<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 26, 1999 or
___ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________to _________
Commission file number 0-15858
IMP, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2722142
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
2830 North First Street, San Jose, CA 95134
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (408) 432-9100
-------------------------------------
(Former name, former address and former fiscal
year if changed since last report)
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 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 ___
<PAGE> 2
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at September 26, 1999: 3,367,404.
2
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IMP, Inc.
FORM 10-Q
SECOND QUARTER
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I: Financial Information (unaudited)
Condensed Balance Sheet at 5
September 26, 1999 and March 28, 1999
Condensed Statement of 6
Operations for the three months ended
September 26, 1999 and September 27, 1998
Condensed Statement of 7
Operations for the six months ended
September 26, 1999 and September 27, 1998
Condensed Statement of Cash 8
Flows for the six months ended
September 26, 1999 and September 27, 1998
Notes to condensed financial 10
statements
Management's discussion and analysis of 13
financial condition and results of
operations
Part II: Other Information
Item 1. Legal Proceedings 24
Item 3. Defaults by the Company on its Senior
Securities 24
Item 6. Reports on Form 8K 24
Signatures 25
</TABLE>
3
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IMP, Inc.
CONDENSED BALANCE SHEET
(In thousands)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
Sept 26, 1999 March 28, 1999
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 798 $ 1,606
Accounts receivable - net of allowances for
doubtful accounts and returns of $337
and $2,529 4,555 9,191
Inventories 6,044 6,076
Deposits and other current assets 341 693
-------- --------
Total current assets 11,738 17,566
Leasehold improvements and equipment 91,554 91,371
Accumulated depreciation (85,315) (83,470)
-------- --------
Net leasehold improvements and equipment 6,239 7,901
Other long term assets 451 494
-------- --------
$ 18,428 $ 25,961
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 3,951 $ 5,212
Trade accounts payable 5,184 6,756
Accrued payroll and related expenses 1,138 1,322
Other accrued liabilities 1,700 1,528
Current portion of capital lease obligations 4,146 3,216
-------- --------
Total current liabilities 16,119 18,034
Long-term portion of debt
and capital lease obligations 397 2,942
Stockholders' equity:
Common stock 35 35
Additional paid-in capital 72,681 72,671
Accumulated deficit (66,907) (63,824)
Treasury stock at cost (3,897) (3,897)
-------- --------
Total stockholders' equity 1,912 4,985
-------- --------
$ 18,428 $ 25,961
======== ========
</TABLE>
See notes to unaudited condensed financial statements
4
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IMP, Inc.
CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Sept 26, 1999 Sept 27, 1998
------------- -------------
<S> <C> <C>
Net revenues $ 7,686 $ 6,738
Cost of revenues 7,333 6,181
------- -------
Gross profit 353 557
Operating expenses:
Research and development 1,199 2,189
Selling, general and administrative 1,065 1,380
------- -------
Operating loss (1,911) (3,012)
Interest:
Expense (274) (303)
Income -- 33
------- -------
Net interest (274) (270)
------- -------
Net loss $(2,185) $(3,282)
======= =======
Basic and diluted net
loss per share $ (.65) $ (1.16)
======= =======
Shares used in computing basic and
diluted net loss per share 3,367 2,828
======= =======
</TABLE>
See notes to unaudited condensed financial statements.
5
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IMP, Inc.
CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
Sept 26, 1999 Sept 27, 1998
------------- -------------
<S> <C> <C>
Net revenues $18,316 $13,325
Cost of revenues 15,396 12,177
------- -------
Gross profit 2,920 1,148
Operating expenses:
Research and development 2,775 4,507
Selling, general and administrative 2,618 2,769
------- -------
Operating loss (2,473) (6,128)
Interest:
Expense (610) (627)
Income -- 138
------- -------
Net interest (610) (489)
------- -------
Net loss $(3,083) $(6,617)
======= =======
Basic and diluted net
loss per share $ (.92) $ (2.34)
======= =======
Shares used in computing basic and
diluted net loss per share 3,367 2,828
======= =======
</TABLE>
See notes to unaudited condensed financial statements.
6
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IMP, Inc.
