U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
[ ] 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 77-03090372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2221 Old Oakland Road
San Jose, California 95131-1402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (408) 321-3600
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, .001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 5, 1999, was
approximately $1,164,000. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may under certain
circumstances be deemed to be affiliates. This determination of executive
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 5, 1999 was 14,142,642.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Form 10-K.
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
Part I
Item 1. Business............................................... 3
Item 2. Properties............................................. 11
Item 3. Legal Proceedings...................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 13
Item 6. Selected Financial Data................................ 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk................................................... 23
Item 8. Financial Statements and Supplemental Data............. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 48
Part III
Item 10. Directors and Executive Officers of the Registrant..... 49
Item 11. Executive Compensation................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 49
Item 13. Certain Relationships and Related Transactions......... 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 49
SIGNATURES........................................................... 52
</TABLE>
Page 2
<PAGE>
PART I
------
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
Item 1. Business
- -----------------
Integrated Packaging Assembly Corporation ("IPAC") is a leading
independent North American semiconductor packaging foundry. The Company
receives wafers from its customers and assembles each integrated circuit in a
protective plastic package. The Company's packaging facilities are located in
San Jose, California in close proximity to its customers and the end-users of
its customers' products. Due to intense competitive pressures in the
electronics industry, semiconductor companies are faced with increasingly
shorter product life cycles and therefore have a need to reduce the time it
takes to bring a product to market. The Company believes that its close
proximity to its customers promotes quicker turnaround design, prototype
production and final product delivery to its North American customers,
compared to its principal competitors which are primarily located in Asia.
Manufacturing
Semiconductor Packaging Services
The Company has focused on packages designed for assembly using Surface
Mount Technology ("SMT") in which leads on integrated circuits are soldered to
the surface of the printed circuit board. Within the SMT market, the Company
focuses on high pin-count packages, such as Quad Flat Packages ("QFPs") and
Thin Quad Flat Packages ("TQFPs"). The Company offers twelve different QFP and
TQFP families with body sizes ranging from 7x7 mm to 32x32 mm, and with the
number of leads available in certain package families ranging from 44 to 376
leads. Integrated circuits packaged by the Company are used in the following
applications: personal computers, modems, disk drives, automobiles, cameras
and telecommunications, among others. The Company also offers a limited
number of packages for emerging packaging technologies, such as Ball Grid
Array ("BGA") packages. Since inception, QFPs and TQFPs have accounted for
substantially all of the Company's packaging revenues.
Packaging involves several manufacturing operations, which are highly
automated to facilitate high volume production. The assembly process begins
with the mounting of a finished, tested wafer onto a carrier. After a dicing
saw cuts the wafer into individual die, the cut wafer is moved to a die bonder
which picks each good die off the wafer and bonds it to a lead frame with
epoxy resin. A lead frame is a miniature sheet of metal, generally made of
copper with selective silver plating on which the pattern of input/output
(I/0) leads has been cut. Next, very fine (typically 0.001 inches in
diameter) gold wires are connected to the die and the leads through the use of
automated machines known as wire bonders. These wire leads provide the
electrical path necessary for the device to function. Each die is then
encapsulated in a plastic casing and marked. The leads protruding from the
finished casing are then plated with a tin and lead composition to permit the
leads to be connected to the printed circuit board. At the end of the
packaging process, the leads are trimmed and formed into requisite shapes.
After this packaging process is complete, the devices undergo final inspection
and are prepared for shipment.
The Company has expended substantial resources to significantly expand
its production capacity since inception. The Company shipped approximately
1.6 million devices in 1994, approximately 10.5 million devices in 1995,
approximately 18.1 million devices in 1996, approximately 11.9 million devices
in 1997 and approximately 19.8 million devices in 1998. Since the fourth
quarter of 1996, the Company has had available
Page 3
<PAGE>
manufacturing capacity. The Company's manufacturing capacity utilization is a
function of the mix of different package types produced by the Company at any
one time and the proportion of standard production runs compared to expedited
production runs. Thus, as the Company shifts its production among different
package types or allocates a different amount of available capacity to
standard production runs, the rate of the Company's capacity utilization
changes, at times significantly.
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.
The Company believes that its competitive position depends on its ability
to have sufficient capacity to meet anticipated customer demand. Accordingly,
although the Company currently has available manufacturing capacity, the
Company will continue to selectively invest to expand such capacity,
particularly through the acquisition of capital equipment, including equipment
for new packages (e.g. BGA and CSP). There can be no assurance that the
Company will be able to utilize such capacity, that the cost of such expansion
will not exceed management's current estimates or that such capacity will not
exceed the demand for the Company's services. In addition, expansion of the
Company's manufacturing capacity will continue to significantly increase its
fixed costs, and the future profitability of the Company will depend on its
ability to utilize its manufacturing capacity in an effective manner. The
Company's inability to generate the additional production volume necessary to
fully utilize its capacity had a material adverse effect on its business,
financial and results of operation during 1997 and 1998 and would continue to
have a material adverse effect on the Company's future business, financial
condition and results of operations.
