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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 June 30, 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)
DELAWARE 77-0309372
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
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 August 6, 1997: 13,927,384
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<C> <S> <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 4. Submission of Matter to a Vote of Security Holders......................... 17
Item 6. Exhibits................................................................... 17
Signatures.......................................................................... 18
</TABLE>
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Part I. Financial Information
Item 1. Financial Statements
Integrated Packaging Assembly Corporation
Condensed Balance Sheet
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, Dec 31,
1997 1996
_______ _______
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $12,431 $15,817
Short term investments 1,001 3,025
Accounts receivable, net 1,622 6,141
Inventory 1,624 1,977
Prepaid expenses and other current assets 596 606
_______ _______
Total currrent assets 17,274 27,566
Property and equipment, net 43,436 41,776
Other assets 296 297
_______ _______
Total assets $61,006 $69,639
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long term debt $6,205 $6,118
Accounts payable 2,856 2,534
Accrued expenses and other liabilities 5,156 3,300
_______ _______
Total current liabilities 14,217 11,952
_______ _______
Long term debt 14,318 16,926
_______ _______
Shareholders' equity
Common Stock 40,083 39,811
Accumulated earnings (deficit) (7,612) 950
_______ _______
Total shareholders' equity 32,471 40,761
_______ _______
Total liabilities and shareholders'
equity $61,006 $69,639
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Integrated Packaging Assembly Corporation
Condensed Statement of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 3,953 $ 8,469 $ 9,528 $ 16,526
Cost of revenues 5,039 6,717 11,534 12,777
-------- ------- -------- --------
Gross profit (loss) (1,086) 1,752 (2,006) 3,749
-------- ------- -------- --------
Operating expenses
Selling, general & administrative 1,380 841 2,460 1,603
Research & development 338 252 683 461
Write down of impaired assets 3,000 -- 3,000 --
-------- ------- -------- --------
Total operating expenses 4,718 1,093 6,143 2,064
-------- ------- -------- --------
Operating income (loss) (5,804) 659 (8,149) 1,685
Interest & other income (expense) (284) 58 (412) (56)
-------- ------- -------- --------
Income (loss) before income taxes (6,088) 717 (8,561) 1,629
Provision for income taxes -- (150) -- (450)
-------- ------- -------- --------
Net income (loss) $ (6,088) $ 567 $ (8,561) $ 1,179
======== ======= ======== ========
Net income (loss) per share $ (0.44) $ 0.04 $ (0.62) $ 0.09
======== ======= ======== ========
Weighted average common
shares and equivalents 13,925 14,798 13,914 13,603
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Integrated Packaging Assembly Corporation
Condensed Statement of Cash Flows
Increase (Decrease) Cash
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30, June 30,
-------- --------
<S> <C> <C>
Cash flows from Operating Activities:
Net income (loss) $(8,561) $ 1,179
Adjustments:
Depreciation and amortization 2,966 1,288
Write down of impaired assets 3,000 --
Changes in assets and liabilities:
Accounts receivable 4,519 (1,364)
Inventory 353 371
Prepaid expenses and other assets 10 (163)
Accounts payable 322 653
Accrued expenses and other liabilities 763 1,460
-------- --------
Net cash provided by operating activities 3,372 3,424
-------- --------
Cash flows used in investing activities:
Acquisition of property and equipment (6,457) (10,758)
Net investment in short term investments 2,024 (6,044)
s -------- --------
Net cash used in investing activities 4,433 (16,802)
-------- --------
Cash flows provided by financing activities:
Payments under capital lease obligations (884) (768)
Principal payments on note payable (8,388) (687)
Proceeds from note payable 6,700 2,000
Proceeds from issuance of Common Stock, net 247 23,112
-------- --------
Net cash provided by (used in) investing activities (2,325) 23,657
-------- --------
Net increase (decrease) in cash (3,386) 10,279
Cash and cash equivalents at beginning of period 15,817 5,424
-------- --------
Cash and cash equivalents at end of period $ 12,431 $ 15,703
======== ========
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.
