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 July 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 August 12, 1998: 14,087,940
<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 .......... 8
Item 3. Quantitative and Qualitative
Disclosure about Market Risks................. 18
Part II. Other Information
Item 4. Defaults Upon Senior Securities....................... 19
Item 6. Exhibits and Reports on Form 8-K...................... 19
Signatures ................................................... 20
</TABLE>
Page 2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Integrated Packaging Assembly Corporation
Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
July 5, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................... $2,969 $2,928
Accounts receivable, net...................... 2,920 3,096
Inventory..................................... 2,946 2,337
Prepaid expenses and other current assets..... 726 757
------------ ------------
Total current assets........................ 9,561 9,118
Property and equipment, net....................... 15,575 46,127
Other assets...................................... 258 237
------------ ------------
Total asset................................. $25,394 $55,482
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Revolving bank line........................... $2,000 $--
Current portion of long term debt............. 14,271 6,548
Accounts payable.............................. 2,982 5,478
Accrued expenses and other liabilities........ 2,683 2,969
------------ ------------
Total current liabilities.................. 21,936 14,995
------------ ------------
Long term debt.................................... -- 14,249
------------ ------------
Deferred gain on sale of facilities............... 1,318 --
------------ ------------
Shareholders' equity:
Common Stock.................................. 40,541 40,290
Accumulated deficit........................... (38,401) (14,052)
------------ ------------
Total shareholders' equity................. 2,140 26,238
------------ ------------
Total liabilities and shareholders equity.. $25,394 $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 Six Months Ended
------------------- -------------------
July 5, June 30, July 5, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues............................ $5,759 $3,953 $12,724 $9,528
Cost of revenues.................... 7,901 5,039 16,316 11,534
--------- --------- --------- ---------
Gross profit (loss)................. (2,142) (1,086) (3,592) (2,006)
Operating expenses:
Selling, general & administrative. 976 1,380 2,033 2,460
Research & development............ 281 338 633 683
Write down of impaired assets..... 18,200 3,000 18,200 3,000
--------- --------- --------- ---------
Total operating expenses....... 19,457 4,718 20,866 6,143
--------- --------- --------- ---------
Operating income (loss)............. (21,599) (5,804) (24,458) (8,149)
Interest & other income............. 52 258 961 642
Interest expense.................... (396) (542) (852) (1,054)
--------- --------- --------- ---------
Income (loss) before income taxes.. (21,943) (6,088) (24,349) (8,561)
Provision for income taxes.......... -- -- -- --
--------- --------- --------- ---------
Net income (loss)................... ($21,943) ($6,088) ($24,349) ($8,561)
========= ========= ========= =========
Per share data:
Net income (loss) per share
Basic.......................... ($1.57) ($0.44) ($1.74) ($0.62)
========= ========= ========= =========
Diluted........................ ($1.57) ($0.44) ($1.74) ($0.62)
========= ========= ========= =========
Number of shares used to compute
per share data
Basic.......................... 14,007 13,925 13,999 13,914
========= ========= ========= =========
Diluted........................ 14,007 13,925 13,999 13,914
========= ========= ========= =========
</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>
Six Months Ended
----------------------
July 5, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... ($24,349) ($8,561)
Adjustments:
Depreciation and amortization......................... 4,724 2,966
Write down of impaired assets......................... 18,200 3,000
Gain on sale of facilities, net ...................... (710) --
Changes in assets and liabilities:
Accounts receivable................................. 176 4,519
Inventory........................................... (609) 353
Prepaid expenses and other assets................... (210) 10
Accounts payable.................................... (2,496) 322
Accrued expenses and other liabilities.............. (8) 763
---------- ----------
Net cash provided by (used in) operating activities... (5,282) 3,372
---------- ----------
Cash flows provided by (used in) investing activities:
Acquisition of property and equipment................... (1,086) (6,457)
Net investment in short term investments................ -- 2,024
Proceeds from sale of facilities, net .................. 7,312 --
---------- ----------
Net cash provided by (used in) investing activities... 6,226 (4,433)
---------- ----------
Cash flows provided by (used in) financing activities:
Proceeds from revolving bank line ...................... 2,000 --
Payments under capital lease obligations................ (984) (884)
Payments on note payable................................ (2,014) (8,388)
Proceeds from note payable.............................. -- 6,700
Proceeds from issuance of Common Stock, net............. 95 247
---------- ----------
Net cash provided by (used in) investing activities... (903) (2,325)
---------- ----------
Net increase (decrease) in cash........................... 41 (3,386)
Cash and cash equivalents at beginning of period.......... 2,928 15,817
---------- ----------
Cash and cash equivalents at end of period................ $2,969 $12,431
========== ==========
Supplemental disclosure of noncash financing activities
Acquisition of equipment under capital leases........... $3,139 $--
Issuance of warrants in conjunction with capital lease.. $132 $--
========== ==========
</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
(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 six month periods ended
July 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. 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. At 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, $14,271, has been classified as a
current liability at July 5, 1998. The amount reclassified to current
effective July 5, 1998, was $8,352.