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
Sept 26, 1999 Sept 27, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,083) $(6,617)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Depreciation and amortization 1,845 2,596
Increase (decrease) from changes in:
Accounts receivable 4,636 443
Inventories 32 (1058)
Deposits and other assets 395 (176)
Trade accounts payable (1,572) (742)
Accrued payroll and related expenses (184) (125)
Other accrued liabilities 172 196
------- -------
Net cash provided by (used for) operating
activities 2,241 (5,483)
------- -------
Cash flows from investing activities:
Net cash used for investing activities
for purchase of capital equipment (183) (855)
------- -------
Cash flows from financing activities:
Proceeds from credit facility 2,601 --
Payments of principal on credit facility (5,624) --
Proceeds from equipment note payable 1,731 --
Payments of principal under capital
lease obligations, net (1,021) (2,001)
Payments on notes payable (563) (914)
Proceeds from issuance of common stock 10 43
------- -------
Net cash used for financing activities (2,866) (2,872)
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C>
Net decrease in cash and cash
equivalents (808) (9,210)
Cash and cash equivalents at beginning of
the period 1,606 11,819
------- -------
Cash and cash equivalents at end of the
period $ 798 $ 2,609
======= =======
Supplemental cash flow disclosures:
Interest paid $ 610 $ 489
Supplemental non cash disclosures:
Equipment acquired under capital lease $ 18 $ 616
</TABLE>
See notes to unaudited condensed financial statements.
8
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IMP, Inc.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited interim condensed financial statements have
been prepared in conformity with generally accepted accounting
principles, consistent with those applied in, and should be read in
conjunction with, the audited financial statements for the year ended
March 28, 1999 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The interim financial
information is unaudited, but reflects all adjustments consisting only
of normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of results for the interim periods
presented. For financial reporting purposes, the Company reports on a 13
or 14 week quarter and a 52 or 53 week year ending on the Sunday closest
to March 31.
2. Cash
At September 26, 1999, the Company had cash and cash equivalents of
approximately $798,000. The Company's cash balance has decreased over
each of the last several quarters. The Company entered into a new
financing facility during the quarter ended June 1999 (see Note 4, Notes
Payable & Financing Arrangements for more details).
The Company failed to make its scheduled payments due during the months
of August, September and October 1999 under its certain of its credit
facilities and its equipment leases. The Company has been negotiating
with the creditors and lessors under such credit facilities and leases
and other debt instruments, for example those put in default due to
cross default clauses. The Company intends to reschedule such payments
and waive the defaults resulting from the Company's failure to make such
payments, but not all such negotiations are yet concluded. As a result,
the indebtedness still subject to negotiation represented by such credit
facilities and those leases which are treated as capital leases is
classified as current on the Company's balance sheet because such
creditors and lessors continue to have the right to effectively declare
the principal amount of the Company's indebtedness to be immediately due
and payable (or to exercise an equivalent remedy with respect to a
capitalized lease). The outstanding balance of debt which was in default
at any time during the quarter ended September 26, 1999 amounted to
$7,950,000 at quarter end. The amount due still subject to negotiation
as at September 26, 1999 was $7,617,000. The amount reclassified from
long-term to current, as at September 26, 1999 was $2,770,000. As a
result, the Company's ability to draw on unused amounts under a
revolving credit facility may be restricted.
9
<PAGE> 10
3. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
Sept 26, 1999 March 28, 1999
------------- --------------
<S> <C> <C>
Raw materials $ 793 $1,103
Work-in-process 4,394 4,120
Finished goods 857 853
------ ------
$6,044 $6,076
====== ======
</TABLE>
4. Notes Payable & Financing Arrangements
Credit facility - On April 30, 1999, the Company entered into a
revolving credit facility, which includes term loans, with The CIT
Group. The maximum and minimum amount of the borrowing is $9.5 million
and $2.5 million, respectively. $7.5 million of the facility allows the
Company to borrow up to 80% of eligible accounts receivable and 25% of
the Company's inventory of raw materials. Up to $1.0 million of the $7.5
million may be based on the raw materials inventory. $2.0 million of the
facility is for term loans relating to equipment. The facility is for a
minimum period to April 30, 2002. The interest rate for the revolving
credit facility is prime rate plus 1.5%, and for the term loans is prime
rate plus 2%. At March 31, 2000, if the Company's net income for the
fiscal year then ending is greater than $1.0 million, the interest rates
are decreased by 0.5% from March 31, 2000 onward. If an event of default
occurs, an additional 1.0% interest is payable. If the Company has a net
loss, for that period, the interest rate will be increased by 0.5% from
March 31, 2000 onward. The facility is secured by inventory, equipment
and fixtures, and other assets, excluding all assets under lease from
other lendors or lessors. As of September 26, 1999, $930,000 was drawn
down on the $7.5 million revolving facility, and the balance outstanding
on the term loan was approximately $1,614,000. As at September 26, 1999
all amounts owing under this facility is classified as current. This
facility replaced the facility from Pacific Business Funding.
Equipment notes payable - The Company has a $5.0 million facility with
an asset based lender, which is fully utilized. This note does not
contain any restrictive financial covenants. The balance outstanding
under this line at September 26, 1999 was approximately $1,406,000. As
at September 26, 1999 all amounts owing under this facility is
classified as current.
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The indebtedness represented by certain credit facilities and those
leases which are treated as capital leases is classified as current on
the Company's balance sheet due to certain credit defaults thereunder
(see Note 2 above).
