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 April 5, 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 April 21, 1998: 14,003,503
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
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Part I. Financial Information
<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 ......... 7
Part II.Other Information
Item 4. Submission of Matter to a Vote of Security Holders ... 16
Item 6. Exhibits ............................................. 16
Signatures ................................................... 17
</TABLE>
Page 2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Integrated Packaging Assembly Corporation
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
April 5, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $4,034 $2,928
Accounts receivable, net ....................... 3,051 3,096
Inventory....................................... 3,448 2,337
Prepaid expenses and other current assets ...... 1,006 757
------------ ------------
Total current assets ....................... 11,539 9,118
Property and equipment, net ......................... 35,276 46,127
Other assets ........................................ 216 237
------------ ------------
Total assets ............................... $47,031 $55,482
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving bank line ............. .............. 2,000 $ --
Current portion of long term debt .............. 5,757 6,548
Accounts payable ............................... 4,455 5,478
Accrued expenses and other liabilities ......... 2,720 2,969
------------ ------------
Total current liabilities ................. 14,932 14,995
------------ ------------
Long term debt ...................................... 6,813 14,249
------------ ------------
Deferred gain on sale of facilities 1,352 --
------------ ------------
Shareholders' equity:
Common stock ................................... 40,393 40,290
Accumulated deficit ............................ (16,459) (14,052)
------------ ------------
Total shareholders' equity ................ 23,934 26,238
------------ ------------
Total liabilities and shareholders' equity. $47,031 $55,482
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
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Integrated Packaging Assembly Corporation
Condensed Statement of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
April 5, March 31,
1998 1997
-------- --------
<S> <C> <C>
Revenues............................ $6,965 $5,575
Cost of revenues.................... 8,415 6,495
--------- ---------
Gross profit (loss)................. (1,450) (920)
--------- ---------
Operating expenses:
Selling, general &
administrative................... 1,057 1,080
Research & development............ 352 345
--------- ---------
Total operating expenses....... 1,409 1,425
--------- ---------
Operating income (loss)............. (2,859) (2,345)
Interest and other income .......... 909 384
Interest expense ................... (456) (512)
--------- ---------
Income (loss) before
income taxes....................... (2,406) (2,473)
Provision for income taxes.......... -- --
--------- ---------
Net income (loss)................... ($2,406) ($2,473)
========= =========
Per share data:
Net income (loss) per share:
Basic.......................... ($0.17) ($0.18)
========= =========
Diluted........................ ($0.17) ($0.18)
========= =========
Number of shares used to compute
per share data:
Basic.......................... 13,991 13,902
========= =========
Diluted........................ 13,991 13,902
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
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Integrated Packaging Assembly Corporation
Condensed Statement of Cash Flows
Increase (Decrease) Cash
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 5, March 31,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... ($2,406) ($2,473)
ADJUSTENTS:
Depreciation and amortization........................ 2,310 1,484
Gain on sale of facilities, net ..................... (541) --
Changes in assets and liabilities:
Accounts receivable................................ 45 3,148
Inventory.......................................... (1,111) 318
Prepaid expenses and other assets.................. (268) (422)
Accounts payable................................... (1,023) (958)
Accrued expenses and other liabilities............. (249) 172
---------- ----------
Net cash provided by (used in)operating activities... (3,243) 1,269
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment.................. (3,397) (2,107)
Proceeds from sale of facilities, net ................. 7,312 --
---------- ----------
Net cash provided by (used in) investing activities.. 3,915 (2,107)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from revolving bank line ..................... 2,000 --
Payments under capital lease obligations............... (490) (435)
Principal payments on note payable..................... (1,167) (7,422)
Proceeds from note payable............................. -- 6,700
Proceeds from issuance of Common Stock, net............ 91 245
---------- ----------
Net cash provided by (used in) investing activities.. 434 (912)
---------- ----------
NET INCREASE (DECREASE) IN CASH.......................... 1,106 (1,750)
Cash and cash equivalents at beginning of period......... 2,928 15,817
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $4,034 $14,067
========== ==========
Supplemental disclosure of cash flow information
Cash paid for interest ................................ $426 $486
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5
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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, 1997
included in the Company's Form 10-K filed with the Securities and
Exchange Commission.
