<PAGE>
UNITED STATES
SECURITIES & 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 March 31, 1997
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: 0-27712
__________________________
INTEGRATED PACKAGING ASSEMBLY CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0309372
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
2221 OLD OAKLAND ROAD
SAN JOSE, CA 95131-1402
(Address of principal executive offices) (Zip Code)
(408) 321-3600
(Registrant's telephone number, including area code)
__________________________
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
------------- -------------
Number of shares of common stock outstanding as of April 28, 1997: 13,924,371
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheet.................................... 3
Condensed Statement of Operations ......................... 4
Condensed Statement of Cash Flows ......................... 5
Notes to Condensed Financial Statements ................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits .................................................. 17
Signatures ......................................................... 18
</TABLE>
Integrated Packaging Assembly Corporation, Form 10-Q Page 2
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
INTEGRATED PACKAGING ASSEMBLY CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $14,067 $15,817
Short term investments ............................ 3,025 3,025
Accounts receivable, net .......................... 2,993 6,141
Inventory.......................................... 1,659 1,977
Prepaid expenses and other current assets ......... 1,033 606
----------- -----------
Total current assets ...................... 22,777 27,566
Property and equipment, net ............................... 42,437 41,776
Other assets .............................................. 292 297
----------- -----------
Total assets .............................. $65,506 $69,639
=========== ===========
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt ................. 6,082 6,118
Accounts payable .................................. 1,576 2,534
Accrued expenses and other liabilities ............ 3,472 3,300
----------- -----------
Total current liabilities ................. 11,130 11,952
----------- -----------
Long term debt ............................................ 15,831 16,926
----------- -----------
Shareholders' equity
Common Stock ...................................... 40,068 39,811
Accumualted earnings (deficit) .................... (1,523) 950
----------- -----------
Total shareholders' equity ................ 38,545 40,761
----------- -----------
Total liabilities and shareholders equity.. $65,506 $69,639
=========== ===========
</TABLE>
Integrated Packaging Assembly Corporation, Form 10-Q Page 3
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues ................................................... $5,575 $8,057
Cost of revenues ........................................... 6,495 6,060
----------- -----------
Gross profit (loss) ........................................ (920) 1,997
----------- -----------
Operating expenses
Selling, general & administrative .................. 1,080 762
Research & development ............................. 345 209
----------- -----------
Total operating expenses ................... 1,425 971
----------- -----------
Operating income (loss) .................................... (2,345) 1,026
Interest & other income (expense) .......................... (128) (114)
----------- -----------
Income (loss) before income taxes .......................... (2,473) 912
Provision for income taxes ................................. -- (300)
----------- -----------
Net income (loss) .......................................... $(2,473) $ 612
=========== ===========
Net income (loss) per share ................................ $ (0.18) $ 0.05
=========== ===========
Weighted average common
shares and equivalents ............................. 13,902 12,407
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Integrated Packaging Assembly Corporation, Form 10-Q Page 4
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) CASH
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $(2,473) $ 612
ADJUSTENTS:
Depreciation and amortization.................................... 1,484 629
Changes in assets and liabilities:
Accounts receivable............................................ 3,148 (1,135)
Inventory...................................................... 318 (207)
Prepaid expenses and other assets.............................. (422) (157)
Accounts payable............................................... (958) 860
Accrued expenses and other liabilities......................... 172 827
------- -------
Net cash provided bo operating activities........................ 1,269 1,429
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment.............................. (2,107) (3,602)
Net investment in short term investments........................... -- (5,043)
------- -------
Net cash used in investing activities............................ (2,107) (8,645)
------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments under capital lease obligations........................... (435) (376)
Principal payments on note payable................................. (7,422) (342)
Proceeds from note payable......................................... 6,700 --
Proceeds from issuance of Common Stock, net........................ 245 23,223
------- -------
Net cash provided by (used in) investing activities............. (912) 22,505
------- -------
NET INCREASE (DECREASE) IN CASH..................................... (1,750) 15,289
Cash and cash equivalents at beginning of period.................... 15,817 5,424
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $14,067 $20,713
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Acquisition of equipment under capital leases..................... $ -- $ 147
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-------------------------------------------------------------------------
Integrated Packaging Assembly Corporation, Form 10-Q Page 5
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the "Company") packages integrated
circuits for companies in the semiconductor industry.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do
not have the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1996 included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the quarter ended March 31, 1997 are not
necessarily indicative of the results that may be expected for any subsequent
period or for the entire year ending December 31, 1997.