5. Earnings per share
FAS 128 requires presentation of both basic and diluted EPS. Basic EPS
is computed by dividing net income (loss) available to common
stockholders by the weighted average number or common shares outstanding
during the period. Diluted EPS is computed using the weighted average
number of common shares outstanding, plus the effects of options and
warrants, during the period, except when antidilutive. In computing
diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the
exercise of stock options. A reconciliation of the numerators and the
denominators of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
Sept 26, Sept 27 Sept 26, Sept 27
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(2,185) $(3,282) $(3,083) $(6,617)
Shares used in per share computation:
Weighted Average Shares Outstanding 3,367 2,828 3,364 2,828
Basic and diluted loss per share $ (0.65) $ (1.16) $ (0.92) $ (2.34)
======= ======= ======= =======
</TABLE>
Options to purchase 179,088 and 265,106 shares of common stock were
outstanding at September 26, 1999, and September 27, 1998 respectively,
but were not included in the computation of diluted EPS as the Company
was in a loss situation, and therefore, to do so would have been
antidilutive.
6. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a
new model for accounting for derivatives and hedging activities. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137
deferred the effective date of SFAS 133 until the first fiscal year
beginning after June 15, 2000. The impact of the implementation of SFAS
133 on the consolidated financial statements of the Company is not
expected to be significant.
7. Subsequent Event
In October 1999, the Company entered into a stock purchase agreement
(the agreement) under which Teamasia Semiconductors (India) Ltd.,
("Teamasia"), a corporation headquartered in India involved in the
manufacturing and sale of discrete semiconductor devices is purchasing
an aggregate of 16.7% of the Company's common stock outstanding after
issuance for consideration of $2,050,000. The transaction is planned to
close in 5 stages during the quarter ending December 26, 1999. The sale
of all of the shares and therefore the receipt of all of the $2,050,000
is subject to the Company's compliance with certain terms and
conditions. The agreement places certain restrictions on the use of the
funds received by the Company for the sale of stock under the agreement.
Under the agreement, Teamasia is also placing orders with the Company
for wafer fabrication. The Company and Teamasia are continuing
discussions regarding a further equity investment by Teamasia in the
Company.
11
<PAGE> 12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
Except for the historical information contained herein, the matters discussed in
this document are forward-looking statements that involve certain risks and
uncertainties, including the risks and uncertainties set forth below under
"Factors Affecting Future Results."
Results of Operations - Second Quarter of Fiscal 2000 Compared to Second Quarter
of Fiscal 1999
Net revenues for the second quarter of fiscal 2000 were $7.7 million compared to
$6.7 million for the same period of the prior year. The increase in net revenues
was due to increased demand for the company's products by customers. Revenues in
the immediate prior quarter were $10.6 million.
Cost of revenues in the second quarter of fiscal 2000 was $7.3 million,
representing 95% of net revenues for that period compared to $6.2 million,
representing 92% of net revenues for the same quarter in the prior fiscal year.
Cost of revenues in the second quarter includes a write off of inventory
totaling $650,000 and property taxes paid due to an audit of previous years.
Research and development expenses were $1.2 million (16% of revenue) in the
second quarter of fiscal 2000 compared to $2.2 million (32% of revenue) in the
corresponding quarter of the prior fiscal year. The research and development
expenses are lower due to the engineering resources being focused on third party
consulting projects instead of internal research and development. Due to the
Company's focus on the rapid development of a portfolio of standard analog
products, the Company believes that research and development expenses in
absolute dollars will continue at current levels.
Selling, general and administrative expenses were $1.1 million (14% of net
revenues) in the second quarter of fiscal 2000 down from $1.4 million (20% of
net revenues) in the same quarter of the prior year. The decrease was primarily
due to a reduction in expenses in marketing and sales administration and a
decrease in commissions.
Net interest expense was $274,000 for the second quarter of fiscal 2000,
compared to $270,000 for fiscal 1999. The increase is due to a decrease in
interest income (which offsets interest expense) as a result of lower cash
balances.
12
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Net loss for the second quarter of fiscal 2000 was $2.2 million compared to a
net loss of $3.3 million for the same period of the prior year. This resulted in
net loss of $.65 per share for the second quarter of fiscal 2000 compared to
$1.16 loss per share in the same period of the prior year.
Results of Operations - First Six Months of Fiscal 2000 Compared to First Six
Months of Fiscal 1999.
Net revenues for the six-month period ended September 26, 1999 were $18.3
million, up 37% compared to net revenues of $13.3 million for the same period of
the prior year. The increase in net revenues was due to increased demand for the
company's products by customers.
Cost of revenues in the six-month period ended September 26, 1999 was $15.4
million, representing 84% of net revenues compared to 91% of net revenues in the
corresponding period of the prior fiscal year. Cost of revenues as a percentage
of revenues in fiscal 2000 are lower as a result of higher utilization of the
Company's manufacturing facility due to the increased demand noted above.