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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 June 30, 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)
JUNE 30, DEC 31,
1997 1996
------ -------
INVENTORY
Raw Materials $1,563 $1,839
Work in process 61 138
------ ------
$1,624 $1,977
====== ======
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NOTE 3. INCOME TAXES:
No provision or benefit for income taxes was recorded for the six months ended
June 30, 1997 as the Company operated at a loss and income taxes in prior years
resulted from alternative minimum tax charges which are not subject to credits
from losses carried back.
NOTE 4. NET INCOME (LOSS) PER SHARE:
Net income per share for the quarter and for the six months ended June 30, 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 and for the six months ended June 30, 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 and for the six months ended
June 30, 1996 included 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 Company's mandatorily
redeemable convertible preferred stock which was outstanding prior to the
Company's initial public offering on February 28, 1996, 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 5. 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 and six
months ended June 30, 1997 and for the comparable periods in the prior year, the
Company's earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
1997 1996 1997 1996
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share....... ($0.44) $0.04 ($0.62) $0.09
Diluted earnings (loss) per share..... ($0.44) $0.04 ($0.62) $0.09
</TABLE>
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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 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, 1996, and
1997. In 1996, the Company spent $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.
Since the first quarter of fiscal 1997, the Company has experienced quarterly
operating losses and quarter to quarter declines in revenues, due to
significantly reduced orders from several key customers. As a result of reduced
orders, the Company has been operating at substantially less than capacity. Due
to the Company's relatively high level of fixed costs, this under utilization of
capacity has resulted in substantial operating losses. The company's ability to
return to profitability will depend on its ability to achieve significant
revenue growth from new or existing customers and to control its fixed costs.
The Company's operating results are affected by a wide variety of factors that
have in the past and could continue to 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 three month and six month periods ended June 30, 1997, were
$4.0 million and $9.5 million respectively, compared with $8.5 million and $16.5
million respectively for the comparable periods in the prior fiscal year. The
decreases in revenues in the 1997 periods are 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.
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GROSS PROFIT
Cost of revenues includes materials, labor, depreciation and overhead costs
associated with semiconductor packaging. Gross profit for the three month and
six month periods ended June 30, 1997 consisted of losses of $1.1 million and
$2.0 million respectively, compared with profits of $1.8 million and $3.7
million respectively, for comparable periods in the prior fiscal year. Gross
profit as a percentage of revenues, or gross margin, was a negative 27.5% for
the quarter ended June 30, 1997 compared to 20.7% for the same quarter of 1996.
Gross margin, was a negative 21.1% for the six months ended June 30, 1997
compared to 22.7% for the same period in 1996. These declines in gross profit
were primarily the result of the lower level of revenues and capacity
utilization in 1997. The Company's gross profits were also adversely affected by
lower average selling prices, caused by industry competition and higher costs
for labor and manufacturing overhead. Revenues will need to improve
significantly for margins to improve.
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 three month and six month periods ended June 30, 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 the lower level of 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 64% to $1.4
million and 54% to $2.5 million for the three month and six month periods ended
June 30, 1997, respectively, over the comparable periods in 1996. These
increases were due primarily to increases in staff and facilities to strengthen
the Company's administrative infrastructure and the Company's sales and customer
service functions.
As a percentage of revenues, selling, general and administrative expenses
increased from 9.9% for the second quarter of 1996 to 34.9% in the 1997 quarter,
and from 9.7% for the first six months of fiscal 1996 to 25.8% for the
comparable 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 in absolute dollars.
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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 34% to $338,000 and 48% to $683,000 for the three month and six month
periods ended June 30, 1997, respectively, over the comparable periods 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
3.0% in the second quarter of 1996 to 8.6% in the second quarter of 1997, and
from 2.8% for the first six months of fiscal 1996 to 7.2% for the comparable
period in 1997. The increases in such expenses as a percentage of revenues
reflect the lower revenue level in 1997 and the higher absolute level of
research and development expenses.