FISCAL YEAR
- -----------
The Company's fiscal quarters and year end on the Sunday nearest the calendar
quarter end and December 31, respectively. For purposes of financial statement
presentation, each fiscal year is presented as having ended on December 31 and
each fiscal quarter is presented as having ended on the calendar quarter end.
Fiscal 1996 and 1997 each consist of 52 weeks.
NOTE 2. BALANCE SHEET COMPONENTS:
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1997
--------- ---------
INVENTORY
Raw materials.................. $1,543 $1,834
Work In process................ 116 143
------ ------
$1,659 $1,977
====== ======
Integrated Packaging Assembly Corporation, Form 10-Q Page 6
<PAGE>
NOTE 3. COMMON STOCK
Common Stock as of March 31, 1997 and March 31, 1996 reflects the sale of
3,450,000 shares of Common Stock issued in the Company's initial public offering
(IPO) which was completed on February 28, 1996. Net proceeds to the Company
were $23.2 million as a result of the initial public offering.
NOTE 4. INCOME TAXES:
No provision for income taxes was recorded for the quarter ended March 31, 1997
as the Company operated at a loss. No tax benefit was recorded for the quarter
as the Company's provisions for income taxes in prior years resulted from
alternative minimum tax charges which are not subject to credits from losses
carried back.
NOTE 5. NET INCOME (LOSS) PER SHARE:
Net income per share for the quarter ended March 31, 1996 was computed using the
weighted average number of common shares and common equivalent shares
outstanding during the period. The net loss per share for the quarter ended
March 31, 1997 was computed using the same method but excluded the common
equivalent shares because of their anti-dilutive effect. Common equivalent
shares for the quarter ended March 31, 1996 included Common Stock issued upon
the conversion of the Company's Mandatorily Redeemable Convertible Preferred
Stock using the if converted method and outstanding stock options and warrants
using the treasury stock method. Pursuant to the requirements of the Securities
and Exchange Commission, common stock equivalent shares relating to stock
options and warrants, using the treasury stock method, and the Mandatorily
Redeemable Convertible Preferred Stock, even where antidilutive, using the as
if-converted method, issued subsequent to December 31, 1994 are included in the
computation of net income per share through February 28, 1996, the date of the
Company's initial public offering.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT FAS 128:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". This statement is
effective for the Company's quarter ending December 31, 1997. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted this Statement for the quarter ended
March 31, 1997 and for the comparable period in the prior year, the Company's
earnings (loss) per share would have been as follows:
QUARTER ENDED MARCH 31,
----------------------
1997 1996
-------- --------
Basic earnings (loss) per share....... ($0.18) $0.05
Diluted earnings (loss) per share..... ($0.18) $0.05
Integrated Packaging Assembly Corporation, Form 10-Q Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The forward-looking statements contained
herein are subject to certain factors that could cause actual results to differ
materially from those reflected in the forward-looking statements. Such factors
include, but are not limited to, those discussed below and elsewhere in this
Report on Form 10-Q.
OVERVIEW
From its inception in April 1992 through December 1993, IPAC focused on
developing manufacturing capacity at its facility in San Jose, California. The
Company commenced commercial production and recognized its initial revenues in
the quarter ended March 31, 1994. The Company has derived substantially all
of its revenues to date from Quad Flat Pack packages. The Company has expanded
its manufacturing capacity every year since it began operations in early 1994.
The Company believes that its competitive position depends on its ability to
have sufficient capacity to meet anticipated customer demand. Accordingly, the
Company made significant investments in capital equipment and facilities
improvements in 1995 and 1996 by acquiring equipment with a cost of $10
million and $19 million, respectively. In 1996, the Company spent an
additional $9.2 million to acquire the building complex in which it has
operated since 1993. The Company currently occupies approximately 55,000
square feet of the 140,000 square feet in the building complex. The Company
currently occupies approximately 55,000 square feet of the 140,000 square feet
in the building complex. The Company believes that its current manufacturing
base of installed equipment, plus additional spending for capital equipment
and facilities improvements in 1997 of up to $7 million should be sufficient
to meet anticipated 1997 capacity requirements.