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in
Asia or Europe. The Company's operations are significantly dependent upon the
Company's ability to obtain capital equipment for its manufacturing operations
in a timely manner. In this regard, the Company spent $4.6 million, including
$3.1 million under a capital lease, in 1998 and expects to spend up to $3.0
million to purchase capital equipment in 1999. The Company currently
purchases capital equipment from a limited group of suppliers including Dai-
Ichi Seiko Co., Ltd., ESEC SA and Kaijo Corporation. The Company has no long
term agreement with any such supplier and acquires such equipment on a
purchase order basis. The market for capital equipment used in semiconductor
packaging has at times been characterized by intense demand, limited supply
and long delivery cycles. The Company's dependence on such equipment
suppliers poses 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 operations could be materially adversely affected. In
this regard, in the second half of 1996, the Company experienced problems with
the performance of certain capital equipment which resulted in manufacturing
inefficiencies. These equipment problems had a material adverse effect on the
Company's financial results in the fourth quarter of 1996. Any further
problems with such capital equipment or any prolonged delay in equipment
shipments by key suppliers or an inability to locate alternative equipment
suppliers could have a material adverse effect on the Company's business,
financial condition and results of operations and could result in damage to
customer relationships. Moreover, increased levels of demand in the capital
equipment market may cause an increase in the price of equipment, further
lengthen delivery cycles and
Page 4
<PAGE>
limit the ability of suppliers to adequately service equipment following
delivery, any of which could have an adverse effect on the Company's business,
financial condition or results of operations. In addition, adverse
fluctuations in foreign currency exchange rates, particularly the Japanese
yen, could result in increased prices for capital equipment purchased by the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company currently outsources some of its electroplating of the copper
leads protruding from the plastic moldings with a tin and lead composition
from International Lead Frame Corporation, a subsidiary of Mitsui High-Tec,
Inc., and Hytek Finishes, Inc. The Company has no long term agreement with
either supplier and such services are provided on a purchase order basis.
From time to time, the Company's plating subcontractors have experienced
significant manufacturing problems. There can be no assurance that the
Company's subcontractors will not experience manufacturing problems in the
future or that such problems will not result in increased costs or production
delays which could have a material adverse effect on the Company's business,
financial condition and results of operations. In 1998, the Company installed
an advanced electroplating system at a leased facility in Milpitas,
California, approximately 2 miles from the Company's main facility. The
Company currently plates approximately 70% of its devices at this facility.
Quality Control
The Company believes that total quality management is a vital component
of customer satisfaction and internal productivity. The Company has
established quality control systems, which are designed to maintain acceptable
manufacturing yields at high volume production. The Company has also
developed a sophisticated proprietary software program for material resource
planning, shop floor control, work in process tracking, statistical process
control and product costing. The Company obtained certification for its
packaging operations pursuant to ISO 9002 in December 1996.
As of December 31, 1998, the Company's quality control staff consisted of
10 engineers, technicians and other employees who monitor the Company's design
and production processes in order to ensure high quality. These employees
include line inspectors who work with members of the production staff to
conduct examination, testing and fine-tuning of products during the production
process. Quality control personnel are involved from initial design to
production. The quality control staff also collects and analyzes data from
various stages of the production process which is used by the Company for
statistical process control.
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, use of
defective raw materials, defective plating services and inadequate sample
testing. From time to time, the Company has experienced lower than
anticipated production yields as a result of such factors. The Company's
failure to maintain high quality production standards or acceptable production
yields would likely result in loss of customers, delays in shipments,
increased costs, cancellation of orders and product returns for rework, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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
Page 5
<PAGE>
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.
Marketing and Sales
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 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
Page 6
<PAGE>
results of operations.
The Company's marketing and sales efforts are focused on North American
semiconductor companies that design or manufacture IC devices which are used
in applications such as personal computers, modems, disk drives and
telecommunication products. Within such markets, the Company emphasizes
packaging complex, high pin-count products. The Company sells its services
directly through its sales and customer support organization. The Company
assists its customers in evaluating designs with respect to manufacturability
and when appropriate recommends design changes to reduce manufacturing costs
and lead times. The Company also offers lead frame design services for a fee.
To date, the Company has been substantially dependent on a relatively
small number of customers. Specifically, Atmel, Cirrus Logic and Ford
accounted for 39%, 11%, and 11%, respectively, of the Company's revenues in
1998. Cirrus Logic, Intel Corporation and Atmel accounted for 17%, 16% and
14%, respectively, of the Company's revenues in 1997. Cirrus Logic, Tseng
Laboratories, and Intel Corporation accounted for 32%, 17% and 14%,
respectively, of the Company's revenues in 1996. The Company anticipates that
significant customer concentration will continue, although the companies which
constitute the Company's largest customers may change from period to period.
