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 October 4, 1998
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, California 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 November 16, 1998:
14,088,419
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TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheet .................................3
Condensed Statement of Operations .......................4
Condensed Statement of Cash Flows .......................5
Condensed to Condensed Financial Statements .............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................8
Item 3. Quantitative and Qualitative
Disclosure about Market Risks ...........................18
Part II. Other Information
Item 1. Legal Proceedings .......................................19
Item 4. Defaults Upon Senior Securities .........................19
Item 6. Exhibits and Reports on Form 8-K ........................19
Signatures .......................................................20
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Part I. Financial Information
Item 1. Financial Statements
Integrated Packaging Assembly Corporation
Condensed Balance Sheet
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Oct 4, Dec 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $6 $2,928
Accounts receivable, net 3,403 3,096
Inventory 2,331 2,337
Prepaid expenses and other current assets 1,018 757
------------ ------------
Total current assets 6,758 9,118
Property and equipment, net 14,730 46,127
Other assets 207 237
------------ ------------
Total assets $21,695 $55,482
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Revolving bank line $2,135 $--
Current portion of long term debt 12,844 6,548
Accounts payable 2,878 5,478
Accrued expenses and other liabilities 2,984 2,969
------------ ------------
Total current liabilities 20,841 14,995
------------ ------------
Long term debt -- 14,249
------------ ------------
Deferred gain on sale of facilities 1,283 --
------------ ------------
Shareholders' equity (deficit):
Common stock 40,610 40,290
Accumulated earnings (deficit) (41,039) (14,052)
------------ ------------
Total shareholders' equity (429) 26,238
------------ ------------
Total liabilities and shareholders' equity $21,695 $55,482
============ ============
</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)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Oct 4, Sept 28, Oct 4, Sept 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $5,816 $4,214 $18,539 $13,742
Cost of revenues 6,930 5,458 23,245 16,992
---------- ---------- ---------- ----------
Gross profit (loss) (1,114) (1,244) (4,706) (3,250)
---------- ---------- ---------- ----------
Operating expenses:
Selling, general & administrative 1,047 1,357 3,080 3,817
Research & development 272 332 905 1,015
Write down of impaired assets -- -- 18,200 3,000
---------- ---------- ---------- ----------
Total operating expenses 1,319 1,689 22,185 7,832
---------- ---------- ---------- ----------
Operating income (loss) (2,433) (2,933) (26,891) (11,082)
Interest & other income (expense) (204) (338) (96) (750)
---------- ---------- ---------- ----------
Income (loss) before income taxes (2,637) (3,271) (26,987) (11,832)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) ($2,637) ($3,271) ($26,987) ($11,832)
========== ========== ========== ==========
Per share data:
Net income (loss) per share
Basic ($0.19) ($0.23) ($1.92) ($0.85)
========== ========== ========== ==========
Diluted ($0.19) ($0.23) ($1.92) ($0.85)
========== ========== ========== ==========
Number of shares used to compute
per share data
Basic 14,088 13,954 14,029 13,927
========== ========== ========== ==========
Diluted 14,088 13,954 14,029 13,927
========== ========== ========== ==========
</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
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------
Oct 4, Sept 28,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from Operating Activities:
Net income (loss) ($26,987) ($11,832)
Adjustments:
Depreciation and amortization 5,855 4,422
Write down of impaired assets 18,200 3,000
Gain on sale of facilities, net (792) --
Changes in assets and liabilities:
Accounts receivable (307) 3,279
Inventory 6 (33)
Prepaid expenses and other assets (435) (398)
Accounts payable (2,600) (136)
Accrued expenses and other liabilities 701 138
---------- ----------
Net cash provided by (used in) operating activities (6,359) (1,560)
---------- ----------
Cash flows provided by (used in) investing activities:
Acquisition of property and equipment (1,289) (8,491)
Net investment in short term investments -- 721
Proceeds from sale of facilities, net 7,312 --
---------- ----------
Net cash provided by (used in) investing activities 6,023 (7,770)
---------- ----------
Cash flows provided by (used in) financing activities:
Proceeds from revolving bank line 2,135 --
Payments under capital lease obligations (976) (1,351)
Payments on note payable (3,897) (9,368)
Proceeds from note payable -- 10,200
Proceeds from issuance of common stock, net 152 348
---------- ----------
Net cash provided by (used in) financing activities (2,586) (171)
---------- ----------
Net increase (decrease) in cash (2,922) (9,501)
Cash and cash equivalents at beginning of period 2,928 15,817
---------- ----------
Cash and cash equivalents at end of period $6 $6,316
========== ==========
Supplemental disclosure of non-cash financing activities
Acquisition of equipment under capital leases $3,139 $--
Cash paid for interest $132 $94
</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
(In thousands except per share data)
(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, 1997 included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the three and nine month periods ended
October 4, 1998 are not necessarily indicative of the results that may be
expected for any subsequent period or for the entire year ending December 31,
1998.