The Company's operating results are affected by a wide variety of factors that
could materially and adversely affect revenues, gross profit and operating
income. These factors include the short-term nature of its customers'
commitments, timing and volume of orders relative to the Company's production
capacity, long lead times for the manufacturing equipment required by the
Company, evolutions in the life cycles of customers' products, timing of
expenditures in anticipation of future orders, lack of a meaningful backlog,
effectiveness in managing production processes, changes in costs and
availability of labor, raw materials and components, costs to obtain materials
on an expedited basis, mix of orders filled, the impact of price competition
on the Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the above factors may adversely affect the
Company's business, financial condition and results of operations.
REVENUES
- --------
The Company recognizes revenues upon shipment of products to its customers.
Revenues for the quarter ended March 31, 1997, decreased to $5.6 million from
$8.1 million for the same quarter in fiscal 1996. The decrease in revenues for
the quarter is the result of the Company's dependence on a limited number of
customers, and a decline in orders from several of the Company's major
customers.
A substantial portion of the Company's net revenues in each quarter results from
shipments during the last month of that quarter, and for that reason, among
others, the Company's revenues are subject to significant quarterly
fluctuations. In addition, the Company establishes its targeted expenditure
levels based on expected revenues. If anticipated orders and shipments in any
quarter do not occur when expected, expenditure levels could be
disproportionately high and the Company's operating results for that quarter
could be materially adversely affected.
Integrated Packaging Assembly Corporation, Form 10-Q Page 8
<PAGE>
GROSS PROFIT
- ------------
Cost of revenues includes materials, labor, depreciation and overhead costs
associated with semiconductor packaging. Gross profit for the quarter ended
March 31, 1997 was a loss of $0.9 million compared with a profit of $2.0 million
for the same quarter in fiscal 1996. Gross profit as a percentage of revenues,
or gross margin, was a negative 16.5% for the first quarter of 1997 compared to
24.8% for the first quarter of 1996. The Company experienced a decline in
gross profit primarily because of the low level of revenues and capacity
utilization. The Company's gross profits were adversely affected by lower
average selling prices, caused by industry competition and higher costs for
labor and manufacturing overhead. The cost of revenues for the first quarter of
1997 also included a provision for the loss of a $250,000 advance payment made
to an overseas vendor of production equipment, as a result of the vendor's
insolvency.
Depreciation for machinery and equipment is calculated using the units of
production method, in which depreciation is calculated based upon the units
produced in a given period divided by the estimate of total units to be produced
over its life following commencement of use. Such estimates are reassessed
periodically when facts and circumstances suggest a revision may be necessary.
In all cases, the asset will be depreciated by the end of its estimated six year
life so that each quarter the equipment is subject to certain minimum levels of
depreciation. During the quarter ended March 31, 1997, the Company applied
depreciation for certain assets at these minimum levels in order to depreciate
its assets over their remaining useful life. The Company expects depreciation
in 1997 to be a greater proportion of revenues than in 1996 due to competitive
pressure on revenues and higher depreciation rates.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and management
personnel, as well as advertising, public relations, legal, and accounting
costs. Selling, general and administrative expenses increased 42% to $1.1
million for the quarter ended March 31, 1997 compared to $0.8 million for the
comparable period in 1996. The increase was due primarily to increases in
staff and facilities to support the Company's growth throughout fiscal 1996.
As a percentage of revenues, selling, general and administrative expenses
increased from 9.5% for the first quarter of 1996 to 19.4% for the same period
in 1997. The increase in such expenses as a percentage of revenues reflects
the lower revenue level in 1997 as well as the increase in selling, general and
administrative expenses.
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development expenses consist primarily of the costs associated with
research and development personnel, the cost of related materials and services,
and the depreciation of development equipment. Research and development
expenses increased 65% to $345,000 for the quarter ended March 31, 1997,
compared to $209,000 for the comparable period in 1996. These increases were due
primarily to the Company's expanded efforts in ongoing product development.
