost of goods sold 23,352,000 (10,942,000) (2) 12,410,000 Gross profit 5,170,000 316,000 5,486,000 Net income (loss) $ (11,496,000) 316,000 $ (11,180,000) ================================================================================================= Net income (loss) per common share $ (1.06) $ -- $ (1.06) =================================================================================================
================================================================================================= Historical Pro Forma Year Ended Pro Forma Year Ended December 31, 1996 Adjustments December 31, 1996 - ------------------------------------------------------------------------------------------------- (unaudited) (unaudited) Net sales $ 19,044,000 $ (8,266,000) (1) $ 10,778,000 Cost of goods sold 15,774,000 (8,304,000) (2) 7,470,000 Gross profit 3,270,000 38,000 3,308,000 Net income (loss) $(41,842,000) 38,000 $ (41,804,000) ================================================================================================= Net income (loss) per common share $ (7.68) $ -- $ (7.68) =================================================================================================
(1) The cost of the die to be provided on consignment will be removed from the selling price of the MCMs. The amount of the 2% prompt payment discount offered to the customer, which is included in revenues, will be reduced by the lower selling prices for these MCMs. (2) The cost of the die to be provided on consignment will be removed from the cost of goods sold, corresponding to the reduction in selling prices of the MCM's. Until July 1997, the Company had a foreign exchange line of credit with the Development Bank of Singapore ("DBS") under which it could enter into forward currency contracts of up to S$30,000,000 for contracts with a maturity of up to twelve months. Advances under the line of credit are guaranteed by MPI and secured by all the F-54 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS assets of MPS, including a second mortgage on MPS's leasehold land and facility. Subject to bank financing and consent, the Company had entered into forward foreign currency contracts to economically hedge foreign currency transactions on a continuing basis for periods consistent with the underlying exposures, generally ranging from one-to-nine months in duration. The Company does not engage in foreign currency speculation; however, the Company's previous use of forward foreign currency contracts does not qualify for hedge accounting treatment in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The Company's objective in entering into forward contracts was to minimize on a continuing basis the impact of foreign exchange rate movements on the Company's operating results. This line of credit was terminated on July 9, 1997 when DBS appointed a Receiver and Manager for MPS. NOTE 6 - DEBT AND ACCRUED INTEREST OF DISCONTINUED OPERATIONS, IN DEFAULT, DUE ON DEMAND
December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- Debt of discontinued operations, in default, due on demand consists of: Line of credit facilities and short-term borrowings of discontinued operations, which are currently in default and included in "Debt of discontinued operations, in default, due on demand," bear interest at the bank's prime rate plus 5% (total 13.75% at December 31, 1998) while in default, secured by substantially all of the assets of MPS, and is guaranteed by MPI. Net of assets held as collateral of $138,000 for 1998 and $1,868,000 for 1997. $ 109,000 $ 770,000 Line of credit facilities and short-term borrowings of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand," secured by substantially all of the assets of MPM, guaranteed by MPI. Net of assets held as collateral of $236,000 for 1998 and $71,000 for 1997. 881,000 1,246,000 8.5% debentures, related to discontinued operations, which are currently in default and thus, due on demand and accordingly included in the caption "Debt of discontinued operations, in default, due on demand", interest is due annually, principal due in March 2001, guaranteed by MPI 9,000,000 9,000,000 Term notes to, or guaranteed by, certain customers of discontinued operations, which are currently in default and included in "Debt of discontinued operations, in default, due on demand," bearing interest at rates ranging from 3.5% to 18.0%, payable in quarterly installments commencing in March 1997, principal due in quarterly installments over a four-year term commencing in March 1998, secured by various assets including certain MPS production equipment, guaranteed by MPI 4,771,000 4,771,000 Term notes to, or guaranteed by, certain customers of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand," originally payable in various quarterly installments commencing in the second quarter of 1996, plus interest at rates ranging from 6.7% to 8.75%, secured by various assets including certain MPS production equipment, all of the domestic assets of MPI, MPA and CTM and all of the outstanding common stock of MPA, MPS and CTM 6,792,000 6,583,000
F-55 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------- Mortgage notes of discontinued operations due January 2000 and January 2005, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" for 1997, payable in monthly installments of S$22,000 (U.S. $14,000) plus interest, with interest at variable rates (13.75% at December 31, 1997), secured by MPS buildings and improvements, guaranteed by MPI -- 1,081,000 Note payable resulting from the deficiency balance of capital leases of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand," bears interest at 7.25% and is guaranteed by MPI 1,610,000 1,601,000 Capital lease obligations of discontinued operations, which are currently in default and accordingly included in "Debt of discontinued operations, in default, due on demand" consisting of various machinery and equipment financing agreements, payable in monthly installments of $10,000, including interest at rates ranging from 4% to 6% -- 160,000 Equipment leases 1998 balance matures in January 2000 and July 2002, payable in monthly installments of $4,000, including interest at rates ranging from 21.6% to 25.9%, secured by various CTM production equipment and guaranteed by MPI 69,000 91,000 ---------- ----------- 23,232,000 25,303,000 Current portion of long-term debt (20,000) (22,000) Accrued interest 3,892,000 5,132,000 Long-term debt, less current portion (49,000) (69,000) ----------- ----------- Debt of discontinued operations, in default, due on demand $27,055,000 $30,344,000 =========== ===========
Certain of the above obligations are payable in Singapore dollars and the balances have been translated at an exchange rate of U.S.$1.00 = S$1.66 at December 31, 1998 and U.S. $1.00 = S$1.6825 at December 31, 1997. Accordingly, actual settlement amounts of such obligations are subject to variances caused by changes in foreign exchange rates. The Company does not have the financial resources to meet its obligations or guarantees for most all of the above obligations, and thus is in default on all of these obligations (except for the equipment leases). As a result, these obligations are due on demand and have been classified as current liabilities within the caption "Debt of discontinued operations, due on demand." The Company is currently negotiating with these lenders to discuss a possible restructuring of these debt obligations. If the Company is unsuccessful in its negotiations, the Company would not be able to repay the amounts outstanding under these obligations. This failure would materially adversely affect the Company's financial condition and ability to continue as a going concern, and could, as is the case with other debt defaults and failure to repay, require that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its U.S. subsidiaries. Scheduled maturities of principal balances are $20,000, $16,000, $20,000, $13,000 and $0 in 1999 through 2003, respectively. However, the company is currently in default under almost all of its debt agreements and accordingly, $27,055,000 is currently due on demand. MPI is directly liable, or is contingently liable based on guarantees of repayment provided, for effectively all of the above obligations. F-56 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In October 1996, the Company issued $2.8 million in 8% convertible debentures to a group of offshore investors (collectively "Purchasers"). As of February 20, 1997, holders of the remaining $1.9 million of debentures had elected to convert, resulting in the issuance of an additional 3,801,787 shares (see Note 10). NOTE 7 - COMMITMENTS AND CONTINGENCIES Following is a schedule by year of estimated future minimum lease payments under capital and operating lease agreements.
YEAR ENDED CAPITAL OPERATING DECEMBER 31, LEASES LEASES - -------------------------------------------------------------------------- 1999 $33,000 $ 611,000 2000 25,000 601,000 2001 25,000 607,000 2002 14,000 575,000 2003 -- 360,000 Thereafter -- 1,600,000 - -------------------------------------------------------------------------- Total minimum lease payments 97,000 $4,354,000 ========== Amount representing interest 28,000 - -------------------------------------------------------------------------- Present value of net minimum lease payments 69,000 Current portion 20,000 - -------------------------------------------------------------------------- Long-term portion $49,000 ==========================================================================
The Company entered into an agreement in 1998 whereby the Company obtained the use of a piece of test equipment and technical support for such equipment from the supplier. The agreement provides for minimum annual payments of $360,000 through 2007, plus the possible acceleration of payments if the Company obtains new customers with projects that require the use of the equipment and technical support of the equipment supplier. The Company has included its commitment under the agreement in the previous table as an operating lease. Certain machinery and equipment are subject to leases which are classified as capital leases for financial reporting purposes. At December 31, 1998 and 1997 $155,000 ($97,000 net) and $155,000 ($128,000 net), respectively, of such leased equipment are included in property, plant and equipment. Amortization expense related to assets under capital leases, for continuing operations was $31,000, $83,000 and $58,000 in 1998, 1997 and 1996, respectively. The Company is also committed under noncancelable operating agreements for the lease of buildings, machinery and equipment. Rent expense for continuing operations in 1998, 1997 and 1996 was approximately $261,000, $336,000 and $364,000 respectively. Certain of the Company's shareholders have been granted certain registration rights; the costs of any such offering, exclusive of any underwriting discount, would be borne by the Company. In May 1995, the United States Environmental Protection Agency ("EPA") issued written notice to all known generators of hazardous waste shipped to a Whittier, California treatment facility that it considers these generators (including the Company) to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The notice requires all of the generators of this waste to take immediate actions to contain and prevent any further release of hazardous substances at the site. In response to the EPA notice, the Company and approximately 100 of the other named generators provided the necessary funding to effect the removal and destruction of the hazardous wastes stored at this site. At present, the Company's percentage of responsibility for this site is less than one half of one percent; and that percentage is expected to decrease substantially as additional generators are determined. In addition, the Company and such generators have provided the necessary funding to test the soil and ground water at this site, which testing is currently ongoing. Although the cost incurred by the Company to date of removing and destroying the hazardous F-57 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS waste stored at this facility was not significant, this effort does not address the cleanup of potential soil and/or ground-water contamination present at this site. There can be no assurance, therefore, that the costs and expenses associated with this action will not increase in the future to a level that would have material adverse effect upon the Company's operations. Based upon the Company's investigation to date, the Company is not able to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's financial position, results of operations or cash flows. The Company has also previously shipped small quantities of hazardous waste for recycling to a San Diego hazardous waste treatment facility operated by a third party operator ("Operator"). The owner of the property and the State of California have filed suits against the Operator and two of its officers and the owner of the property has obtained a mandatory injunction to compel the removal of hazardous waste on site. If the Operator does not comply, it is possible that the property owner or a government agency could also sue or bring enforcement proceedings against approximately 100 hazardous waste generators, including the Company, that shipped such wastes to the facility to pay for the removal and to participate in site cleanup if any contamination is discovered. Based upon the Company's investigation to date, the Company is not able to determine whether this matter, if resolved adversely to the Company, would have a material adverse effect upon the Company's financial position, results of operations or cash flows. However, the Company has received no further communication regarding this site since 1994. Numerous creditors have filed or threatened lawsuits against MPI and its subsidiaries for various defaults and violations of certain agreements entered into by MPI and its various subsidiaries. As a result of DBS Bank's decision to enforce its claims, MPM and MPS are in liquidation and receivership, respectively in Singapore. Should MPI be unable to restructure its debt obligations incurred through guarantees of MPM's and MPS's debts, MPI may be forced to seek protection under Chapter 7 or 11 of Title 11 the United States Code. On April 10, 1997, DBS sent to MPS a written demand for payment of the outstanding debt owed to DBS by MPM. In addition to demanding payment, DBS imposed the default interest rate (an additional 3% interest rate) on the outstanding debt, which has been accrued through the expected completion of the liquidation process. Two of the Company's former directors, Lewis Solomon and Gary Stein ("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New York against the Company and its major customer, Schlumberger. This filing was made one day after Gary Stein resigned from the Company's Board of Directors. Lewis Solomon previously resigned in August 1998 from the Company's Board of Directors. In the complaint, Plaintiffs have charged that the Company failed to pay them for alleged consulting services, expense reimbursements and other forms of compensation aggregating $101,250. Further, Plaintiffs allege that they were wrongfully terminated, thereby preventing them from exercising stock options, and that the Company interfered with the Plaintiffs prospective economic relationships and business advantages as consultants and directors of public corporations. The total of other alleged damages claimed by Plaintiffs are $5.5 million plus additional damages to be determined at trial. The Company believes that the Plaintiffs' claims are without merit and will vigorously oppose these allegations. In addition, the Company has made substantial counter claims against Plaintiffs for damages of $829,020, attorneys fees and additional damages to be proven at trial. In the counterclaim, the Company alleged that Mr. Solomon and Mr. Stein, as directors, voted to approve an agreement between themselves and the Company which would compensate them as consultants in addition to director fees that Mr. Solomon and Mr. Stein were then being paid, which agreement was not approved by a majority of disinterested directors in accordance with California Corporations Code 310(a). In addition, the counterclaim alleges Mr. Solomon and Mr. Stein voted themselves various options in violation of the same Code, and that the agreement was not signed by a Company officer with requisite authority to approve such an agreement. And finally, the counterclaim alleges that in approving the agreement, Mr. Solomon and Mr. Stein breached their fiduciary duties and they did not provide any services of material benefit to the Company. Because the lawsuit is at such an early stage, it is impossible to estimate the damages, if any, the Company may be required to pay the Plaintiffs. The Company is involved in various other claims arising in the ordinary course of business; none of these other claims, in the opinion of management, is expected to have a material adverse impact on the financial position, cash flows or overall trends in the results of operations of the Company. F-58 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under the SFAS 109 asset and liability method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. Net income (loss) is comprised of the following:
Year ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------- Domestic operations $ 725,000 $ 289,000 $ (2,526,000) Singapore operations 3,961,000 (11,785,000) (39,316,000) - ---------------------------------------------------------------------- Total $4,686,000 $(11,496,000) $(41,842,000) ======================================================================
A reconciliation of the provision for income taxes to the amount computed by applying the statutory Federal income tax rate to income before income taxes follows: Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Amounts computed at Federal statutory rate $ 1,593,000 $ (3,909,000) $(14,295,000) Foreign losses with no benefit 3,121,000 10,910,000 Taxes below the Federal rate on undistributed foreign earnings 831,000 2,829,000 Alternative minimum taxes due 12,000 Realization of previously deferred tax benefits (1,369,000) Amortization of non-deductible intangible assets 37,000 37,000 38,000 Non-deductible expenses 7,000 6,000 247,000 Losses for which no current benefits are available -- -- 271,000 Utilization of NOL carryforward (262,000) (86,000) -- - ------------------------------------------------------------------------------- Provision for income taxes $ 18,000 $ -- $ -- =============================================================================== F-59 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The components of deferred income taxes: Year ended December 31, 1998 1997 Deferred tax assets: Net operating loss carryforwards $ 3,724,000 $ 3,951,000 Accrued liabilities and reserves 652,000 2,804,000 Tax credit carryforwards 635,000 499,000 Deferred income -- 106,000 Book and tax depreciation differences 95,000 92,000 - -------------------------------------------------------------------------------- 5,106,000 7,452,000 Valuation allowance (5,106,000) (7,452,000) - -------------------------------------------------------------------------------- Deferred taxes $ -- $ -- ================================================================================ At December 31, 1998 and 1997, a 100% valuation allowance has been provided on the total deferred income tax assets as they are not more likely than not to be realized. The Company has not recorded provisions for any United States income taxes in 1997 and 1996. At December 31, 1998, the Company had Federal net operating loss carryforwards of approximately $10,531,000 for Federal tax reporting purposes and approximately $2,450,000 for California tax purposes. The net operating loss carryforwards for tax purposes expire between 2000 and 2011. As of December 31, 1998, the Company also has approximately $500,000 and $135,000 in Federal and state research and development credit carryforwards, respectively. These credits expire between 2000 to 2012. Additionally, the Company has approximately $31,000 of investment tax credits which expire in 2001. The Company believes that it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. During 1997 and 1996, the Company's Singapore operations generated operating losses for both financial reporting and income tax purposes. NOTE 9 - SHAREHOLDERS' EQUITY In October 1996, the Company issued $2.8 million in 8% convertible debentures. As of December 31, 1996, holders of $900,000 of these debentures had elected to convert, under the terms of the debentures, into 1,306,996 shares of common stock. As of February 20, 1997, holders of the remaining $1.9 million of debentures had elected to convert, resulting in the issuance of an additional 3,801,786 shares. During 1998, employees exercised options to purchase 63,611 shares of the Company's common stock. In order to permit the Company to issue additional options to employees, the Shareholders approved an amendment to the Company's 1993 Stock Option/Stock Issuance Plan, which reserved an additional 4 million shares for the plan (see Note 12) on August 21, 1997. As of March 10, 1998, shareholders approved an amendment to the Company's Amended and Restated Articles of Incorporation to increase the authorized shares of Common Stock from 15 million shares to 50 million shares and to add 10 million shares of undesignated preferred stock, pursuant to a written consent solicitation. The Company is prohibited by certain agreements from paying cash dividends. MPS is a party to a line of credit facility with a bank that requires MPS to obtain the consent of DBS prior to declaring dividends, repaying creditors or transferring funds to MPI. In addition, an agreement relating to the guarantee of Motorola of a bank loan to MPS grants Motorola the right to prohibit payment of dividends on the stock of MPI, CTM and MPA. The Transpac agreements also contain similar restrictions. F-60 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution retirement savings plan which is intended to qualify under section 401(k) of the Internal Revenue Code. The Plan covers substantially all full-time U.S. employees. Participants may contribute a percentage of their salaries subject to statutory annual limitations. The Company matches a percentage of the employee contributions as specified in the plan agreement. Contributions by the Company totaled $70,000, $48,000 and $65,000 in 1998, 1997 and 1996, respectively. NOTE 11 - STOCK OPTION/STOCK ISSUANCE PLAN AND STOCK PURCHASE WARRANTS STOCK OPTION/STOCK ISSUANCE PLAN - The Company maintains a stock option/stock issuance plan under which incentive stock options may be granted to employees of the Company and nonqualified stock options may be granted to consultants and non-employee directors of the Company. Under the terms of the plan, nontransferable options may be granted for terms of up to 10 years and are generally exercisable at the rate of 33% per year, although vesting terms are determined at the discretion of the Board of Directors. Options are generally granted with an exercise price not less than the fair market value of the common stock shares at the date of grant. A total of 4,690,632 shares of common stock have been reserved for issuance under the plan. The plan expires in December 2000. On August 21, 1997, the Company cancelled and regranted substantially all existing options (other than options granted pursuant to the Automatic Option Grant Program). Based in part upon the delisting of the Company's Common Stock from the Nasdaq National Market, the financial condition of the Company, the stock price and the necessity of retaining its employees, the Company believes that this program would be in the best interests of the shareholders. As such, the Board of Directors and the Stock Option Plan Administration Committee cancelled and regranted substantially all options outstanding under the Discretionary Option Grant Program of the Plan (and granted additional options to persons who have received options under the Automatic Option Grant Program) with an exercise price in excess of the fair market value of the Common Stock of the Company as traded on the OTC Bulletin Board on the Grant Date. Pursuant to such program, each such outstanding option was cancelled and a new replacement option granted for the same number of shares, with an exercise price of $0.19875 (the fair market value of the Common Stock on the new grant date). The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for this plan. Under APB Opinion 25, when the exercise price of options granted under the Company's plan is equal to the market price of the underlying stock on the date of grant, no compensation cost is recognized. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if such compensation cost for the Company's stock option and issuance plans had been determined in accordance with the fair value based method prescribed in SFAS 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: 0% dividend yield; expected volatility of 75%, 19 - 23% and 16%, risk free interest rates of 5.39 - 5.75%, 5.25% - 6.22% and 6.10%; and expected lives of 3 to 6 years (determined on an option-by-option basis). Under the accounting provisions of SFAS 123, the Company's net income (loss) per share would have been increased to the pro forma amounts indicated below: F-61 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996 Net loss: As reported................................... $4,686,000 $(11,496,000) $(41,842,000) Proforma...................................... 4,650,000 (11,583,000) (41,858,000) Earnings per common share: As reported................................... 0.43 (1.11) (7.68) Proforma...................................... 0.43 (1.12) (7.69) Earnings per common share assuming dilution: As reported................................... 0.43 (1.06) (7.68) Proforma...................................... 0.42 (1.07) (7.69)
A summary of the status of the Company's stock option plan as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates is presented below:
1998 1997 1996 ----------------------------------------------------------------------------------------------- WEIGHTED- Weighted- Weighted- SHARES AVERAGE Shares Average Shares Average (000) EXERCISE PRICE (000) Exercise Price (000) Exercise Price ----------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,870 $0.36 1,547 $2.22 550 $2.62 Granted 578 0.54 4,264 0.32 1,117 2.03 Exercised (64) 0.20 -- -- (61) 1.35 Forfeited (1,960) 0.28 (1,941) 1.75 (59) 3.28 Outstanding at end of year 2,425 0.48 3,870 0.36 1,547 2.22 Options exercisable at year-end 1,066 0.41 1,202 0.37 867 2.14 Weighted-average fair value of options granted during the year $ 0.27 $ 0.10 $ 0.53
The following table summarizes information about fixed stock options outstanding at December 31, 1998.