NOTE 2. NOTES PAYABLE AND CAPITAL LEASES:
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank Term
Note Payable, Equipment Notes Payable and Line of Credit as well as its capital
leases. The Company is in the process of attempting to renegotiate payment
terms related to these debt instruments with the respective parties. Certain
of these debt facilities require that the Company maintain certain financial
covenants. Since July 5, 1998, the Company was out of compliance with certain
of these covenants. As a result of the covenant noncompliance and failure to
make scheduled repayments, the entire balance due, $12,844, has been classified
as a current liability.
NOTE 2. BALANCE SHEET COMPONENTS:
(In thousands)
<TABLE>
<CAPTION>
Oct 4, Dec 31,
1998 1997
------------ ------------
<S> <C> <C>
Inventory
Raw materials $2,133 $2,176
Work in process 198 161
------------ ------------
$2,331 $2,337
============ ============
</TABLE>
NOTE 4. INCOME TAXES:
No provision or benefit for income taxes was recorded for the three and
nine month periods ended October 4, 1998 and September 28, 1997, as the Company
operated at a loss.
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NOTE 5. NET INCOME (LOSS) PER SHARE:
The Company adopted Statement of Financial Accounting Standards No.128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997. All
prior-period earnings per share data have been restated in accordance with SFAS
128. Net income (loss) per basic and diluted share for the three and nine
month periods ended October 4, 1998 and September 28, 1997 was computed using
the weighted average number of common shares outstanding during the period but
excluded the dilutive potential common shares from assumed conversions because
of their anti-dilutive effect. Dilutive potential common shares include
outstanding stock options and warrants using the treasury stock method. At
October 4, 1998, there were 2,517 options and warrants outstanding to purchase
common stock at a weighted average price of $0.77 per share. At September 28,
1997, there were 2,148 options and warrants outstanding to purchase common
stock at a weighted average price of $0.88 per share.
NOTE 6. EQUIPMENT IMPAIRMENT CHARGE:
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 requires that long-
lived assets held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of an asset
will not be recovered through expected future cash flows (undiscounted and
before interest) from use of the asset. The amount of impairment loss is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARD:
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 and supercedes and
amends a number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's financial statements. The standard is effective for the Company in
fiscal 2000.
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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
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and
resultant underabsorption of fixed costs resulted in operating losses that have
continued throughout 1998. At the end of the second quarter of 1998, the
Company ceased making scheduled repayments of its debt balances outstanding
relating to its Bank Term Note Payable, Equipment Notes Payable and Line of
Credit as well as its capital leases. The Company is in the process of
attempting to renegotiate payment terms related to these debt instruments with
the respective parties. As a result of the operating losses and cost of
capital additions, the Company is currently seeking immediate additional
financing which is required in the fourth quarter of 1998 to meet its projected
working capital and other cash requirements. The Report of Independent
Accountants included in the Company's 1997 Annual Report on Form 10-K contains
a going concern statement.
The Company's operating results are affected by a wide variety of factors
that have in the past and could in the future materially and adversely affect
revenues, gross profit and operating income. These factors include the
Company's ability to secure additional financing, 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 have in the past and may in the
future adversely affect the Company's business, financial condition and results
of operations.