All of the Company's customers operate in the cyclical semiconductor
business and their order levels may vary significantly from period to period.
In addition, 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. In this regard, Ford recently announced that
it will stop manufacturing the automotive components that the Company
packages, by the end of 1999. As a result, the Company does not expect any
significant revenue from Ford during the second half of 1999. There can be no
assurance that adverse developments in the semiconductor industry will not
adversely affect the Company's business, financial condition and results of
operations. 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. The Company ships
its products in accordance with customer purchase orders and upon receipt of
semiconductor wafers from its customers. The Company generally ships products
within one to seven days after receiving the customer's wafers, and,
accordingly, the Company has not, to date, had a material backlog of orders.
The Company expects that revenues in any quarter will be substantially
dependent upon orders received in that quarter. The Company's expense levels
are based in part on its expectations of future revenues and the Company may
be unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
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
Page 7
<PAGE>
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 continue to 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.
Research and Development
The Company's research and development efforts are focused on improving
the efficiency and capabilities of its production processes, and on developing
new packages by making improvements upon commercially available materials and
technology. The Company's research and development efforts are focused on
improving existing technology, such as developing thermally enhanced QFPs that
result in better heat dissipation, and emerging packaging technologies, such
as BGA packages that provide for an increased number of leads per device
without increasing the size of the functional integrated circuit and Chip
Scale Packaging ("CSP"). Although the Company did not ship significant
quantities of BGA devices in 1998, it believes that the increased pin count
made available by BGA technology is an important technology that will enable
the Company to provide new packaging services to its customers. The Company
also works closely with the manufacturers of its packaging equipment in
designing and modifying the equipment used in the Company's production
process.
As of December 31, 1998, the Company employed 5 persons in research and
development activities. In addition, other management and operational
personnel are involved in research and development activities. The Company
supplements its research and development efforts with alliances and technology
licensing agreements. For example, the Company is a member of an ARPA-TRP
consortium working to enhance cooperation and participation by United States
companies in assembly and packaging technology. In 1998, 1997 and 1996, the
Company's research and development expenses were approximately $1,101,000,
$1,276,000, and $1,053,000, respectively. The Company expects to continue to
invest significant resources in research and development.
The Company has focused its manufacturing resources on plastic QFPs for
use with SMT, and the Company has neither the capability nor the intent to
provide services to other substantial segments of the semiconductor packaging
market. For example, the Company has no capacity to manufacture packages for
use with PTH technology, nor does the Company presently intend to manufacture
packages using materials other than plastic, such as ceramic. BGA packaging
currently represents a very small, but increasing, portion of the Company's
overall revenues and a relatively small portion of the overall semiconductor
packaging market. Technological change in the semiconductor packaging
industry is continuous and in the future semiconductor manufacturers are
expected to require increased technological and manufacturing expertise. The
introduction of new packaging technologies, a reduction or shift away from
QFP's, or the failure of the market for BGA packaging to develop would result
in a material adverse effect on the Company's business, financial condition
and results of operations.
Intellectual Property
The Company's success depends in part on its ability to obtain patents
and licenses and to preserve other intellectual property rights relating to
its manufacturing processes. As of December 31, 1998, the Company held ten
U.S. patents, which expire, between 2012 and 2015, and four additional patent
applications have been filed and are pending. The Company expects to continue
to file patent applications when appropriate to protect
Page 8
<PAGE>
its proprietary technologies; however, the Company believes that its continued
success depends primarily on factors such as the technological skills and
innovation of its personnel rather than on its patents. The process of
seeking patent protection can be expensive and time consuming. There can be
no assurance that patents will issue from pending or future applications or
that, if patents are issued, they will not be challenged, invalidated or
circumvented, or that rights granted thereunder will provide meaningful
protection or other commercial advantage to the Company. Moreover, there can
be no assurance that any patent rights will be upheld in the future or that
the Company will be able to preserve any of its other intellectual property
rights.
As is typical in the semiconductor industry, the Company may receive
communications from third parties asserting patents on certain of the
Company's technologies. The Company has received one such letter from a
competitor. However, in this case and in the event any other third party were
to make a valid claim and a license were not available on commercially
reasonable terms, the Company's business, financial condition and results of
operations could be materially and adversely affected. Litigation, which
could result in substantial cost to and diversion of resources of the Company,
may also be necessary to enforce patents or other intellectual property rights
of the Company or to defend the Company against claimed infringement of the
rights of others. The failure to obtain necessary licenses or the occurrence
of litigation relating to patent infringement or other intellectual property
matters could have a material adverse effect on the Company's business,
financial condition and results of operations.
Environmental Matters
The semiconductor packaging process involves a significant amount of
chemicals and gases which are subject to extensive governmental regulations.