Options Outstanding Options Exercisable --------------------------------------------------------------- ---------------------------- Number Weighted-Average Weighted-Average Number Weighted- Range of Exercise Outstanding at Remaining Exercise Price Exercisable at Average Prices 12/31/98 Contractual Life 12/31/98 Exercise Price - -------------------------------------------------------------------------------------------------------------------- $ 0.20 to $ 0.26 504,720 8.6 years $0.20 258,587 $0.20 $ 0.42 to $ 0.51 1,605,333 8.9 $0.47 775,001 $0.49 $ 0.58 to $ 0.63 259,000 9.2 $0.61 -0- $ -- $ 1.75 to $ 1.91 45,900 7.9 $1.90 23,175 $1.90 $ 4.19 to $ 5.13 9,900 5.6 $5.04 9,450 $5.08 ============== ============= $ 0.20 to $ 5.13 2,424,853 1,066,213 ============== =============
STOCK PURCHASE WARRANTS - On November 19, 1997, the Company entered into an Investment Banking Agreement for a term of two years. Pursuant to the Investment Banking Agreement, the Company is to receive business development services including the review of the Company's managerial and financial requirements, review of the Company's budgets and business plans, analysis of alternative methods by which the Company can raise capital and certain other related services in exchange for the issuance of 1,000,000 common stock purchase warrants. This warrant has a term of five years, an exercise price of $1.00 per share, and has certain registration rights. The fair market value of the Company's Common Stock on the grant date was $0.625. The exercise of the warrant was contingent on shareholder approval of an increase in the number of authorized shares necessary to provide a sufficient number of shares underlying the warrant. Shareholders subsequently granted such F-62 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS approval effective March 10, 1998. The Company issued 50,000 common stock purchase warrants at an exercise price of $1.00 per share in November 1997, pursuant to an agreement whereby the Company will receive investment consulting services for a period of two years. The warrants become exercisable over the first two years of the agreement and expire in November 2002. Both agreements were cancelled for nonperformance during 1998 and the warrants lapsed without exercise. In connection with the issuance of $2.8 million of convertible debentures on October 23, 1996 (see Note 7) the Company issued 75,421 common stock purchase warrants to the lead investor at an exercise price of $0.55 (the average conversion price of the debentures). These warrants, which were exercisable 45 days after issuance, expired on October 23, 1997. In connection with its IPO (see Note 10), the Company issued 160,000 common stock purchase warrants to its underwriter at an exercise price of $6.50. These warrants, which were exercisable upon issuance, expire in April 1999. The Company issued 17,693 common stock purchase warrants at an exercise price of $5.63 per share in August 1993. These warrants expired in August 1998. No stock purchase warrants have been exercised during the three years ended December 31, 1998. NOTE 12 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS Cash paid for interest during 1998, 1997 and 1996 totaled $18,000, $688,000 and $1,731,000 respectively. In 1996, the Company entered into capital lease obligations to acquire property, plant and equipment totaling $1,784,000. As discussed in Notes 7 and 10, holders of $1,900,000 of convertible debentures had elected to convert their debentures into 3,801,856 shares of common stock, as of December 31, 1997. NOTE 13 - RELATED PARTY TRANSACTIONS In exchange for management, marketing, advisory, strategic planning and technical services, the Company paid $249,000 and $626,000 in 1998 and 1997 to the Company's present or former Board Members or entities which are affiliated with three of the Company's Board members. The Company has $67,000 accrued and unpaid to Board Members at December 31, 1998. NOTE 14 - DISCONTINUED OPERATIONS On July 10, 1997, The Development Bank of Singapore Limited, one of the Company's and its subsidiaries largest creditors ("DBS"), appointed a Receiver and Manager to liquidate the assets of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is a wholly owned subsidiary of the Company which manufactured primarily pressed ceramics products. DBS exercised its option to appoint a Receiver and Manger under the terms of a Deed of Debenture dated November 27, 1984 (as amended) between DBS and MPS. The Company anticipates that the Receiver and Manager will complete the liquidation of MPS in 1999. The Company has guaranteed all of MPS's obligations to DBS These loans are included in the caption "Debt and accrued interest of discontinued operations, due on demand" in the Consolidated Balance Sheet. The Company has guaranteed the repayment of such shortfall. The Company recorded the effect of the receivership as of June 30, 1997, and the results of operations of MPS have been classified as "Loss from discontinued operations" on the Consolidated Statement of Operations. As a result of the appointment of a Receiver and Manager, MPS is no longer able to manufacture its pressed ceramic products and has ceased generating revenue since July 10, 1997. During 1998, the Company (as guarantor) reached written agreements with all six of MPS' secured creditors. For five of those creditors (see separate discussion regarding the settlement of the DBS Bank loans below), the Company agreed to make payments aggregating $3,565,062 as full satisfaction of the total of all obligations to these creditors. The payments to these creditors are due on May 1, 1999. In addition, for one of these creditors, the Company issued immediately exercisable warrants for the purchase of 200,000 shares of the Company's common stock at an exercise price of $1.00 per share in full satisfaction of the debt. The Company has reached further agreements with five of the six MPS creditors. The Company has signed letter agreements which call for the conversion of all amounts due to these five creditors into shares of Series A Preferred Stock. These conversion agreements are F-63 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS subject to agreement of the final creditor to conversion, reduction of the letter agreement into definitive agreements, as well as approval by a majority of the Company's shareholders. The Company has also evaluated the net realizable value of the assets of its MPS subsidiary. The effect of this is to reduce the carrying value of certain assets by $6.4 million in 1997 and $6.2 million in 1996. These charges are included on the Consolidated Statement of Operations in the caption "Estimated gain (loss) on disposal of discontinued operations." In 1998, the Company revised its estimate of the amount it will ultimately owe under debt obligations originating in Singapore. In November 1998, Management was informed of the sale of the two buildings owned by MPS, and such buildings were sold in excess of their book value. The net proceeds from these sales were utilized to retire a portion of Singapore debt obligations. The revised estimate of the amount ultimately owed under these debt obligations resulted in recording a gain on the estimated disposal of discontinued operations of $3,512,000 for the year ended December 31, 1998. This gain is included on the Consolidated Statement of Operations in the caption "Estimated gain (loss) on disposal of discontinued operations." On March 18, 1997, a Receiver was appointed to handle the liquidation of the multilayer ceramics operations of MPM (S) Pte. Ltd. As of December 31, 1998, essentially all of the assets of MPM had been sold. Final resolution of the remaining liabilities will come only after the liquidation of MPS, since MPS has guaranteed the DBS bank loan and the equipment leases entered into by MPM. The portion of these liabilities remaining after any reduction available from the sale of MPS and MPM assets will then be transferred to MPI, as MPI also guaranteed these loans and leases. As of April 14, 1998, the Company (as guarantor) reached an agreement with MPM's lessor for the, payment of $483,056 as full satisfaction of the balance remaining after the sale of the leased equipment; this payment is due May 1, 1999. The Company has reached further agreement with the lessor wherein the lessor would convert the amount due to it into shares of Series A Preferred Stock. This conversion agreement is subject to agreement of the final MPS creditor to conversion, reduction of the letter agreement into definitive agreements, as well as approval of a majority of the Company's shareholders. The holders of the debentures issued to Transpac and related parties still retain $9.0 million of debt securities issued by MPM which are guaranteed by the Company. The Company and MPM are in default thereunder. On April 22, 1998, the Company (as guarantor) reached an agreement with Transpac for the payment of $3,112,463 as full satisfaction of the total of all obligations to Transpac; this payment is due on May 1, 1999. In addition, immediately exercisable warrants for the purchase of 500,000 shares of the Company's common stock at an exercise price of $1.00 per share were issued to Transpac, and the Company agreed to a payment of 30% of any monetary proceeds from the settlement of a specific claim, and the Company guaranteed a minimum proceeds of $1,000,000 on or prior to December 31, 1999. The Company has reached further agreement with Transpac wherein Transpac would convert the amount due to it into shares of Series A Preferred Stock. This conversion agreement is subject to agreement of the final MPS creditor to conversion, reduction of the letter agreement into definitive agreements, as well as approval of a majority of the Company's shareholders. As indicated previously, both MPS and MPM are indebted to DBS, and the Company has guaranteed those obligations. As of July 20, 1998, the Company (as guarantor) reached an agreement with DBS for the payment of $1,177,397 as full satisfaction of all obligations to DBS; this payment is due on May 1, 1999. In addition, the Company agreed to a payment of 5% of any monetary proceeds from the settlement of a specific claim, and there were further considerations given to DBS that are not considered material by the Company. The Company has reached further agreement with the lessor wherein the lessor would convert the amount due to it into shares of Series A Preferred Stock. This conversion agreement is subject to agreement of the final MPS creditor to conversion, reduction of the letter agreement into definitive agreements, as well as approval of a majority of the Company's shareholders. The Company's MPC subsidiary was informed in April 1997 that Carborundum Corporation ("Carborundum"), its sole customer, was immediately cancelling the manufacturing and related agreements with MPC as a result of Carborundum's sale of its assets to a third party. On April 5, 1997, a fire at the Company's MPC facility caused damage to the building and certain equipment. The Company is insured against the fire, and has fully settled the claim with the Company's insurance carrier. F-64 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company has closed the MPC operation and has terminated all of its MPC employees. The Company has recorded the effect of the closure of this business as of June 30, 1997, and the results of operations of MPC have been classified as "Loss from discontinued operations" in the Consolidated Statement of Operations. Discontinued operations include management's best estimates of the amounts expected to be realized on the sale of its assets associated with theses discontinued operations and the expenses to be incurred through the disposal date. The amounts the Company will ultimately realize and incur could differ materially in the near term from the amounts assumed in arriving at the loss on disposal of the discontinued operation. Management anticipates that the foreign operations will be fully dissolved in 1999. However, Management cannot predict how long it may take the High Court of the Republic of Singapore to complete the Winding Up of these companies. All debt obligations originating in Singapore have been classified to the caption "Debt and accrued interest of discontinued operations, in default, due on demand." "Current liabilities of discontinued operations, net" included in the Consolidated Balance Sheets at December 31, 1997 consists of accounts payable and accrued liabilities. Consistent with the 1997 presentation, all guaranteed debt obligations have been reclassified to the caption "Debt and accrued interest of discontinued operations, due on demand" and are included in the discussion at Note 6. On April 14, 1999, the final MPS creditor, which had not previously signed a letter agreement calling for the conversion into shares of Series A Preferred Stock, signed a Letter of Intent with a group of outside investors ("Investor") to assign its creditor position for undisclosed consideration. This Letter of Intent is subject to the Company obtaining approval of the debt conversion to equity by a majority of the Company's shareholders. In anticipation that this assignment will be completed, the Investor has signed a non-binding letter agreement which calls for the conversion of all the Company's obligations to this final MPS creditor into shares of Series A Preferred Stock. NOTE 15 - DECONSOLIDATION OF CURRENT LIABILITIES OF DISCONTINUED OPERATIONS, NET TO SHAREHOLDERS' DEFICIT During 1998, the High Court of the Republic of Singapore ordered the Winding up of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the Company. As a result of this decision, MPM cannot continue as an operating business, and it cannot be allowed to dispose of its assets or incur further liabilities. In addition, the Company does not have any control over the management of MPM. This function is undertaken by the Receiver and Manager appointed by DBS Bank. In September 1997, the High Court of the Republic of Singapore ordered the Winding up of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly owned subsidiary of the Company. As with MPM, MPS cannot continue as an operating business, and the Company does not have any control over the management of MPS. This function is undertaken by the Receiver and Manager appointed by DBS Bank. The Company has been informed by DBS and the Receiver and Manager for MPM and MPS that there will not be any funds remaining (after the liquidation of assets) to satisfy any claims of unsecured creditors for MPM and MPS. Due the circumstances as described above, management, effective for 1998, has not consolidated MPM and MPS, into the consolidated financial statements for MPI and subsidiaries. For MPM, the decision was based upon the Singapore High Court's decision to Wind Up in September 1997, however, due to the material amount of assets remaining to be liquidated and also due to requests made by MPS' Receiver and Manager for the F-65 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Company to assist them in the realization and disposal of MPS' remaining assets, Management elected to consolidate until there was a clearer determination of the control of the subsidiary and realization of its assets. In November 1998, Management was informed of the sale of the two buildings owned by MPS. In addition, it became more evident during 1998 that any remaining realization of accounts receivable on the books of MPS was highly questionable. Accordingly the decision was made to not consolidate MPM and MPS. In 1998, the Company revised its estimate of the amount it will ultimately owe under debt obligations originating in Singapore. Revision of the estimate arose primarily from the sale of two buildings in Singapore. In November 1998, Management was informed of the sale of the two buildings owned by MPS, and such buildings were sold in excess of their book value. The net proceeds from these sales were utilized to retire a portion of Singapore debt obligations. The revised estimate of the amount ultimately owed under these debt obligations resulted in recording a gain on the estimated disposal of discontinued operations of $3,916,000 for the year ended December 31, 1998. This gain is included on the Consolidated Statement of Operations in the caption "Estimated gain (loss) on disposal of discontinued operations." The effect of this decision was to reduce the Current Liabilities of Discontinued Operations, net and improve the Shareholders' Deficit by $10.2 million as of December 31, 1998. NOTE 16 - GEOGRAPHIC INFORMATION
Year ended December 31, 1998 1997 1996 Net sales to unaffiliated customers: United States $19,271,000 $28,522,000 $19,044,000 Singapore -- -- -- - ----------------------------------------------------------------------------------------------- Net sales as reported in the accompanying consolidated statements of operations $19,271,000 $28,522,000 $19,044,000 =============================================================================================== Net income (loss) from operations: United States $ 725,000 $ 289,000 $(2,526,000) Singapore -- -- -- - ----------------------------------------------------------------------------------------------- Income (loss) from operations as reported in the accompanying consolidated statements of operations $ 725,000 $ 289,000 $(2,526,000) ===============================================================================================
December 31, 1998 1997 - ------------------------------------------------------------------------------ Identifiable assets: United States $ 6,885,000 $ 9,911,000 Singapore and Indonesia -- - ------------------------------------------------------------------------------ Total assets as reported in the accompanying consolidated balance sheets $ 6,885,000 $ 9,911,000 ============================================================================== Identifiable liabilities: United States $ 5,022,000 $ 9,517,000 Singapore 27,055,000 40,626,000 - ------------------------------------------------------------------------------ Total liabilities as reported in the accompanying consolidated balance sheets $32,077,000 $ 50,143,000 ============================================================================== F-66 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - EARNINGS PER SHARE
For the Year Ended December 31, 1998 --------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount --------------------------------------------- Net income from continuing operations $725,000 BASIC EPS Income available to common stockholders 725,000 10,817,695 $0.07 ======= Effect of Dilutive Securities Stock Options -- 150,542 Warrants -- -- -------- ----------- DILUTED EPS Income available to common stockholders + assumed conversions $725,000 10,968,237 $0.07 ======== ========== =======
Options to purchase 1,920,133 shares and warrants to purchase 660,000 shares of common stock at prices ranging from $0.42 to $6.50 were outstanding during 1998, but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares. The options and warrants, which expire between April 1999 and July 2008 were still outstanding as of December 31, 1998.
For the Year Ended December 31, 1997 -------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------------------- Net income from continuing operations $289,000 BASIC EPS Income available to common stockholders 289,000 10,360,841 $0.04 ======= Effect of Dilutive Securities Stock Options -- 525,478 Warrants -- -- -------- ---------- DILUTED EPS Income available to common stockholders + assumed conversions $289,000 10,886,319 $0.03 ======== ========== =======
Options and warrants to purchase shares of common stock were outstanding during the second half of 1997 but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares. F-67 MICROELECTRONIC PACKAGING, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 -------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------------------- Net loss from continuing operations $ (2,526,000) BASIC EPS Income available to common stockholders (2,526,000) 5,445,380 $(0.46) ========= Effect of Dilutive Securities Stock Options -- -- Warrants -- -- ------------ ----------- DILUTED EPS Income available to common stockholders + assumed conversions $ (2,526,000) 5,445,380 $(0.46) ============= =========== =========
Options and warrants to purchase shares of common stock which were outstanding during the second half of 1996 were not included in the computation of diluted EPS because the options' and warrants' effect on EPS would be anti-dilutive. NOTE 18 - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1998, the Company recorded certain non-recurring adjustments, the most significant of which was a change in the estimated amount payable to secured creditors relating to the Company's discontinued operations (see Note 14). This change in the amount due to secured creditors was primarily due to the sale of the two buildings owned by MPS which resulted in a net reduction in debt incurred by discontinued operations (guaranteed by the Company) and a gain on disposal of discontinued operations, totaling $3.5 million. After the effect of this reduction in debt of discontinued operations, the Company owes approximately $27.1 million at December 31, 1998 of debt and accrued interest, which amount is classified as "Debt and accrued interest of discontinued operations, in default, due on demand" in the Consolidated Balance Sheet. F-68 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULES Board of Directors Microelectronic Packaging, Inc. San Diego, California The audits referred to in our report dated March 11, 1999, except for Note 14, paragraph 15, which is as of April 14, 1999, relating to the consolidated financial statements of Microelectronic Packaging, Inc., which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a working capital deficiency of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31, 1998, is in default of most of it's loan agreements, is economically dependent on a single customer, has three foreign subsidiaries in receivership and/or liquidation under Singapore law, has various claims and lawsuits filed against the Company and it's subsidiaries and may be forced to seek protection for the Company and certain subsidiaries under United States bankruptcy law. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. Continuation of the Company is dependent on the Company's ability to negotiate arrangements with its lenders, raise sufficient capital, achieve sufficient cash flow to meet its debt obligations and profitability. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO SEIDMAN, LLP Costa Mesa, California March 11, 1999 except for Note 14, paragraph 14, which is as of April 14, 1999. F-69 MICROELECTRONIC PACKAGING, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1998 SCHEDULE II
Additions Balance At Charged To Transfers to Beginning Of Costs And Discontinued Balance At End Period Expenses Operations Deductions Of Period ----------------------------------------------------------------------------------- Allowance For Doubtful Accounts for the Year Ended: December 31, 1996 $ 199,000 $ 99,000 $ $ $ 298,000 December 31, 1997 298,000 -- -- (63,000) 235,000 December 31, 1998 235,000 -- -- -- 235,000 Inventory Valuation Reserves for the Year Ended: December 31, 1996 $ 1,030,000 $ 606,000 $ -- $ (312,000) $ 1,324,000 December 31, 1997 1,324,000 49,000 (909,000) (220,000) 244,000 December 31, 1998 244,000 455,000 -- -- 699,000 Other Valuation Reserves (1) for the Year Ended: December 31, 1996 $ 983,000 $1,817,000 $ -- $ -- $ 2,800,000 December 31, 1997 2,800,000 -- (2,526,000) -- 274,000 December 31, 1998 274,000 -- -- (200,000) 74,000 Property, Plant And Equipment - Continuing Operations for the Year Ended: December 31, 1997 $ 6,163,000 $ -- (6,163,000) $ -- $ -- December 31, 1998 -- -- -- -- -- Property, Plant And Equipment - Discontinued Operations for the Year Ended: December 31, 1997 $14,943,000 $ 755,000 $ 6,163,000 $ -- $21,861,000 December 31, 1998 21,861,000 -- -- (21,861,000) --
(1) Pertains To Other Receivables, Including Innoventure Receivable for 1996. F-70 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 ---------------------------- COMMISSION FILE NUMBER 0-23562 --------------------- MICROELECTRONIC PACKAGING, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-3142624 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9577 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123 - -------------------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (619) 292-7000 --------------------- Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At May 10, 1999, there were outstanding 10,856,890 shares of the ---------- Registrant's Common Stock, no par value per share. ================================================================================ F-71 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) Current assets: Cash $ 129,000 $ 469,000 Accounts receivable, net 1,130,000 1,306,000 Inventories 2,742,000 3,073,000 Other current assets 166,000 60,000 - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 4,167,000 4,908,000 Property, plant and equipment, net 1,654,000 1,806,000 Other non-current assets 144,000 171,000 ==================================================================================================================== $ 5,965,000 $ 6,885,000 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Current portion of long-term debt $ 19,000 $ 20,000 Accounts payable 3,932,000 4,045,000 Accrued liabilities 669,000 908,000 Debt and accrued interest of discontinued operations, in default, due on demand 27,557,000 27,055,000 - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 32,177,000 32,028,000 Long-term debt, less current portion 45,000 49,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT Common stock, no par value 40,162,000 40,143,000 Accumulated deficit (66,419,000) (65,335,000) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' deficit (26,257,000) (25,192,000) - -------------------------------------------------------------------------------------------------------------------- $ 5,965,000 $ 6,885,000 ====================================================================================================================
F-72 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, --------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Net sales $ 1,743,000 $ 7,334,000 Cost of goods sold 1,584,000 5,381,000 - ---------------------------------------------------------------------------------------------------------------------- Gross profit 159,000 1,953,000 Selling, general and administrative 546,000 776,000 Engineering and product development 191,000 272,000 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (578,000) 905,000 Other income (expense): Interest (expense), net (506,000) (3,000) Other income, net -- 70,000 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before provision for income taxes (1,084,000) 972,000 Provision for income taxes -- (18,000) - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,084,000) $ 954,000 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) per common share $ (0.10) $ 0.09 ====================================================================================================================== ====================================================================================================================== Net income (loss) per common share - assuming dilution $ (0.10) $ 0.08 ======================================================================================================================
F-73 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, --------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES OF: Continuing operations $ (331,000) $ 195,000 Discontinued operations (23,000) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (331,000) 172,000 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of fixed assets (4,000) (546,000) Proceeds from the sale of fixed assets 13,000 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (4,000) (533,000) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt and promissory notes (5,000) (3,000) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (5,000) (3,000) - ---------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH (340,000) (364,000) CASH AT BEGINNING OF PERIOD 469,000 1,296,000 - ---------------------------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 129,000 $ 932,000 ======================================================================================================================
F-74 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT (unaudited)
Common Stock Accumulated --------------------------------------- Shares Amount Deficit Total ----------------- ----------------- ------------------ ------------------ Balance at January 1, 1999 10,856,890 $40,143,000 $(65,335,000) $(25,192,000) Non-employee stock-based compensation 19,000 19,000 Net (loss) (1,084,000) (1,084,000) - ---------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1999 10,856,890 $40,162,000 $(66,419,000) $(26,257,000) ============================================================================================================================
F-75 MICROELECTRONIC PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. QUARTERLY FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements and related notes as of March 31, 1999 and for the three month period ended March 31, 1999 and 1998 are unaudited but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position and results of operations of the Company for the interim period. Certain prior year amounts have been reclassified to conform to the current year presentation. The results of operations for the three month period ended March 31, 1999 is not necessarily indicative of the operating results to be expected for the full fiscal year. The information included in this report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other information, including risk factors, set forth for the year ended December 31, 1998 in the Company's Annual Report on Form 10-K. Readers of this Quarterly Report on Form 10-Q are strongly encouraged to review the Company's Annual Report on Form 10-K. Copies are available from the Chief Financial Officer of the Company at 9577 Chesapeake Drive, San Diego, California 92123. 2. INVENTORIES Inventories consist of the following:
MARCH 31, 1999 December 31, 1998 ---------------------------- ---------------------------- (UNAUDITED) Raw materials ................................. $ 2,276,000 $ 2,203,000 Work-in-progress .............................. 1,194,000 1,531,000 Finished goods ................................ 1,000 38,000 Obsolescence reserve .......................... (729,000) (699,000) ---------------------------- ---------------------------- $ 2,742,000 $ 3,073,000 ============================ ============================
3. EFFECTS OF INCOME TAXES The Company has not recorded provisions for any income taxes for the three months ended March 31, 1999, since the Company's operations have generated operating losses for both financial reporting and income tax purposes. A 100% valuation allowance has been provided on the total deferred income tax assets as they are not more likely than not to be realized. The Company believes that it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. F-76 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 4. NET INCOME (LOSS) PER SHARE
For the three months ended March 31, 1999 -------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------ ------------ --------- Loss from continuing operations $(1,084,000) BASIC EPS Loss available to common shareholders $ (0.10) $(1,084,000) 10,856,890 ========
The computation of diluted loss per share excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company.