As a percentage of revenues, research and development expenses increased from
2.6% in the first quarter of 1996 to 6.2% for the comparable period in 1997.
The increase in such expenses as a percentage of revenues reflects the lower
revenue level in 1997 and the higher level of research and development expenses.
Integrated Packaging Assembly Corporation, Form 10-Q Page 9
<PAGE>
INTEREST AND OTHER INCOME (EXPENSE)
- -----------------------------------
Interest and other income resulted in net other expense of $128,000 for the
quarter ended March 31, 1997 compared to a net other expense of $114,000 for the
same quarter last year. Other income for the first quarter of 1997 increased to
$173,000 from $56,000 for the comparable period in 1996 primarily due earnings
on higher average cash and cash equivalent balances primarily from the IPO and
to rental income net of rental expenses from the building complex purchased by
the Company in December 1996. Interest expense increased to $511,000 in the
first quarter of 1997 from $319,000 for the comparable period in 1996 as a
result of the increased level of long term debt used to acquire property and
equipment.
PROVISION FOR INCOME TAXES
- --------------------------
The Company did not record a provision for income tax for the quarter ended
March 31, 1997 as the Company operated at a loss. For the same quarter last
year, the Company's effective tax rate was 33%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the quarter ended March 31, 1997, the Company's principal source of
liquidity was cash flow from operations of $1.3 million. Cash flow from
operations was comprised primarily of non-cash depreciation and amortization
expenses of $1.5 million, a decrease in accounts receivable of $3.1 million,
offset by a loss of $2.5 million and a decrease in accounts payable of $1.0
million. As of March 31, 1997, the Company had cash and cash equivalents of
$14.1 million and short term investments of $3.0 million.
The Company had capital expenditures of $2.1 million during the first quarter of
1997. Such capital expenditures were incurred primarily for the purchase of
production equipment and improvements to the Company's facilities. The Company
expects to spend approximately $5 million on capital expenditures during the
remainder of 1997 for the acquisition of production equipment, primarily related
to the Company's new products, for equipment to enable the Company to perform
its own plating operations, and for facilities improvements. Most of the
Company's production equipment has been funded either through capital leases or
term loans secured by production equipment. The Company acquired $3.7 million
and $4.0 million of production equipment through capital leases in 1993 and 1994
respectively, which leases expire from December 1997 to January 1999. The
production equipment acquired in 1995 and 1996 was funded through several term
loans. The Company borrowed $4.9 million and $9.8 million on such term loans in
1995 and 1996 respectively. No such leases or term loans were taken down in the
first quarter of 1997. At March 31, 1997, the Company had approximately $4
million of unused borrowing facilities from its equipment lenders. Such
borrowing facilities expire in June 1997.
The Company has a $2.0 million revolving credit line, secured by substantially
all of the Company's assets, expiring in July 1997. As of March 31, 1997, no
money had been borrowed against this line. As of March 31, 1997, the Company
was not in compliance with a covenant which requires the Company to maintain a
minimum quick ratio. This covenant non-compliance also applies to two term
loans with a total outstanding balance of $3.5 million from the same financial
institution. The Company however, has received a waiver of this covenant from
the financial institution until June 30, 1997.
Integrated Packaging Assembly Corporation, Form 10-Q Page 10
<PAGE>
On March 25, 1997, the Company secured a mortgage loan of $6.7 million from an
insurance company. The loan carries a five year term and is secured by the real
estate and buildings purchased by the Company in December 1996. The proceeds of
this mortgage loan were used to pay off and retire a $6.5 million real estate
loan which had been entered into in December 1996 to provide temporary financing
for the acquisition of the Company's building complex.
The Company believes that its existing cash and short term investment balances
along with anticipated cash from operations and equipment financing will be
sufficient to meet its projected working capital and other cash requirements for
the next 12 months. There can be no assurance, however, that lower than
expected revenues, increased expenses, increased costs associated with the
purchase or maintenance of capital equipment, or other events will not cause the
Company to seek more capital, or capital sooner than currently expected. The
timing and amount of the Company's actual capital requirements will depend on a
number of factors, including demand for the Company's services, level of
capacity utilization, availability of capital equipment, adverse fluctuations in
foreign currency exchange rates, changes in semiconductor industry conditions
and competitive factors. There can be no assurance that additional financing
will be available when needed or, if available, will be available on
satisfactory terms.