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 excess production
capacity. In addition, rapid technological change, evolving industry
standards, intense competition and fluctuations in end-user demand characterize
the markets for integrated circuits. Since the Company's business is entirely
dependent on the requirements of semiconductor companies for independent
packaging foundries, any future downturn in the semiconductor industry is
expected to have an adverse effect on the Company's business, financial
condition and results of operations. In this regard, since late 1996, the
Company's results of operations have been materially adversely affected by
reduced orders from several major customers in the PC graphics segment of the
semiconductor industry.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
Therefore, reserves have been recorded for the difference between net carrying
value at historical costs and estimates of fair market value of the assets.
Since 1996, the Company has experienced a decline in the average selling
prices for its services and expects that average-selling prices for its
services will decline in the future, principally due to intense competitive
conditions. A decline in average selling prices of the Company's services, if
not offset by reductions in the cost of performing those services, would
decrease the Company's gross margins and 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.
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The Company must continue to 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. Furthermore, since the Company's expense levels are
based in part on anticipated future revenue levels, if revenue were to fall
below anticipated levels, the Company's operating results would be materially
adversely affected.
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues for the three month and nine month periods ended October
4, 1998, were $5.8 million and $18.5 million, respectively, compared with $4.2
million and $13.7 million, respectively, for the comparable periods in the
prior fiscal year. The increases in revenues in the 1998 periods are primarily
due to increased orders offset in part by a reduction in average selling prices
due to mix and a decline in selling prices.
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
would be materially adversely affected.
Gross Profit
Cost of revenues includes materials, labor, depreciation and overhead
costs associated with semiconductor packaging. Gross profit for the three and
nine month periods ended October 4, 1998, consisted of losses of $1.1 million
and $4.7 million, respectively, compared with losses of $1.2 million and $3.3
million, respectively, for comparable periods in the prior fiscal year. Gross
profit as a percentage of revenues was a negative 19.2% for the three months
ended October 4, 1998, compared to negative 29.5% for the same period of 1997.
Gross profit was a negative 25.4% for the nine months ended October 4, 1998,
compared to negative 23.7% for the same period in 1997. These declines in
gross profit were primarily the result of lower average selling prices, caused
by package mix and industry competition, and higher costs for depreciation,
labor and manufacturing overhead and low capacity utilization.
Depreciation for certain of the Company's machinery and equipment
acquired prior to 1997 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 five or six year life so
that each quarter the equipment is subject to certain minimum levels of
depreciation. Assets acquired beginning in 1997 are depreciated using the
straight-line method. Depreciation and amortization was $1.1 million and $5.9
million for the three month and nine month periods ended October 4, 1998,
respectively, compared to $1.4 million and $4.4 million, respectively, for the
same periods in 1997. Depreciation expense decreased substantially during the
third quarter of 1998, as a result of the write down of impaired assets
recorded during the second quarter of 1998.
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 decreased 23% to $1.0
million and 19% to $3.1 million for the three and nine month periods ended
October 4, 1998, respectively, over the comparable periods of 1997. These
decreases were due primarily to reduced spending in administration and the
Company's sales and customer service functions.
As a percentage of revenues, selling, general and administrative expenses
decreased from 32.2% for the third quarter of 1997 to 18.0% in the third
quarter of 1998 and from 27.8% for the first nine months of 1997 to 16.6% for
the comparable period in 1998. The decreases in such expenses as a percentage
of revenues were primarily due to the higher revenue level in 1998.
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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 decreased 18.4% to $272,000 and 10.8% to
$905,000 for the three and nine month periods ended October 4, 1998,
respectively, over the comparable periods in 1997. These decreases are due to
reduced spending.
As a percentage of revenues, research and development expenses decreased
from 7.9% in the third quarter of 1997 to 4.7% in the third quarter of 1998,
and from 7.4% for the first nine months of fiscal 1997 to 4.9% for the
comparable period in 1998. The decreases in such expense as a percentage of
revenues reflect the higher revenue level in 1998 and containment of the
absolute level of research and development expenses.