For the three months ended March 31, 1998 --------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------------- --------------- ----------------- Income from continuing operations $ 954,000 BASIC EPS Income available to common shareholders 954,000 10,793,279 $ 0.09 ================= Effect of dilutive securities: Stock options -- 1,740,282 Warrants -- -- ----------------- --------------- DILUTED EPS Income available to common shareholders + assumed conversions $ 954,000 12,533,561 $ 0.08 ================= =============== =================
Options to purchase 275,800 shares and warrants to purchase 1,227,693 shares of common stock at prices ranging from $0.63 to $6.50 were outstanding during the first quarter of 1998, but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares for the quarter then ended. F-77 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 5. COMMITMENTS AND CONTINGENCIES The Company entered into a lease for new manufacturing facilities and corporate offices. Commencing September 1, 1997, and extends to October 31, 2002. Minimum monthly rental payments of $16,000 began on November 1, 1997, with scheduled annual increases of 6% to 7% per year beginning November 1, 1998. The Company also entered into an agreement in 1998 whereby the Company obtained the use of a piece of test equipment and technical support for such equipment from a supplier. The agreement calls for minimum annual payments of $360,000 through 2007, plus the possible acceleration of payments if the Company obtains new customers with projects that require the use of the equipment and technical support of the equipment supplier. 6. ASIAN CREDITOR LOAN AGREEMENTS GUARANTEED BY MPI With respect to the Company's subsidiaries in Singapore, all of which ceased operations in 1997 ("Singapore Subsidiaries"), the Company guaranteed certain debt obligations of the Singapore Subsidiaries ("Guaranty Obligations"). During 1998, the Company entered into settlement agreements ("Settlement Agreements") with each of the eight creditors of the Singapore Subsidiaries to whom the Company had a liability under the Guaranty Obligations ("Singapore Subsidiary Creditors"), pursuant to which the Company and the Singapore Subsidiary Creditors agreed that the Company would be released from all of its liabilities under the Guaranty Obligations in exchange for cash settlement payments in the aggregate amount of approximately $9.3 million ("Settlement Payments"). The Company was obligated to pay the entire amount of the Settlement Payments on or about May 1, 1999 ("Settlement Due Date"). After entering into the Settlement Agreements, the Company determined that it would not have the ability to pay any portion of the Settlement Payments by the Settlement Due Date. Therefore, the Company and the Singapore Subsidiary Creditors negotiated new terms for the settlement of the Guaranty Obligations, which new settlement terms are set forth in non- binding letter agreements entered into between the Company and each of the eight Singapore Subsidiary Creditors during the first quarter of 1999 ("Letter Agreements"). The Letter Agreements provide that the entire amount of the Guaranty Obligations would be converted into shares of the Company's Series A Preferred Stock ("Debt to Equity Conversion"). Each share of Series A Preferred Stock would be convertible into two shares of the Company's Common Stock, have a 3.5% per annum cumulative dividend, liquidation preferences, registration rights, and certain other rights, preferences and privileges senior to the Company's Common Stock. Upon the effective date of the Debt to Equity Conversion, the entire amount that would be shown on the Company's accompanying financial statements as "Debt and accrued interest of discontinued operations, in default, due on demand ("Discontinued Operations Debt"), the aggregate amount of which is $27,557,000 as of March 31, 1999, would be converted into shares of the Company's Series A Preferred Stock. Upon such conversion, the Discontinued Operations Debt would be reduced to zero. The Letter Agreements call for the Company and the Singapore Subsidiary Creditors to enter into definitive agreements with respect to the Debt to Equity Conversion ("Conversion Agreements"). The Company has entered into Conversion Agreements with three of the eight Singapore Subsidiary Creditors. In addition, the Company has entered into an agreement with an additional Singapore Subsidiary Creditor, pursuant to which all of the rights of such creditor under the Guaranty Obligations will be assigned to one or more third parties (some of whom are employees of the Company). All of such third parties have agreed, upon such assignment, to enter into Conversion Agreements and participate in the Debt to Equity Conversion on the same terms and conditions as the other Singapore Subsidiary Creditors ("Creditor Assignment"). The Creditor Assignment will become effective upon the approval of the Debt to Equity Conversion by the Company's shareholders. Thus, after taking into account the three Conversion Agreements and the Assignment Agreement that have already been entered into, the Company only needs to enter into Conversion Agreements, which may not be more favorable to any one creditor than the other creditors, with all of the remaining four of the Singapore Subsidiary Creditors and obtain shareholder approval and a fairness opinion. As soon as that has been accomplished, which the Company believes should be accomplished during the second quarter of 1999, the Company will take steps to obtain shareholder approval of the Debt to Equity Conversion. In the event the Company is successful in obtaining shareholder approval of the Debt to Equity Conversion, the Discontinued Operations Debt will be eliminated in its entirety and the Company will no longer have any liabilities under the Guaranty Obligations. In addition, if the Company is successful in completing the Debt to Equity Conversion, the equity interests of the Company's existing shareholders will be substantially diluted and the Singapore Subsidiary Creditors, assuming conversion of all their Series A Preferred Stock on the closing of the Debt to Equity Conversion, would own a majority of the outstanding common stock of the company. 7. GOING CONCERN The Company's accompanying financial statements have been prepared assuming the Company (along with its only operating subsidiary, CTM) will continue as a going concern. A number of factors, including the Company's history of significant losses, the debt service costs associated with the Guaranty Obligations and the Company's other debt obligations, and the current uncertainty regarding whether the Company will successfully complete the Debt to Equity Conversion, raise substantial doubts about the Company's ability to continue as a going concern. As of March 31, 1999, the Company has an accumulated deficit of $66.4 million and a working capital deficiency of $28.0 million, which includes $27.6 million of liabilities under the Guaranty Obligations. In the event the Company is not successful in completing the Debt to Equity Conversion, and any of the Singapore Subsidiary Creditors demand that the Company pay any portion of the Settlement Payments or any of the Company's liabilities under the Guaranty Obligations, the Company would be unable to do so. If the Company fails to complete the Debt to Equity Conversion, material adverse impacts will occur with respect to the Company's financial condition and ability to continue as a going concern. Furthermore, such failure is likely to require the Company and its U.S. subsidiaries to seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code. F-78 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUIDTED) - -------------------------------------------------------------------------------- 8. FORWARD LOOKING STATEMENTS These Condensed Consolidated Financial Statements contain forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the effects of debt restructuring. F-79 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS NET SALES For the three months ended March 31, 1999, net sales were $1,743,000 as compared to net sales of $7,334,000 for the first quarter of 1998, resulting in decreased sales of $5,591,000 or 76%. The decrease in net sales is primarily the result of decreased shipments to the Company's largest customer. Sales to this one customer comprised 85% and 77% of total net sales for the first quarters of 1999 and 1998, respectively. Sales to this customer declined from $6,465,000 for the first quarter of 1998 to $1,490,000 for the first quarter of 1999, a decrease of $4,975,000 or 77%. Units shipped to this customer declined by 35%, reflecting lower demand from the customer in the first quarter of 1999 as compared to the first quarter of 1998. Revenue in terms of dollars declined by greater than revenue in terms of units because of a significant shift in product mix in the first quarter of 1999. Approximately one-half of sales to the Company's principal customer in 1999 were comprised of the repair and upgrade of multi-chip modules (MCMs). This repair activity generates only one-fourth of the dollar revenue as compared to the dollar revenue of newly-built MCMs, thereby causing a decline in revenue dollars greater than the decline in revenue units. Such repair activities comprised only 5% of sales for the first quarter of 1998. COST OF GOODS SOLD For the three months ended March 31, 1999, the cost of goods sold was $1,584,000 as compared to $5,381,000 for the first quarter of 1998, a decrease of 3,797,000 or 71%. The decrease in cost of goods sold is partially due to a 32% decline in MCM units shipped from 1998 to 1999. The decrease in units shipped was exacerbated by a 63% decrease in the average selling price of a unit shipped in 1999 as compared to the corresponding quarter of 1998. The primary reason for the decrease in average cost per unit sold results from the change in product mix described above. GROSS PROFIT Gross profit was $159,000 (9% of net sales) for the first quarter of 1999 as compared to $1,953,000 (27% of net sales) for the first quarter of 1998. The decrease in gross profit is attributable to the decrease in sales and the result of the change in product mix, as discussed above. F-80 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $546,000 for the first quarter of 1999, representing a decrease of $230,000 or 30% from the first quarter of 1998. The decrease is primarily the result of a reduction of additional consulting fees which had been incurred by the Company. ENGINEERING AND PRODUCT DEVELOPMENT Engineering and product development expenses were $191,000 for the first quarter of 1999, representing a decrease of $81,000 or 30% from the corresponding quarter of 1998. The decrease is primarily comprised of decreased use of outside consultants in 1999 as compared to 1998. INTEREST EXPENSE Interest expense was $506,000 for the first quarter of 1999, representing an increase of $503,000 from the corresponding quarter of 1998. The Company had previously recorded at June 30, 1997 estimated interest on the Guaranty obligations through December 31, 1998, as part of the estimated loss on its discontinued operations. Since the Guaranty Obligations have not yet been paid, the Company initiated the accrual of interest thereon in the first quarter of 1999. The Company has accrued but not paid this interest. No provision for interest expense was necessary in the first quarter of 1998 as the Company had accrued interest expense at June 30, 1997 as part of its discontinued operations. See Note 6 to the accompanying Condensed Consolidated Financial Statements for an explanation of how the Company intends to eliminate the Guaranty Obligations and the associated interest expense. OTHER INCOME Other income was nil for the first quarter of 1999, as compared to $70,000 for the first quarter of 1998. Other income for 1998 was comprised of the amortization of deferred revenue which was reclassified to discontinued operations at December 31, 1998, and collection of a previous year tax item, which did not occur in 1999. EFFECTS OF INCOME TAXES The Company has not recorded provisions for any income taxes for the three months ended March 31, 1999, since the Company's operations have generated operating losses for both financial reporting and income tax purposes. A 100% valuation allowance has been provided on the total deferred income tax assets as they are not more likely than not to be realized. F-81 The Company believes that it has incurred an ownership change pursuant to Section 382 of the Internal Revenue Code, and, as a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards in subsequent periods will be subject to annual limitations. LIQUIDITY AND CAPITAL RESOURCES During the three months ended March 31, 1999, the Company financed its operations from operating cash flow. During this period, operating activities of continuing operations used $331,000. Investing activities, consisting principally of the acquisition of fixed assets of continuing operations, used $4,000. At March 31, 1999, the Company had a working capital deficiency of $28,011,000 and an accumulated deficit of $66,419,000. At March 31, 1999, the Company had outstanding approximately $27,557,000 of principal and accrued interest under the Guaranty Obligations. The Company's sources of liquidity at March 31, 1999 consisted of inventories of $2,742,000, trade accounts receivable of $1,130,000 and its cash balance of $129,000. The Company has no borrowing arrangements available to it. As indicated in Note 6, to the Condensed Consolidated Financial Statements, the Company has renegotiated its settlement of the Guaranty Obligations pursuant to which settlement all liabilities and accrued interest under the Guaranty Obligations, would be converted into 9,362,777 shares of the Company's Series A Preferred Stock. If the Conversion Agreements are not all finalized, or if the Company's shareholders do not approve the Debt to Equity Conversion, the entire liability of $27,557,000 under the Guaranty Obligations, which is currently in default, will be immediately due and payable. FUTURE OPERATING RESULTS Status as a Going Concern. The Company's independent certified public accountants have included an explanatory paragraph in their audit report with respect to the Company's 1998, 1997, 1996 and 1995 consolidated financial statements related to a substantial doubt with respect to the Company's ability to continue as a going concern. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and assuming the Company is successful in restructuring its liability under the Guaranty Obligations, the Company currently anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations in the ordinary course throughout 1999. Any significant increase in planned capital expenditures or other costs or any decrease in or elimination of anticipated sources of revenue or the inability of the Company to restructure its liability under the Guaranty Obligations could cause the Company to restrict its business and product development efforts. There can be no assurance that the Company will be successful in restructuring its liability under the Guaranty Obligations. If adequate revenues are not available, the Company will be unable to execute its business development efforts and may be unable to continue as a going concern. There can be no assurance that the Company's future consolidated financial statements will not include another F-82 going concern explanatory paragraph if the Company is unable to restructure its liability under the Guaranty Obligations and become profitable. The factors leading to and the existence of the explanatory paragraph will have a material adverse effect on the Company's ability to obtain additional financing. Risk of Bankruptcy. If the Company is not able to restructure its liabilities under the Guaranty Obligations, the Company will need to be reorganized under Chapter 11 of Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of the United States Code. There can be no assurance that if the Company decides to reorganize under the applicable laws of the United States that such reorganizational efforts would be successful or that shareholders would receive any distribution on account of their ownership of shares of the Company's stock. Similarly, there can be no assurances that if the Company decides to liquidate under the applicable laws of the United States that such liquidation would result in the shareholders receiving any distribution on account of their ownership of shares of the Company's stock. In fact, if the Company were to be reorganized or liquidated under the applicable laws of the United States, the bankruptcy laws would require (with limited exceptions) that the creditors of the Company be paid before any distribution is made to the shareholders. Certain Obligations of MPS. In connection with Microelectronic Packaging (S) Pte. Ltd. ("MPS") borrowing from Citibank N.A., Motorola guaranteed (and subsequently satisfied MPS' obligation) of $2.2 million in borrowings from Citibank N.A. Under the terms of the agreement relating to Motorola's guarantee, MPI granted Motorola a security interest in all of the issued and outstanding capital stock of MPS, CTM Electronics, Inc. ("CTM") and Microelectronic Packaging America ("MPA"). While in default, Motorola may have the right to vote and give consents with respect to all of the issued and outstanding capital of MPS, CTM and MPA . As a result, during the continuation of any such event of default, MPI may be unable to control at the shareholder level the direction of the subsidiaries that generate substantially all of the Company's revenues and hold substantially all of the Company's assets. Any such loss of control would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. The other Asian debt agreements contain numerous restrictions and events of default that have been triggered by the aforementioned actions and would, if they became effective and operative, materially adversely affect the Company's business, prospects, results of operations, condition and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. In January 1999, the Company and Motorola signed a non-binding letter agreement which calls for the conversion of all the Company's liabilities to Motorola under the Guaranty Obligations into shares of the Company's Series A Preferred Stock as explained in Note 6 to the accompanying Condensed Consolidated Financial Statements. There can be no assurance that the Company will be successful in its efforts to reduce this non-binding agreement reached with Motorola to a binding Conversion Agreement. Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for 85% of the Company's net sales in the first quarter of 1999 and is expected to continue to account for most of the Company's net sales. Under the agreement between Schlumberger and the Company entered into in January 1998, the Company is obligated to provide Schlumberger with its F-83 requirements for MCM product. Given the Company's anticipated continued reliance on its MCM business as a large percentage of overall net sales, the failure to meet Schlumberger's requirements will materially adversely affect the Company's ability to continue as a going concern. In addition, under the terms of the agreement, Schlumberer is entitled to request repricing of the Company's products. Schlumberger has requested repricing on several occasions in the past. Such repricing in the future may result in the Company being unable to produce the products made for Schlumberger with an adequate operating profit, and the Company may be unable to compete with the prices of other vendors who supply the same or similar products to Schlumberger. The failure to satisfy the terms of the agreement, or the failure of the Company to achieve an operating profit under the contract, would have a material adverse impact on the Company's business, financial condition, and results of operation. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than one year, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry and in other industries concerning the potential effects associated with such compliance. Although the Company currently offers products that are designed to be Year 2000 compliant, there can be no assurance that the Company's products and the software products used by the Company contain all necessary date code changes. As of March 31, 1999, the Company has partially completed an analysis of its readiness for compliance with the Year 2000 change. Its assessment of its manufacturing systems and company products reveals that no known Year 2000 issues currently exist either in the products, their raw materials, or their relationship as components to larger systems produced by its customers; its financial systems software is currently being upgraded to a newer replacement system which will be complete in 1999, and which system is Year 2000 compliant; documentation systems that currently use fixed dating are Year 2000 compliant, while those that require revision dating are currently under review; and approximately 50% of the Company's computing hardware systems have been upgraded to be Year 2000 compliant. The Company's costs to become Year 2000 compliant as of March 31, 1999 have been $235,000 for computer software and $48,000 for computer hardware. The Company has not yet completed its analysis of its readiness for compliance with the Year 2000 change. Based upon the partial analysis described above, the Company believes its exposure to Year 2000 risks is limited because the majority of the Company's recordkeeping systems are new and compliant and have been installed within the last eighteen months. The Company utilizes no custom-programmed "legacy" software or hardware systems known to need Year 2000 upgrading or conversion. The Company believes it should be fully compliant with its Year 2000 issues by the end of the second quarter of 1999 when it believes it will have completed due diligence of its internal systems and supplier compliance requirements, as well as completed the remaining 50% of its computing hardware upgrades needed. However, there can be no assurance that conditions or events may occur during the course of the completion of this analysis which will have an adverse impact on the Company's readiness for compliance with the Year 2000 change. In addition, the Company cannot be certain that its suppliers, service providers and customers will be Year 2000 compliant. The failure of these companies to be fully F-84 compliant could create critical cash shortages to the Company due to the inability of customers to send payments to the Company. In addition, any product shortages from suppliers, or service shutdowns from the Company's utility or communications providers could potentially shut down the Company's manufacturing operations, thereby causing a material adverse impact on the Company's operations and liquidity. The Company believes that the purchasing patterns of customers and potential customers and the performance of vendors may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by the Company or the inability to render services or provide supplies to the Company. Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products, and disruption of supply patterns. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers and vendors, to spend significant resources upgrading their internal systems, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and condition. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no derivative financial instruments. The Company has outstanding indebtedness at March 31, 1999 to DBS denominated in Singapore dollars of approximately Singapore $737,000 (U.S. equivalent $445,000). All of the Company's other indebtedness is denominated in U.S. dollars, and all other Singapore-based assets have been liquidated by the receiver of MPM or MPS and used to retire outstanding indebtedness. Accordingly, the Company believes its exposure to foreign currency rate movements is limited. F-85 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. F-86 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K. None. The Exhibits filed as part of this report are listed below. Exhibit No. Description ----------- ----------------------------------------------------- 10.75 Debt Conversion and Mutual Settlement and Release Agreement between Texas Instruments Incorporated and the Company dated April 27, 1999. 10.76 Debt Conversion and Mutual Settlement and Release Agreement between ORIX Leasing and the Company dated April 16, 1999. 10.77 Debt Conversion and Mutual Settlement and Release Agreement between Transpac Capital and the Company dated April 29, 1999. 10.78 Form of Assignment of Interest Under Letter Agreement With STMicroelectronics, Inc. between FI Financial, LLC and various parties dated April 21, 1999. 10.79 Letter Agreement between STMicroelectronics, Inc., FI Financial LLC and the Company dated April 14, 1999 10.80 Letter of Intent Agreement between FI Financial LLC and the Company dated April 15, 1999. 27.1 Financial Data Schedule F-87 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROELECTRONIC PACKAGING, INC. ------------------------------- (Registrant) Date: May 14, 1999 By: /s/ Denis J. Trafecanty ----------------------------- ---------------------------------- Denis J. Trafecanty Senior Vice President, Chief Financial Officer and Secretary F-88 EX-99.(A) 2 DEBT CONVERSION AND MUTUAL SETTLEMENT AGREEMENT EXHIBIT "A" DEBT CONVERSION AND MUTUAL SETTLEMENT AND RELEASE AGREEMENT THIS DEBT CONVERSION AND MUTUAL SETTLEMENT AND RELEASE AGREEMENT ("Conversion Agreement") is entered into at San Diego, California, effective as of April 29, 1999 ("Effective Date"), between Microelectronic Packaging, Inc. ("MPI"), on behalf of itself and its predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns (collectively with MPI the "MPI Group"); and Transpac Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd ("Natsteel Equity"), and their respective predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns (collectively the "Investor Group"). WITNESSETH: WHEREAS, MPI (as "Holding Company"); MPM Singapore Pte Ltd (as "Company"), a wholly owned subsidiary of MPI that is in liquidation ("MPM"); the Investor Group (as "Investors"); and Transpac Capital (as "Agent"); are parties to an agreement entitled Convertible Loan Agreement dated March 25, 1996 ("Loan Agreement"). WHEREAS, in connection with the Loan Agreement, MPI (as "Guarantor") entered into a guaranty dated March 26, 1996, pursuant to which MPI guaranteed the payment obligations of MPM pursuant to the Loan Agreement ("Guaranty"). WHEREAS, in connection with the Loan Agreement, MPI (as "Company") and the Investor Group (as "Investors") entered into a Subscription Agreement dated March 25, 1996, pursuant to which MPI sold and issued to the Investor Group the aggregate number of Eight Hundred Forty Two Thousand and Thirteen (842,013) shares of MPI's common stock for an aggregate purchase price of Two Million Dollars ($2,000,000.00), which would be equal to a price per share of Two Point Three Seven Five Two Six Zero Two Dollars ($2.3752602) per share ("Subscription Agreement"). WHEREAS, MPM has not been able to comply with its payment obligations under the Loan Agreement, is in default thereunder, and is in liquidation. WHEREAS, in an effort to restructure and settle all of MPI's obligations under the Loan Agreement and the Guaranty, MPI and the Investor Group entered into a Restructuring, Settlement and Mutual Release Agreement dated April 22, 1998, pursuant to which MPI agreed to make certain payments and issue certain warrants to the Investor Group, in exchange for the agreement of the Investor Group to reduce the amount of MPI's obligations under the Loan Agreement and the Guaranty ("Restructuring Agreement"). Contingent upon MPI's performance of its obligations under the Restructuring Agreement, the Restructuring Agreement provided that all obligations of MPI under the Loan Agreement and Guaranty would be deemed settled and the Investor Group would release MPI from any further obligations with respect thereto. WHEREAS, MPI is not able to comply with its payment obligations under the Restructuring Agreement. WHEREAS, the MPI Group with respect to the Investor Group, and the Investor Group with respect to the MPI Group, desire to finally settle all of their respective rights and obligations under the Loan Agreement, the Guaranty, the Restructuring Agreement and all amendments thereto, and all other related agreements (collectively the "Former Agreements"), terminate and release all of their respective rights and obligations under the Former Agreements, and settle all other disputes of any kind that may or could exist between the MPI Group and the Investor Group with respect to the Former Agreements, all upon the terms and conditions set forth in this Conversion Agreement. NOW THEREFORE, in consideration of the mutual agreements contained herein and for other good and sufficient consideration, the receipt and sufficiency of which is hereby acknowledged, MPI and the Investor Group agree as follows: 1. Defined Terms. In addition to those terms that may be defined ------------- elsewhere in this Conversion Agreement, the following terms shall have the meanings defined in this Section 1. 1.1 "Conversion Date" means the date upon which the Transpac Conversion occurs pursuant to the terms and conditions hereof. 1.2 "Performance Date" means June 30, 1999. 1.3 "Series A Preferred Stock" means the Series A Preferred Stock of MPI, the rights, preferences privileges and restrictions of which are set forth in the Certificate of Amendment to the Amended and Restated Articles of Incorporation of MPI, in the form attached hereto as Exhibit "A" and incorporated herein by reference. 1.4 "Transpac Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM and guaranteed by MPI in the aggregate to the Investor Group, accrued as of December 31, 1997 (which is the entire amount MPI and the Investor Group have agreed is due and payable pursuant to the Loan Agreement and the Guaranty), into Four Million Thirty One Thousand Eight Hundred and Twenty Six (4,031,826) shares of Series A Preferred Stock. 1.5 "DBS Bank Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM and Microelectronic Packaging (S) Pte. Ltd. and guaranteed by MPI to DBS Bank, accrued as of December 31, 1997 (which is the entire amount MPI and DBS Bank have agreed is due and payable), into One Million One Hundred Fifty Four Thousand Three Hundred and Eleven (1,154,311) shares of Series A Preferred Stock. 2 1.6 "Motorola Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Motorola, Inc., accrued as of December 31, 1997 (which is the entire amount MPI and Motorola have agreed is due and payable), into Eight Hundred Sixty Nine Thousand Nine Hundred Thirty Two (869,932.00) shares of Series A Preferred Stock. 1.7 "NS Electronics Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPI to NS Electronics Bangkok Ltd., accrued as of December 31, 1997 (which is the entire amount MPI and NS Electronics have agreed is due and payable), into Two Hundred Seventy One Thousand One Hundred Seventy Six (271,176) shares of Series A Preferred Stock. 1.8 "Orix Leasing Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM and MPS and guaranteed by MPI to Orix Leasing Singapore Limited, accrued as of December 31, 1997 (which is the entire amount MPI and Orix Leasing have agreed is due and payable) into Four Hundred Seventy Three Thousand Five Hundred Eighty Four (473,584) shares of Series A Preferred Stock. 1.9 "Samsung Corning Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Samsung Corning Co., Ltd., accrued as of December 31, 1997 (which is the entire amount MPI and Samsung Corning have agreed is due and payable) into One Hundred Eighty Three Thousand Two Hundred Seventy Five (183,275) shares of Series A Preferred Stock. 1.10 "STMicroelectronics Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to STMicroelectronics, Inc. (and/or any one or more assignees and/or transferees of STMicroelectronics, Inc.), accrued as of December 31, 1997 (which is the entire amount MPI and STMicroelectronics have agreed is due and payable) into One Million Three Hundred Twenty Two Thousand Six Hundred Forty One (1,322,641) shares of Series A Preferred Stock. 1.11 "Texas Instruments Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Texas Instruments Incorporated, accrued as of December 31, 1997 (which is the entire amount MPI and Texas Instruments have agreed is due and payable) into One Million Fifty Six Thousand and Twenty Seven (1,056,027) shares of Series A Preferred Stock. 