Research and development expenses were $2.8 million (15% of net revenues) for
the six-month period ended September 26, 1999 compared to $4.5 million (34% of
net revenue) in the comparable period of fiscal 1999. The decline is due to the
engineering resources being focused on third party consulting projects instead
of internal research and development. Due to the Company's focus on the rapid
development of a portfolio of standard analog products, the Company believes
that research and development expenses in absolute dollars will continue at
current levels.
Selling, general and administrative expenses were $2.6 million (14% of net
revenues) for the six-month period ended September 26, 1999 compared to $2.8
million (21% of net revenues) in the corresponding period of the prior year. The
decrease in absolute dollars was primarily due to lower commission expenses.
Net interest expense was $610,000 for the six-month period ended September 26,
1999 compared to $489,000 for the corresponding period of the prior fiscal year.
The increase is due to a decrease in interest income as a result of lower cash
balances.
Net loss for the six-month period ended September 26, 1999 was $3.1 million
compared to a net loss of $6.6 million for the same period of the prior fiscal
year. This resulted in net loss of $.92 per share for the six-month period ended
September 26, 1999 compared to $2.34 loss per share in the same period of the
prior fiscal year.
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<PAGE> 14
Liquidity and Capital Resources
At September 26, 1999, the Company had cash and cash equivalents of
approximately $798,000. The Company's cash balance has decreased over each of
the last several quarters. On April 30, 1999, the Company entered into a $9.5
million financing facility with The CIT Group. Included in the $9.5 million is a
facility for up to $2.0 million in secured term loans and a facility which
allows the Company to borrow up to $7.5 million based on accounts receivable and
inventory balances. As a result of the Company not making scheduled payments
during the second quarter on other credit facilities and certain capital leases
the Company may not be able to draw on unused amounts under this facility.
During the six month period ended September 26, 1999, the Company's net cash
provided by operations was $2.2 million compared to net cash used for operating
activities of $5.5 million in the six month period ended September 27, 1999. The
net cash provided by operating activities for the six month period ended
September 26, 1999 consisted of a net decrease in operating assets and
liabilities of $3.5 million partially offset by the net loss for the six month
period of $3.1 million. The net cash used for operating activities for the six
month period ended September 27, 1998 consisted primarily of the net loss of
$6.6 million and an increase in net operating assets and liabilities of
$509,000. For the six month period ended September 26, 1999, non-cash
adjustments consisted of depreciation and amortization expense of $1.8 million
compared to $2.6 million for the six month period ended September 27, 1998.
Our investing activities used cash of $183,000 for the six month period ended
September 26, 1999 compared to the use of $855,000 for the six month period
ended September 27, 1998. The decrease is due to tight capital expenditure
controls in place in order to conserve cash.
Our financing activities used cash of approximately $2.9 million during the six
month period ended September 26, 1999. Proceeds from a new credit facility and
equipment note payable totaled $4.3 million offset by payments of $7.2 million
relating to a replaced credit facility, repayment of the amounts initially drawn
down on the new credit facility as a result of a reduced borrowing base,
payments on notes payable and payments of principal under capital lease
obligations. For the six months ended September 27, 1998 financing activities
used cash of approximately $2.9 million. Payments of principal under capital
lease obligations and payments on notes payable declined from $2.9 million for
the six month period ended September 27, 1998 to $1.5 million for the six month
period ended September 26, 1999 as a result of not making scheduled payments in
August and September 1999.
The Company has minimal financial resources and operating needs are funded
principally from the collection of accounts receivable. Should the cash flow
from accounts receivable be lessened or interrupted by slow collections or by a
decrease in revenue generation, the Company could find itself unable to meet its
obligations. In addition, the Company's cash balance has decreased over each of
the last several quarters. If the Company continues to report operating losses
and negative cash flow it will need to obtain additional funding to remain in
operation. There can be no assurance that such funding will be available at
reasonable rates, if at all.
Factors Affecting Future Results
The Company's business, financial condition and future results of operations
have been, and may in the future, be affected by a variety of factors, including
those described below:
Cash. As discussed above in "Liquidity and Capital Resources" on September 26,
1999 the Company had low cash balances. The Company has minimal financial
resources and operating needs are funded principally from the collection of
accounts receivable. In September 1999, the Company took steps to materially
reduce its ongoing payroll expenses. The Company has entered into an equity
investment agreement with Teamasia for $2,050,000 and is continuing discussions
regarding a further equity investment by Teamasia in the Company. Teamasia is
also placing orders with the Company for wafer fabrication.