Write Down of Impaired Assets
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
Therefore, reserves have been recorded for the difference between net carrying
value at historical costs and estimates of fair market value of the 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 cancellation 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 are primarily comprised of interest expense
on equipment financing, offset by interest earnings from investments in cash
equivalents and short-term investments. Interest and other income resulted in
net other expense of $204,000 for the three months ended October 4, 1998 and
net other income of $96,000 for the nine months ended October 4, 1998, compared
to net other expense of $338,000 and $750,000 for the three month and nine
month periods ended September 28, 1997, respectively. For the nine months
ended October 4, 1998, interest and other income included a gain of $700,000
from the sale of the land and building not occupied by the Company. See
"Liquidity and Capital Resources". The increase in net other expense is due to
an increased level of borrowing and a reduction in monies invested.
Provision for Income Taxes
The Company did not record a provision for income tax for the three and
nine month periods ended October 4, 1998 and September 28, 1997 as the Company
operated at a loss.
Liquidity and Capital Resources
During the nine months ended October 4, 1998, the Company's net cash used
in operations was $6.4 million. Net cash used in operations was comprised
primarily of a net loss of $27.0 million, partially offset by $5.9 million of
non-cash charges for depreciation and amortization and write down of impaired
assets of $18.2 million and a net decrease in working capital items of $3.4
million. The net decrease in working capital items primarily reflected a $2.6
million reduction in accounts payable and the reclassification of long-term
debt to current liabilities as a result of the covenant non-compliance and the
failure to make scheduled payments, as discussed previously. As of October 4,
1998, the Company had cash and cash equivalents of $6,000.
The Company had capital expenditures of $4.4 million, including $3.1
million under a capital lease, during the first nine months of 1998. The
capital expenditures were incurred primarily for the purchase of production
equipment and improvements to the Company's facilities. The Company expects
to spend approximately $0.1 million on capital expenditures during the
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remainder of 1998 for the acquisition of equipment. 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. During the third quarter of 1997, the Company
borrowed $3.5 million on such term loans for the purchase of production
equipment.
In 1997, 1996 and 1995, the Company entered into borrowing facilities
with a number of lenders, allowing the Company to finance 70% to 80% of the
cost of collateralized machinery and equipment. Borrowings under these
facilities accrued interest at rates ranging from 7.75% to 14.0% with terms
ranging from 36 to 48 months. The Company borrowed an aggregate of $3.5
million, $9.8 million and $4.9 million through these facilities in 1997, 1996
and 1995, respectively.
In March 1997, the Company secured a mortgage loan with an insurance
company, which provided the Company with a $6.7 million five year term loan.
The loan was secured by the real estate and buildings purchased by the Company
in December 1996. The loan accrued interest at 8.5%, and was payable in equal
monthly installments of $58,000, with a balloon payment of $5.9 million due
after five years. The proceeds of this mortgage loan were used to pay off and
retire the $6.5 million real estate loan which was entered into in December
1996 to provide temporary financing for the acquisition of the Company's
building complex. The loan accrued interest at 2.25% over the rate for 30 day
certificates of deposit and was collateralized by a certificate of deposit of
equivalent value.
In December 1997, the Company entered into a line of credit agreement
with a bank that provides, through December 1998, for borrowings up to the
lesser of $5,000,000 or 80% of eligible accounts receivable. At October 4,
1998, $2,135,000 was outstanding under this line of credit. Borrowings under
the line of credit accrue interest at the bank's prime rate (8.5% at
December 31, 1997) plus 1.25% and are collateralized by the assets of the
Company. The agreement requires the Company to maintain certain financial
covenants, including a liquidity ratio, minimum tangible net worth, maximum
debt to tangible net worth, quarterly profitability and prohibits the Company
from the payment of dividends without prior approval by the bank. Since July
5, 1998, the Company has not been in compliance with such covenants.