1.12 "Other Creditor Conversions" means collectively the DBS Bank Conversion, the Motorola Conversion, the NS Electronics Conversion, the Orix Leasing Conversion, the Samsung Corning Conversion, the STMicroelectronics Conversion and the Texas Instruments Conversion. 1.13 "Other Creditors" means collectively DBS Bank; Motorola, Inc.; NS Electronics Bangkok Ltd.; Orix Leasing Singapore Limited; Samsung Corning Co., Ltd.; STMicroelectronics, Inc.; and Texas Instruments Incorporated. 3 1.14 "Insolvency Action" means the commencement of a voluntary or involuntary case against MPI under the United States Bankruptcy Code ("Code") or an assignment for the benefit of creditors by MPI, but shall not include any involuntary case brought under the Code which is dismissed within sixty (60) days of its commencement where no action is brought during such time period to avoid any issuance of Series A Preferred Stock by MPI or the performance by MPI of any of its other obligations pursuant to this Conversion Agreement. 2. Duration of Conversion Agreement. This Conversion Agreement shall ------------------------------- remain in full force and effect until the Conversion Date, subject to the following termination provisions: 2.1 Prior to the Performance Date, no party shall have any right to terminate this Conversion Agreement in any respect, and all of the terms and conditions hereof shall remain in full force and effect as set forth herein. 2.2 As of and after the Conversion Date, even if the Conversion Date occurs after the Performance Date, no party shall have any right to terminate this Conversion Agreement in any respect, and all of the terms and conditions hereof shall remain in full force and effect as set forth herein. 2.3 After the Performance Date, so long as the Conversion Date has not occurred, Transpac Capital shall have sole discretion on behalf of the Investor Group (but shall not be required) to terminate this Conversion Agreement by giving a written termination notice to MPI ("Termination Notice"). In the event Transpac Capital gives MPI a Termination Notice after the Performance Date and prior to any occurrence of the Conversion Date, then this Conversion Agreement shall be deemed terminated as of the date the Termination Notice is deemed given to MPI pursuant to the provisions of Section 10.3 hereof. In the event this Conversion Agreement is terminated by Transpac Capital pursuant to the provisions of this Section 2.3, then this Conversion Agreement shall be deemed completely void, and MPI and the Investor Group shall retain and remain subject to whatever respective rights and obligations they may otherwise have under the Former Agreements. 2.4 Regardless of any other provision of this Section 2, if an Insolvency Action is commenced prior to the Conversion Date, then this Conversion Agreement and the respective rights and obligations of MPI and the Investor Group hereunder shall be deemed immediately terminated without notice, and MPI and the Investor Group shall retain and remain subject to whatever respective rights and obligations they may have under the Former Agreements. 2.5 Except as provided otherwise in Sections 7.1 or 7.3 of this Agreement, the Former Agreements shall remain in full force and effect at all times after the Effective Date. 3. Conditions to Transpac Conversion. The completion of the Transpac --------------------------------- Conversion pursuant to the terms and conditions of this Conversion Agreement shall be subject to the performance and satisfaction of each of the following conditions, either prior to or concurrently with the occurrence of the Transpac Conversion ("Completion Conditions"): 4 3.1. The completion of the Other Creditor Conversions pursuant to agreements entered into between MPI and the Other Creditors upon terms and conditions that are not more favorable to any of such Other Creditors than the terms and conditions contained in this Conversion Agreement. In particular, but without limiting the generality of the foregoing provisions of this section, the effective price per share of the Series A Preferred Stock applicable to the Other Creditor Conversions shall not be less than One Dollar and Two Cents ($1.02), and the terms and conditions of the settlement and release provisions applicable to the Other Creditor Conversions shall not be different in any material respect from the terms and conditions of the settlement and release provisions contained in this Conversion Agreement. Furthermore, in connection with the STMicroelectronics Conversion, MPI will have agreed to amend the warrants to purchase MPI's common stock held by STMicroelectronics, Inc., if at all, only upon terms and conditions no more favorable to STMicroelectronics, Inc., than those in the Transpac Warrant Amendments. 3.2 The material terms and conditions of the Transpac Conversion and the Other Creditor Conversions shall have been approved by MPI's Board of Directors, which approval shall be sought and obtained by MPI in accordance with all applicable laws. 3.3 The material terms and conditions of the Transpac Conversion and the Other Creditor Conversions shall have been approved by MPI's Shareholders, which approval shall be sought and obtained by MPI in accordance with all applicable laws. 3.4 The Certificate of Amendment of the Amended and Restated Articles of Incorporation of MPI, in the form attached hereto as Exhibit "A" and incorporated herein by reference ("Certificate of Amendment"), shall have been duly adopted by all necessary corporate action of the Board of Directors and shareholders of MPI, and shall have been duly filed with and accepted by the California Secretary of State, upon which filing and acceptance MPI shall be authorized to issue the Series A Preferred Stock to the Investor Group and the Other Creditors as required pursuant to the Transpac Conversion and the Other Creditor Conversions. 3.5 L.H. Friend, Weinress, Frankson & Presson, Inc., an investment banking firm who serves as financial adviser to MPI, shall have executed and issued to MPI a written opinion, in form and substance satisfactory to MPI in its sole discretion, concluding that the Transpac Conversion and the Other Creditor Conversions are fair to MPI's Shareholders ("Fairness Opinion"), and a copy of such Fairness Opinion shall have been provided to Transpac Capital. 3.6 MPI and the Investor Group shall have performed each of their respective obligations and conditions that this Conversion Agreement requires them to perform on or prior to the Conversion Date. 4. Obligations of MPI for Transpac Conversion. MPI shall have the ------------------------------------------ following affirmative obligations under this Conversion Agreement until such time as the Transpac Conversion has been completed, or this Conversion Agreement has been terminated pursuant to the provisions of Section 2 hereof: 5 4.1 MPI shall use its best and most diligent efforts to obtain the agreement of each of the Other Creditors to complete the Other Creditor Conversions pursuant to agreements entered into between MPI and the Other Creditors upon terms and conditions that are not more favorable to such Other Creditors than the terms and conditions contained in this Conversion Agreement. In particular, but without limiting the generality of the foregoing provisions of this section, MPI shall use its best and most diligent efforts to obtain the agreement of the Other Creditors that the effective price per share of the Series A Preferred Stock applicable to the Other Creditor Conversions shall not be less than One Dollar and Two Cents ($1.02), and the terms and conditions of the settlement and release provisions applicable to the Other Creditor Conversions shall not be different in any material respect from the terms and conditions of the settlement and release provisions contained in this Conversion Agreement. 4.2 MPI shall use its best and most diligent efforts to obtain the approval of MPI's Board of Directors of the material terms and conditions of the Transpac Conversion and the Other Creditor Conversions, which approval shall be obtained in accordance with applicable laws. 4.3 MPI shall use its best and most diligent efforts to obtain the approval of MPI's Shareholders of the material terms and conditions of the Transpac Conversion and the Other Creditor Conversions, which approval shall be obtained in accordance with applicable laws. 4.4 MPI shall use its best and most diligent efforts to cause the Certificate of Amendment to be approved by MPI's Board of Directors and shareholders, which approval shall be obtained in accordance with applicable laws, and to cause the Certificate of Amendment to be filed with and accepted by the California Secretary of State, upon which filing and acceptance MPI shall be authorized to issue the Series A Preferred Stock to the Investor Group and the Other Creditors as required pursuant to the Transpac Conversion and the Other Creditor Conversions. 4.5 MPI shall use its best and most diligent efforts to cause the Transpac Conversion to be completed as soon as reasonably possible. 4.6 MPI shall use its best and most diligent efforts at all times prior to the Conversion Date, to conduct its business in the usual and ordinary course. 5. [This Section has been intentionally left blank.] 6. Completion of Conversion. At such time as all of the Completion ------------------------ Conditions have been performed and satisfied by MPI, then MPI and the Investor Group shall complete the Transpac Conversion concurrently with the completion by MPI and the Other Creditors of the Other Creditor Conversions, by concurrently taking the following actions: 6.1 Actions By MPI. -------------- 6 (a) MPI shall duly execute and deliver to Transpac Capital a counterpart copy of the form of Registration Rights Agreement attached to this Conversion Agreement as Exhibit "B" and incorporated herein by reference ("Registration Agreement"). (b) MPI shall duly execute and deliver to Transpac Capital four (4) counterpart copies of the form of First Amendment to Warrant To Purchase Common Stock of MPI attached to this Conversion Agreement as Exhibit "C" and incorporated herein by reference (collectively the "Transpac Warrant Amendments"), one with respect to each of the Warrants to Purchase Common Stock of MPI, dated April 24, 1998 (collectively the "Transpac Warrants"), issued respectively to Transpac Capital, Transpac Holdings, Regional Investment and Natsteel Equity. (c) MPI shall duly execute and deliver to Transpac Capital a counterpart copy of the form of IBM Proceeds Agreement attached to this Conversion Agreement as Exhibit "D" and incorporated herein by reference ("IBM Agreement"). (d) MPI's Chief Executive Officer shall duly execute and deliver to Transpac the form of Certificate of Chief Executive Officer attached to this Conversion Agreement as Exhibit "E" and incorporated herein by reference ("Certificate of CEO"), certifying the following matters: (i) Any approvals of MPI's shareholders and directors that may be required under any applicable law, in connection with the transactions contemplated by this Conversion Agreement, have been duly obtained and are in full force and effect as of the Conversion Date. (ii) All of the representations and warranties of MPI set forth in this Conversion Agreement,. the Ancillary Agreements (as defined below) or in any other document delivered to the Investor Group in connection herewith, are true, accurate, complete, and not misleading in any material respect as of the Conversion Date. (iii) MPI has performed all of the duties and obligations required to be performed by MPI on or prior to the Conversion Date, pursuant to the provisions of this Conversion Agreement, the Ancillary Agreements (as defined below) or in any other document delivered to the Investor Group in connection herewith. (e) MPI shall cause its legal counsel to duly execute and deliver to Transpac the form of legal opinion letter attached to his Conversion Agreement as Exhibit "F" and incorporated herein by reference ("Legal Opinion"). (f) MPI shall deliver to Transpac copies of certificates of good standing for MPI issued by the California Secretary of State and the California Franchise Tax Board, dated not more than five (5) days prior to the Conversion Date. 7 (g) MPI shall deliver to Transpac stock certificates representing shares of Series A Preferred Stock issued by MPI to the Investor Group in the following names and numbers of shares: (i) Transpac Capital Pte Ltd, 1,624,822 (ii) Transpac Industrial Holdings Ltd, 1,599,632 (iii) Regional Investment Company Ltd, 440,843 (iv) Natsteel Equity III Pte Ltd, 366,529 (h) MPI shall deliver to Transpac and its legal counsel copies of the following documents: (i) A copy of the Certificate of Amendment and Bylaws of MPI (as amended through the Conversion Date), certified by the Secretary of MPI as true and correct copies thereof as of the Conversion Date. (ii) A copy of the resolutions of the Board of Directors and shareholders of MPI evidencing the amendment to MPI's Amended and Restated Articles of Incorporation providing for the authorization of the Series A Preferred Stock and the approval of this Agreement and the other agreements, documents, and matters contemplated hereby, certified by the Secretary of MPI to be true, complete and correct. 6.2 Actions By Investor Group. ------------------------- (a) Each member of the Investor Group shall duly execute and deliver to MPI a counterpart copy of the Registration Agreement. (b) Each member of the Investor Group shall duly execute and deliver to MPI the counterpart copy of the Transpac Warrant Amendment that relates to the Transpac Warrant of the respective member of the Investor Group. (c) Each member of the Investor Group shall duly execute and deliver to MPI a counterpart copy of the form of IBM Agreement. 6.3 Effect of Conversion. Upon the occurrence of the -------------------- Conversion Date, (a) the debts owed by MPI to all members of the Investor Group shall be deemed to have been converted, respectively, into the number of shares of MPI's Series A Preferred Stock issued to each respective member of the Investor Group, as set forth in Section 6.1; and (b) as of and after the Conversion Date, MPI shall not owe any debt of any kind to any of the members of the Investor Group, as set forth in more detail pursuant to Section 7 of this Conversion Agreement. 7. Settlement and Mutual Release. If and only if the Conversion is ----------------------------- completed pursuant to the terms and conditions of this Conversion Agreement, then in that case 8 only, effective as of the Conversion Date, MPI and the Investor Group agree that the terms and conditions of this Section 7 shall be in effect with respect to the Former Agreements and all of the respective rights and obligations of MPI and the Investor Group pursuant to the Former Agreements and all other related agreements: 7.1 The Former Agreements shall be deemed to have been voluntarily terminated pursuant to the mutual agreement of MPI and the Investor Group, without any remaining liability to either MPI or the Investor Group. Without limiting the generality of the foregoing provisions of this section, MPI and the Investor Group agree that MPI shall no longer have any obligations of any kind under the Former Agreements to pay any amount to the Investor Group, and the Investor Group shall no longer have any rights of any kind under the Former Agreements to convert any amounts owed under the Former Agreements into, or to otherwise obtain ownership of, shares of MPI's stock of any class or series. 7.2 All rights of the Investor Group described in a letter from Wong Lin Hong to Denis Trafecanty, dated March 4, 1998, written with reference to the Written Consent Solicitation of Shareholders, to the effect that MPI will not issue any shares of preferred stock for an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) without first obtaining the agreement of Transpac Capital and/or the Investment Group, shall be deemed to have been voluntarily terminated pursuant to the mutual agreement of MPI and the Investor Group, without any remaining liability to either MPI or the Investor Group. As of and at all times after the Conversion Date, the Investor Group agrees that neither Transpac Capital nor any other member of the Investor Group has any right of any kind to approve or consent to any issuance by MPI of any shares of its stock of any class or series, except as provided otherwise under MPI's articles of incorporation in effect from time to time, or except as provided otherwise under applicable law. Furthermore, by executing this Conversion Agreement, Transpac Capital and the other members of the Investment Group agree to and approve all issuances by MPI of Series A Preferred Stock that are to be issued in connection with the Transpac Conversion and the Other Creditor Conversions, so long as such transactions are carried out in compliance with the terms and conditions of this Conversion Agreement and the debt conversion agreements between MPI and the Other Creditors 7.3 The MPI Group with respect to the Investor Group, and the Investor Group with respect to the MPI Group, shall be deemed to have forever released and discharged each other from and against any and all claims, damages and caused of action they may have against each other with respect to and in connection with the Former Agreements and any matter arising out of the terms and conditions thereof, including without limitation, any breach of any representation or warranty or noncompliance or nonfulfillment of any covenant or agreement contained in or arising out of the Former Agreements; provided that such release and discharge shall not extend to any claims, damages and causes of action any member of the Investor Group may have against any member of the MPI Group (or any member of the MPI Group may have against any member of the Investor Group) for fraud or willful misconduct with respect to any of the Former Agreements or any of the transactions contemplated by this Agreement. However, the foregoing release provisions of this section do not apply to this Conversion Agreement, or the Certificate of Amendment, the Registration Agreement, the Transpac Warrants (as amended by the Transpac Warrant Amendments), or the IBM Agreement 9 (collectively the "Ancillary Agreements"), or any of the respective rights and obligations of MPI and/or the Investor Group pursuant to the terms and conditions of this Conversion Agreement or the Ancillary Agreements. 8. Representations, Warranties and Agreements of MPI. In addition ------------------------------------------------- to any representations and warranties MPI may make to the Investor Group elsewhere in this Conversion Agreement, the Ancillary Agreements or in any other document delivered to the Investor Group in connection herewith, MPI represents and warrants to the Investor Group that the statements contained in this Section 8 are true, accurate, complete, and not misleading in any material respect, and also shall be so as of the Conversion Date. 8.1 Organization and Good Standing, and Other Status. MPI is a ------------------------------------------------ corporation, legally and validly incorporated, organized and existing under the laws of the State of California. MPI is in good standing as certified by both the California Secretary of State and the California Franchise Tax Board. 8.2 Authority to Conduct Business. MPI possesses full ----------------------------- corporate power and lawful authority to own, lease and operate its assets, and to carry on its business as presently conducted. MPI is duly and legally qualified to do business and is in good standing in each country, state, county, city or other jurisdiction in which the failure to so qualify would have a material adverse impact on MPI's business. 10 8.3 Authority Regarding this Agreement. ---------------------------------- 8.3.1 MPI has the complete and unrestricted right, power, authority and capacity to (a) execute and deliver this Conversion Agreement, the Ancillary Agreements and every other document executed and delivered by MPI to the Investor Group in connection therewith (collectively the "Transaction Documents"); and (b) carry out and perform each of MPI's obligations pursuant to the Transaction Documents. 8.3.2 As of the Conversion Date, no further corporate or shareholder authority, approvals, actions or proceedings will be necessary on the part of MPI to authorize the Transaction Documents or any of the transactions contemplated thereby. 8.3.3 This Conversion Agreement has been, and, as of the Conversion Date all of the other Transaction Documents will have been, duly and validly executed and delivered by MPI, and when so executed and delivered, will constitute legal, valid and binding obligations of MPI, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Registration Agreement may be limited by applicable federal or state securities laws. 8.3.4 The execution and delivery of this Conversion Agreement does not, the execution and delivery of the other Transaction Documents will not, and the consummation of the transactions contemplated thereby will not, violate any provision of MPI's Amended and Restated Articles of Incorporation or Bylaws (as amended), or any mortgage, lien, lease, agreement, instrument, order, judgment or decree to which MPI is a party or by which MPI or any of its assets is bound. 8.4 Valid Issuance of Preferred and Common Stock. The Series A --------------------------------------------- Preferred Stock, when issued and delivered in accordance with the terms of this Conversion Agreement, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than those stated in this Conversion Agreement and/or that may arise under applicable state and federal securities laws. The common stock of MPI issuable upon conversion of the Series A Preferred Stock has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Certificate of Amendment, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than those stated in this Conversion Agreement and/or that may arise under applicable state and federal securities laws. 8.5 Consents. No consent, approval, order or authorization of, --------- or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority or any third party on the part of MPI is required in connection with the consummation of the transactions contemplated by this Conversion Agreement, except (i) the filing of the Certificate of Amendment with the California Secretary of State; (ii) the filing required pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as 11 amended, and the rules thereunder, which filing will be effected within 15 days after the issuance of the Series A Preferred Stock pursuant hereto. 8.6 Offering. Subject in part to the truth and accuracy of the -------- representations of the Investor Group set forth in Section 9 of this Agreement, the issuance of the Series A Preferred Stock as contemplated by the Transaction Documents is exempt from the registration and qualification requirements of any applicable state and federal securities laws, and neither MPI nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 8.7 Disclosure. MPI has fully provided each member of the ----------- Investor Group with all information each such party has requested for deciding whether to enter into the transactions contemplated by the Transaction Documents, including without limitation, the acquisition of the Series A Preferred Stock. 8.8 Brokers. MPI has not taken any actions in connection with ------- the negotiations relating to the Transaction Documents or the transactions contemplated thereby that could give rise to an obligation on the part of any member of the Investor Group to pay any brokerage or finder's fee, commission or similar compensation to any party in connection therewith. 8.9 Litigation: Except as set forth in this Section 8.9, there ---------- is no action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the best of MPI's knowledge, currently threatened) against MPI, its activities, properties or assets or, to the best of MPI's knowledge, against any officer, director or employee of MPI in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of, MPI. To the best of MPI's knowledge, there is no factual or legal basis for any such Action that might result, individually or in the aggregate, in any material adverse change in the business, properties, assets, financial condition, affairs or prospects of MPI. MPI is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality, and there is no Action by MPI currently pending or which MPI intends to initiate (other than claims for monetary damages asserted by MPI against International Business Machines Corporation ("IBM") under the Purchase Option Agreement dated August 4, 1994, between IBM and MPI and the Multilayer Technology Transfer and Licensing Agreement dated August 4, 1994, between IBM and MPI). MPI is a defendant in a lawsuit filed on December 18, 1998, against MPI and Schlumberger Technologies, Inc., in the United States District Court for the Southern District of New York ("Lawsuit"). The plaintiffs in the Lawsuit are Gary Stein and Lewis Solomon. Both Mr. Solomon and Mr. Stein are former directors of MPI. The Lawsuit alleges the following claims against MPI: (a) Failure to pay an amount alleged to be not less than Thirty Thousand Dollars ($30,000.00) allegedly owed to Lewis Solomon as compensation for services performed by him as the former Chairman of MPI's Board of Directors; 12 (b) Failure to pay an amount alleged to be not less than Seventy One Thousand Two Hundred Fifty Dollars ($71,250.00) allegedly owed in the aggregate to Mr. Stein and Mr. Solomon as compensation under a consulting agreement; (c) Wrongful termination of a consulting agreement, for which wrongful termination Mr. Stein and Mr. Solomon allege damages in the aggregate of not less than Five Hundred Thousand Dollars ($500,000.00); (d) Tortious interference with Mr. Stein's and Mr. Solomon's prospective economic relationships and business advantages as consultants and directors of public corporations, presumably arising out of MPI's termination of their consulting agreement, for which Mr. Stein and Mr. Solomon allege damages in the aggregate of not less than Five Million Dollars ($5,000,000.00); (e) Costs and expenses incurred in the Lawsuit in an unspecified amount. MPI believes the claims made by Mr. Stein and Mr. Solomon against MPI in the lawsuit are completely without merit. MPI is actively and vigorously defending the lawsuit, and has made substantial counterclaims against Mr. Stein and Mr. Solomon . 8.10 Capitalization. The capitalization of MPI immediately -------------- prior to the Conversion Date will consist of the following: (a) Preferred Stock. A total of 9,362,778 authorized --------------- shares of preferred stock, no par value per share, consisting of 9,362,778 shares designated as Series A Preferred Stock, none of which will be issued and outstanding. Upon the Transpac Conversion and Other Creditor Conversions, the rights, preferences and privileges of the Series A Preferred Stock will be as stated in MPI's Amended and Restated Articles of Incorporation, as amended by the Certificate of Amendment, and as provided by law. (b) Common Stock. A total of Fifty Million (50,000,000) ------------ authorized of common stock, no par value per share (the "Common Stock"), of which not more than Eleven Million (11,000,000) shares will be issued and outstanding. (c) Options, Warrants, Reserved Shares. Except for: (i) ---------------------------------- the conversion privileges of the Series A Preferred Stock; (ii) the rights of first refusal granted to Transpac Capital, Transpac Holdings, Regional Investment and Natsteel Equity under Section 8.1 of the Subscription Agreement; (iii) Four Million Six Hundred Ninety Thousand Six Hundred Thirty Two (4,690,632) shares of Common Stock reserved for issuance under MPI's 1993 Stock Option Plan under which options to purchase Two Million Four Hundred Twenty Four Thousand Five Hundred (2,424,500) shares are outstanding; and (iv) warrants to purchase Seven Hundred Thousand (700,000) shares of Common Stock; there is no outstanding, option, warrant, right (including conversion or preemptive rights) or agreement for the purchase or acquisition from MPI of any shares of its capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of MPI's capital stock. Apart from the 13 exceptions noted in this Section 8.10, and except for rights of first refusal held by MPI to purchase shares of its stock issued under MPI's 1993 Stock Option Plan, no shares of MPI's outstanding capital stock , or stock issuable upon exercise or exchange of any outstanding options, warrants or rights, or other stock issuable by MPI, are subject to any preemptive rights, rights of first refusal or other rights to purchase such stock (whether in favor of MPI or any other person), pursuant to any agreement or commitment of MPI. 9. Representations, Warranties and Agreements of the Investor ----------------------------------------------------------- Group. In addition to any representations and warranties the Investor Group may make to MPI elsewhere in this Conversion Agreement, the Ancillary Agreements or in any other document delivered to MPI in connection herewith, the members of the Investor Group severally as to themselves, but not jointly, represent and warrant to MPI that the statements contained in this Section 9 are true, accurate, complete, and not misleading in any material respect, and also shall be so as of the Conversion Date. 9.1 Authority Regarding this Agreement. ---------------------------------- 9.1.1 Each member of the Investor Group has the complete and unrestricted right, power, authority and capacity to (a) execute and deliver each Transaction Document to which it is a party; and (b) carry out and perform each of their respective obligations pursuant to such Transaction Documents. 9.1.2 As of the Conversion Date, no further corporate or shareholder authority, approvals, actions or proceedings will be necessary on the part of any member of the Investor Group to authorize the Transaction Documents or any of the transactions contemplated thereby. 9.1.3 This Conversion Agreement has been, and, as of the Conversion Date all of the other Transaction Documents will have been, duly and validly executed and delivered by each member of the Investor Group which is a party to such agreements or documents, and when so executed and delivered, will constitute legal, valid and binding obligations of each member of the Investor Group which is a party to such agreements or documents, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Registration Agreement may be limited by applicable federal or state securities laws. 9.2 Purchase Entirely For Own Account. MPI is entering into the --------------------------------- Transaction Documents in reliance on the representation made by each member of the Investor Group, which representation is respectively confirmed by each such member's execution of this Conversion Agreement, and each such member hereby confirms, that the Series A Preferred Stock to be received by each respective member of the Investor Group, and MPI's common stock issuable upon conversion thereof (collectively the "Securities") will be acquired for investment and not with a view to the resale or distribution of any part thereof, and that such member has no 14 present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Conversion Agreement, each member of the Investor Group further represents that such member does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. Notwithstanding the foregoing, MPI acknowledges and understands that Transpac Capital may hold the Securities on behalf of, for the benefit of or as the nominee for, certain affiliated or related entities, and thus may distribute the Securities to such entities. 9.3 Disclosure of Information. Each respective member of the ------------------------- Investor Group believes it has received all the information it considers necessary or appropriate for deciding whether to acquire the Securities. Each member of the Investor Group further represents that it has had an opportunity to ask questions and receive answers from MPI regarding the terms and conditions of the Transaction Documents and the business, properties, prospects and financial condition of MPI. 9.4 Investment Experience. Each member of the Investor Group --------------------- acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. Each member of the Investor Group has carefully evaluated such member's financial resources and investment position and the risks associated with an investment in the Securities, and acknowledges that such member is able to bear the economic risks of this investment. Each member of the Investor Group further acknowledges that such member's financial condition is such that the member is not under any present necessity or constraint to dispose of the securities to satisfy any existing or contemplated debt or undertaking. If other than an individual, each member of the Investor Group also represents it has not been organized for the purpose of acquiring the Securities. 