Integrated Packaging Assembly Corporation, Form 10-Q Page 11
<PAGE>
CERTAIN FACTORS AFFECTING OPERATING RESULTS
The Company's operating results are affected by a wide variety of factors that
could materially and adversely affect revenues, gross profit, operating income
and liquidity. These factors include the short term nature of its customers'
commitments, the timing and volume of orders relative to the Company's
production capacity, long lead times for the manufacturing equipment required by
the Company, evolutions in the life cycles of customers' products, timing of
expenditures in anticipation of future orders, lack of a meaningful backlog,
effectiveness in managing production processes, changes in costs and
availability of labor, raw materials and components, costs to obtain materials
on an expedited basis, mix of orders filled, the impact of price competition on
the Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the above factors would adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS
- -----------------------------------------------------
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in Asia
or Europe. The market for capital equipment used in semiconductor packaging has
been and is expected to continue to be characterized by intense demand, limited
supply and long delivery cycles. The Company's operations require a substantial
amount of this capital equipment. Accordingly, the Company's operations and
plans to expand its product offerings are highly dependent on its ability to
obtain a significant amount of high quality capital equipment from a limited
number of suppliers. The Company has no long term agreement with any such
supplier and acquires such equipment on a purchase order basis. This dependence
creates substantial risks. Should any of the Company's major suppliers be
unable or unwilling to provide the Company with high quality capital equipment
in amounts necessary to meet the Company's requirements, the Company would
experience severe difficulty locating alternative suppliers in a timely fashion
and its ability to place new product lines into volume production would be
materially adversely affected. A prolonged delay in equipment shipments by key
suppliers or an inability to locate alternative equipment suppliers would have a
material adverse effect on the Company's business, financial condition and
results of operations and could result in damage to customer relationships. In
this regard, problems with the quality of certain capital equipment affected the
Company's ability to package semiconductors for certain customers in a timely
manner at acceptable yields, with the result that the Company's business,
operating results and financial condition were adversely affected in 1996 and
1997.
Moreover, increased levels of demand in the capital equipment market may cause
an increase in the price of equipment, further lengthen delivery cycles and
limit the ability of suppliers to adequately service equipment following
delivery, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, adverse
fluctuations in foreign currency exchange rates, particularly the Japanese yen,
could result in increased prices for the equipment purchased by the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Integrated Packaging Assembly Corporation, Form 10-Q Page 12
<PAGE>
DEPENDENCE ON THE SEMICONDUCTOR INDUSTRY; CUSTOMER CONCENTRATION
- ----------------------------------------------------------------
The Company's business is substantially affected by market conditions in the
semiconductor industry, which is highly cyclical and, at various times, has been
subject to significant economic downturns and characterized by reduced product
demand, rapid erosion of average selling prices and production overcapacity. In
addition, the markets for integrated circuits are characterized by rapid
technological change, evolving industry standards, intense competition and
fluctuations in end user demand. Because the Company's business is entirely
dependent on the requirements of semiconductor companies for independent
packaging foundries, any downturn in the semiconductor industry is expected to
have an adverse effect on the Company's business, financial condition and
results of operations. For example, delays or rescheduling of orders due to a
downturn or anticipated downturn in the semiconductor industry could have a
material adverse effect on the Company's business, operating results and
financial condition.
Some segments of the semiconductor industry may be affected more than others.
If certain of the Company's significant customers are in a segment which has
been impaired, there would be an adverse effect on the Company's business,
financial condition and results of operations.
In this regard, the Company experienced a significant decline in orders during
the first quarter of fiscal 1997 which the Company attributes to reduced demand
for semiconductors manufactured by certain of the Company's customers that
serve, in particular, the personal computer market. There can be no assurance
that this downturn in the computer industry, or the general economic conditions
underlying this downturn, will not recur again. Furthermore, there can be no
assurance that any such continuation or expansion of this downturn will not
result in an additional and significant decline in the demand for the products
produced by the Company's customers and a corresponding material adverse impact
on the Company's business, operating results and financial condition.