On January 20, 1998, the Company completed the sale of its facilities,
which consists of land and two buildings with a total of 138,336 square feet of
building space, and agreed to lease back the 82,290 square foot building that
it occupies. Net proceeds from the sale were $7.3 million, net of the
elimination of $6.6 million of mortgage debt, fees, commissions and closing
costs. The results for the first quarter of 1998 include a gain of $700,000
from the sale of the land and building not occupied by the Company. The
remaining gain of approximately $1,400,000 will be amortized as a reduction of
lease expense over the initial ten year term of the lease for the building that
the Company occupies.
During the nine months ended October 4, 1998, the Company utilized $2.6
million in financing activities. This resulted primarily from proceeds from a
revolving line of credit for $2.1 million, offset by payments of notes payable
and capital leases of $2.0 million and $1.0 million, respectively.
In June 1998, the Company entered in a capital lease for approximately
$3.1 million of production equipment. The lease expires in 2002. In
conjunction with the lease, the Company issued warrants to purchase 171,428
shares of common stock at $1.31 per share and are exercisable for seven years.
The warrants were valued at $132,000 using a Black-Scholes valuation model.
At October 4, 1998, the aggregate principal amount outstanding under all
equipment loans was $12.8 million. Certain of the credit facilities require
the Company to maintain certain financial covenants including minimum tangible
net worth, a ratio of total liabilities to tangible net worth, and quarterly
revenues and quarterly income before interest, taxes, depreciation and
amortization (EBITDA). At October 4, 1998, the Company was not in compliance
with such covenants.
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank Term
Note Payable, Equipment Notes Payable and Line of Credit as well as its capital
leases. The Company is in the process of attempting to renegotiate payments
terms related to these debt instruments with the respective parties. Certain
of these debt facilities require that the Company maintain certain financial
covenants. At October 4, 1998, the Company was out of compliance with certain
of these covenants. As a result of the covenant noncompliance and failure to
make scheduled repayments, the entire balance due, $12.8 million, has been
classified as a current liability at October 4, 1998.
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In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement provides, through October 1999, for borrowings up to the lesser of
$2.8 million or 80% of eligible accounts receivable. The bank charges fees of
2%, increasing to 2.5 % effective December 1, 1998, of each invoice factored.
The Company is currently seeking immediate additional financing which is
required in the fourth quarter of 1998 to fund its operations, to address its
capital expenditures. There can be no assurances, however, that financing will
be available on terms acceptable to the Company, if at all. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the Company's stockholders will be substantially diluted and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. If adequate funds are not available
on acceptable terms, the Company's business, financial condition and results of
operations would be materially adversely affected. In such event, the Company
would be required to substantially curtail, cease or liquidate its operations
and reorganize its indebtedness. Although the Company is pursuing additional
equity and debt financing, there can be no assurance that such financing will
be obtained. The Company is also evaluating the possible sale or merger of the
Company, but there can be no assurance that such a transaction can be completed
on terms acceptable to the Company, if at all.
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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 Company's ability to secure
additional financing, 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 to the Company:
Default Upon Senior Securities; Need for Immediate Financing; Risks of
Bankruptcy
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank Term
Note Payable, Equipment Notes Payable and Line of Credit as well as its capital
leases. The Company is in the process of attempting to renegotiate payments
terms related to these debt instruments with the respective parties. Certain
of these debt facilities require that the Company maintain certain financial
covenants. At October 4, 1998, the Company was out of compliance with certain
of these covenants. As a result of the covenant noncompliance and failure to
make scheduled repayments, the entire balance due, $12.8 million, has been
classified as a current liability at October 4, 1998.
The Company is currently seeking immediate additional financing which is
required in the fourth quarter of 1998 to fund its operations, to address its
working capital needs and to provide funding for capital expenditures. There
can be no assurances, however, that financing will be available on terms
acceptable to the Company, if at all. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the Company's
stockholders will be substantially diluted and such equity securities may have
rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. If adequate funds are not available on acceptable
terms, the Company's business, financial condition and results of operations
would be materially adversely affected. In such event, the Company would be
required to substantially curtail, cease or liquidate its operations and
reorganize its indebtedness. Although the Company is pursuing additional
equity and debt financing, there can be no assurance that such financing will
be obtained. The Company is also evaluating the possible sale or merger of the
Company, but there can be no assurance that such a transaction can be completed
on terms acceptable to the Company, if at all.