9.5 Restricted Securities. Each member of the Investor Group --------------------- understands that the Securities are characterized as "restricted securities" under the federal securities laws of the United States, inasmuch as they are being acquired from MPI in a transaction not involving a public offering, and that under such laws and applicable regulations the Securities may be resold without registration only in certain limited circumstances. In this connection, each member of the Investor Group represents that it is familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently in effect, and understands the resale limitations imposed thereby and generally by the federal securities laws of the United States. Each member of the Investor Group further understands that the Securities have not been registered under the Securities Act of 1933, as amended ("33 Act") or qualified or otherwise registered under the applicable securities laws of any state or other jurisdiction, that any disposition of the Securities by such Buyer is subject to restrictions imposed by federal and state laws, that the stock certificates representing the Securities will bear a restrictive legend stating that such member cannot dispose of the Securities absent such registration and qualification, except pursuant to any available exemption from such registration and qualification. 9.6 Further Restrictions on Transfer. Without in any way -------------------------------- limiting the representations set forth above in this Section 9, each member of the Investor Group further agrees not to make any disposition of all or any portion of the Securities unless and until the 15 transferee has agreed in writing for the benefit of MPI to be bound by the provisions of Sections 9.3 through 9.7 hereof, and the provisions of the Registration Agreement, to the extent such sections and such agreement are then applicable, and: (a) There is then in effect a Registration Statement under the 33 Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) The member of the Investor Group disposing of the Securities shall have notified MPI of the proposed disposition and shall have furnished MPI with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by MPI, such member shall have furnished MPI with an opinion of counsel, reasonably satisfactory to MPI, that such disposition will not require registration of the Securities in question under the 33 Act. Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be required: (i) for any transfer of any Securities in compliance with SEC Rule 144 or Rule 144A; or (ii) for any transfer of any Securities by a holder thereof that is a partnership or a corporation to: (1) a partner of such partnership or a shareholder of such corporation; (2) a retired partner of such partnership who retires after the date hereof; or (3) the estate of any such partner or shareholder; provided, that in each of the foregoing cases the transferee agrees -------- in writing to be subject to the terms of this Section 9 to the same extent as if the transferee were an original purchaser of Securities hereunder. 9.7 Restrictive Legend. Each certificate representing the ------------------ Series A Preferred Stock or any other securities issued in respect of the Series A Preferred Stock or upon the conversion thereof, shall be stamped or otherwise imprinted with a legend in the following form, in addition to any legend required pursuant to applicable state securities laws: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED), NOR QUALIFIED OR OTHERWISE REGISTERED UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES HAVE BEEN ACQUIRED ONLY FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF OR HYPOTHECATED (a) IN THE ABSENCE OF BOTH (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (AS AMENDED), AND (ii) AN EFFECTIVE QUALIFICATION OR REGISTRATION UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, OR (b) UNLESS AN EXEMPTION FROM ANY SUCH REGISTRATIONS OR QUALIFICATIONS IS AVAILABLE AND THE ISSUER HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATIONS OR QUALIFICATIONS ARE NOT REQUIRED. 9.8 Foreign Persons. If a member of the Investor Group is not --------------- a United States person, such member hereby represents that (a) they have satisfied themselves as to 16 the full observance of the laws of their own jurisdiction in connection with any acquisition of the Securities, including without limitation (i) the legal requirements within such jurisdiction applicable to the acquisition of the Securities; (ii) any foreign exchange restrictions applicable to such acquisition; (iii) any governmental or other consents that may need to be obtained; and (iv) the income tax and other tax consequences, if any, that may be relevant to the acquisition, holding, sale or transfer of the Securities; and (b) such member's acquisition and continued ownership of the Securities will not violate any applicable securities or other laws of such member's jurisdiction. 9.9 Brokers or Finders. The member of the Investor Group have ------------------ not taken any actions in connection with the negotiations relating to this Conversion Agreement or the transactions contemplated hereby that could give rise to an obligation on the part of MPI to pay any brokerage or finder's fee, commission or similar compensation to any party in connection therewith. 9.10 Transpac Capital as Agent. Each member of the Investor ------------------------- Group hereby appoints Transpac Capital to act as its agent for purposes of this Conversion Agreement. Each member of the Investor Group hereby authorizes Transpac Capital to take such actions and exercise such rights, powers and discretions as are specifically delegated to Transpac Capital pursuant to this Conversion Agreement, and to take such other actions and exercise such other rights, powers and discretions as are reasonably incidental thereto. However, Transpac Capital shall not commence any legal action or other legal proceeding in the name of any other member of the Investor Group without such member's consent. The relationship between Transpac Capital and the Other Investors for this purpose is that of agent and principal only. Transpac Capital shall not, by virtue of any provision of this Conversion Agreement, be deemed to be a trustee for any other member of the Investor Group, nor an agent or trustee for MPI. 10. Miscellaneous Provisions. ------------------------ 10.1 Exhibits. All exhibits described in this Conversion -------- Agreement are incorporated by reference as if fully set forth herein, and constitute a material part of this Conversion Agreement, whether or not such exhibits are attached hereto. 10.2 Governing Law. This Conversion Agreement shall in all ------------- respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of California, United States of America. Any legal action between the parties regarding this Conversion Agreement shall be brought in, and the parties hereby consent to the jurisdiction of and venue in, either (a) the federal and state courts located in the County of San Diego, State of California, United States of America; or (b) the courts located in the country of Singapore. 10.3 Notices. Any notice, demand or other communication ------- required or permitted under this Conversion Agreement shall be deemed given and delivered when in writing and (a) personally served upon the receiving party, or (b) upon the third (3rd) calendar day after mailing to the receiving party by either (i) United States registered or certified mail, postage prepaid, or (ii) FedEx or other comparable overnight delivery service, delivery charges prepaid, and addressed as follows: 17 To MPI: Microelectronic Packaging, Inc. 9577 Chesapeake Drive San Diego, CA 92123 Attn: Chief Executive Officer To any member of Transpac Capital Pte Ltd the Investor Group 6 Shenton Way #20-09 DBS Building Tower Two Singapore 068809 Attn: Wong Lin Hong Any party may change the address specified in this section by giving the other party notice of such new address in the manner set forth herein. 10.4 Severability. In the event that any provision of this ------------ Conversion Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or invalid, then this Conversion Agreement shall continue in full force and effect without said provision. If this Conversion Agreement continues in full force and effect as provided above, the parties shall replace the invalid provision with a valid provision which corresponds as far as possible to the spirit and purpose of the invalid provision. 10.5 Counterparts. This Conversion Agreement may be executed ------------ in any number of counterparts, each of which may be executed by less than all of the parties hereto, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one document. 10.6 Entire Agreement. This Conversion Agreement, the Ancillary ---------------- Agreements, and the documents and agreements contemplated herein and therein, constitute the entire agreement between the parties with respect to the subject matter hereof, and supersede all prior oral or written agreements, representations or warranties between the parties other than those set forth herein or herein provided for. 10.7 Successors and Assigns. Except as specifically permitted ---------------------- pursuant to the terms and conditions hereof, no party shall be permitted to assign their respective rights or obligations under this Conversion Agreement without the prior written consent of the other parties. The provisions hereof shall inure to the benefit of, and be binding upon, the permitted successors and assigns, heirs, executors, and administrators of the parties hereto. 10.8 Amendment and Waiver. No modification or waiver of any -------------------- provision of this Conversion Agreement shall be binding upon the party against whom it is sought to be enforced, unless specifically set forth in writing signed by an authorized representative of that party. A waiver by any party of any of the terms or conditions of this Conversion Agreement in any one instance shall not be deemed or construed to be a waiver of such terms or conditions for the future, or of any subsequent breach thereof. The failure by any party hereto at any time to enforce any of the provisions of this Conversion Agreement, or to 18 require at any time performance of any of the provisions hereof, shall in no way to be construed to be a waiver of such provisions or to affect either the validity of this Conversion Agreement or the right of any party to thereafter enforce each and every provision of this Conversion Agreement. [The remainder of this page has been intentionally left blank.] 19 10.9 Survivability. All of the representations, warranties, ------------- agreements and obligations of the parties pursuant to this Conversion Agreement shall survive any issuance of the Shares and/or the Option Shares by the Company to the Buyers. IN WITNESS WHEREOF, the parties hereto have duly executed this Conversion Agreement as of the date first above written. MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD By:_________________________ By:______________________________ Signature Signature By:_________________________ By:______________________________ Print Print Title:______________________ Title:___________________________ [The remainder of this page has been intentionally left blank.] 20 CONTINUATION OF SIGNATURES FOR DEBT CONVERSION AND MUTUAL SETTLEMENT AND RELEASE AGREEMENT dated April 29, 1999 TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD By:_________________________ By:______________________________ Signature Signature By:_________________________ By:______________________________ Print Print Title:______________________ Title:___________________________ NATSTEEL EQUITY III PTE LTD By:______________________________ Signature By:______________________________ Print Title:___________________________ 21 EX-99.(B) 3 CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION EXHIBIT "B" CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MICROELECTRONIC PACKAGING, INC. a California corporation Andrew Wrobel and Denis Trafecanty certify that: 1. They are the President and the Secretary, respectively, of MICROELECTRONIC PACKAGING, INC., a California corporation. 2. Article III of the Restated Articles of Incorporation of this corporation is amended to read as follows: ARTICLE III ----------- This corporation is authorized to issue two classes of shares to be designated respectively "Common Stock" and "Preferred Stock." The number of shares of Common Stock this corporation is authorized to issue is Fifty Million (50,000,000), without par value. The number of shares of Preferred Stock this corporation is authorized to issue is Nine Million Three Hundred Sixty Two Thousand Seven Hundred Seventy Eight (9,362,778), without par value, all of which are designated as "Series A Preferred Stock." 1. Rights, Preferences, Privileges and Restrictions of Common Stock. The ---------------------------------------------------------------- rights, preferences, privileges and restrictions granted to and imposed on this corporation's Common Stock are as follows: A. Dividend Rights. Subject to any rights, preferences and --------------- privileges that have been granted to the Series A Preferred Stock, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. B. Liquidation Rights. Subject to any rights, preferences and ------------------ privileges that have been granted to the Series A Preferred Stock, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Common Stock shall be entitled to receive all of the assets of the corporation available for distribution to its shareholders, ratable in proportion to the number of shares of the Common Stock held by them. C. Redemption. The Common Stock is not redeemable. ---------- D. Voting Rights. Subject to any rights, preferences and privileges ------------- that have been granted to the Series A Preferred Stock, the holders of shares of Common Stock shall be entitled to vote on all matters at all meetings of the shareholders of the corporation and shall be entitled to one vote for each share of Common Stock entitled to vote at such meeting. 2. Rights, Preferences, Privileges and Restrictions of Series A Preferred ---------------------------------------------------------------------- Stock. The rights, preferences, privileges and restrictions granted to and - ----- imposed on this corporation's Series A Preferred Stock are as follows: A. Dividends. --------- 1. Fixed Amount. Out of any assets legally available ------------ therefor, the Board shall have discretion (but shall not be required) to declare a dividend on the outstanding Series A Preferred Stock at the fixed rate of Three Point Five Seven Cents ($0.0357) per share per annum (subject to adjustment to equitably account for any stock splits, stock dividends, combinations, recapitalizations or the like, and not compounded from one year to the next) ("Fixed Amount Dividends"). Fixed Amount Dividends shall be payable only when, as, and if declared by the Board. Fixed Amount Dividends payable to the holders of Series A Preferred Stock pursuant hereto, whether or not declared by the Board, shall at all times be cumulative until paid in full, and shall be paid in preference and priority to any Common Equivalent Dividends (as that term is defined in Section A(2) below), and any dividend or other distribution being paid or distributed to the holders of Common Stock. 2. Common Equivalent. Subject to the priority of the Fixed ----------------- Amount Dividends, in the event the Board declares a dividend on or other distribution with respect to the corporation's outstanding common stock ("Common Stock"), which is payable other than in Common Stock and/or other securities or rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock, then out of any assets legally available therefor, the holders of Series A Preferred Stock shall concurrently receive dividends or other distributions in an amount equal to (a) the amount of the dividend or other distribution payable on one share of Common Stock; multiplied by (b) the number of shares of Common Stock, rounded to the nearest whole number (with one half being rounded upward), into which the total number of shares of Series A Preferred Stock held by such holder could be converted on the record date for determining which holders of Common Stock are entitled to receive the dividend or other distribution in question ("Common Equivalent Dividends"). Common Equivalent Dividends payable to the holders of Series A Preferred Stock pursuant hereto shall at all times be cumulative until paid in full, and shall be paid in preference and priority to any dividend or other distribution being paid or distributed to the holders of Common Stock. 3. Treatment Upon Conversion. Upon any conversion of the ------------------------- Series A Preferred Stock pursuant to the provisions of Section D hereof entitled Conversion ("Triggering Conversion"), any Fixed Amount Dividends and/or Common - ---------- Equivalent Dividends payable with respect to the shares of Series A Preferred Stock being converted (collectively "Conversion Dividends"), shall concurrently be converted into that number of shares of this corporation's fully paid and nonassessable Common Stock determined by dividing the dollar amount of the Conversion Dividends by the Conversion Price applicable to the Triggering Conversion ("Dividend Conversion Shares"). Otherwise, the provisions of Section D hereof entitled Conversion shall be applicable to the Dividend Conversion ---------- Shares in the same manner as 2 such provisions are applicable to any other shares of Common Stock to be issued pursuant to the Triggering Conversion. 4. Waiver. Pursuant to the affirmative vote, written ------ consent or agreement of the holders of a majority of the then outstanding Series A Preferred Stock ("Approving Preferred Majority"), the Approving Preferred Majority shall be entitled on behalf of all holders of Series A Preferred Stock, to waive any dividend such holders would otherwise be entitled to receive, including without limitation, any Fixed Amount Dividends and/or Common Equivalent Dividends (collectively the "Preferred Dividends"). B. Liquidation Preference. In the event of any liquidation, ---------------------- dissolution or winding up of this corporation, either voluntary or involuntary: 1. Priority Distribution. The holders of Series A Preferred --------------------- Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or funds of this corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (a) One Dollar and Two Cents ($1.02) for each outstanding share of Series A Preferred Stock (subject to adjustment to equitably account for any stock splits, stock dividends, combinations, recapitalizations or the like) ("Original Series A Issue Price"), plus (b) an amount equal to any declared but unpaid dividends on such share, including without limitation, any accumulated balance of Preferred Dividends ("Priority Distribution"). If the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit payment to such holders of the full amount of the Priority Distribution, then the entire assets and funds of this corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. 2. Acquisition or Sale. For purposes of this Section B ------------------- entitled Liquidation Preference, a liquidation, dissolution or winding up of ---------------------- this corporation shall be deemed to be occasioned by, or to include (unless an Approving Preferred Majority shall determine otherwise), (a) the acquisition of this corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of this corporation; or (b) a sale of all or substantially all of the assets of this corporation (collectively "Acquisition or Sale"). In the event of any Acquisition or Sale, if the consideration received by this corporation or its shareholders is other than cash, the value of the non-cash consideration will be deemed to be equal to its fair market value, except that the value of any securities received in any Acquisition or Sale shall be determined as follows: (a) For securities not subject to an investment letter or other similar restriction on free marketability covered by Section B(2)(b) below: (i) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the thirty (30) day period ending three (3) days prior to the closing of the Acquisition or Sale; (ii) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over 3 the thirty (30) day period ending three (3) days prior to the closing of the Acquisition or Sale; or (iii) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Board and an Approving Preferred Majority. (b) The method of valuation of securities subject to an investment letter or other restriction on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined above in Section B(2)(a), to reflect the approximate fair market value thereof, as mutually determined by the Board and an Approving Preferred Majority. (c) In the event the requirements of this Section B(2)(c) are not complied with, this corporation shall forthwith either: (i) cause the closing of the Acquisition or Sale to be postponed until the time such requirements have been complied with; or (ii) cancel the Acquisition or Sale, in which event the rights, preferences, privileges and restrictions of the holders of Series A Preferred Stock shall revert to and be the same as such rights, preferences, privileges and restrictions existing immediately prior to the date the first Transaction Notice (as hereafter defined) is given. This corporation shall give each holder of record of Series A Preferred Stock written notice of any impending Acquisition or Sale not later than (i) twenty (20) days prior to the shareholders' meeting called to approve such Acquisition or Sale, or (ii) twenty (20) days prior to the closing of such Acquisition or Sale, whichever is earlier, and shall also notify such holders in writing of the final approval of such Acquisition or Sale (any of the foregoing a "Transaction Notice"). The first Transaction Notice to be given shall describe the material terms and conditions of the impending Acquisition or Sale, and this corporation shall thereafter give holders of record of the Series A Preferred Stock prompt notice of any material changes in such material terms and conditions ("Material Change Notice"). The Acquisition or Sale shall in no event take place sooner than twenty (20) days after this corporation has given the first Transaction Notice, or sooner than ten (10) days after this corporation has given any Material Change Notice; provided, however, that such periods may be shortened by an Approving Preferred Majority. C. Redemption. To the extent it may otherwise lawfully do so, this ---------- corporation shall be entitled, in the sole discretion of the Board, to redeem all or any part of the outstanding shares of Series A Preferred Stock, in accordance and compliance with the following provisions: 1. Notice. Not less than twenty (20) and not more than thirty ------ (30) days prior to the date as of which the Board intends to give effect to a redemption of some or all of the shares of Series A Preferred Stock ("Redemption Date"), a written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is mailed) of the Series A Preferred Stock to be redeemed, at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected on the applicable Redemption Date, specifying each of the following: (a) the number of shares to be redeemed from such holder ("Redemption Shares"); (b) the Redemption Date; (c) the Series A Redemption Price (as that term is hereafter defined); (d) the then applicable Conversion Price (as that term is hereafter defined); (e) the date of termination of the right to convert the Redemption Shares into shares of Common Stock, 4 which date shall not be earlier than five (5) days prior to the Redemption Date ("Conversion Termination Date"); and (e) the place at which payment may be obtained; and shall call upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed ("Redemption Notice"). 2. Partial Redemptions to be Pro-Rata. In the event a ---------------------------------- Redemption Notice specifies that less than all of the outstanding shares of Series A Preferred Stock are to be redeemed, then the number of shares of Series A Preferred Stock to be redeemed shall be allocated pro-rata among all of the holders thereof, based on the proportionate number of shares of Series A Preferred Stock held by each such holder. 3. Conversion Prior to Redemption. Upon receiving a ------------------------------ Redemption Notice, at any time prior the to Conversion Termination Date stated therein, each holder of Series A Preferred Stock shall be entitled to convert some or all of the Redemption Shares into shares of Common Stock pursuant to the provisions of Section D(1) below. Any such conversion shall be deemed to take place on the Redemption Date. Any shares of Series A Preferred Stock not converted to shares of Common Stock pursuant hereto shall remain subject to redemption pursuant to the provisions of this Section C entitled Redemption, and ---------- as set forth in the Redemption Notice. If this corporation fails to carry out the redemption of any Redemption Shares that are not converted to shares of Common Stock pursuant to this Section C(3), then in such event, the redemption described in the Redemption Notice shall be deemed null and void, and any conversion of shares of Series A Preferred Stock into shares of Common Stock pursuant hereto, shall also be deemed null and void. 4. Redemption Price. The price per share required to be paid ---------------- by the corporation upon the redemption of any share of Series A Preferred Stock pursuant hereto shall be equal to the sum of (a) the Original Series A Issue Price (subject to adjustment to equitably account for any stock splits, stock dividends, combinations, recapitalizations or the like), plus (b) an amount equal to any declared but unpaid dividends on such share, including without limitation, any accumulated balance of Preferred Dividends ("Series A Redemption Price"). 5. Certificates. On or after the Redemption Date, each ------------ of Redemption Shares that have not been converted into shares of Common Stock pursuant to Section C(3) hereof, shall surrender to this corporation the certificate or certificates representing such Redemption Shares ("Redemption Certificates"), in the manner and at the place designated in the Redemption Notice, and thereupon the applicable Series A Redemption Price shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If on the Redemption Date the funds necessary for the redemption of the Redemption Shares shall be available therefor, then any Redemption Shares so called for redemption for which Redemption Certificates are not surrendered, shall nevertheless be considered redeemed, and all rights of the holders thereof shall be terminated, except for only the right to receive the Redemption Price without interest upon the surrender of the Redemption Certificates. 6. Payment. Concurrently with receiving the Redemption ------- Certificates, this corporation shall pay the Series A Redemption Price to the person whose name 5 appears on the Redemption Certificates, in cash in one lump sum. 7. No Previous Redemption of Common Stock. At all times while -------------------------------------- any shares of Series A Preferred Stock are outstanding, this corporation shall not redeem any shares of Common Stock, unless such redemption has been authorized by an Approving Preferred Majority. 8. Good Faith Modification. Regardless of any of the ----------------------- provisions of this Section C entitled Redemption, the holders of the outstanding ---------- shares of Series A Preferred Stock shall consider in good faith any request of the Board to modify the rights, preferences and privileges of such holders pursuant to this Section C entitled Redemption, if the Board deems such ---------- modification reasonably necessary to permit this corporation to obtain financing or credit from a financial institution. D. Conversion. The holders of the Series A Preferred Stock shall ---------- have conversion rights as follows ("Conversion Rights"): 1. Voluntary Conversion. Each share of Series A Preferred -------------------- Stock shall be convertible, at the option of the holder thereof, (i) at any time after the date of issuance of such share, and (ii) on or prior to the fifth (5th) day prior to the Redemption Date, if any, as may have been fixed in any Redemption Notice with respect to such share of the Series A Preferred Stock, at the office of this corporation or any transfer agent for such stock ("Voluntary Conversion"), into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series A Preferred Stock shall be Fifty One Cents ($0.51); provided, however, that the Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth in Section D(4) below. 2. Automatic Conversion. Each share of Series A Preferred -------------------- Stock shall automatically be converted into shares of Common Stock at the Conversion Price in effect at that time for the Series A Preferred Stock, immediately upon this corporation's receipt of the written consent of the Approving Preferred Majority to the conversion of all then outstanding Series A Preferred Stock under this Section D. 3. Mechanics of Conversion. Before any holder of Series A ----------------------- Preferred Stock shall be entitled to convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record 6 holder or holders of such shares of Common Stock as of such date. Regardless of any of the foregoing provisions, this corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing the shares of Series A Preferred Stock being converted are either delivered to the corporation or any transfer agent as provided herein, or the holder notifies the corporation or any transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection therewith. 4. Conversion Price Adjustments of Preferred Stock for ----------------------------------------------- Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the - --------------------------------------------------- Series A Preferred Stock shall be subject to adjustment from time to time as follows: (a) If this corporation shall issue, after the date upon which any shares of Series A Preferred Stock were first issued ("Purchase Date"), any Additional Stock (as hereafter defined) without consideration or for a consideration per share less than the Conversion Price for the Series A Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series A Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section D(4)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of the Additional Stock in question (including shares of Common Stock deemed to be issued pursuant to Section D(4)(f)(i) or (ii) hereof, but not including shares excluded from the definition of Additional Stock by Section D(4)(g)(ii) hereof), plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price; and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to Section D(4)(f)(i) or (ii) hereof, but not including shares excluded from the definition of Additional Stock by Section D(4)(g)(ii) hereof), plus the number of shares of Additional Stock in question. (b) No adjustment of the Conversion Price for the Series A Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. (c) Except to the extent provided for in Section D(4)(f)(iii) and (iv) hereof, and Section D(4)(i) hereof, no adjustment of the Conversion Price pursuant to this Section D(4) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (d) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. 