For example, liquid waste is produced at the stage at which silicon wafers are
diced into chips with the aid of diamond saws and cooled with running water.
In addition, excess materials on leads and moldings are removed from packaged
semiconductors in the trim and form process. The Company has installed
equipment to collect certain solvents used in connection with its
manufacturing process and has contracted with independent waste disposal
companies to remove such hazardous material.
In 1998, the Company installed an advanced electroplating system at a
leased facility in Milpitas, California. This plating operation involves the
use of significant quantities of certain hazardous substances. Although the
Company has designed procedures to ensure such materials are handled in
compliance with applicable regulations, there can be no assurance that the
operation of such facility will not expose the Company to additional costs in
complying with environmental regulations or result in future liability to the
Company.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals used in the Company's
manufacturing process and on the facility occupied by the Company. The
Company believes that its activities conform to present environmental and land
use regulations applicable to its operations and its current facility.
Increasing public attention has, however, been focused on the environmental
impact of semiconductor manufacturing operations and the risk to neighbors of
chemical releases from such operations. There can be no assurance that
applicable land use and environmental regulations will not in the future
impose the need for additional capital equipment or other process requirements
upon the Company or restrict the Company's ability to expand its operations.
The adoption of new ordinances or similar measures or any failure by the
Company to comply with applicable environment and land use regulations or to
restrict the discharge of hazardous substances could subject the Company to
future liability or cause its manufacturing operations to be curtailed or
suspended.
Employees
As of December 31, 1998, the Company had 245 full time employees, 218 of
whom were engaged in manufacturing, 5 in research and development, 8 in sales
and customer service and 14 in finance and
Page 9
<PAGE>
administration. The Company's employees are not represented by any collective
bargaining agreement, and the Company has never experienced a work stoppage.
The Company believes that its employee relations are good. The success of the
Company's future operations depends in large part on the Company's ability to
attract and retain highly skilled technical, manufacturing and management
personnel. There can be no assurance that the Company will be successful in
attracting and retaining key personnel.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position(s)
- ------------------------ ----- -----------------------------------------
Patrick Verderico 55 President, Chief Executive Officer and
Director
Ernest G. Barrieau II 43 Executive Vice President, Sales and
Marketing
Gerald K. Fehr 61 Executive Vice President, Operations
and Chief Technology Officer
Alfred V. Larrenaga 51 Executive Vice President, Finance and
Chief Financial Officer
Patrick Verderico joined the Company in April 1997 as its Chief Operating
Officer and was appointed the Company's President and Chief Executive Officer
and a Director in July 1997. From 1996 to 1997, Mr. Verderico was Chief
Operating Officer and Executive Vice President of Maxtor Corporation, a disk
drive manufacturer. From 1994 to 1996, Mr. Verderico was Chief Financial
Officer and Vice President Finance and Administration of Creative Technology,
a multi media products company. From 1992 to 1994, Mr. Verderico was Chief
Financial Officer and Vice President Finance and Administration of Cypress
Semiconductor. Prior to 1992, Mr. Verderico held various management positions
in finance and operations with Coopers & Lybrand, Philips Semiconductors and
National Semiconductor. Mr. Verderico is also a Director of Catalyst
Semiconductor and Micro Component Technology, Inc.
Ernest G. Barrieau joined the Company in October 1997 as its Executive
Vice President, Sales and Marketing. From 1996 to 1997, Mr. Barrieau was Vice
President North American Sales of Alphatec Group, a semiconductor packaging
company. From 1991 to 1996, Mr. Barrieau was Corporate Vice President World
Wide Sales and Marketing, and Director of Thai Micro Systems, a semiconductor
packaging company. Prior to 1991, Mr. Barrieau held various management
positions in sales and operations with Amkor Electronics and Fairchild
Semiconductor.
Gerald K. Fehr is a co-founder of the Company and has served as Vice
President, Technology of the Company since March 1993 and Executive Vice
President, Operations and Chief Technology Officer since December 1997. From
January 1991 to March 1993, Dr. Fehr served as an independent consultant in
the semiconductor packaging industry. From March 1981 to January 1991, Dr.
Fehr served as Director of Packaging and Assembly for LSI Logic, Inc., a
semiconductor company. From June 1978 to March 1981, Dr. Fehr served as
Manager of Packaging Operations of Burroughs, a semiconductor company. From
May 1975 to June 1978, Dr. Fehr served as Manager of Packaging Operations of
Fairchild, a semiconductor corporation. From 1968 to 1975, Dr. Fehr served as
Manager of Assembly and Packaging for Intel Corporation.
Alfred V. Larrenaga joined the Company in August 1997 as Vice President,
Finance and Chief Financial Officer and became Executive Vice President,
Finance and Chief Financial Officer in April 1998. From 1988 to 1997, Mr.
Larrenaga was Senior Vice President and Chief Financial Officer of Southwall
Technologies Inc., a thin film technology company. Prior to 1988, Mr.