Delisting of Common Stock on Nasdaq National Market
In June 1998, the Company was notified by The Nasdaq Stock Market that
its Common Stock did not comply with Nasdaq's $1.00 minimum bid price
requirement and that the Company's Common Stock would be delisted. The Company
requested and was granted a hearing, which was held on November 13, 1998. All
action regarding delisting has been stayed pending the results of the hearing.
On November 13, 1998, the Company presented its case to the NASDAQ panel. The
Company was informed that it would be notified within thirty (30) days of the
outcome of the hearing, which could include immediate delisting. If the
Company's Common Stock is delisted, there will be an adverse effect on the
ability of investors to obtain quotations for the Common Stock, the bid-ask
spread for the Common Stock will likely increase and the trading volume in the
Company's Common Stock could be adversely affected.
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 over
capacity. In addition, rapid technological change, evolving industry
standards, intense competition and fluctuations in end user demand characterize
the markets for integrated circuits. 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
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<PAGE>
orders due to a downturn or anticipated downturn in the semiconductor industry
have in the past and could in the future 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 since 1996 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, 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 Company's need for
additional financing, and the uncertainty as to whether such financing can be
obtained, has adversely affected the Company's ability to obtain new customers.
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.
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. Since early 1997, the Company has 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's failure to
achieve high quality production 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 Company believes that it has improved its production quality,
however, there can be no assurance that production quality will continue to
improve in the future.
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<PAGE>
Dependence on Raw Materials Suppliers
To maintain competitive manufacturing operations, the Company must obtain
from its suppliers, 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, suppliers
have extended lead times or limited the supply of required materials to the
Company because of supplier 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 suppliers 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's
ability to respond to increased orders would also be adversely affected if the
Company is not able to obtain increased supplies of key raw materials.
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.
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, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. in Taiwan, ANAM in Korea, PT
Astra in Indonesia and Swire Technologies in Hong Kong. Each of these
companies 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 have also 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. The Company also
faces competition from other 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
principal competitors. The principal elements of competition in the
semiconductor packaging market include delivery cycle times, price, product
performance, quality, production yield, responsiveness and flexibility,
reliability and the ability to design and incorporate product improvements.
The Company believes it principally competes on the basis of shorter delivery
cycle times it can offer customers due to the close proximity of its
manufacturing facility to its customers' operations and the end users of its
customers' products.
Since 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 will continue to 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 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 continue to make investments in
the development and design of such packages, and to develop its expertise and
capacity to manufacture such products. 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
Page 15
<PAGE>
Company resources into such development costs will continue to 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.
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 Company's operations utilize a substantial amount of this
capital equipment. Accordingly, the Company's operations are highly dependent
on its ability to obtain 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.
Management of Operations; New Management Team
The Company's Chief Executive Officer and President joined the Company in
April 1997 and became President and CEO in July 1997. Several of the Company's
other executive officers have joined the Company since then. 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 on anticipated future revenue levels and are relatively fixed in nature
the Company's operating results will continue to be materially adversely
affected if the Company's revenues do not increase significantly, as evidenced
by the Company's results during the first nine months of 1998.
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.
Year 2000 Issue
There is a risk to the Company from unforeseen problems related to the
"Year 2000 issue." The "Year 2000" issue arises because most computer systems
and programs were designed to handle only a two digit year, not a four digit
year. When Year 2000 begins, these computers may interpret "00" as the year
1900 and could either stop processing date related computations or could
process them incorrectly. The Company has completed an assessment of its
information systems and does not anticipate any internal material Year 2000
issues from its own information systems, databases or programs. Certain
software packages are currently being upgraded to compliant versions. The
costs incurred to date and expected to be incurred in the future are not
material to the Company's financial condition or results of operations.