7 (e) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration shall be deemed to be the fair market value thereof as determined in good faith by the Board irrespective of any accounting treatment. (f) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms ultimately convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of Sections D(4)(a) through (g) hereof: (i) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments), to the extent then exercisable, of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Section D(4)(d) and (e) hereof), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided for in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (ii) The aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments), to the extent then convertible or exchangeable, any such convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and the subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to (1) the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends); plus (2) the minimum additional consideration, if any, to be received by this corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections D(4)(d) and (e) hereof). (iii) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, then the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 8 (iv) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (v) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections D(4)(f)(i) and (ii) hereof, shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section D(4)(f)(iii) and (iv) hereof. (g) For purposes of this Section D(4), the term "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section D(4)(f)) by this corporation after the Purchase Date, except for any of the following: (i) Common Stock issued pursuant to a transaction described in Section D(4)(h) below; or (ii) Common Stock issuable or issued to (1) employees, consultants or directors of this corporation directly or pursuant to a stock option plan or restricted stock plan, and such issuance has been approved by the Board, or (2) vendors or joint venture partners of this corporation, but only if such issuance is in a transaction with primarily a non- financing purpose, and has been approved by the Board. (h) In the event this corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (collectively referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents (with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section D(4)(f) hereof). (i) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of 9 Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. 5. Other Distributions. In the event this corporation shall ------------------- declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section D(4)(h) hereof, then, in each such case for the purpose of this Section D(5), the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. 6. Recapitalizations. If at any time or from time to time ----------------- there shall be a recapitalization or reclassification of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section D entitled Conversion, or in Section B hereof ---------- entitled Liquidation Preference, provision shall be made so that the holders of ---------------------- the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization or reclassification. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section D entitled Conversion, with respect to the rights of the holders of the Series A Preferred - ---------- Stock after the recapitalization or reclassification, to the end that the provisions of this Section D entitled Conversion (including adjustment of the ---------- Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. 7. No Impairment. This corporation will not, by amendment or ------------- restatement of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section D entitled Conversion, and in the taking of all such action as may be necessary or - ---------- appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. 8. No Fractional Shares. No fractional shares shall be issued -------------------- upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share (with one half being rounded upward). Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. 9. Certificate of Adjustment. Upon the occurrence of each ------------------------- adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this Section D entitled Conversion, this corporation, at its ---------- expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each 10 holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (a) such adjustment and readjustment, (b) the Conversion Price for such series of Preferred Stock at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Series A Preferred Stock. 10. Notices of Record Date. In the event of any taking by this ---------------------- corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 11. Reservation of Stock Issuable Upon Conversion. This --------------------------------------------- corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the corporation's articles of incorporation. 12. Notices. Any notice required by the provisions of this ------- Section D entitled Conversion, to be given to the holders of shares of Series A ---------- Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. E. Voting Rights. ------------- 1. Generally. The holder of each share of Series A Preferred --------- Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as- converted basis (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be converted) shall be rounded to the nearest 11 whole number (with one-half being rounded upward). 2. Board of Directors Election and Removal. --------------------------------------- (a) Election. So long as any shares of Series A Preferred -------- Stock are outstanding: (i) the holders of the Series A Preferred Stock, voting as a separate series (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect one (1) director of this corporation; and (ii) the holder of the Series A Preferred Stock and the Common Stock, voting together as a single class (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect the remaining directors of this corporation. (b) Quorum; Required Vote. --------------------- (i) Quorum. At any meeting held for the purpose of ------ electing directors, the presence in person or by proxy: (A) of the holders of a majority of the shares of the Series A Preferred Stock shall constitute a quorum of the Series A Preferred Stock for the election of directors to be elected solely by the holders of the Series A Preferred Stock; and (B) of holders of Series A Preferred Stock and Common Stock representing a majority of the voting power of all the then-outstanding shares of the directors to be elected jointly by the holders of the Series A Preferred Stock and the Common Stock. (ii) Required Vote. With respect to the election of ------------- any director or directors by the holders of the outstanding shares of a specified series, series', class or classes of stock given the right to elect such director or directors pursuant to Section E(2)(a) above (the "Specified Stock"), that candidate or those candidates (as applicable), shall be elected who either: (i) in the case of any such vote conducted at a meeting of the holders of such Specified Stock, receive the highest number of affirmative votes of the outstanding shares of such Specified Stock, up to the number of directors to be elected by such Specified Stock; or (ii) in the case of any such vote taken by written consent without a meeting, are elected by the unanimous written consent of the holders of the shares of such Specified Stock, except that, if such vote is to fill a vacancy on the Board other than a vacancy created by removal of a director, such vacancy may be filled election by the written consent of the holders of a majority of the outstanding shares of such Specified Stock. (c) Vacancy. If there shall be any vacancy in the office ------- of a director elected by the holders of any Specified Stock pursuant to Section E(2)(a), then a successor to hold office for the unexpired term of such director may be elected by either: (i) the remaining director or directors (if any) in the office that were so elected by the holders of such Specified Stock, by the affirmative vote of a majority of such directors (or by the sole remaining director elected by the holders of such Specified Stock if there be but one); or (ii) the required vote of holders of the shares of such Specified Stock specified in Section E(2)(b)(ii) above that are entitled to elect such director under Section E(2)(a). (d) Removal. Subject to Section 303 of the California ------- Corporations Code, any director who shall have been elected to the Board by the holders of any Specified Stock pursuant to Section E(2)(a) or by any director or directors elected by holder of any Specified Stock as provided in Subsection E(2)(c), may be removed during his or her term of 12 office, either with or without cause, by, and only by, the affirmative vote of shares representing a majority of the voting power of all the outstanding shares of such Specified Stock entitled to vote given either at a meeting of such shareholders duly called for that purpose or pursuant to a written consent of shareholders without a meeting, and any vacancy created by such removal may be filled only in the manner provided in Section E(2)(c). (e) Procedures. Any meeting of the holders of any ---------- Specified Stock, and any action taken by the holders of any Specified Stock written consent without a meeting, in order to elect or remove a director under this Section E(2), shall be held in accordance with the procedures and provisions of this corporation's bylaws, the California Corporations Code and applicable law regarding shareholder meetings and shareholder actions by written consent, as such are then in effect (including, but not limited to, procedures for determining the record date for shares entitled to vote). F. Protective Provisions. So long as any shares of Series A --------------------- Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least two thirds (2/3) of the then outstanding shares of Series A Preferred Stock: 1. Sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of; 2. Alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock. 3. Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock; 4. Authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security senior to or on a parity with the Series A Preferred Stock with respect to dividends, liquidation, redemption or voting; 5. Redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of the capital stock of this corporation; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares at cost, or at cost upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section C hereof entitled Redemption; ---------- 6. Amend or otherwise modify this corporation's articles of incorporation in such a manner as to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to adversely affect such shares; 7. Declare or pay any dividends or other distributions of any kind 13 on or with respect to shares of Common Stock (other than such a dividend payable solely in the form of shares of Common Stock); 8. Declare or pay any dividends or other distributions of any kind on or with respect to shares of Series A Preferred Stock, except for Fixed Amount Dividends. 9. Take any other action with respect to which the holders of Series A Preferred Stock are entitled to vote and/or grant approval as a separate class or series under the applicable laws of the State of California. 10. Reclassify any outstanding shares of securities of this corporation into shares having rights, preferences or privileges senior to or on a parity with the Series A Preferred Stock. G. Status of Redeemed or Converted Stock. In the event any shares of ------------------------------------- Series A Preferred Stock shall be redeemed or converted pursuant to Section C hereof entitled Redemption, or Section D hereof entitled Conversion, the shares ---------- ---------- so redeemed or converted shall be canceled. 3. The foregoing amendment of Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and Section 903 of the California Corporations Code. The total number of outstanding shares of this corporation's Common Stock is not more than Eleven Million (11,000,000). There are no outstanding shares of this corporation's Preferred Stock. The number of shares of this corporation's Common Stock [The remainder of this page has been intentionally left blank.] 14 voting in favor of the Amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%). The undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of their own knowledge. Date: _____________, 1999 ___________________________________ ____________________________________ Andrew K. Wrobel Denis J. Trafecanty Chairman, President and Senior Vice President Chief Executive Officer Chief Financial Officer 15 EX-99.(C) 4 REGISTRATION RIGHTS AGREEMENT EXHIBIT "C" REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Registration Agreement") is entered into at San Diego, California, effective as of this day ______, 1999 ("Effective Date"), between Microelectronic Packaging, Inc. ("Company"); and Transpac Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd ("Natsteel Equity") (each an "Investor" or "Holder," and collectively the "Investor Group" or the "Holders"). This Registration Agreement is entered into between the Company and the Investor Group pursuant to the provisions of Section 6.1 of the Debt Conversion and Mutual Settlement and Release Agreement ("Conversion Agreement") entered into between the Company and the Investor Group as of the Effective Date. 1. Defined Terms. In addition to those terms defined elsewhere in this ------------- Registration Agreement, the following terms shall have the meanings defined for such terms in this Section 1: (a) "33 Act" means the Securities Act of 1933, as amended. (b) "Form S-3" means such form under the 33 Act as in effect on the date hereof or any registration form under the 33 Act subsequently adopted by the Securities and Exchange Commission ("Commission") that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the Commission. (c) "Holder" means any person owning or having the right to acquire Registrable Securities, or any assignee thereof in accordance with Section 8 hereof. (d) "34 Act" means the Securities Exchange Act of 1934, as amended. (e) "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 33 Act, and the declaration or ordering of effectiveness of such registration statement or document. (f) "Registrable Securities" means (i) common stock of the Company issuable or issued upon conversion of the Series A Preferred Stock; and (ii) any common stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of any Registrable Securities, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this Registration Agreement are not assigned in accordance with this Registration Agreement. (g) The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities. (h) "Common Stock" means common stock of the Company. (i) "Series A Stock" means the Series A Preferred Stock of the Company. 1. Registration. Subject to all of the provisions of this Registration ------------ Agreement, commencing as of the Effective Date, the Company shall use best efforts to cause be registered under the 33 Act, all, or as many as reasonably possible of the Registrable Securities, by means of a Form S-3 registration statement, or if the use of Form S-3 is not then available, then by means of such other Form(s) as may be available in connection with the Registrable Securities (all subsequent references herein to Form S-3 shall be deemed to include references to such other Form(s) unless expressly provided otherwise); provided, however, that the Company shall not be obligated to effect any such registration any of the following situations: (a) If the Holders, together with the holders of any other securities of the Company entitled to inclusion or otherwise included in such registration, propose to sell securities of the Company on Form S-3 at an aggregate price to the public of less than One Million Five Hundred Thousand Dollars ($1,500,000.00), provided, however, that such One Million Five Hundred Thousand Dollar ($1,500,000.00) minimum shall not apply if the Holders represent in writing to the Company that they intend to dispose of at least Two Million (2,000,000) shares of Registrable Securities; or (b) Within one hundred and twenty (120) days after the filing and/or effective date of any other registration filed pursuant hereto. (c) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the 33 Act. In addition, during such times as the Company is causing Registrable Securities to be registered under the 33 Act pursuant to this Registration Agreement, the Company shall not register or attempt to register any other securities of the Company under the 33 Act for purposes of effecting a public offering of such securities without the prior written consent of a majority in interest of the holders of Series A Preferred Stock, except for (a) registrations of Registrable Securities held by other holders of Series A Preferred Stock pursuant to registration agreements substantially the same as this Registration Agreement; and (b) registrations relating to an employee benefit plan of the Company or a business combination involving the Company. 2 2. Company's Duties. In connection with any registration effected by the ---------------- Company pursuant hereto, the Company will keep each Holder advised in writing as to the initiation of the registration and as to the completion thereof. The Company shall: (a) File a Form S-3 registration statement with the Securities and Exchange Commission ("Commission") not later than six (6) months after the Effective Date, and to the extent practicable, cause such registration statement to be declared effective within 45 days of such filing. However, in the event such registration statement is not on Form S-3, then the 45 day period set forth in the immediately preceding sentence shall be extended to 90 days. (b) Keep the registration statement effective for one year after the effective date of such registration statement. (c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 33 Act with respect to the disposition of all securities covered by such registration statement. (d) Furnish such number of prospectuses and other documents incident to such registration statement, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request. (e) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the 33 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and shall promptly prepare and file with the Commission either a supplement to such prospectus, or an amendment to such registration statement, or a filing under the 34 Act, which is incorporated by reference into such registration statement (and in the case of an amendment to such registration statement use the Company's best efforts to cause such amendment to become effective as soon as reasonably possible), as may be necessary so that, as thereafter delivered to purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in light of the circumstances then existing, and at the request of any Holder, shall furnish to such Holder a reasonable number of copies of such supplement, amendment or filing under the 34 Act. (f) Cause all Registrable Securities registered hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (g) Use reasonable, diligent efforts to register and qualify the securities covered by such registration statement under such other securities laws or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall 3 not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (h) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. (i) Furnish, at the request of any Holder of Registrable Securities included in such registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective: (1) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders of Registrable Securities included in such registration, addressed to the underwriters, if any, and to the Holders of Registrable Securities included in such registration; and (2) a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders of Registrable Securities included in such registration, addressed to the underwriters, if any, and to the Holders of Registrable Securities included in such registration. 3. Limiting Provisions. In connection with any offering involving an ------------------- underwriting of shares of the Company's capital stock, the Company shall not be required by reason of this Registration Agreement, to include any of the Registrable Securities in such underwriting, unless the Holders accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering or have a material adverse effect on the price of or market for the Company's capital stock. If the total amount of securities, including Registrable Securities, to be included in such offering exceeds the amount of securities to be sold (other than by the Company) that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders possessing contractual registration rights, according to the total amount of securities entitled to be included therein that are owned by each selling shareholder, or in such other proportions as shall mutually be agreed to by such selling shareholders); provided, however, that the number of shares of Registrable Securities to be - -------- ------- included in such underwriting and registration shall not be reduced unless all other securities of the Company (including, without limitation, securities held by officers, directors and employees of the Company and other shareholders of the Company who do not have contractual registration rights), are first entirely excluded from the underwriting and 4 registration. Any Registrable Securities excluded and withdrawn from such underwriting shall be withdrawn from the registration. 4. Information from Holder. It shall be a condition precedent to the ----------------------- obligations of the Company to take any action pursuant to this Registration Agreement with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 5. Expenses of Registration. All expenses other than underwriting ------------------------ discounts and commissions incurred in connection with registrations, filings or qualifications, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration begun pursuant to this Registration Agreement if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered, which request shall be binding on all Holders of the Registrable Securities (in which case all participating Holders shall bear such expenses pro rata based on the relative number of Registrable Securities held by each Holder that were to be included in the withdrawn registration); provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company not known to the Holders as of the Effective Date and have withdrawn their request for registration with reasonable promptness after learning of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights hereunder. 6. Delay of Registration. No Holder shall have any right to obtain or --------------------- seek an injunction restraining or otherwise delaying any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Registration Agreement. 7. Indemnification. In the event any Registrable Securities are included --------------- in a registration statement pursuant to this Registration Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners or officers, directors and shareholders of each Holder, legal counsel and accountants for each Holder, any underwriter (as defined in the 33 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 33 Act or the 34 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the 33 Act, the 34 Act or any state securities laws, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a 5 material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 33 Act, the 34 Act, any state securities laws or any rule or regulation promulgated under the 33 Act, the 34 Act or any state securities laws; and the Company will reimburse each such Holder, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the 33 Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the 33 Act, the 34 Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any person intended to be indemnified pursuant to this Section 7(b), for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld), provided that in no event shall any indemnity under this Section 7(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action (including any governmental action), such 6 indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 7. (d) If the indemnification provided for in this Section 7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 7 shall survive the completion of any offering of Registrable Securities in a registration statement filed by the Company. 8. Assignment of Registration Rights. The rights to cause the Company to --------------------------------- register Registrable Securities pursuant hereto may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner or shareholder of a Holder, (ii) is a Holder's family member or trust for the benefit of an individual Holder, or (iii) after such assignment or 7 transfer, holds at least Fifty Percent (50%) of the Holder's original number of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, (b) such transferee or assignee agrees in writing to be bound by and subject to all of the terms and conditions of this Agreement, and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 33 Act. 9. "Market Stand-Off" Agreement. Each Holder hereby agrees that it will --------------------------- not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to any public offering of securities by the Company, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock, whether any such transaction described in clause (i) or (ii) immediately above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The underwriters in connection with any public offering of securities by the Company are intended third party beneficiaries of this Section 9 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. In order to enforce the foregoing covenant, the Company may impose stop- transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 10. Miscellaneous Provisions. ------------------------ 10.1 Exhibits. All exhibits described in this Registration Agreement -------- are incorporated by reference as if fully set forth herein, and constitute a material part of this Registration Agreement, whether or not such exhibits are attached hereto. 10.2 Governing Law. This Registration Agreement shall in all ------------- respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of California, United States of America. Any legal action between the parties regarding this Registration Agreement shall be brought in, and the parties hereby consent to the jurisdiction of and venue in, the federal and state courts located in the County of Los Angeles, State of California, United States of America. 8 10.3 Notices. Any notice, demand or other communication required or ------- permitted under this Registration Agreement shall be deemed given and delivered when in writing and (a) personally served upon the receiving party, or (b) upon the third (3rd) calendar day after mailing to the receiving party by either (i) United States registered or certified mail, postage prepaid, or (ii) FedEx or other comparable overnight delivery service, delivery charges prepaid, and addressed as follows: To Company: Microelectronic Packaging, Inc. 9577 Chesapeake Drive San Diego, CA 92123 Attn: Chief Executive Officer To any member of Transpac Capital Pte Ltd the Investor Group 6 Shenton Way #20-09 DBS Building Tower Two Singapore 068809 Attn: Wong Lin Hong Any party may change the address specified in this section by giving the other party notice of such new address in the manner set forth herein. 10.4 Severability. In the event that any provision of this ------------ Registration Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or invalid, then this Registration Agreement shall continue in full force and effect without said provision. If this Registration Agreement continues in full force and effect as provided above, the parties shall replace the invalid provision with a valid provision which corresponds as far as possible to the spirit and purpose of the invalid provision. 10.5 Counterparts. This Registration Agreement may be executed in ------------ any number of counterparts, each of which may be executed by less than all of the parties hereto, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one document. 10.6 Entire Agreement. This Registration Agreement, the Ancillary ---------------- Agreements, and the documents and agreements contemplated herein and therein, constitute the entire agreement between the parties with respect to the subject matter hereof, and supersede all prior oral or written agreements, representations or warranties between the parties other than those set forth herein or herein provided for. 10.7 Successors and Assigns. Except as specifically permitted ---------------------- pursuant to the terms and conditions hereof, no party shall be permitted to assign their respective rights or obligations under this Registration Agreement without the prior written consent of the other parties. The provisions hereof shall inure to the benefit of, and be binding upon, the permitted successors and assigns, heirs, executors, and administrators of the parties hereto. 9 10.8 Amendment and Waiver. No modification or waiver of any -------------------- provision of this Registration Agreement shall be binding upon the party against whom it is sought to be enforced, unless specifically set forth in writing signed by an authorized representative of that party. A waiver by any party of any of the terms or conditions of this Registration Agreement in any one instance shall not be deemed or construed to be a waiver of such terms or conditions for the future, or of any subsequent breach thereof. The failure by any party hereto at any time to enforce any of the provisions of this Registration Agreement, or to require at any time performance of any of the provisions hereof, shall in no way to be construed to be a waiver of such provisions or to affect either the validity of this Registration Agreement or the right of any party to thereafter enforce each and every provision of this Registration Agreement. 10.9 Survivability. All of the representations, warranties, ------------- agreements and obligations of the parties pursuant to this Registration Agreement shall survive any registration of the Registrable Shares pursuant hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Registration Agreement as of the date first above written. MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD By:_______________________________ By:_______________________________ Signature Signature Print Print Name:_____________________________ Name:_____________________________ Print Print Title:____________________________ Title:____________________________ 10 TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD By:_______________________________ By:_______________________________ Signature Signature Print Print Name:_____________________________ Name:_____________________________ Print Print Title:____________________________ Title:____________________________ NATSTEEL EQUITY III PTE LTD By:_______________________________ Signature Print Name:_____________________________ Print Title:____________________________ 11 EX-99.(D) 5 TRANSPAC WARRANT AND AMENDMENT NO. 1 EXHIBIT "D" THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT. No. WCS-1 WARRANT TO PURCHASE COMMON STOCK of MICROELECTRONIC PACKAGING, INC. Void after April 24, 2003 This certifies that, for valid and good consideration, 2 (the "Holder") is entitled, subject to the terms set forth below, to purchase from Microelectronic Packaging, Inc. (the "Company"), a California corporation, the number of shares of the Common Stock of the Company, as constituted on the date hereof, upon surrender hereof, at the principal office of the Company referred to below at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to determination and adjustment as provided below. 1. Term of Warrant. Subject to the terms and conditions set forth --------------- herein, this Warrant shall be exercisable, in whole or in part, at any time or from time to time on or after April 24, 1998. This Warrant shall expire at 5:00 p.m., Pacific Standard Time, on April 24, 2003 without any action on the part of any party (the "Expiration Date"). 2. Exercise Price. The exercise price at which this Warrant may be -------------- exercised shall be $1.00 per share of Common Stock, as adjusted from time to time pursuant to Section 11 hereof (the "Exercise Price"), payable either by cash or check or by net exercise pursuant to Section 4.d. 3. Number of Shares. The Holder is entitled, subject to the ---------------- provisions of this Warrant, to purchase from the Company an aggregate of 3 fully paid and nonassessable shares of Common Stock of the Company (subject to adjustment as provided herein) (the "Warrant Shares"). 4. Exercise of Warrant. ------------------- a. Subject to the terms and conditions set forth herein, the purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, and such exercise shall be effected by the surrender of this Warrant, the Notice of Paid Exercise annexed hereto and upon payment of the Exercise Price in cash or by check. b. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person or persons entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. c. Upon any partial exercise of this Warrant, there shall be issued to the Holder hereof a new Warrant certificate in respect of the Warrant Shares as to which the Warrant Shares evidenced by this Warrant certificate shall not have been exercised. This Warrant certificate may be exchanged at the office of the Company by surrender of this Warrant certificate properly endorsed either separately or in combination with one or more other Warrant certificates for one or more new Warrant certificates evidencing the right of the Holder thereof to purchase the same aggregate number of Warrant Shares as were purchasable upon exercise of this Warrant evidenced by the Warrant certificate or certificates exchanged. No fractional shares will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in this Warrant. This Warrant certificate is transferable at the office of the Company in the manner and subject to the limitations set forth in this Warrant. d. In lieu of exercising this Warrant by paying the Exercise Price in cash or by check, Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the Notice of Net Exercise annexed hereto in which event the Company shall issue to Holder a number of shares of the Company's Common Stock, computed using the following formula: Where X - The number of shares of Common Stock to be issued to Holder. X= (Y)(A-B) -------- A Y - The number of shares of Common Stock covered by this Warrant to be canceled pursuant to such exercise under this Warrant. A - The fair market value of one share of the Company's Common Stock, B - Exercise Price (as adjusted to the date of such calculations). For purposes of this Section 4.d., the fair market value of one share of the Company's Common Stock as of any date shall be determined as follows: (1) if such stock is then quoted on the Nasdaq Stock Market, American Stock Exchange or New York Stock Exchange, its average closing price on such market or exchange calculated over the 30 trading days immediately preceding the date of determination, as reported in The Wall Street Journal; ----------------------- (2) if such stock is publicly traded and is then listed on a national securities exchange, its average closing price calculated over the 30 trading days immediately preceding the date of determination on the principal national securities exchange on which the stock is listed or admitted to trading as reported in The Wall Street Journal; ----------------------- (3) if such stock is publicly traded, but is not quoted on the Nasdaq Stock Market nor listed or admitted to trading on a national securities exchange, the mean of the average closing bid and asked prices calculated over the 30 trading days immediately preceding the date of determination as reported in The Wall Street Journal (or, if not so reported, as ----------------------- otherwise reported by any newspaper or other source as the Board of Directors of the Company may determine in good faith); or (4) if none of the foregoing is applicable, as determined by the Board of Directors of the Company in good faith; provided, however, that if Transpac (as defined below), acting as agent for the Warrant Holders (as defined below), objects to such determination, then as determined by an investment banker or accountant mutually acceptable to the Company and Transpac (as defined below), with the costs of such appraisal to be borne by Transpac (as defined below). If the Company's Common Stock is not publicly traded, the Board of Directors of the Company shall inform the Warrant Holders (as defined below) of its good faith determination of the fair market value of such Common Stock upon the written request of any Warrant Holder (as defined below). e. The Company hereby represents and covenants that the Warrant Shares (or other securities) received upon exercise of this Warrant are and will be listed, admitted to trading or authorized for quotation on any stock market or securities exchange upon which the Common Stock or any other securities of the Company are then listed, admitted to trading or authorized for quotation. 5. No Fractional Shares or Scrip. No fractional shares or scrip ----------------------------- representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 6. No Rights of Shareholder. The Holder shall not be entitled to ------------------------ vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the shares of Common Stock purchasable upon the exercise hereof shall have been issued, as provided herein. 7. Transfer of Warrant. ------------------- a. Warrant Register. The Company will maintain a register ---------------- (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes. b. Non-transferability and Non-Negotiability of Warrant. ---------------------------------------------------- This Warrant may not be transferred or assigned without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). Any Holder of this Warrant or Warrant Shares (i) that is a partnership or like organization may distribute or transfer all or any portion of such securities to its partners or affiliated entities, or (ii) that is a corporation or other entity may distribute or transfer all or any portion of such securities to its subsidiaries or its parent company or entity, and, in each case, shall not be obligated to provide the Company with any securities laws opinion of counsel with respect to such distribution or transfer. c. Compliance with Securities Laws. ------------------------------- (1) Authorization. Holder has full power and authority to ------------- enter into this Warrant, and such Warrant constitutes its valid and legally binding obligation, enforceable in accordance with its terms. (2) Purchase Entirely for Own Account. This Warrant has --------------------------------- been purchased by the Holder for such Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and such Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation to any person with respect to this Warrant or underlying shares of Common Stock. (3) Disclosure of Information. Such Holder acknowledges ------------------------- that it has received all the information that it has requested in connection with the purchase of this Warrant, including the Company's filings with the Securities and Exchange Commission. Holder further represents that it has had an opportunity to ask questions and receive answers from the Company, as well as to consult its own legal, tax and other advisors, regarding the information provided and the terms and conditions of the offering of this Warrant. Holder represents and warrants that it is prepared to lose its entire interest in this Warrant and the underlying shares of Common Stock and has not relied on the Company or any of the Company's advisors in determining whether to make this investment in the Company. (4) Investment Experience. Holder acknowledges that it is --------------------- able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in this Warrant and the underlying shares of Common Stock. Such Holder also represents it has not been organized for the purpose of acquiring this Warrant. (5) Accredited Investor. ------------------- (A) Holder is an "accredited investor" as defined below and understands the meaning of that term. (B) The term "accredited investor" as used herein refers to: (a) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5(A) of the Act whether acting in its individual or fiduciary capacity; any broker dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Borrower Act of 1940 or any business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Borrower licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (b) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; (c) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; (d) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (e) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (f) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (g) Any trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment or the issuer believes immediately prior to making any sale that such person comes within this description; or (h) Any entity in which all of the equity owners are accredited investors. As used in this Section, the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section, "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the Holder should consider whether it should add any or all of the following items to its adjusted gross income for income tax purposes in order to reflect more accurately its actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, and deductions claimed for depletion. (6) Restricted Securities. The Holder understands that this Warrant --------------------- and underlying Common Stock it is purchasing are characterized as "restricted securities" under U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and without registration under such laws and applicable regulations and cannot be resold without registration under the Act, except in certain limited circumstances. In this connection, the Holder represents that it is familiar with SEC Rule 144, as currently in effect, and understands the resale limitations imposed on these securities by the Act. (7) Representations by Foreign Investor. The Holder hereby represents ----------------------------------- that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for this Warrant and underlying shares of Common Stock, including (i) the legal requirements within its jurisdiction for the purchase of this Warrant and underlying shares of Common Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of this Warrant and underlying shares of Common Stock. The Holder's subscription and payment for, and its continued beneficial ownership of this Warrant, will not violate any applicable securities or other laws of its jurisdiction. (8) Compliance with Securities Laws. Unless otherwise provided ------------------------------- herein, without in any way limiting the representations set forth above, the Holder further agrees not to make any disposition of all or any portion of this Warrant or any shares of Common Stock to be issued upon exercise hereof unless and until the transferee has agreed in writing for the benefit of the Company to be bound by the terms of this Warrant, provided and to the extent such sections are then applicable, and: (A) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (B) (1) the Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition and (2) the Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Act. 8. Legends. This Warrant and all shares of Common Stock issued upon ------- exercise hereof will bear one or all of the following legends; provided, that if this Warrant is exercised under Section 4.d. on or after the second anniversary of the date of issuance of this Warrant, the legend in paragraph (A) below shall be removed unless in the opinion of counsel reasonably acceptable to the Holder such legend is required by applicable law: (A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT." (B) Any legend required by the laws of the State of California or other applicable authority, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code. 9. Reservation of Stock. The Company covenants that during the term -------------------- this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its articles of incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens, and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein) and will be fully paid and non- assessable. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 10. Amendments and Waivers. ---------------------- a. Any term of this Warrant may be amended or waived with the written consent of the Company and the Holder. b. No waivers of or exceptions to any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. Adjustments. The number of shares purchasable hereunder are ----------- subject to adjustment from time to time as follows: a. Merger, Sale of Assets, etc. If at any time, while this ---------------------------- Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger (other than a mere reincorporation merger where the subsidiary or affiliate of the Company used to effectuate the reincorporation merger assumes all of the Company's obligations under this Warrant) or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect or by net exercise pursuant to Section 4.d., the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer which a holder of the shares deliverable upon such exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer, if this Warrant had been exercised immediately before the consummation of such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 11. The foregoing provisions of this Section 11(a) shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation which are at the time receivable upon the exercise of this Warrant. If the per share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. b. Reclassification, etc. If the Company at any time while ---------------------- this Warrant, or any portion thereof, remains outstanding and unexpired shall, by reclassification of securities or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change, and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. c. Split, Subdivision or Combination of Shares. If the ------------------------------------------- Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, this Warrant shall thereafter represent the right to acquire such number of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such change, and the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. d. Adjustments for Dividends in Stock or Other Securities or --------------------------------------------------------- Property. If while this Warrant, or any portion hereof, remains outstanding and - -------- unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property of the Company which such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 11. e. Prior Notice of Certain Events. The Company will provide ------------------------------ Holder with notice of any merger, asset sale or dividend not less than ten (10) business days prior to the record date for such event. 12. Registration of Warrant Shares. ------------------------------ a. Company Registration. If (but without any obligation to -------------------- do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Warrant Holders (as defined below)) any of its common stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), the Company shall, at such time, promptly give each Warrant Holder thirty (30) days prior written notice of such registration. Upon the written request of each Warrant Holder given within twenty (20) days after mailing of notice of such registration by the Company in accordance with Section 13.b., the Company shall, subject to the provisions of Section 12.d., at the Company's expense, cause to be registered under the Act all of the Warrant Shares that each Warrant Holder has requested to be registered. b. Demand Registration. Beginning April 24, 1999, Holders ------------------- of at least 50% of the Warrant Shares issued or issuable pursuant to all of the Warrants issued in connection with to the Restructuring, Settlement and Mutual Release Agreement (the "Settlement Agreement") dated April 24, 1998 by and among the Company, Transpac Capital Pte Ltd ("Transpac"), Transpac Industrial Holdings Ltd, Regional Investment Company Ltd and Natsteel Equity III Pte Ltd (the "Warrant Holders") shall have the right to request the filing of a registration statement on Form S-3 but if the use of Form S-3 is not then available, then on such other Form(s) as may be available to sell the Warrant Shares (and all subsequent references herein to Form S-3 shall be deemed to be references to such other Form(s) as well unless expressly provided otherwise) (such requests shall be in writing and shall state the number of shares of Warrant Shares to be disposed of and the intended methods of disposition of such shares by such Holder or Holders); provided, however, that the Company shall not be obligated to effect any such registration if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Warrant Shares and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $1,000,000, (provided that such $1,000,000 minimum shall not apply if the Warrant Holders represent in writing to the Company that they intend to dispose of at least 250,000 Warrant Shares) or (ii) after the Company has effected one (1) such registration pursuant to such a request of the Holders. c. Company Obligations. In the case of each registration ------------------- effected by the Company pursuant to Section 12.b., the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (1) File such S-3 registration statement with the Securities and Exchange Commission within 45 days of receipt of a request pursuant to Section 12.b. and, to the extent practicable, cause such registration statement to be declared effective within 45 days of such request. In the event that such registration statement is not on Form S-3, then the 45 day periods set forth in the immediately preceding sentence shall be extended to 90 days. (2) Keep the registration statement effective for one year after the effective date of such registration statement; (3) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (4) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (5) Notify each seller of Warrant Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and shall promptly prepare and file with the Securities and Exchange Commission either a supplement to such prospectus or amendment to such registration statement or a filing under the Securities Exchange Act of 1934, as amended (the "1934 Act"), which is incorporated by reference into such registration statement (and in the case of an amendment to such registration statement use its best efforts to cause such amendment to become effective as soon as possible), as may be necessary so that, as thereafter delivered to purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in light of the circumstances then existing, and at the request of any such seller, shall furnish to such seller a reasonable number of copies of such supplement, amendment or filing under the 1934 Act; (6) Cause all such Warrant Shares registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. d. Limiting Provisions. ------------------- (1) Notwithstanding the provisions of Section 12.a., if the Company shall furnish to the Holders requesting inclusion in a registration statement pursuant to Section 12.a., a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 120 days after receipt of the request for such registration; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (2) In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 12.a., to include any of the Warrant Shares in such underwriting, unless the Warrant Holders accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not, jeopardize the success of the offering or have a material adverse effect on the price of or market for the Company's capital stock. If the total amount of securities, including Warrant Shares, requested by shareholders to be included in such offering exceeds the amount of securities to be sold (other than by the Company) that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Warrant Shares, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders possessing contractual registration rights according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders). The limitations contained in this Section 12.c.(3) could result in no Warrant Shares being sold in a particular underwriting. Officers, directors and employees of the Company, as well as other shareholders who do not have contractual registration rights, will not be permitted to participate in the registration unless the registration request of the Warrant Holders is fully satisfied. 13. Miscellaneous. ------------- a. Governing Law. This Warrant shall be governed by and ------------- construed under the laws of California. The parties to this Warrant hereby (i) irrevocably submit to the jurisdiction of the courts of Singapore, the courts of the State of California, and the Federal courts of the United States sitting in the State of California for the purpose of any action or proceeding arising out of or relating to this Warrant and any other documents and instruments relating hereto, (ii) agree that all claims in respect of any such action or proceeding may be heard and determined in such courts, (iii) irrevocably waive (to the extent permitted by applicable law) any objection which it now or hereafter may have to the laying of venue of any such action or proceeding brought in any of the foregoing courts, and any objection on the ground that any such action or proceeding in any such court has been brought in an inconvenient forum and (iv) agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner permitted by law. b. Notices. Unless otherwise provided, any notice required ------- or permitted under this Warrant shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof in the case of the Company, and on the Warrant Register in the case of the Holder, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. c. Counterparts. This Warrant may be executed in two or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. d. Successor and Assigns. This Warrant shall bind and --------------------- benefit the Holder and each of its successors and assigns and the Company and each of its successors and assigns. IN WITNESS WHEREOF, each of Microelectronic Packaging, Inc., and the Holder has caused this Warrant to be executed by one of its duly authorized officers or such other authorized person or entity. Dated: April 24, 1998 MICROELECTRONIC PACKAGING, INC. By: ______________ (Print Name of Signatory) Title: 4 By: ______________ (Print Name of Signatory) Title: NOTICE OF PAID EXERCISE ----------------------- To: MICROELECTRONIC PACKAGING, INC. (1) The undersigned hereby elects to purchase __________ shares of Common Stock of Microelectronic Packaging, Inc. pursuant to Section 4(a) of the attached Warrant, and tenders herewith payment of the purchase price for such shares. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell, or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws or unless sold pursuant to Rule 144 of such Act. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: [Name] And, if said number of shares of Common Stock shall not be all the shares of Common Stock purchasable under the within Warrant certificate, a new Warrant certificate is to be issued in the name of said undersigned for the balance remaining of the Warrant Shares purchasable thereunder less any fraction of a share paid in cash. NOTICE OF NET EXERCISE ---------------------- To: MICROELECTRONIC PACKAGING, INC. (1) The undersigned hereby elects to purchase __________ shares of Common Stock of Microelectronic Packaging, Inc. pursuant to Section 4.d. of the attached Warrant, such that an additional number of shares of Common Stock under the Warrant will be cancelled in respect of the purchase price in the manner set forth in Section 4.d. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell, or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws or unless sold pursuant to Rule 144 of such Act. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: [Name] And, if number of shares of Common Stock being cancelled pursuant to Section 4.d. of the Warrant shall not be all the shares of Common Stock purchasable under the within Warrant certificate, a new Warrant certificate is to be issued in the name of said undersigned for the balance remaining of the Warrant Shares purchasable thereunder less any fraction of a share paid in cash. EXHIBIT "D" FIRST AMENDMENT TO WARRANT TO PURCHASE COMMON STOCK OF MICROELECTRONIC PACKAGING, INC. No. WCS-1 THIS FIRST AMENDMENT ("First Amendment") TO WARRANT TO PURCHASE COMMON STOCK OF MICROELECTRONIC PACKAGING, INC. ("Warrant"), is entered into effective as of June _______, 1999 ("Effective Date") between Microelectronic Packaging, Inc., a California corporation ("MPI"), and Transpac Capital Pte. Ltd. (the "Holder"), with respect to the Warrant to Purchase Common Stock of MPI No. WCS-1 dated April 24, 1998, between MPI and Holder ("Warrant"). This First Amendment is entered into pursuant to Section 6.1(b) of the Debt Conversion and Mutual Settlement and Release Agreement dated April 29, 1999 ("Conversion Agreement"), entered into between (a) MPI on behalf of itself and its predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns; and (a) Transpac Capital Pte Ltd, Transpac Industrial Holdings Ltd, Regional Investment Company Ltd, and Natsteel Equity III Pte Ltd, and their respective predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns. 1. Amendment of Warrant. MPI and Holder hereby agree that Section 2 of -------------------- the Warrant shall be amended by deleting it in its entirety and replacing it with the following new Section 2: 2. Exercise Price. The exercise price at which this Warrant may -------------- be exercised shall be Fifty Cents ($0.50) per share of Common Stock, as adjusted from time to time pursuant to Section 11 hereof (the "Exercise Price"), payable either by cash or check or by net exercise pursuant to Section 4.d. 2. No Other Amendments. Except for the amendment to the Warrant described ------------------- in Section 1 of this First Amendment, no other provisions of the Warrant are amended or changed by virtue of this First Amendment, and all other provisions of the Warrant remain in full force and effect without any amendments or changes thereto. 3. Consideration. MPI and Holder agree that their respective rights and ------------- obligations under the Conversion Agreement constitute sufficient consideration to cause the provisions of this First Amendment to be enforceable against MPI and Holder in accordance with its terms. IN WITNESS WHEREOF, MPI and Holder have executed this First Amendment as of the Effective Date. MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE. LTD. a California corporation By: ____________________________ By: _____________________________ Signature Signature Print Print Name: __________________________ Name: ___________________________ Print Print Title:__________________________ Title: __________________________ EX-99.(E) 6 ASSIGNMENT AGREEMENT EXHIBIT "E" ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT is entered into effective as of June _____, 1999 ("Effective Date"), between STMicroelectronics, Inc. ("ST"), and FI Financial, LLC ("FIF"), with respect to the payment by FIF of a cash lump sum in the amount of Five Hundred Thousand United States Dollars (US$500,000.00) ("Investor Payment"), in exchange for the assignment by ST to FIF pursuant to the terms and conditions hereof, of all of ST's rights, title, claims and interest in, under and pursuant to each and every one of the following agreements and documents: (a) Deed of Guarantee and Indemnity dated August 17, 1995, entered into between Microelectronic Packaging, Inc. ("MPI") and SGS- Thompson Microelectronics Pte Limited ("SGS") ("Guaranty"); (b) a document entitled "Charge" dated August 17, 1995, entered into between Microelectronic Packaging (S) PTE LTD ("MPS") and SGS ("Charge"); (c) Supply Guarantee and Preferred Allocation Agreement dated July, 1995, between MPS and SGS ("Supply Agreement"); (d) Supplemental Agreement to Supply Guarantee and Preferred Allocation Agreement dated August 17, 1995 and October 19, 1995, entered into between MPS and SGS ("Supplemental Agreement"); (e) Warrant to Purchase Common Stock of MPI dated September 24, 1998, pursuant to which ST is entitled to purchase an aggregate of Two Hundred Thousand (200,000) shares of MPI's common stock at a price of One Dollar ($1.00) per share ("Warrant"); (f) the Judgment by Confession and Stipulated Judgment dated September 24, 1998, between MPI and ST, and all agreements and documents related thereto ("Judgments"); and (g) Restructuring, Settlement and Mutual Release Agreement dated September 24, 1998, entered into between, among others, ST and MPI (all of the foregoing agreements and documents are referred to collectively in this letter as the "ST Agreements"). FOR VALUE RECEIVED, and in consideration of the payment to ST of the Investor Payment, ST hereby completely assigns, conveys and transfers to FIF, all of ST's rights, title, claims and interests in, under and pursuant to each and every one of the ST Agreements ("Assignment"). In connection with the Assignment, ST represents and warrants to FIF that as of the Effective Date, ST is the sole and exclusive owner of all of the rights, title, claims and interests of SGS and ST in, under and pursuant to the ST Agreements, and that ST has not assigned, conveyed or otherwise transferred any interest in or any portion of the ST Agreements to any party other than FIF. Otherwise, ST does not make any additional representations or warranties of any kind with respect to the ST Agreements. Regardless of any other provision of this Assignment Agreement, FIF represents, warrants and agrees that: (a) FIF is a sophisticated and experienced investor who has the capability to evaluate the risks of the transactions contemplated by this Assignment Agreement, and has the ability to protect FIF's own interests in connection therewith. 1 (b) FIF has performed whatever due diligence review FIF deems necessary and/or appropriate in connection with the transactions contemplated by this Assignment Agreement, and is satisfied with the results of such due diligence review. (c) FIF has not requested that ST make, and ST has not made and is not making, any representations or warranties of any kind regarding the propriety of FIF's contemplated acquisition of the ST Agreements, the value or enforceability of any rights ST may have under the ST Agreements, the value or enforceability of any rights FIF may have as an assignee of the ST Agreements, the value or enforceability of any rights FIF may have to acquire shares of capital stock of MPI by virtue of FIF's acquisition of the ST Agreements, or the current or potential value of any of such shares of capital stock IN WITNESS WHEREOF, ST and FIF have executed and delivered this Assignment Agreement as of the Effective Date. STMICROELECTRONICS, INC. FI FINANCIAL, LLC By:__________________________________ By:_____________________________ Steven K. Rose, Vice President James T. Waring, Manager 2 ASSIGNMENT OF INTEREST UNDER LETTER AGREEMENT WITH STMICROELECTRONICS, INC. THIS ASSIGNMENT OF INTEREST UNDER LETTER AGREEMENT WITH STMICROELECTRONICS, INC. ("Assignment"), is entered into effective as of April 21, 1999 ("Effective Date"), between FI Financial, LLC ("FIF"), and the party whose name appears below, which party is referred to herein as the "Assignee": _____________________________________________________________________________ PRINT NAME OF "ASSIGNEE" Unless otherwise defined herein, all capitalized terms appearing in this Assignment shall have the meanings defined for such terms in the letter agreement dated April 14, 1999, entered into between FIF, STMicroelectronics, Inc. ("ST"), and Microelectronic Packaging, Inc. ("MPI") ("Letter Agreement"). Pursuant to the Letter Agreement, FIF and ST have opened an escrow with Mission Valley Escrow ("Escrow Account"), and FIF has deposited into the Escrow Account the amount of Five Hundred Thousand Dollars ($500,000.00). Pursuant to this Assignment, Assignee desires to acquire from FIF an interest in the Escrow Account, and a corresponding interest under the Letter Agreement, all in accordance with the provisions of this Assignment. FOR VALUE RECEIVED, FIF hereby assigns and transfers to Assignee, and Assignee hereby accepts from FIF, an interest in the Escrow Account ("Assigned Interest") in the dollar amount appearing below, which dollar amount is referred to herein as the "Escrow Reimbursement": ______________________________________________________________________________ PRINT APPLICABLE DOLLAR AMOUNT FOR "ESCROW REIMBURSEMENT" In exchange for receiving the Assigned Interest, Assignee hereby directs Ross, Dixon & Bell, LLP ("RDB") to withdraw the amount of the Escrow Reimbursement from RDB's Client Trust Account, which amount was received by RDB from Assignee for the purpose of acquiring the Assigned Interest, and immediately pay the amount of the Escrow Reimbursement to FIF or its assignee, which assignee may be designated by James T. Waring. 