In addition, the Company has been substantially dependent on a relatively small
number of customers within the semiconductor industry. The high concentration
of business with a limited number of customers adversely affected the Company's
results in the first quarter of 1997, when business volume dropped substantially
for several customers. There can be no assurance that such customers or any
other customers will continue to place orders with the Company in the future at
the same levels as in prior periods. The loss of one or more of the Company's
customers, or reduced orders by any of its key customers, would adversely affect
the Company's business, financial condition and results of operations.
DESIGN AND ENGINEERING OF NEW PRODUCTS
- --------------------------------------
The Company believes that its competitive position depends substantially on its
ability to design new semiconductor packages in high demand and to develop
manufacturing capabilities for such products. These products include Ball Grid
Array (BGA) packages, Chip Scale Packages (CSP), and Thin Quad Flat Pack (TQFP)
packages. The Company plans to make significant investments in the development
and design of such packages, and to develop its expertise and capacity to
manufacture such products in large volumes. There can be no assurance that the
Company will be able to utilize such new designs or be able to utilize such
manufacturing capacity in a timely manner, that the cost of such development
will not exceed management's current estimates or that such capacity will not
exceed the demand for the Company's services. In addition, the allocation of
Company resources into such development costs will continue to significantly
increase the Company's operating expenses and fixed costs. The Company's
inability to generate the additional revenues necessary to make use of such
developments and investments would have a material adverse effect on the
Company's business, financial condition and results of operations.
Integrated Packaging Assembly Corporation, Form 10-Q Page 13
<PAGE>
UTILIZATION OF MANUFACTURING CAPACITY
- -------------------------------------
The Company has made substantial investments in expanding its manufacturing
capacity during its operating history, in anticipation of increased future
business. During the first quarter of 1997, the Company incurred a net loss as
revenues dropped substantially, while overhead and fixed costs increased, with
the result that there was substantial manufacturing overcapacity. There can be
no assurance that the Company will be able to utilize such manufacturing
capacity in a timely manner. The Company's inability to generate the
additional revenues necessary to fully utilize its capacity would have a
material adverse effect on the Company's business, financial condition and
results of operations.
MANAGEMENT OF GROWTH
- --------------------
During the Company's operating history, it has experienced periods of
substantial growth in the number of its employees and the volume of its
business. This growth has strained the Company's managerial, financial,
manufacturing and other resources. In order to manage its growth, the Company
must not only improve its existing operational, financial and management
systems, it must continue to implement additional operating and financial
controls and hire and train additional personnel. Any failure to improve the
Company's operational, financial and management systems could have a material
adverse effect on the Company's business, financial condition and results of
operations. Because the Company's expense levels are based in part on
anticipated future revenue levels, if revenue does not meet projected levels,
the Company's operating results would be materially adversely affected.
In addition, the Company must hire and train significant numbers of additional
personnel to operate the highly complex capital equipment required by its
manufacturing operations. There can be no assurance that the Company will be
able to hire and properly train sufficient numbers of qualified personnel or to
effectively manage such growth and its failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT QUALITY AND RELIABILITY; PRODUCTION YIELDS
- --------------------------------------------------
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, errors in the
design of equipment and related tooling, use of defective raw materials,
defective plating services and inadequate sample testing. From time to time,
the Company has experienced and expects to experience lower than anticipated
production yields as a result of such factors. The Company has also experienced
inefficiencies due to rework of subcontracted plating services which required
the Company to reschedule planned new production and resulted in lower gross
profit during such periods. The Company's failure to maintain high quality
production standards or acceptable production yields would likely result in loss
of customers, delays in shipments, increased costs, cancellation of orders and
product returns for rework, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Integrated Packaging Assembly Corporation, Form 10-Q Page 14
<PAGE>
DEPENDENCE ON RAW MATERIALS SUPPLIERS AND SUBCONTRACTORS
- --------------------------------------------------------
To maintain competitive manufacturing operations, the Company must obtain from
its vendors, in a timely manner, sufficient quantities of acceptable materials
at expected prices. The Company sources most of its raw materials, including
critical materials such as lead frames and die attach compound, from a limited
group of suppliers. Molding compound, a critical raw material, is obtained from
a single supplier. From time to time, vendors have extended lead times or
limited the supply of required materials to the Company because of vendor
capacity constraints and, consequently, the Company has experienced difficulty
in obtaining acceptable raw materials on a timely basis. In addition, from time
to time, the Company may reject materials from those vendors that do not meet
its specifications, resulting in declines in output or yield. Any interruption
in the availability of or reduction in the quality of materials from these
suppliers would materially adversely affect the Company's business, financial
condition and results of operations. For example, in the second quarter of
fiscal 1996, the Company's revenues were adversely affected by the rejection of
a batch of key material.