Stock Traded on Nasdaq SmallCap Market. On December 11, 1998, a hearing was held
before a Panel authorized by the National Association of Securities Dealers,
Inc. Board of Governors to determine whether the Company would be allowed to
maintain the listing of its common stock on the Nasdaq National Market. The
hearing addressed, among other things, the Company's compliance with the minimum
$1 per share price requirement and the $4 million net tangible assets
requirement for stock traded on Nasdaq. The Panel concluded that the Company
could retain its listing on the Nasdaq National Market if it complied with the
following conditions: (i) effect a one-for-ten reverse split of our common stock
so that the Company's closing bid price meets or exceeds the $1.00 per share for
a minimum of ten consecutive trading days; (ii) file with the Securities and
Exchange Commission (SEC) on or before February 16, 1999, a December 31, 1998
balance sheet, which, with pro forma adjustments for significant events and
transactions after such date, shows net tangible assets of at least $4.0
million; and (iii) file with the SEC on or before March 31, 1999, a balance
sheet as of a date 45 days prior thereto, which, with appropriate pro forma
adjustments, shows net tangible assets of at least $6.5 million. Effective
January 13, 1999, the Company
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<PAGE> 15
effected a one-for-ten reverse stock split, thus addressing the minimum trading
price per share requirement. On February 16, 1999 the Company filed a proforma
balance sheet dated as of December 31, 1998 incorporating the effect of a
February 1999 Private Placement showing net tangible assets of $6.1 million. The
Company did not satisfy the final criterion of net tangible assets of $6.5
million by March 31, 1999. As a result, on April 7, 1999 the Company's common
stock was moved from the Nasdaq National Market to the Nasdaq SmallCap Market
where it continues to trade under the symbol "IMPX."
Because of the low volume of trading on the Nasdaq SmallCap Market, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, our securities. In addition, if the Company's common
stock trading price remains below $5.00 per share, trading in the Company's
common stock could also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). The additional burdens imposed upon broker-dealers by such
requirements could discourage broker-dealers from trading in the Company's
common stock, which could severely limit the market liquidity of the common
stock and the ability of investors to trade our common stock.
In addition, the Company's market capitalization might decrease and stockholder
value might decrease as a result of the reverse stock split. The reverse split
increased the number of odd-lot holders of the Company's common stock.
Transaction costs involving odd-lot amounts of common stock are generally higher
on a per-share basis than transaction costs involving even-lot amounts of common
stock. Thus, the reverse split might have the effect of increasing the
transaction costs of certain of the Company's stockholders.
Dependence on Foundry Business. In the near term the Company's success depends
on its ability to attract additional business from new and existing customers
for its analog and high-voltage wafer fabrication services. During periods of
low demand, high fixed wafer fabrication costs have historically had a material
adverse effect on the Company's results of operations. For example, during the
last three-quarters of fiscal 1997, all of fiscal 1998, the first half of fiscal
1999 and the second quarter of fiscal 2000 the Company's operating results were
adversely affected by the low utilization of the Company's manufacturing
facility.
Dependence on New Analog Products. In the long term the Company's success
depends on its ability to develop new analog integrated circuit products for
existing and new applications, to introduce such products in a timely manner,
and to gain customer acceptance for its products. The development of new analog
integrated circuits is highly complex and from time to time the Company has
experienced delays in developing and introducing new products. Successful
product development and introduction depends on a number of factors including
proper new product definition, completion of design and testing of new products
on time, achievement of acceptable manufacturing yields and market acceptance of
the Company's and its customers'
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<PAGE> 16
products. Moreover, successful product design and development is dependent on
the Company's ability to attract, retain and motivate qualified analog design
engineers, of which there are a limited number. There can be no assurance that
the Company will be able to meet these challenges or adjust to changing market
conditions as quickly and cost-effectively as necessary to compete successfully.
Due to the complexity and variety of analog circuits, the limited number of
analog circuit designers and the limited effectiveness of computer-aided design
systems in the design of analog circuits, there can be no assurance that the
Company will be able to continue to successfully develop and introduce new
products on a timely basis. The Company seeks to design alternate source
products that have already achieved market acceptance from other vendors, as
well as new proprietary IMP products. However, there can be no assurance that
any products introduced by the Company will be accepted by customers or that any
product initially accepted by the Company's customers will result in production
orders. The Company's failure to continue to develop, introduce and sell new
products successfully could materially and adversely affect its long-term
business and operating results.
Dependence upon Ability to Fabricate Higher-Margin Products. The ability of the
Company to transition from the fabrication of lower-margin products to
higher-margin products, including both those developed by the Company and those
for which it serves as a third-party foundry, is very important for the
Company's future results of operations. Rapidly changing customer demands may
result in the obsolescence of existing Company inventories. There can be no
assurances that the Company will be successful in its efforts to keep pace with
changing customer demands. In this regard, the ability of the Company to develop
higher-margin products will be materially and adversely affected if it is unable
to retain its engineering personnel due to the Company's current business
climate.