3 By executing this Assignment where indicated below, Assignee confirms that Assignee has acquired the Assigned Interest in exchange for the Escrow Reimbursement, and FIF confirms that FIF has in fact assigned and transferred the Assigned Interest to Assignee, which shall be deemed to be a portion of the Escrow Account in an amount equal to the Escrow Reimbursement. Furthermore, by executing this Assignment where indicated below, Assignee hereby authorizes FIF to act as the agent for Assignee in connection with all matters pertaining to the Escrow Account, subject to the limitation that Assignee's portion of the Escrow Account in an amount equal to the Escrow Reimbursement ("Assignee's Balance") shall be withdrawn from the Escrow Account only for the following purposes ("Authorized Purposes"): (a) to pay the amount of Assignee's Balance to ST pursuant to the terms and conditions of the Letter Agreement, but only after Assignee has executed and delivered to MPI a counterpart copy of the Debt Conversion and Mutual Settlement and Release Agreement and the other agreements related thereto, that pertain to the shares of MPI's Series A Preferred Stock that are being acquired by Assignee in exchange for Assignee's Balance ("ST Transaction"); or (b) in the event the ST Transaction for any reason is not completed on or before June 30, 1999 (or such later date as may be agreed upon in writing by Assignee), to pay the amount of Assignee's Balance to Assignee upon the closing of the Escrow Account. Assignee agrees that FIF has consented to act as agent for Assignee in connection with the Escrow Account solely for the convenience of Assignee, and that FIF shall not have any liabilities or obligations of any kind to Assignee in connection with the Escrow Account, unless and only unless FIF authorizes Assignee's Balance to be withdrawn from the Escrow Account for any reason other than the Authorized Purposes, without Assignee's written approval. Assignee agrees that all of the funds on deposit in the Escrow Account are being invested at a nominal rate of interest roughly equivalent to the rate of interest generally paid by national banks on funds deposited in passbook savings accounts, and that for the convenience of the parties, FIF shall be entitled to collect and retain all of the interest earned on the funds deposited in the Escrow Account. FIF expects the amount of such interest to be minor and nominal, and Assignee agrees that the amount of such interest will not be material to Assignee under the circumstances and should be paid to FIF for the convenience of the parties. IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the Effective Date. FI FINANCIAL, LLC ASSIGNEE By:________________________________ _________________________________ James T. Waring, Manager Signature 4 _________________________________ Print Name 5 EX-99.(F) 7 IBM PROCEEDS AGREEMENT EXHIBIT "F" IBM PROCEEDS AGREEMENT THIS IBM PROCEEDS AGREEMENT ("IBM Agreement") is entered into effective as of this day _________, 1999 ("Effective Date"), between Microelectronic Packaging, Inc. ("MPI"), on behalf of itself and its predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns (collectively with MPI the "MPI Group"); and Transpac Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd ("Natsteel Equity"), and their respective predecessors, successors, former and current subsidiaries, affiliates, shareholders, directors, officers, agents, attorneys, representatives, insurers, employees and assigns (collectively the "Investor Group"). This IBM Agreement is being entered into between the MPI and the Investor Group pursuant to the applicable terms and conditions of the Debt Conversion and Mutual Settlement and Release Agreement dated as of the Effective Date ("Conversion Agreement"), entered into between the MPI Group and the Investor Group. Unless otherwise defined herein, capitalized terms appearing in this IBM Agreement shall have the meanings defined for such terms in the Conversion Agreement. 1. Defined Terms. In addition to defined terms whose meanings may be ------------- defined elsewhere in this IBM Agreement or in the Conversion Agreement, the following terms shall have the meanings defined for such terms in this Section 1: 1.1 "Covered Agreements" means one or both of the following agreements entered into by and between MPI and International Business Machines Corporation ("IBM"): (a) the Purchase Option Agreement dated August 4, 1994 by and between IBM and MPI; and (b) the Multilayer Technology Transfer and Licensing Agreement dated August 4, 1994 between IBM and MPI. 1.2 "Covered Payments" means the gross monetary proceeds MPI receives directly from IBM or any agent of IBM pursuant to any cash settlement, monetary award granted pursuant to court-ordered arbitration or mediation proceedings, or court order based upon claims for monetary damages, in any manner arising under any one or both of the Covered Agreements. 1.3 "Net MPI Proceeds" means the Covered Payments, less (a) the first Three Million Three Hundred Thirty Three Thousand Dollars and Thirty Three Cents ($3,333,333.33) of Covered Payments MPI receives, (b) any portion of the Covered Payments that MPI is obligated to pay, and in fact pays, to MPI's legal counsel and/or other parties other than the Investor Group or the Development Bank of Singapore Limited ("DBS"), in exchange for such legal counsel's and/or other parties' services in seeking enforcement of the Covered Agreements and collection of the Covered Payments ("Compensation Payments"), and (c) the total amount of all fees and expenses MPI has incurred that are directly related to seeking enforcement of the Covered Agreements and/or collection of the Covered Payments, including without limitation, legal fees and expenses, but excluding any amount included in Compensation Payments ("Enforcement Expenses"). In the event the Covered Payments are to be paid in a series of installments ("Installment Payments"), then the total amount of the Compensation Payments and the Enforcement Expenses ("Covered Payment Deductions") shall be spread out and applied to each of the Installment Payments on a pro-rata basis, meaning that each of the Installment Payments shall be reduced by an amount calculated by multiplying the total amount of the Covered Payment Deductions by a fraction, the numerator of which is the amount of the Installment Payment in question, and the denominator of which is the total amount of all of the Installment Payments to be paid. The number resulting from this multiplication shall be the Net MPI Proceeds with respect to the Installment Payment in question. 2. Investor Group Percentages. Not later than thirty (30) days after -------------------------- MPI receives any Net MPI Proceeds, MPI shall pay to the respective members of the Investor Group a percentage of the Net MPI Proceeds ("Investor Group Payments") equal to the percentage set forth opposite the name of such member as follows ("Investor Group Percentage"): Name of Member of Investor Group Percentage of Net MPI Proceeds -------------------------------------------------------------------- Transpac Capital 12.090% Transpac Holdings 11.900% Regional Investment 3.280% Natsteel Equity 2.730% -------------------------------------------------------------------- TOTAL for all members of the Investor Group 30.000% In the event the Covered Payments are to be paid in a series of installments, (a) then not later than thirty (30) days after MPI receives a particular Installment Payment, MPI shall pay to the respective members of the Investor Group an amount equal to the Installment Payment in question, multiplied by the applicable Investor Group Percentage. 3. Consideration. MPI and the Investor Group agree that their ------------- respective rights and obligations under the Conversion Agreement constitute sufficient consideration to cause the provisions of this IBM Agreement to be enforceable against the MPI Group and the Investor Group in accordance with its terms. 4. Miscellaneous Provisions. ------------------------ 4.1 Governing Law. This IBM Agreement shall in all respects be ------------- construed, interpreted and enforced in accordance with and governed by the laws of the State of California, United States of America. Any legal action between the parties regarding this IBM Agreement shall be brought in, and the parties hereby consent to the jurisdiction of and venue in, 2 either (a) the federal and state courts located in the County of San Diego, State of California, United States of America; or (b) the courts located in the country of Singapore. 4.2 Notices. Any notice, demand or other communication required ------- or permitted under this IBM Agreement shall be deemed given and delivered when in writing and (a) personally served upon the receiving party, or (b) upon the third (3rd) calendar day after mailing to the receiving party by either (i) United States registered or certified mail, postage prepaid, or (ii) FedEx or other comparable overnight delivery service, delivery charges prepaid, and addressed as follows: To MPI: Microelectronic Packaging, Inc. 9577 Chesapeake Drive San Diego, CA 92123 Attn: Chief Executive Officer To any member of Transpac Capital Pte Ltd the Investor Group 6 Shenton Way #20-09 DBS Building Tower Two Singapore 068809 Attn: Wong Lin Hong Any party may change the address specified in this section by giving the other party notice of such new address in the manner set forth herein. 4.3 Severability. In the event that any provision of this IBM ------------ Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or invalid, then this IBM Agreement shall continue in full force and effect without said provision. If this IBM Agreement continues in full force and effect as provided above, the parties shall replace the invalid provision with a valid provision which corresponds as far as possible to the spirit and purpose of the invalid provision. 4.4 Counterparts. This IBM Agreement may be executed in any ------------ number of counterparts, each of which may be executed by less than all of the parties hereto, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one document. 4.5 Entire Agreement. This IBM Agreement, the Conversion ---------------- Agreement, the other Ancillary Agreements, and the documents and agreements contemplated herein and therein, constitute the entire agreement between the parties with respect to the subject matter hereof, and supersede all prior oral or written agreements, representations or warranties between the parties other than those set forth herein or herein provided for. 4.6 Successors and Assigns. Except as specifically permitted ---------------------- pursuant to the terms and conditions hereof, no party shall be permitted to assign their respective rights or 3 obligations under this IBM Agreement without the prior written consent of the other parties. The provisions hereof shall inure to the benefit of, and be binding upon, the permitted successors and assigns, heirs, executors, and administrators of the parties hereto. 4.7 Amendment and Waiver. No modification or waiver of any -------------------- provision of this IBM Agreement shall be binding upon the party against whom it is sought to be enforced, unless specifically set forth in writing signed by an authorized representative of that party. A waiver by any party of any of the terms or conditions of this IBM Agreement in any one instance shall not be deemed or construed to be a waiver of such terms or conditions for the future, or of any subsequent breach thereof. The failure by any party hereto at any time to enforce any of the provisions of this IBM Agreement, or to require at any time performance of any of the provisions hereof, shall in no way to be construed to be a waiver of such provisions or to affect either the validity of this IBM Agreement or the right of any party to thereafter enforce each and every provision of this IBM Agreement. 4.8 Survivability. All of the representations, warranties, ------------- agreements and obligations of the parties pursuant to this IBM Agreement shall survive any issuance of the Shares by MPI to the Investor Group. IN WITNESS WHEREOF, the parties hereto have duly executed this IBM Agreement as of the date first above written. MICROELECTRONIC PACKAGING, INC. TRANSPAC CAPITAL PTE LTD By:____________________________ By:_______________________________ Signature Signature Print Print Name:__________________________ Name:_____________________________ Print Print Title:_________________________ Title:____________________________ [The remainder of this page has been intentionally left blank.] 4 CONTINUATION OF SIGNATURES FOR IBM PROCEEDS AGREEMENT dated __________, 1999 TRANSPAC INDUSTRIAL HOLDINGS LTD REGIONAL INVESTMENT COMPANY LTD By:____________________________ By:___________________________ Signature Signature Print Print Name:__________________________ Name:_________________________ Print Print Title:_________________________ Title:________________________ NATSTEEL EQUITY III PTE LTD By:___________________________ Signature Print Name:_________________________ Print Title:________________________ 5 EX-99.(G) 8 LETTER AGREEMENT EXHIBIT "G" April 14, 1999 VIA FAX TRANSMISSION - -------------------- (972) 466-7044 - -------------- AND REGULAR MAIL - ---------------- Steven K. Rose, Esq. Vice President, Secretary and General Counsel STMicroelectronics, Inc. 1310 Electronics Drive M. S. 2346 Carrollton, Texas 75006 Re: Microelectronic Packaging, Inc. Dear Mr. Rose: The purpose of this letter is to provide a statement of the good faith intent and agreement of STMicroelectronics, Inc. ("ST"), Microelectronic Packaging, Inc. ("MPI") and FI Financial, LLC ("FIF"), with respect to the complete assignment and transfer by ST to FIF (and by FIF at its discretion to certain employees of Microelectronic Packaging, Inc. ("MPI") and certain non- employees of MPI ("Investor Group")), of all of ST's rights, title, claims and interests in, under and pursuant to the following agreements and documents: (a) Deed of Guarantee and Indemnity dated August 17, 1995, entered into between MPI and SGS-Thompson Microelectronics Pte Limited ("SGS") ("Guaranty"); (b) a document entitled "Charge" dated August 17, 1995, entered into between Microelectronic Packaging (S) PTE LTD ("MPS"), and SGS ("Charge"); (c) Supply Guarantee and Preferred Allocation Agreement dated July, 1995, between MPS and SGS ("Supply Agreement"); (d) Supplemental Agreement to Supply Guarantee and Preferred Allocation Agreement dated August 17, 1995 and October 19, 1995, entered into between MPS and SGS ("Supplemental Agreement"); (e) Warrant to Purchase Common Stock of MPI dated September 24, 1998, pursuant to which ST is entitled to purchase an aggregate of Two Hundred Thousand (200,000) shares of MPI's common stock at a price of One Dollar ($1.00) per share ("Warrant"); (f) the Judgment by Confession and Stipulated Judgment dated September 24, 1998, between MPI and ST, and all agreements and documents related thereto ("Judgments"); and (g) Restructuring, Settlement and Mutual Release Agreement dated September 24, 1998, entered into between, among others, ST and MPI ("Settlement Agreement") (all of the foregoing agreements and documents are referred to collectively in this letter as the "ST Agreements"). 1. In addition to those terms that may be defined elsewhere in this letter, the following terms shall have the meanings defined in this Section 1. 1.1 "Transpac Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM (S) Pte. Ltd. ("MPM") and guaranteed by MPI in the aggregate to Transpac Capital Pte Ltd ("Transpac Capital"), Transpac Industrial Holdings Ltd ("Transpac Holdings"), Regional Investment Company Ltd ("Regional Investment"), and Natsteel Equity III Pte Ltd ("Natsteel Equity") (collectively the "Transpac Entities"), accrued as of December 31, 1997 (which is the entire amount MPI and the Transpac Entities have agreed is due and payable), into Four Million Thirty One Thousand Eight Hundred and Twenty Six (4,031,826) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.2 "DBS Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM and MPS and guaranteed by MPI to Development Bank of Singapore Limited ("DBS"), accrued as of December 31, 1997 (which is the entire amount MPI and DBS have agreed is due and payable), into One Million One Hundred Fifty Four Thousand Three Hundred and Eleven (1,154,311) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.3 "Motorola Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Motorola, Inc. ("Motorola"), accrued as of December 31, 1997 (which is the entire amount MPI and Motorola have agreed is due and payable), into Eight Hundred Sixty Nine Thousand Nine Hundred Thirty Two (869,932) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.4 "NS Electronics Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPI to NS Electronics Bangkok (1993) Ltd. ("NS Electronics"), accrued as of December 31, 1997 (which is the entire amount MPI and NS Electronics have agreed is due and payable), into Two Hundred Seventy One Thousand One Hundred Seventy Six (271,176) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.5 "Orix Leasing Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPM and MPS and guaranteed by MPI to Orix Leasing Singapore Limited ("Orix Leasing"), accrued as of December 31, 1997 (which is the entire amount MPI and Orix Leasing have agreed is due and payable) into Four Hundred Seventy Three Thousand Five Hundred Eighty Four (473,584) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.6 "Samsung Corning Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Samsung Corning Co., Ltd. ("Samsung Corning"), accrued as of December 31, 1997 (which is 2 the entire amount MPI and Samsung have agreed is due and payable) into One Hundred Eighty Three Thousand Two Hundred Seventy Five (183,275) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.7 "Texas Instruments Conversion" means the conversion of indebtedness in the amount of principal and interest owed by MPS and guaranteed by MPI to Texas Instruments Incorporated ("Texas Instruments"), accrued as of December 31, 1997 (which is the entire amount MPI and Texas Instruments have agreed is due and payable) into One Million Fifty Six Thousand and Twenty Seven (1,056,027) shares of Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 1.8 "Other Creditor Conversions" means collectively the Transpac Conversion, the DBS Conversion, the Motorola Conversion, the NS Electronics Conversion, the Orix Leasing Conversion, the Samsung Corning Conversion, and the Texas Instruments Conversion. 1.9 "Other Creditors" means collectively the Transpac Entities, DBS; Motorola ; NS Electronics; Orix Leasing; Samsung Corning; and Texas Instruments. 2. None of the funds to be paid by FIF or any member of the Investor Group to ST in exchange for the assignment and transfer of the ST Agreements will have been obtained from MPI. 3. Assuming the terms and conditions of this letter and the Escrow Instructions (as hereafter defined) are satisfied, all of the rights, title, claims and interests of ST in, under and pursuant to the ST Agreements will be transferred to FIF, and none of such rights, title, claims and interests will be transferred to MPI. ST agrees that, pursuant to agreements that will be entered into between FIF and members of the Investor Group, certain portions of the interests obtained by FIF in the ST Agreements will be assigned by FIF to members of the Investor Group. However, the respective rights and obligations of FIF and ST pursuant to this letter and the Escrow Instructions (as hereafter defined) shall not be affected in any manner by any assignment or lack of assignment by FIF to members of the Investor Group or any other party, of any portion of FIF's interests in the ST Agreements. Regardless of any other provision of this letter, the Escrow Instructions (as hereafter defined) or the Assignment Agreement (as hereafter defined), FIF represents, warrants and agrees that: 3.1 FIF is a sophisticated and experienced investor who has the capability to evaluate the risks of the transactions described in and contemplated by this letter, and has the ability to protect FIF's own interests in connection therewith. 3.2 FIF has performed whatever due diligence review FIF deems necessary and/or appropriate in connection with the transactions described in and contemplated by this letter, and is satisfied with the results of such due diligence review. 3 3.3 FIF has not requested that ST make, and ST has not made and is not making, any representations or warranties of any kind regarding the propriety of FIF's contemplated acquisition of the ST Agreements, the value or enforceability of any rights ST may have under the ST Agreements, the value or enforceability of any rights FIF may have as an assignee of the ST Agreements, the value or enforceability of any rights FIF may have to acquire shares of capital stock of MPI by virtue of FIF's acquisition of the ST Agreements, or the current or potential value of any of such shares of capital stock. 4. Subject to the terms and conditions of this letter and the Escrow Instructions (as hereafter defined), not later than June 30, 1999, FIF will pay to ST in cash in one lump sum, the amount of Five Hundred Thousand United States Dollars (US$500,000.00) ("Investor Payment"), in exchange for ST's complete assignment and transfer to FIF of all of ST's rights, title, claims and interests in, under and pursuant to the ST Agreements ("ST Assignment"). The ST Assignment will be evidenced by an assignment agreement in the form of Exhibit "A" attached hereto and incorporated herein by reference ("Assignment Agreement"). ST agrees that, pursuant to agreements that will be entered into between FIF and members of the Investor Group, certain portions of the interests obtained by FIF under the Assignment Agreement will be assigned by FIF to members of the Investor Group. However, the respective rights and obligations of FIF and ST pursuant to this letter and the Escrow Instructions (as hereafter defined) shall not be affected in any manner by any assignment or lack of assignment by FIF to members of the Investor Group or any other party, of any portion of FIF's interests under the Assignment Agreement. 5. FIF shall not have any obligations to pay the Investor Payment to ST until such time as all of the following conditions have been completely satisfied: 5.1 MPI has obtained the approval of its Board of Directors and Shareholders with respect to the Other Creditor Conversions and the conversion of the ST Agreements by FIF (and its assignees) into an aggregate of One Million Three Hundred Twenty Two Thousand Six Hundred Forty Seven (1,322,647) shares of MPI's Series A Preferred Stock, or such other amounts as may be agreed upon between such parties. 5.2 ST shall have duly executed the Assignment Agreement and delivered such originally executed copy to the Escrow Agent (as hereafter defined). 5.3 ST shall have delivered to the Escrow Agent (as hereafter defined) (a) the originally executed copies of the Warrant, the Judgments and the Settlement Agreement; and (b) all of the originally executed copies, or in the alternative the cleanest copies in ST's possession, of the remainder of the ST Agreements (collectively "ST Agreement Copies"). 6. Not later than April 19, 1999, FIF shall have deposited the entire amount of the Investor Payment in trust with Mission Valley Escrow Company in San Diego, California ("Escrow Agent"), pursuant to written escrow instructions ("Escrow Instructions") that have been approved and executed by both FIF and ST ("Escrow Account"), and the entire amount of the Investor Payment shall continually remain on deposit in the Escrow Account at all times 4 during the term of this letter. MPI shall pay all fees and expenses charged by the Escrow Agent. All interest or other amounts earned or accrued with respect to the Escrow Account prior to the payment of the Investor Payment to ST, shall remain the property of FIF and its assignees. The Escrow Instructions shall include the following provisions, in addition to any other provisions that may be jointly approved by FIF and ST: 6.1 At such time during the term of the Escrow Account as the conditions stated in Sections 5.1, 5.2 and 5.3 above have been satisfied, the Escrow Agent shall (a) deliver the Investor Payment to ST; and (b) concurrently deliver the original executed copy of the Assignment Agreement and the ST Agreement Copies to FIF. 6.2 In the event the Investor Payment has not been paid to ST at or before 5:00 p.m. California time on June 30, 1999 ("Escrow Termination Date"), then the Escrow Account shall be deemed to have been automatically terminated as of that specific time, without the need for any further instructions from or actions taken by either ST or FIF, and the Escrow Agent shall thereupon immediately return all funds in the Escrow Account to FIF, and immediately return the originally executed copy of the Assignment Agreement and the ST Agreement Copies to ST. 6.3 The Escrow Termination Date shall not be extended beyond June 30, 1999, except pursuant to the written agreement of ST and FIF. 7. Once the Investor Payment has been deposited in the Escrow Account pursuant to the provisions of Section 6 hereof, this letter shall remain in full force and effect until 5:00 p.m. California time on June 30, 1999, or until such earlier time as the Investor Payment has been paid to ST. In the event the Investor Payment is not deposited in the Escrow Account pursuant to the provisions of Section 6 hereof, then this letter shall be deemed void and of no force or effect. 8. Once the Investor Payment has been deposited in the Escrow Account pursuant to the provisions of Section 6 hereof, if thereafter the Investor Payment has not been paid to ST at or before 5:00 p.m. California time on June 30, 1999, then as of that specific time, this letter shall immediately terminate ("Automatic Termination"). 9. Once the Investor Payment has been deposited in the Escrow Account pursuant to the provisions of Section 6 hereof, until such time as there has been an Automatic Termination, ST hereby specifically agrees that ST will not seek to enforce any of the ST Agreements, or any of ST's rights pursuant thereto, including without limitation, any rights ST may have pursuant to the Judgments. However, MPI agrees that no provision of this letter or the Escrow Instructions, and no actions taken or omitted to be taken by ST in connection therewith, nor any other fact or circumstance existing in connection with any of the foregoing, shall constitute or be construed to constitute any (a) waiver by ST of any rights ST may have under the ST Agreements prior to the time ST has received the Investor Payment; or (b) basis for the allegation of any defense by MPI against the enforcement of the ST Agreements in accordance 5 with their terms, including without limitation, any defense based on theories of estoppel or laches. 10. MPI agrees that concurrently with the Escrow Agent's delivery of the Investor Payment to ST as described herein, MPI will duly execute and deliver to ST a release agreement in a form that is substantially the same as the releases granted by MPI to ST pursuant to the provisions of the Settlement Agreement. 11. The parties intend that the provisions of this letter be binding upon each of them in accordance with their respective rights and obligations as set forth herein. By executing this letter where indicated below, ST, FIF and MPI are indicating their agreement to be bound by the terms and conditions of this letter. STMICROELECTRONICS, INC. FI FINANCIAL, LLC By:_______________________________________ By:________________________________ Steven K. Rose, Vice President James T. Waring, Manager MICROELECTRONIC PACKAGING, INC. By:_______________________________________ Denis Trafecanty, Senior Vice President and Chief Financial Officer 6 EX-99.(H) 9 L.H. FRIEND OPINION EXHIBIT "H" April 28, 1999 Board of Directors Microelectronic Packaging, Inc. 9577 Chesapeake Drive San Diego, CA 92123 PERSONAL & CONFIDENTIAL ----------------------- Gentlemen: You have asked L.H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") for our opinion as investment bankers as to the fairness, from a financial point of view, to Microelectronic Packaging, Inc., a California corporation (the "Company" or "MPI") and its stockholders, of the conversion of $27,556,801 of debt related to the Company's discontinued operations into shares (the "Debt") of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") pursuant to the Debt Conversion and Mutual Settlement and Release Agreements (the "Agreements") between the Company and Transpac Capital Pte. Ltd., Texas Instruments Incorporated, Motorola, Inc., The Development Bank of Singapore Limited, FI Financial LLC, ORIX Leasing Singapore Limited, NS Electronics Bangkok (1993) Ltd. and Samsung Corning Co. Ltd. (the "Creditors") (collectively the "Transaction"). The Agreements provide for the Creditors to convert the Debt into 9,362,777 shares of the Preferred Stock, which will be convertible into 18,725,554 shares of the Company's Common Stock. As part of its investment banking business, Friend is continually engaged in the evaluation of businesses and their securities in connection with debt restructurings, mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. We have acted as advisors to the Company's Board of Directors as to the fairness of the conversion of the Debt to shares of the Preferred Stock, but have not materially participated in the negotiations leading to the Agreements. You have requested our opinion as to whether the Proposed Transaction is fair to MPI and its Stockholders from a financial point of view. In connection with formulating our opinion, we have, among other things: (a) Reviewed the Agreements between the Company and the Creditors; (b) Reviewed the Company's Annual Report to Stockholders on Form 10-K for the fiscal years ended December 31, 1998, 1997 and 1996, and Form 10-Q for the quarter ended March 31, 1999; (c) Examined certain operating and financial information and financial projections provided to us by the management of MPI; (d) Reviewed the historical market prices and trading volume of the Company's Common Stock; (e) Analyzed publicly available financial and market data regarding certain companies in the electronic component manufacturing industry and compared them to the Company's financial and market data; (f) Conducted interviews with certain members of MPI's management; and (g) Performed such other studies, analyses, inquires and investigations as we deemed appropriate. We have relied upon and assumed, without independent verification, that the financial forecasts and projections provided to us have been reasonably prepared and reflect the best currently available estimates of the future financial results and condition of the Company, and that there has been no material change in the assets, financial condition and business prospects of the Company since the date of the most recent financial statements made available to us. We have not independently verified the accuracy and completeness of the information supplied to us and do not assume any responsibility with respect to it. We have not made any physical inspection or independent appraisal of any of the properties or assets of the Company, or conducted any independent inquiry or investigation with respect to the Company or the Transaction. This opinion is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by us at the date of this letter. This opinion is furnished solely for the benefit of the Company, its Board of Directors, and its stockholders in connection with the Transaction, and may not be relied upon by any other person or for any other purpose without our express, prior, written consent. This opinion is delivered to each recipient subject to the conditions, scope of engagement, limitations and understandings set forth in this opinion and our engagement letter dated December 8, 1998, and subject to the understanding that the obligations of Friend in the Transaction are solely corporate obligations, and no officer, director, employee, agent, shareholder or controlling person of Friend shall be subjected to any personal liability whatsoever to any person, nor will any such claim be asserted by or on behalf of any recipient of this opinion. Our opinion is limited to the fairness, from a financial point of view, of the Transaction and does not address MPI's underlying business decision to effect the Transaction. As of the date hereof, based upon and subject to the foregoing, and based upon such other matters as we deemed relevant, it is our opinion that the Transaction is fair to the Company and its stockholders from a financial point of view. Very truly yours, L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC. -----END PRIVACY-ENHANCED MESSAGE-----