Larrenaga held various management positions in finance with Asyst Technologies
Inc., the Farinon Division of Harris Corporation and Arthur Andersen & Co.
LLP.
Page 10
<PAGE>
The Company's success depends to a significant extent upon the continued
service of its key management and technical personnel, each of whom would be
difficult to replace. The competition for qualified employees is intense, and
the loss of the services of key personnel or the inability to attract, retain
and motivate qualified new personnel could have a material adverse effect on
the Company's business, financial condition and results of operations.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
Item 2. Properties
- -------------------
In January 1998, the Company sold its facility, which consisted of land
and two buildings comprising approximately 138,000 square feet, and entered
into a lease, with a initial term of ten years, for the approximately 82,000
square foot building which it occupies and it uses for its manufacturing
operations, executive offices and product development. In November 1997, the
Company leased a separate 2,500 square foot building, approximately 2 miles
from the Company's principal facility, for its advanced electroplating system.
The Company believes its existing facilities are adequate to meet its needs
for the foreseeable future. Since 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.
Item 3. Legal Proceedings
- --------------------------
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities
require that the Company maintain certain financial covenants. The Company
has been out of compliance with certain of these covenants since the second
quarter of 1998. As a result of the covenant noncompliance and failure to
make scheduled repayments, the Company is in default under these agreements.
On October 13, 1998, Comerica Bank commenced an action against the
Company in Superior Court, Santa Clara County, California (Case #CV 777252).
Comerica seeks monetary damages of approximately $2,000,000 and recovery of
leased personal property. The Company has stipulated to the entry of a Writ
of Possession and Comerica Bank has agreed to forbear execution of the Writ
until after May 31, 1999.
On September 22, 1998, Heller Financial, Inc. commenced an action against
the Company in Superior Court, Santa Clara County, California (Case # CV
776830). Heller Financial, Inc. seeks monetary damages of approximately
$1,050,000 and recovery of leased personal property. The Company has
stipulated to the entry of a Writ of Possession and Heller Financial, Inc. has
agreed to forbear an execution of the Writ until after May 31, 1999.
On September 28, 1998, The CIT Group/Equipment Financing, Inc. commenced
an action against the Company in Superior Court, Santa Clara County,
California (Case # CV 776836). The CIT Group/Equipment Financing, Inc. seeks
monetary damages of approximately $1,250,000 and recovery of leased personal
property. The Company has stipulated to the entry of a Writ of Possession and
the CIT Group/Equipment Financing, Inc. has agreed to forbear execution of the
Writ until after May 31, 1999.
On November 18, 1998, Transamerica Business Credit Corporation commenced
an action against the Company in Superior Court, Santa Clara County,
California, (Case # CV778142). Transamerica seeks monetary damages of
approximately $3,800,000 and recovery of leased personal property. The
Company has
Page 11
<PAGE>
stipulated to the entry of a Writ of Possession and Transamerica has agreed to
forbear execution of the Writ until after May 31, 1999.
On November 24, 1998, Phoenix Leasing Incorporated commenced an action
against the Company in Superior Court, San Francisco County, California (Case
#CV999461). Phoenix seeks monetary damages of approximately $240,000 and
recovery of leased personal property. The Company has stipulated to the entry
of a Writ of Possession and Phoenix Leasing has agreed to forbear the
execution of the Writ until after May 31, 1999.
The Company has also entered into forbearance agreements through May 31,
1999 with three other secured creditors who have not yet commenced litigation
against the Company.
The Company does not have any material defenses to these actions. An
adverse outcome in any of these actions would have a material adverse effect
on the Company. If the forbearance agreements with the creditors do not
remain in effect, the Company will be forced to seek protection under the
bankruptcy laws or cease operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable.
Page 12
<PAGE>
Part II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company effected the initial public offering of its Common Stock on
February 28, 1996. As of February 11, 1999, there were approximately 1,500
beneficial owners of the Company's Common Stock. The Company's Common Stock
was delisted from the Nasdaq Stock Market in November 1998. The Company's
Common Stock is listed for quotation on the OTC Bulletin Board under the
Symbol "IPAC." The following table sets forth for the periods indicated, the
high and low prices of the Company's Common Stock.
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
First Quarter......................... $8.50 $3.50
Second Quarter........................ 5.00 2.50
Third Quarter......................... 4.00 2.00
Fourth Quarter........................ 2.50 0.50
Fiscal Year Ended December 31, 1998
First Quarter......................... $1.59 $0.69
Second Quarter........................ 1.37 0.50
Third Quarter......................... 1.00 0.13
Fourth Quarter........................ 0.25 0.06
</TABLE>
The trading price of the Company's Common Stock is expected to continue
to be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
semiconductor industry, changes in earnings estimates or recommendations by
analysts, the failure of the Company to meet or exceed published earnings
estimates or other events or factors. In addition, the public stock markets
have experienced extreme price and trading volume volatility in recent months.