The results of operations for the quarter ended April 5, 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. BALANCE SHEET COMPONENTS
(In thousands)
<TABLE>
<CAPTION>
April 5, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Inventory
Raw materials $3,207 $2,176
Work in process 241 161
----------- -----------
$3,448 $2,337
=========== ===========
</TABLE>
NOTE 3. INCOME TAXES:
No provision or benefit for income taxes was recorded for the
three months ended April 5, 1998 and March 31, 1997, as the Company
operated at a loss.
NOTE 4. 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 has been restated in
accordance with SFAS 128. Net income (loss) per basic and diluted share
for the quarters ended April 5, 1998 and March 31, 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 April 5, 1998, there were 2,320,00
options and warrants outstanding to purchase common stock at a weighted
average price of $1.50 per share. At March 31, 1997, there were
1,412,000 options and warrants outstanding to purchase common stock at a
weighted average price of $4.01 per share.
Page 6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements contained herein are subject to certain
factors that could cause actual results to differ materially from those
reflected in the forward-looking statements. Such factors include, but
are not limited to, those discussed below and elsewhere in this Report
on Form 10-Q.
Overview
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 which have continued into 1998. As a result of the
operating losses and cost of capital additions, the Company believes that
in addition to existing cash balances, it will need additional financing
in the second quarter of 1998 to meet its projected working capital and
other cash requirements through 1998. 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 could materially and adversely affect revenues, gross profit
and operating income. These factors include the short-term nature of its
customers' commitments, timing and volume of orders relative to the
Company's production capacity, long lead times for the manufacturing
equipment required by the Company, evolutions in the life cycles of
customers' products, timing of expenditures in anticipation of future
orders, lack of a meaningful backlog, effectiveness in managing
production processes, changes in costs and availability of labor, raw
materials and components, costs to obtain materials on an expedited
basis, mix of orders filled, the impact of price competition on the
Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the above factors 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, the markets for
integrated circuits are characterized by rapid technological change,
evolving industry standards, intense competition and fluctuations in end-
user demand. 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.
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 may 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 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.
Page 7
<PAGE>
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 period ended April 5, 1998 and
March 31, 1997, were $7.0 million and $5.6 million, respectively. The
increase in revenues in the 1998 period is primarily due to increased
orders offset in part by a reduction in average 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 could 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 month period ended April 5, 1998 consisted of a $1.5
million loss compared to $0.9 million loss in the comparable period
ended March 31, 1997. Gross profit as a percentage of revenues, or
gross margin, was a negative 20.8% for the quarter ended April 5, 1998
compared to a negative 16.5% for the same quarter of 1997. This decline
in gross profit was 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. The Company expects depreciation in 1998 to be a greater
percentage of revenues than in 1997 due to the higher amounts of
investment in equipment and higher depreciation rates. Depreciation and
amortization was $2.3 million in the quarter ended April 5, 1998,
compared to $1.5 million in the quarter ended March 31, 1997.
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 2.1% to $1,057,000 for the three month period ended
April 5, 1998 versus $1,080,000 in the comparable period in 1997. This
decrease was due primarily to a leveling off in administration and the
Company's sales and customer service functions.
Page 8
<PAGE>
As a percentage of revenues, selling, general and administrative
expenses decreased from 19.4% for the first quarter of 1997 to 15.2% in
the first quarter of 1998. The decrease in such expenses as a percentage
of revenues is primarily due to the higher revenue level in 1998.
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 2.0% to $352,000 for the
three month period ended April 5, 1998 from $345,000 in the comparable
period in 1997.
As a percentage of revenues, research and development expenses
decreased from 6.2% in the first quarter of 1997 to 5.0% in the first
quarter of 1998. The decrease 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.
Interest and Other Income (Expense)
Net interest and other income is primarily comprised of interest
expense on equipment financing, offset by interest earnings from
investments in cash equivalents and short term investments. For the
quarter ended April 5, 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." As a result, interest
and other income resulted in net other income of $453,000 for the three
month period ended April 5, 1998 compared to net other expense of
$128,000 for the comparable period in the prior fiscal year. Interest
expense decreased to $456,000 for the three month period ended April 5,
1998 compared to $512,000 for the comparable period in the prior fiscal
year. This decrease was the result of the decreased level of long term
debt used to acquire property and equipment. Interest income decreased
by $153,000 due to a reduction in monies invested.
Provision for Income Taxes
The Company did not record a provision for income tax for the
three months ended April 5, 1998 and the quarter ended March 31, 1997 as
the Company operated at a loss.