The Company purchases all of its materials on a purchase order basis and has no
long term contracts with any of its suppliers. There can be no assurance that
the Company will be able to obtain sufficient quantities of raw materials and
other supplies. The Company's business, financial condition and results of
operations would be materially adversely affected if it were unable to obtain
sufficient quantities of raw materials and other supplies in a timely manner or
if there were significant increases in the costs of raw materials that the
Company could not pass on to its customers.
The Company also relies on subcontractors to perform certain manufacturing
operations such as plating. From time to time, the Company's plating
subcontractors have experienced significant manufacturing problems. In
particular, such problems resulted in delayed customer shipments by, and
increased costs to, the Company during the second and third quarters of 1995.
There can be no assurance that the Company's subcontractors will not experience
manufacturing problems in the future or that such problems will not result in
increased costs or production delays which could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON SINGLE MANUFACTURING FACILITY
- -------------------------------------------
The Company's current manufacturing operations are located in a single facility
in San Jose, California. Because the Company does not currently operate
multiple facilities in different geographic areas, a disruption of the Company's
manufacturing operations resulting from various factors, including sustained
process abnormalities, human error, government intervention or a natural
disaster such as fire, earthquake or flood, could cause the Company to cease or
limit its manufacturing operations and consequently would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Integrated Packaging Assembly Corporation, Form 10-Q Page 15
<PAGE>
COMPETITION; POTENTIAL DECLINE IN AVERAGE SELLING PRICES
- --------------------------------------------------------
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia. Each of these competitors has significantly greater
manufacturing capacity, financial resources, research and development
operations, marketing and other capabilities than the Company, and has been
operating for a significantly longer period of time than the Company. Such
companies also have established relationships with many large semiconductor
companies which are current or potential customers of the Company. The Company
could face substantial competition from Asian packaging foundries should one or
more of such companies decide to establish foundry operations in North America.
In this regard, Anam, a large Korean packaging foundry has announced plans to
construct a facility in Arizona. The Company could also face competition from
emerging independent North American packaging foundries. The Company also
competes against companies which have in house packaging capabilities as current
and prospective customers constantly evaluate the Company's capabilities against
the merits of in house packaging. Many of the Company's customers are also
customers of one or more of the Company's competitors. In addition, the Company
expects that average selling prices for its products may decline in the future,
principally due to intense competitive conditions. A decline in average selling
prices of the Company's products, if not offset by reductions in the cost of
producing those products, would decrease the Company's gross margins and could
materially and adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to reduce its cost per unit.
Integrated Packaging Assembly Corporation, Form 10-Q Page 16
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Integrated Packaging Assembly Corporation, Form 10-Q Page 17
<PAGE>
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.
Integrated Packaging Assembly Corporation
Date: May 12, 1997 /s/ Tony Lin
----------------------------
Tony Lin
Principal Financial and Accounting Officer
Integrated Packaging Assembly Corporation, Form 10-Q Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF OPERATIONS, THE CONDENSED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,067
<SECURITIES> 3,025
<RECEIVABLES> 3,216
<ALLOWANCES> 223
<INVENTORY> 1,659
<CURRENT-ASSETS> 22,777
<PP&E> 48,864
<DEPRECIATION> 6,427
<TOTAL-ASSETS> 65,506
<CURRENT-LIABILITIES> 11,130
<BONDS> 0
0
0
<COMMON> 40,068
<OTHER-SE> (1,523)
<TOTAL-LIABILITY-AND-EQUITY> 65,506
<SALES> 5,575
<TOTAL-REVENUES> 5,575
<CGS> 6,495
<TOTAL-COSTS> 6,495
<OTHER-EXPENSES> 1,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511
<INCOME-PRETAX> (2,473)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,473)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