NOTE 2. BALANCE SHEET COMPONENTS
(In thousands)
<TABLE>
<CAPTION>
July 5, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Inventory
Raw materials $2,715 $2,176
Work in process 231 161
----------- -----------
$2,946 $2,337
=========== ===========
</TABLE>
NOTE 4. INCOME TAXES:
No provision or benefit for income taxes was recorded for the
three and six month periods ended July 5, 1998 and June 30, 1997, as the
Company operated at a loss.
Page 6
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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 six month periods ended July 5, 1998 and June 30, 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 July 5, 1998, there were
2,402 options and warrants outstanding to purchase common stock at a
weighted average price of $0.84 per share. At June 30, 1997, there were
1,158 options and warrants outstanding to purchase common stock at a
weighted average price of $2.14 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 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.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements contained herein are subject to certain
factors that could cause actual results to differ materially from those
reflected in the forward-looking statements. Such factors include, but
are not limited to, those discussed below and elsewhere in this Report on
Form 10-Q.
Overview
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 into 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
will need additional financing in the third 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 have in the past and could in the future 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, 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 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
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.
Page 8
<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 and six month periods ended July
5, 1998, were $5.8 million and $12.7 million, respectively, compared with
$4.0 million and $9.5 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 six month periods ended July 5, 1998, consisted of
losses of $2.1 million and $3.6 million, respectively, compared with
losses of $1.1 million and $2.0 million, respectively, for comparable
periods in the prior fiscal year. Gross profit as a percentage of
revenues was a negative 37.2% for the three months ended July 5, 1998,
compared to negative 27.5% for the same period of 1997. Gross profit was
a negative 28.2% for the six months ended July 5, 1998, compared to
negative 21.1% for the same period in 1997. These declines in gross
profit were primarily the result of lower average selling price, 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 $2.4 million and $4.7 million for the
three month and six month periods ended July 5, 1998, compared to $1.5
million and $3.0 million for the same periods in 1997. The Company
expects depreciation expense to substantially decrease during the
remainder 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 29% to $1.0 million and 17% to $2.0 million for the
three and six month periods ended July 5, 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 34.9% for the second quarter of 1997 to 17.0% in
the second quarter of 1998 and from 25.8% for the first six months of
1997 to 16.0% 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.
Page 9
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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 16.9% to $281,000 and 7.3% to
$633,000 for the three and six month periods ended July 5, 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 8.6% in the second quarter of 1997 to 4.9% in the second
quarter of 1998, and from 7.2% for the first six months of fiscal 1997 to
5.0% for the comparable periods 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 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 $320,000 for the three
months ended July 5, 1998 and net other income of $133,000 for the six
months ended July 5, 1998, compared to net other expense of $284,000 and
$412,000 for the three month and six month periods ended June 30 1997,
respectively. For the six months ended July 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". 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 six month periods ended July 5, 1998 and June 30, 1997 as the Company
operated at a loss.
Liquidity and Capital Resources
During the six months ended July 5, 1998, the Company's net cash
used in operations was $5.3 million. Net cash used in operations was
comprised primarily of a net loss of $24.3 million, partially offset by
$4.7 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 $3.1 million. The net decrease in working
capital items primarily reflected a $0.6 million increase in inventories
and $2.5 million reduction in accounts payable. As of July 5, 1998, the
Company had cash and cash equivalents of $3.0 million.