Competition. Currently, the Company's principal competitors in the silicon
foundry market include American Microsystems Inc., a division of Japan Energy
Corporation, Austrian Micro Systems, GMT Microelectronics Corporation, Orbit
Semiconductor, a division of the DII Group, Tower Semiconductor, as well as
internal manufacturing facilities within its customers and excess fabrication
capacity within standard product vendors. To a lesser degree the Company also
competes with large Asian foundries, such as Chartered Semiconductor of
Singapore and TSMC of Taiwan. The Company's principal competitors for existing
and new Analog Products include Dallas Semiconductor, Linear Technology
Corporation, Linfinity Microelectronics, Maxim Integrated Products, Inc.,
Micrel, Semtech, Sipex, Supertex, Texas Instruments, Unitrode Corporation and
certain European and Asian manufacturers. Many of the Company's competitors have
substantially greater technical, manufacturing, financial and marketing
resources than the Company. The Company's international sales are primarily
denominated in U.S. currency. Consequently, changes in exchange rates that
strengthen the U.S. dollar could increase the price in local currencies of the
Company's products in foreign markets and make the Company's products relatively
more expensive than competitor's products that are denominated in local
currency.
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<PAGE> 17
Due to the current excess of supply over demand for semiconductors of all types,
including both foundry services and analog integrated circuits, the Company
expects continued strong competition from existing suppliers as well as the
entry of new competitors. Such competitive pressures could reduce the market
acceptance of the Company's products and result in market price reductions and
increases in expenses that could adversely affect the Company's business,
financial condition or results of operations.
Patents and Licenses. Although the Company is not currently a party to any
material litigation relating to patents and other intellectual property rights,
because of technological developments in the semiconductor industry, it is
possible that certain of the Company's designs or processes may involve
infringement of existing patents. 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. The Company has from time to time received, and may in the future
receive, communications from third parties asserting patents, maskwork rights,
or copyrights on certain of our products and technologies. The Company has been
contacted by the Lemelson Medical Foundation. This foundation has filed patent
violation legal actions against 88 semiconductor companies. The Company is
currently not one of the defendants in this action but might be added at a later
date. Although we are not currently a party to any material litigation, if a
third party were to make a valid intellectual property claim and a license were
not available on commercially reasonable terms, our operating results could be
materially and adversely affected. Litigation, which could result in substantial
cost to us and diversion of our resources, may also be necessary to enforce our
patents or other intellectual property rights or to defend us against claimed
infringement of the rights of others.
Manufacturing. The fabrication of integrated circuits is a highly complex and
precise process. Minute impurities, contaminants in the manufacturing
environment, difficulties in the fabrication process, defects in the masks used
to print circuits on a wafer, manufacturing equipment failure, wafer breakage or
other factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. The majority of the Company's
costs of manufacturing are relatively fixed, and, consequently, the number of
shippable die per wafer for a given product is critical to the Company's results
of operations. To the extent the Company does not achieve acceptable
manufacturing yields or experiences product shipment delays, its financial
condition or results of operations would be materially and adversely affected.
The Company has from time to time in the past experienced lower than expected
production yields, which have delayed product shipments and adversely affected
gross margins. Moreover, there can be no assurance that the Company in general
will be able to maintain acceptable manufacturing yields in the future.
The Company manufactures all of its wafers at the one fabrication facility in
San Jose. Given the unique nature of the Company's processes, it would be
difficult to arrange for independent manufacturing facilities to supply such
wafers in a short period of
17
<PAGE> 18
time. Any prolonged inability to utilize the Company's manufacturing facility as
a result of fire, natural disaster or otherwise, would have a material adverse
effect on the Company's financial condition or results of operations. Although
it believes that it has adequate capacity to support its near term plans, the
Company has in the past subcontracted the fabrication of a portion of its wafer
production to outside foundries, and may need to do so again. At the present
time, there are several wafer foundries that are capable of supplying certain of
the Company's needs. However, there can be no assurance that the Company will
always be able to find the necessary foundry capacity.
Due to the relatively long manufacturing cycle for integrated circuits, the
Company builds some of its inventory in advance of receiving orders from its
customers. As a consequence of inaccuracies inherent in forecasting demand for
such products, inventory imbalances periodically occur that result in surplus
amounts of some Company products and shortages of others. Such shortages can
adversely affect customer relationships; surpluses can result in larger than
desired inventory levels.
The Company's backlog consists of distributor and OEM customer orders required
to be shipped within six months following the order date. Customers may
generally cancel or reschedule orders to purchase products without significant
penalty to the customer. As a result, to reflect changes in their needs,
customers frequently revise the quantities of the Company's products to be
delivered and their delivery schedules. Since backlog can be canceled or
rescheduled without significant penalty, the Company does not believe its
backlog is a meaningful indicator of future revenue. In addition, the Company's
backlog includes its orders from domestic distributors as to which revenues are
not recognized until the products are sold by the distributors. Such products
when sold may result in revenue lower than the stated backlog amounts as a
result of discounts that are authorized by the Company at the time of sale by
the distributors.