Liquidity and Capital Resources
During the three months ended April 5, 1998, the Company's net
cash used in operations was $3.2 million. Net cash used in operations
was comprised primarily of a net loss of $2.4 million partially offset
by $2.3 million of non-cash charges for depreciation and amortization
and a net decrease in working capital items of $2.6 million. The net
decrease in working capital items primarily reflected a $1.1 million
increase in inventories and $1.0 million reduction in accounts payable.
As of April 5, 1998, the Company had cash and cash equivalents of $4.0
million.
The Company had capital expenditures of $3.4 million during the
first three 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
$7 million on capital expenditures during the remainder of 1998 for the
acquisition of production equipment, primarily related to the Company's
new products, and for equipment to enable the Company to perform its own
plating operations. Most of the Company's production equipment has been
funded either through capital leases or term loans secured by production
Page 9
<PAGE>
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. At April 5, 1998, the
aggregate principal amount outstanding under all equipment loans was
$11.0 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 April 5, 1998, the Company was in compliance
with such covenants.
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 which provides, through December 1998, for
borrowings up to the lesser of $5,000,000 or 80% of eligible accounts
receivable. At April 5, 1998, $2,000,000 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. At April 5, 1998, the
Company was 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.
The Company currently expects to spend up to $7 million for
production equipment and facilities improvements during the remainder of
1998. The Company currently plans to borrow approximately $7 million
through equipment secured borrowings to finance 1998 expenditures.
However, the Company currently does not have commitments with respect to
such financing and there can be no assurance that such financing will be
available on terms acceptable to the Company, if at all. Further, it is
unlikely that the Company will be able to secure substantial additional
equipment financing prior to an infusion of equity capital.
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The Company is currently seeking additional financing in the second
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 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 effected. In such event, the Company would
be required to substantially curtail its operations and reorganize its
current 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 subject to certain financial covenants under its
borrowing facilities including minimum revenues and EBITDA, on a
quarterly basis. In the event future revenue and income levels do not
increase, it is likely that the Company would be out of compliance with
certain of its financial covenants during 1998. In this event, the
Company anticipates receipt of a waiver of the covenants in default from
the respective financial institutions. If the waivers were not received,
certain debt would become currently due and payable and the line of
credit would no longer be available for use.
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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 to the Company:
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 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 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.
Page 12
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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 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, if the Company's revenues do not increase significantly,
the Company's operating results will continue to be materially
adversely affected as evidenced by the Company's results during the first
three months of 1998.
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 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 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 is partially
attributable to product quality issues experienced during 1996. The
Company has taken actions to address these issues and believes that it
has improved its production quality, however, there can be no assurance
that production quality will continue to improve in the future.
Page 13
<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 may 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 could materially and adversely affect the
Company's business, financial condition and results of operations. There
can by no assurance that the Company will be able to reduce its cost per
unit.
Page 14
<PAGE>
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 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.
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 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 15
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Sale of Facilities, filed on January 30, 1998.
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Integrated Packaging Assembly Corporation
Date: May 6, 1998 /s/ Alfred V. Larrenaga
______________________________
Alfred V. Larrenaga
Executive Vice President and
Chief Financial Officer
Page 17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FROM THE CONDENSED STATEMENT OF OPERATIONS, THE
CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE CONDENSED
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE
MONTH PERIOD ENDING APRIL 5, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-05-1998
<PERIOD-TYPE> 3-MOS
<CASH> 4,034
<SECURITIES> 0
<RECEIVABLES> 3,321
<ALLOWANCES> (270)
<INVENTORY> 3,448
<CURRENT-ASSETS> 11,539
<PP&E> 48,146
<DEPRECIATION> (12,870)
<TOTAL-ASSETS> 47,031
<CURRENT-LIABILITIES> 14,932
<BONDS> 0
0
0
<COMMON> 40,393
<OTHER-SE> (16,459)
<TOTAL-LIABILITY-AND-EQUITY> 47,031
<SALES> 6,965
<TOTAL-REVENUES> 6,965
<CGS> 8,415
<TOTAL-COSTS> 8,415
<OTHER-EXPENSES> 1,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 456
<INCOME-PRETAX> (2,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,406)
<EPS-PRIMARY> ($0.17)
<EPS-DILUTED> ($0.17)
</TABLE>