WRITE DOWN OF IMPAIRED ASSETS
For the quarter ended June 30, 1997, the Company took a $3 million charge for
impaired assets. This charge included a $2.4 million reserve related to
equipment used for the production of certain products with limited future
demand, and a $500,000 reserve for the cancelation of purchase orders for
equipment which the Company has determined to be surplus in relation to current
demand.
INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income is primarily comprised of interest expense on
equipment, offset by interest earnings from investments in cash equivalents.
Interest and other income resulted in net other expense of $284,000 and $412,000
for the three month and six months periods ended June 30, 1997 compared to net
other income of $58,000 and net other expense of $56,000 for the comparable
periods in the prior fiscal year. Interest expense increased to $542,000 and
$1,054,000 respectively, for the three month and six month periods ended June
30, 1997, compared to $308,000 and $626,000 respectively, for comparable periods
in the prior fiscal year. These increases were the 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 or for the
six months ended June 30, 1997 as the Company operated at a loss. For the same
quarter and six month period last year, the Company recorded taxes at effective
rates of 21% and 28% respectively.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997, the Company's principal source of
liquidity was cash flow from operations of $3.4 million. Cash flow from
operations was comprised primarily of an $8.6 million net loss, in part due to
$6.0 million of non-cash charges for depreciation and amortization and a write
down of impaired assets. Such loss was offset by a decrease in accounts
receivable of $4.5 million due to collections exceeding revenues. As of June 30,
1997, the Company had cash and cash equivalents of $12.4 million and short term
investments of $1.0 million.
The Company had capital expenditures of $6.5 million during the first six months
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 $2 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 during
the first half of 1997.
As of June 30, 1997, the Company was not in compliance with covenants related to
term loans with a total outstanding balance of $4.0 million from two financial
institutions. In one case, the covenant, which requires the Company to maintain
certain minimum profitability was subsequently waived, until September 30, 1997.
In the other case, the covenants were subsequently amended such that the Company
was in compliance with such covenants at June 30, 1997.
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 terminated its $2.0 million short term revolving credit line in
June, 1997. No money had been borrowed against the credit line during the two
years it had been in effect.
The Company believes that its existing cash and short term investment balances
along with anticipated cash flow 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 continued operating
losses, 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. In addition, unless the Company is able to return to
profitability, the Company will need to raise additional capital to fund its
operations. 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. To the extent such financing involves the
issuance of stock or convertible securities, the relative voting power of the
Company's existing stockholders would be diluted and to the extent the Company
has earnings, such financing could also be dilutive to earnings per share.
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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. The
occurrence or continuation of unfavorable changes in any of the above factors
would adversely affect the Company's business, financial condition and results
of operations. In addition, the following factors pose risks:
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.
The semiconductor industry is comprised of different market segments based on
device type and the end use of the device. Accordingly, within the semiconductor
industry, demand for production in a particular segment may be subject to more
significant fluctuations than other segments. If any of the Company's
significant customers are in a segment which has experienced adverse market
conditions, there would be an adverse effect on the Company's business,
financial condition and operating results. In this regard, the Company has
experienced a significant decline in orders during fiscal 1997 which the Company
attributes in part 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 reduced demand, or the general
economic conditions underlying such demand, will not continue to adversely
affect the Company's results of operations. Furthermore, there can be no
assurance that any such continuation or expansion of this reduced demand 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 has adversely affected the Company's
operating results during 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.
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MANAGEMENT OF OPERATIONS; NEW MANAGEMENT TEAM
The Company's Chief Executive Officer and President recently joined the Company
in April 1997. Several of the Company's other executive officers have joined the
Company within the past few months. The Company's ability to increase its
revenues and return to profitability will depend upon the ability of new
management to improve the Company's manufacturing operations and to attract new
customers and to increase orders from existing customers. In order to manage its
business, the Company must improve its existing operational, financial and
management systems, 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 have been and will continue to be materially
adversely affected as evidenced by the Company's results during the first half
of 1997.