The Company could be adversely impacted by Year 2000 issues faced by
major distributors, suppliers, customers, vendors, and financial organizations
with which the Company interacts. The Company is in the process of determining
Page 16
<PAGE>
the impact those parties that are not Year 2000 compliant may have on the
operations of the Company. Non-compliance by any of the Company's major
distributors, suppliers, customers, vendors, or financial organizations could
result in business disruptions that could have a material adverse affect on the
Company's results of operations, liquidity and financial condition. The
Company plans on developing a contingency plan once it has completed its
assessment of significant external compliance. The contingency plan will be
developed to minimize the Company's exposure to work slowdowns or business
disruptions and any adverse affects on the Company's results of operations.
The contingency plan should be completed by the end of 1998.
Page 17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosure
Interest Rate Risk - The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio is
generally comprised of municipal government securities that mature within one
year. The Company places investments in instruments that meet high credit
quality standards. These securities are subject to interest rate risk, and
could decline in value if interest rates fluctuate. Due to the short duration
and conservative nature of the Company's investment portfolio, the Company does
not expect any material loss with respect to its investment portfolio.
The Company has various debt instruments outstanding that mature by 2002.
Certain of these instruments have interest rates that are based on associated
rates that may fluctuate over time based on economic changes in the
environment, such as LIBOR and the Prime Rate. The Company is subject to
interest rate risk, and could be subjected to increased interest payments if
market interest rates fluctuate. The Company does not expect any changes in
such interest rates to have a material adverse effect on the Company's results
from operations.
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<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 13, 1998, Comerica Bank commenced an action against the
Company in Superior Court, Santa Clara County, California (Case #CV 777252).
Comerica seeks monetary damages of approximately $2,000,000 and recovery of
leased personal property. The Company has agreed to stipulate to the entry of
a Writ of Possession and Comerica Bank has agreed to forbear execution of the
Writ until on or after December 8, 1998.
On September 22, 1998, Heller Financial, Inc. commenced an action against
the Company in Superior Court, Santa Clara County, California (Case #CV
776830). Heller Financial, Inc. seeks monetary damages of approximately
$1,050,000 and recovery of leased personal property. The Company has agreed to
stipulate to the entry of a Writ of Possession and Heller Financial, Inc. has
agreed to forbear execution of the Writ until on or after December 4, 1998.
On September 28, 1998, The CIT Group/Equipment Financing, Inc. commenced
an action against the Company in Superior Court, Santa Clara County, California
(Case #CV 776836). The CIT Group/Equipment Financing, Inc. seeks monetary
damages of approximately $1,250,000 and recovery of leased personal property.
A hearing on the Plaintiff's Application for Writ of Possession is currently
set for November 24, 1998.
The Company does not have any defense against these actions. An adverse
outcome in any of the actions would have a material adverse effect on the
Company and if the Company cannot obtain further extensions from all of these
Plaintiffs, it will be forced to seek protection under the bankruptcy laws.
Item 4. Default Upon Senior Securities
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank Term
Note Payable, Equipment Notes Payable and Line of Credit as well as its capital
leases. The Company is in the process of attempting to renegotiate payments
terms related to these debt instruments with the respective parties. Certain
of these debt facilities require that the Company maintain certain financial
covenants. At October 4, 1998, the Company was out of compliance with certain
of these covenants. As a result of the covenant noncompliance and failure to
make scheduled repayments, the entire balance due, $12.8 million, has been
classified as a current liability at October 4, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 19
<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: November 16, 1998 /s/ Alfred V. Larrenaga
______________________________
Alfred V. Larrenaga
Executive Vice President
and Chief Financial Officer
Page 20
<PAGE>
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<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 INCLUDED IN THE
COMPANY'S THE COMPANY'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDING OCTOBER 4,
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</LEGEND>
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<TOTAL-LIABILITY-AND-EQUITY> 21,695
<SALES> 18,539
<TOTAL-REVENUES> 18,539
<CGS> 23,245
<TOTAL-COSTS> 23,245
<OTHER-EXPENSES> 22,185
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<INTEREST-EXPENSE> 1,304
<INCOME-PRETAX> (26,987)
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