Furthermore, the Company is dependent on a number of subcontractors for certain
of its manufacturing processes, such as epitaxial deposition services. The
failure of any of these subcontractors to perform these processes on a timely
basis could result in manufacturing delays, which could materially adversely
affect the Company's results of operations. Currently, the Company purchases
certain materials, including silicon wafers, on a purchase order basis from a
limited number of vendors. Any disruption or termination of supply from any of
these suppliers could have a material adverse effect on the Company's financial
condition and results of operations.
The packaging of the Company's products is performed by a limited group of third
party subcontractors located predominantly in Asian and Pacific Rim countries,
including Indonesia. Certain of the raw materials included in such products are
obtained from sole source suppliers. Although the Company seeks to reduce its
dependence on its sole and limited source suppliers, disruption or termination
of any of these sources could occur and such disruptions could have a material
adverse effect on the Company's financial condition or results of operations. In
the event that any of the Company's subcontractors were to experience financial,
operational, production or
18
<PAGE> 19
quality assurance difficulties resulting in a reduction or interruption in
supply to the Company, the Company's operating results would be adversely
affected until alternate subcontractors, if any, became available.
Environmental and Safety Regulation. Federal, state, and local regulations
impose a variety of safety and environmental controls on the storage, handling,
discharge and disposal of certain chemicals and gases used in semiconductor
manufacturing. The Company's facilities have been designed to comply with these
regulations, and it believes that its activities are conducted in material
compliance with such regulations. There can be no assurance, however, that
interpretation and enforcement of current or future environmental regulations
will not impose costly requirements upon the Company. Any failure of the Company
to control adequately the storage, use and disposal of regulated substances
could result in future liabilities.
While the Company to date has not experienced any materially adverse effects on
its business from safety and environmental regulations, there can be no
assurance that changes or new interpretations of such regulations will not
impose costly equipment, facility or other requirements.
Year 2000 Issues
General. The Company is currently conducting a company-wide Year 2000 readiness
program (the Y2K program). The Y2K program is addressing the issue of computer
programs and embedded computer chips being able to distinguish between the year
1900 and the year 2000. Any of such systems and equipment, including integrated
circuits, computers and manufacturing equipment, sold or used by the Company,
its customers and its suppliers, that recognize a date code field of "00" as the
year 1900 rather than the year 2000 could cause such systems or equipment to
malfunction prior to or in the year 2000 and lead to significant business
delays, additional expenses and disruptions in service or operations. As a
result, the systems and equipment of all business organizations containing
integrated circuits, software or computer hardware may need to be upgraded or
replaced in order to resolve the potential impact of this misinterpretation and
the resulting errors or system failures and to make such systems, equipment and
software Year 2000 compliant.
The Company's Y2K program is divided into four sections - (1) IMP Manufactured
Products, (2) Internal Information Technology (IT) Systems, (3) Manufacturing
Systems and Equipment, and (4) Third Party Suppliers and Customers. The Y2K
program is divided into three phases (i) inventorying potential Year 2000 items,
(ii) assessing the Year 2000 compliance of items determined to be material to
the Company; and (iii) repairing or replacing such material items. The Company
has substantially completed the first two phases of work required to achieve
Year 2000 compliance requirement and in Phase Three it has repaired or replaced
the majority of items on its inventory. It believes that substantially all of
the issues that it identifies will be resolved by the end of 1999. Some items
that cannot be tested appropriately may require additional work after that time.
19
<PAGE> 20
Through September 26, 1999, the Company has incurred less than $200,000.00 in
expenses associated with making its systems and equipment Year 2000 compliant.
Based on the preliminary results of the assessment and the modifications
completed to date, the Company believes that the total cost for year 2000
compliance will not exceed $500,000. However, there can be no assurance that any
such assessments and updates will be completed on a timely basis, if at all, or
within estimated budgets, or that any required updates or corrections will work
as anticipated in the year 2000.
Impact on Sales of IMP Manufactured Products. The Company designs its products
both internally and through third party design providers. Both sources of
product design rely on licenses of third party technology for certain aspects of
these designs. The Company has done an internal assessment of the Year 2000
compliance of certain of its stand-alone products, and the Company believes that
these products are designed so that they are not dependent on embedded software
or hardware that relies on a date code field and, therefore, such products are
Year 2000 compliant. The Company also manufactures wafers containing designs
implemented by its customers. It has no knowledge of the Year 2000 compliance of
such products. To the extent that date information is necessary for the proper
functioning of the Company's and its customer's products, the products rely on
date information from other manufacturer's devices resident in the networks or
systems in which they operate. Thus, any Year 2000 problems within these third
party products or systems could cause the such products not to work accurately
and/or without disruption, if at all, with other companies' devices and systems.