This volatility has significantly affected the market prices of securities of
many high technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future.
Page 13
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, (1)
-------- -------- -------- --------- ---------
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $3,451 $20,764 $36,402 $19,744 $23,281
Cost of revenue................. 3,438 15,627 28,840 24,089 29,114
-------- -------- -------- --------- ---------
Gross profit (loss)............. 13 5,137 7,562 (4,345) (5,833)
Operating expenses:
Selling, general and
administrative.............. 1,309 2,229 3,488 5,167 4,068
Research and development...... 170 694 1,053 1,276 1,101
Provision for impairment
of assets.................... -- -- -- 3,000 18,200
-------- -------- -------- --------- ---------
Total operating expenses.... 1,479 2,923 4,541 9,443 23,369
-------- -------- -------- --------- ---------
Operating income (loss)......... (1,466) 2,214 3,021 (13,788) (29,202)
Interest and other income....... 54 551 1,210 971 1,209
Interest expense................ (674) (1,074) (1,384) (2,185) (1,783)
-------- -------- -------- --------- ---------
Income (loss) before income
taxes......................... (2,086) 1,691 2,847 (15,002) (29,776)
Provision for income taxes...... -- (141) (530) -- --
-------- -------- -------- --------- ---------
Net income (loss)...............$(2,086) $1,550 $2,317 $(15,002) $(29,776)
======== ======== ======== ========= =========
Diluted net income (loss)
per share (1)................. ($1.02) $0.16 $0.16 ($1.08) ($2.12)
======== ======== ======== ========= =========
Number of shares used to
compute diluted per share
data (1)...................... 2,051 9,603 14,157 13,898 14,046
======== ======== ======== ========= =========
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
Balance Sheet Data:
Working capital............... $2,075 $4,773 $15,614 ($5,877) ($16,086)
Total assets.................. 13,310 28,260 69,639 55,482 18,728
Long-term obligations /
deferred gains.............. 5,371 7,015 16,926 14,249 1,249
Mandatorily redeemable
convertible preferred stock. 8,020 15,981 -- -- --
Total shareholders' equity
(deficit)................... (2,764) (918) 40,761 26,238 (3,207)
</TABLE>
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine shares used in computing per share amounts.
Page 14
<PAGE>
Item 7. 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 as follows and elsewhere in this Report on Form 10-K.
Overview
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and
resultant underabsorption of fixed costs resulted in operating losses that
have continued throughout 1998. At the end of the second quarter of 1998, the
Company ceased making scheduled repayments of its debt balance outstanding
relating to its Equipment Notes Payable and its capital leases. Certain of
these debt facilities require that the Company maintain certain financial
covenants. The Company has been out of compliance with certain of these
covenants since the second quarter of 1998. As a result of the covenant
noncompliance and failure to make scheduled repayments, the entire balance due
has been classified as a current liability since June 1998. Certain of the
Company's secured creditors commenced legal actions against the Company
seeking monetary damages and recovery of the financed equipment. In December
1998 the Company entered into a $7 million bank line of credit that is
guaranteed by a third party and the Company obtained forbearance agreements
from its secured creditors through May 31, 1999. The forbearance agreements
require, among other things, that the Company make monthly payments through
May 31, 1999. The Company does not have any material defenses against the
legal actions brought by its secured creditors. An adverse outcome in any of
the actions would have a material adverse effect on the Company and if the
forbearance agreements do not remain in effect for each of these lenders, the
Company will be forced to seek protection under the bankruptcy laws or cease
operations. As a result of the operating losses and cost of capital
additions, the Company is currently seeking immediate additional financing to
meet its projected working capital and other cash requirements. The Report of
Independent Accountants included on page 25 contains a going concern
statement.
The Company's operating results are affected by a wide variety of factors
that have in the past and could in the future materially and adversely affect
revenues, gross profit and operating income. These factors include the
Company's ability to secure additional financing, the short-term nature of its
customers' commitments, timing and volume of orders relative to the Company's
production capacity, long lead times for the manufacturing equipment required
by the Company, evolutions in the life cycles of customers' products, timing
of expenditures in anticipation of future orders, lack of a meaningful
backlog, effectiveness in managing production processes, changes in costs and
availability of labor, raw materials and components, costs to obtain materials
on an expedited basis, mix of orders filled, the impact of price competition
on the Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the preceding 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
Page 15
<PAGE>
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.
To date, the Company has been substantially dependent on a relatively
small number of customers. Specifically Atmel, Cirrus Logic and Ford
accounted for 39%, 11%, and 11%, respectively, of the Company's revenues in
1998. Cirrus Logic, Intel Corporation and Atmel accounted for 17%, 16% and
14%, respectively, of the Company's revenues in 1997. Cirrus Logic, Tseng
Laboratories, and Intel Corporation account for 32%, 17%, and 14%,
respectively, of the Company's revenues in 1996. The Company anticipates
significant customer concentration will continue, although the companies which
constitute the Company's largest customer may change from period to period.