UNDERUTILIZATION OF MANUFACTURING CAPACITY; HIGH FIXED COSTS
The Company has made substantial investments in expanding its manufacturing
capacity during its operating history, in anticipation of increased future
business. During the first half of 1997, the Company incurred net losses as
revenues dropped substantially, while overhead and fixed costs increased, with
the result that there was substantial underutilized manufacturing capacity. The
Company continues to operate with significant underutilized capacity. There can
be no assurance that the Company will receive orders from new or existing
customers that will enable it to utilize such manufacturing capacity in a timely
manner. The Company's inability to generate the additional revenues necessary to
more fully utilize its capacity has had and will continue to 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 are 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 achieve 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. The
decline in the level of orders in 1997 is partially attributable to product
quality issues experienced during 1996.
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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. Substantially all 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 has rejected 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.
Page 14
<PAGE>
COMPETITION; 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. In July, 1997, the
Alphatec Group, a large provider of semiconductor manufacturing services based
in Thailand, announced their intent to sell their US subsidiary, which includes
a packaging foundry located in Manteca, California. 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. The Company's current and potential
customers typically seek to satisfy their packaging requirements through a
limited number of manufacturers. Thus, the Company's ability to obtain new
customers often requires that the Company displace an existing competitor.
From mid 1996, the Company has experienced a decline in the average selling
prices for a number of its products. The Company expects that average selling
prices for its products may continue 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.
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.
Page 15
<PAGE>
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 utilize a substantial
amount of this capital equipment. Accordingly, the Company's operations 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.
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.
Page 16
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved at the Company's Annual Meeting of
Stockholders held on June 17, 1997:
(a) The following Directors were elected:
<TABLE>
<CAPTION>
PERCENT OF
SHARES
DIRECTORS VOTES FOR OUTSTANDING
---------------------------------------------------------------------------------------
<S> <C> <C>
1. Victor A. Batinovich 11,056,510 79.4 %
2. Philip Chapman 11,076,864 79.6 %
3. Gill Cogan 11,076,864 79.6 %
4. Paul Low 11,076,864 79.6 %
5. Eric Young 11,076,864 79.6%
</TABLE>
(b) The stockholders approved the following proposals:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES VOTED
PROPOSAL VOTES FOR % (1) AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2. Reincorporation in Delaware 8,011,501 57.6 % 676,171 2,950
3. Amendment to increase the number of
shares of common stock reserved for
future issuance under the Company's
1993 Stock Option Plan by 500,000
shares 10,503,612 75.4 % 549,044 9,000
4. Ratification of the appointment of
Price Waterhouse LLP as the
Company's independent accountants
for the 1997 fiscal year 11,092,818 79.7 % 1,300 4,776
</TABLE>
(1) Percentage refers to votes for as a percentage of total
shares outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: August 11, 1997 /s/ Tony Lin
------------------------------
Tony Lin
Principal Financial and Accounting Officer
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,431
<SECURITIES> 1,001
<RECEIVABLES> 1,861
<ALLOWANCES> 239
<INVENTORY> 1,624
<CURRENT-ASSETS> 17,274
<PP&E> 51,308
<DEPRECIATION> (7,872)
<TOTAL-ASSETS> 61,006
<CURRENT-LIABILITIES> 14,217
<BONDS> 0
0
0
<COMMON> 40,083
<OTHER-SE> (7,612)
<TOTAL-LIABILITY-AND-EQUITY> 61,006
<SALES> 9,528
<TOTAL-REVENUES> 9,528
<CGS> 11,534
<TOTAL-COSTS> 11,534
<OTHER-EXPENSES> 6,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,054
<INCOME-PRETAX> (8,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,561)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