The Company had capital expenditures of $4.2 million, including
$3.1 million under a capital lease, during the first six 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 $1 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
Page 10
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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 July 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 July 5, 1998, the
Company was not 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 six months ended July 5, 1998, the Company utilized
$900,000 in financing activities. This resulted primarily from proceeds
from a revolving line of credit for $2.0 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 July 5, 1998, the aggregate principal amount outstanding under
all equipment loans was $14.3 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 July 5, 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 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, $14.3 million, has been classified as
a current liability at July 5, 1998. The amount reclassified to current
effective July 5, 1998, was $8.4 million.
Page 11
<PAGE>
The Company is currently seeking additional financing in the third
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.
Page 12
<PAGE>
CERTAIN FACTORS AFFECTING OPERATING RESULTS
The Company's operating results are affected by a wide variety of
factors that could materially and adversely affect revenues, gross
profit, operating income and liquidity. These factors include the short
term nature of its customers' commitments, the timing and volume of
orders relative to the Company's production capacity, long lead times for
the manufacturing equipment required by the Company, evolutions in the
life cycles of customers' products, timing of expenditures in anticipation
of future orders, lack of a meaningful backlog, effectiveness in managing
production processes, changes in costs and availability of labor, raw
materials and components, costs to obtain materials on an expedited basis,
mix of orders filled, the impact of price competition on the Company's
average selling prices and changes in economic conditions. 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 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 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, $14.3 million, has been classified as
a current liability at July 5, 1998. The amount reclassified to current
effective July 5, 1998, was $8.4 million.
The Company is currently seeking additional financing in the third
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 had ninety (90) days to
demonstrate compliance with such requirement. The Company requested an
extension of the compliance period, but Nasdaq recently denied the
request. Accordingly, unless the closing bid price of the Company's
Common Stock is equal to or greater than $1.00 for ten (10) consecutive
trading days ending on or prior to September 14, 1998, the Company's
Common Stock will be delisted at the opening of business on September 16,
1998. In addition, after the $18.2 million write down of impaired assets
in the second quarter of 1998, the Company has net tangible assets of
$2.1 million, which is below Nasdaq's minimum maintenance requirements of
$4.0 million. If the Company's Common Stock is delisted, there will be
an adverse affect 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 orders due to a
Page 13
<PAGE>
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 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 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.
Page 14
<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 by no
assurance that the Company will be able to reduce its cost per unit.
Page 15
<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 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 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.
Page 16
<PAGE>
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, 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 six
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 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, customer's 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 party 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.
Page 18
<PAGE>
Part II OTHER INFORMATION
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 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, $14.3 million, has been classified as
a current liability at July 5, 1998. The amount reclassified to current
effective July 5, 1998, was $8.4 million.
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: August 13, 1998 /s/ Alfred V. Larrenaga
______________________________
Alfred V. Larrenaga
Executive Vice President and
Chief Financial Officer
Page 20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FROM THE CONSDENSED 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 SIX
MONTH PERIOD ENDING JULY 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> JUL-05-1998
<PERIOD-TYPE> 6-MOS
<CASH> 2,969
<SECURITIES> 0
<RECEIVABLES> 3,191
<ALLOWANCES> (271)
<INVENTORY> 2,946
<CURRENT-ASSETS> 9,561
<PP&E> 30,797
<DEPRECIATION> (15,222)
<TOTAL-ASSETS> 25,394
<CURRENT-LIABILITIES> 21,936
<BONDS> 0
0
0
<COMMON> 40,541
<OTHER-SE> (38,401)
<TOTAL-LIABILITY-AND-EQUITY> 25,394
<SALES> 12,724
<TOTAL-REVENUES> 12,724
<CGS> 16,316
<TOTAL-COSTS> 16,316
<OTHER-EXPENSES> 20,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 852
<INCOME-PRETAX> (24,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,349)
<EPS-PRIMARY> ($1.74)
<EPS-DILUTED> ($1.74)
</TABLE>