In this regard, Ford recently announced that it will stop manufacturing the
automotive component that the Company packages, by the end of 1999. As a
result, the Company does not expect any significant revenue from Ford during
the second half of 1999.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
charges 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 estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
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.
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.
Page 16
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain items
in the Company's statement of operations as a percentage of revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0%
Cost of revenues.......................... 79.2 122.0 125.0
---------- ----------- -----------
Gross profit (loss)....................... 20.8 (22.0) (25.0)
Operating expenses:
Selling, general and administrative.... 9.6 26.2 17.5
Research and development............... 2.9 6.4 4.7
Provision for impairment of assets..... -- 15.2 78.2
---------- ----------- -----------
Total operating expenses............ 12.5 47.8 100.4
---------- ----------- -----------
Operating income (loss)................... 8.3 (69.8) (125.4)
Interest and other income................. 3.3 4.9 5.2
Interest expense.......................... (3.8) (11.1) (7.7)
---------- ----------- -----------
Income (loss) before income taxes......... 7.8 (76.0) (127.9)
Provision for income taxes................ (1.4) -- --
---------- ----------- -----------
Net income (loss)......................... 6.4% (76.0)% (127.9)%
========== =========== ===========
</TABLE>
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues increased 18% to $23.3 million in 1998, from $19.7
million in 1997. Revenues decreased 46% to $19.7 million in 1997, from $36.4
million in 1996. The increase in revenues in 1998 was primarily due to
increased orders offset in part by a reduction in average selling prices due
to changes in product mix and a decline in selling prices. The decrease in
1997 revenues was primarily due to lower orders from customers, coupled with
operational problems in quality and delivery.
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 (Loss)
Cost of revenues includes materials, labor, depreciation and overhead
costs associated with semiconductor packaging. Gross (loss) increased to
$(5.8) million in 1998 from ($4.3) million in 1997. Gross profit was $7.6
million in 1996. Gross profit (loss) as a percentage of revenues was (25.0%)
in 1998, (22.0%) in 1997 and 20.8% in 1996. These declines in gross profit
were primarily the result of lower average selling prices, caused by changes
in product mix and industry competition, and higher costs for depreciation,
labor and manufacturing overhead and low capacity utilization.
Depreciation for certain production 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
Page 17
<PAGE>
divided by the estimate of total units to be produced over its life following
commencement of use. Such estimate is reassessed when facts and circumstances
suggest a revision may be necessary. Based upon reduced utilization of
machinery and equipment in relation to plan, the estimate for total throughput
was reduced in late 1996 causing the depreciation rate per unit to increase in
late 1996. Such higher depreciation rate continued into 1997 and 1998. In
all cases, the asset will be fully depreciated by the end of its estimated six
year life. Compared with straight line depreciation, the units of production
method generally results in lower depreciation expense during the early life
of the equipment and relatively higher depreciation expense once the equipment
is in full production. All machinery and equipment acquired after 1996 is
depreciated using the straight line depreciation method. After the write down
of impaired assets (see "Write Down of Impaired Assets" on page 18) in June
1998, depreciation expense for the second half of 1998 was significantly lower
than the first half 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
facilities costs. Selling, general and administrative expenses were $4.1
million in 1998, $5.2 million in 1997 and $3.5 million in 1996. The decrease
in 1998, compared to 1997, was due primarily to reduced spending in
administration and sales. The increase in 1997, compared to 1996, was due
primarily to increases in staff, marketing efforts, and facilities to support
the Company's expansion.
As a percentage of revenues, selling, general and administrative expenses
decreased to 17.5% in 1998 compared to 26.2% in 1997. In 1996, the percentage
was 9.6%. The fluctuation in percentages reflects the changes in absolute
spending and revenue.
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 were $1.1 million in 1998, $1.3 million in
1997, and $1.1 million in 1996.
As a percentage of revenues, research and development expenses were 4.7%
in 1998, 6.4% in 1997 and 2.9% in 1996. The changes in such expenses as a
percentage of revenues reflected changes in absolute spending and revenue.
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 estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
During the second quarter of 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.
Page 18
<PAGE>
Interest and Other Income
Interest income in 1998, 1997, and 1996 was $83,000, $573,000, and
$982,000, respectively. The reductions were due to lower investment balances,
which resulted from the losses from operations and capital expenditures.
Interest income for 1996, was the result of interest earned on proceeds from
the Company's initial public offering which was completed in February 1996. In
1998, 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".
In 1997 and 1996, other income included $124,000 and $228,000, which was
earned for development work with a semiconductor industry consortium. In
1997, other income also included approximately $270,000 from the sublease of a
portion of the Company's facilities complex, which was sold in 1998.