Any failure of these products to be Year 2000 compliant would result in the
malfunctioning of such products or of the systems in which such products
operate. Any failure of the Company's products, its customers designs or any
third party products on which the Company's products rely or any third party
products which incorporate certain of the Company's licensed designs or
technologies to be Year 2000 compliant could result in a substantial decline in
the Company's revenues or could result in the Company's incurring substantial
unexpected expenses associated with product returns, warranty claims and claims
for consequential damages and would materially adversely affect the Company's
business, results of operations and financial condition.
Internal Information Technology (IT) System. With respect to its internal IT
computer systems, the Company is now in Phase Three of the Y2K program. It has
evaluated and has replaced or has tested operating systems for the critical
computers used for its management information systems. Many applications
programs have been modified and the majority of such programs are expected to be
modified as requred by the end of 1999. The Company is also in Phase Three for
its non-IT systems, such as personal computers. Where necessary the Company
plans to upgrade or replace critical non-compliant systems by the end of 1999.
Manufacturing Systems and Equipment. The Company relies on a number of embedded
programs, computer systems and applications to operate and monitor the design,
control and manufacturing aspects of its business. These include its automated
design software and its fabrication, test and physical plant equipment with
embedded
20
<PAGE> 21
hardware and/or software. With respect to such items, the Company is now in
Phase Three of the Y2K program. It has evaluated and has replaced or has tested
modifications for the majority of such systems. The Company believes that it
will complete the remaining critical corrective actions, including testing, by
the end of 1999.
Third Party Suppliers and Customers. The Company has contacted the majority of
its key suppliers and contract manufacturers to assess the possible effects of
their Year 2000 readiness on the Company's business. Although many of these
suppliers and contract manufacturers have notified the Company that they have
been addressing the problem, they have not provided specific assurance regarding
the Year 2000 compliance of their systems and software. The Company's reliance
on suppliers and contract manufacturers and, therefore, on the proper
functioning of their information systems and software, means that failure of
such key suppliers and contract manufacturers to address Year 200 issues could
have a material impact on the Company's operations and financial results.
In addition to its suppliers and contract manufacturers, the Company relies on a
large variety of business enterprises such as customers, creditors, financial
organizations, and domestic and international governmental entities for the
accurate exchange of data. Any disruption in the computer systems of any of
these third parties could materially and adversely affect the Company.
Summary. The Company has not yet established detailed contingency plans for the
Year 2000 issues, but, based on the results of the assessment of its internal
systems and the audit of its third party suppliers and customers, the Company
will evaluate the need for and begin to implement contingency plans.
Many of the Company's products, systems, suppliers and customers address markets
that are vulnerable to technological issues involving the Year 2000, therefore
substantially all of the Company's revenues may be at risk. Despite the
Company's efforts to address the Year 2000 impact on its products, internal
systems and business operations, the Year 2000 issue may result in a material
disruption of its business or have a material adverse effect on the Company's
business, financial condition or results of operations.
21
<PAGE> 22
IMP, Inc.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The previously disclosed securities class action and derivative lawsuits
filed against the Company and certain of its present and former officers and
directors have been settled and all claims dismissed with prejudice.
Item 3. Defaults by the Company on its Senior Securities
The Company has failed to make its scheduled payments due during the
months of August, September, and October 1999 under its credit facilities and
certain of its equipment leases, for a total aggregate amount of $1,035,654 (See
Note 2 to Condensed Financial Statements).
Item 6. Reports on Form 8-K.
NO REPORTS ON FORM 8-K WERE FILED DURING THE THREE MONTHS ENDED
SEPTEMBER 26, 1999.
22
<PAGE> 23
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.
IMP, Inc.
---------
Registrant
/s/ ZVI GRINFAS
- - ----------------- ---------------------------------
November 10, 1999 Zvi Grinfas
President and Chief Executive Officer
23
<PAGE> 24
EXHIBIT INDEX
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<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
27.1 Financial Data Schedule
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<ARTICLE> 5
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-START> MAR-29-1999
<PERIOD-END> SEP-26-1999
<EXCHANGE-RATE> 1
<CASH> 798
<SECURITIES> 0
<RECEIVABLES> 4,555
<ALLOWANCES> 0
<INVENTORY> 6,044
<CURRENT-ASSETS> 11,738
<PP&E> 91,554
<DEPRECIATION> (85,315)
<TOTAL-ASSETS> 18,428
<CURRENT-LIABILITIES> 16,119
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 72,681
<TOTAL-LIABILITY-AND-EQUITY> 18,428
<SALES> 7,686
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<CGS> 7,333
<TOTAL-COSTS> 7,333
<OTHER-EXPENSES> 2,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> (2,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,185)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
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