Interest Expense
Interest expense consists primarily of interest payable on bank debt, and
capital leases and term loans secured by equipment. The Company has financed
its manufacturing equipment primarily through capital leases and term loans
secured by equipment with terms ranging from four to five years, and carrying
imputed interest rates ranging from 7.5% to 15.5% per annum. Interest
expense for 1998, 1997, and 1996 was $1.8 million, $2.2 million and $1.4
million, respectively.
Provision for Income Taxes
In 1998 and 1997, due to the losses from operations, the Company recorded
no tax provision. The Company's provision for taxes in 1996 was $530,000,
representing an effective tax rate of approximately 19%. The effective tax
rate represents alternative minimum tax ("AMT") resulting from limits on the
use of net operating loss carry forwards for AMT purposes and tax accelerated
depreciation on all machinery and equipment.
Liquidity and Capital Resources
During 1998, the Company's net cash used in operations was $6.7 million.
Net cash used in operations was comprised primarily of a net loss of $29.8
million, partially offset by $7.0 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 $2.1 million. The net decrease in
working capital items primarily reflected a $3.3 million reduction in accounts
payable and the reclassification of long-term debt to current liabilities as a
result of the covenant non-compliance and the failure to make scheduled
payments, as discussed previously. As of December 31, 1998, the Company had
no cash balance and is operating under bank lines obtained in October and
December 1998.
The Company had capital expenditures of $4.6 million, including $3.1
million under a capital lease, during 1998. The capital expenditures were
incurred primarily for the purchase of production equipment and improvements
to the Company's facilities. Most of the Company's production equipment has
been funded either through capital leases or term loans secured by production
equipment. 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 1997, the
Company borrowed $3.5 million on such term loans for the purchase of
production equipment.
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
Page 19
<PAGE>
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 provided, for borrowings up to the lesser of $5,000,000 or
80% of eligible accounts receivable. Borrowings under the line of credit
accrued interest at the bank's prime rate (8.5% per annum at December 31,
1997) plus 1.25% and were 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 prohibited the Company from
the payment of dividends without prior approval by the bank. Since July 5,
1998, the Company has not been in compliance with such covenants. This line
was replaced with an accounts receivable factoring agreement in October 1998.
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 sale and lease back transaction resulted in a gain of $2,100,000,
of which $700,000 from the sale of the land and building not occupied by the
Company was recognized in the first quarter of 1998. 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.
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 December 31, 1998, the aggregate principal and interest amount
outstanding under all equipment loans was $12.9 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 December 31, 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 balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable. The bank charges an administration fee of 0.5% of the gross
accounts receivable factored and a monthly interest charge of 1.25% of the
average balance owed.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999. The line
provides for monthly borrowings and interest acquired at the bank's prime
rate, (7 3/4% per annum at December 31, 1998).
Page 20
<PAGE>
Certain of the Company's secured creditors commenced legal actions
against the Company seeking monetary damages and recovery of the financed
equipment. In connection with the December 1998 bank financing, the Company
obtained forbearance agreements from the secured creditors through May 31,
1999. The forbearance agreements require, among other things, that the
Company make monthly payments through May 31, 1999.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, 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, preference 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.
Year 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of a
single century, the 1900s. Any program so created may read or attempt to
read, "00" as the year 1900. There are two other related issues which could
also, lead to incorrect calculations or failure, such as (i) some systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the year 2000 is a leap year. Accordingly, some computer hardware and
software including programs embedded within machinery and parts will need to
be modified prior to the year 2000 in order to remain functional. To address
the issue, the Company created an internal task force to assess its state of
readiness for possible "Year 2000" issues and take the necessary actions to
ensure Year 2000 compliance. The task force has and continues to evaluate
internal business systems, production equipment, software and other components
which affect the Company's products, and the Company's vulnerability to
possible "Year 2000" exposures due to suppliers' and other third parties' lack
of preparedness for the year 2000.
The Company is in the process of assessing its production equipment and
its information system and does not anticipate any material Year 2000 issues
from its equipment or its own information system, 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 result of operations. In
addition, the Company has been in contact with its suppliers and other third
parties to determine the extent to which they may be vulnerable to "Year 2000"
issues. As this assessment progresses, matters may come to the Company's
attention, which could give rise to the need for remedial measures which have
not yet been identified. As a contingency, the Company may replace the
suppliers and third party vendors who cannot demonstrate to the Company that
their products or services will be Year 2000 compliant. The Company cannot
currently predict the potential effect of third parties' "Year 2000" issues on
its business.
Page 21
<PAGE>
The Company believes that its Year 2000 compliance project will be
completed in advance of the Year 2000 date transition and will not have a
material adverse effect on the Company's financial condition or overall trends
in the results of operations. However, there can be no assurance that
unexpected delays or problems, including the failure to ensure Year 2000,
compliance by systems or products supplied to the Company by a third party,
will not have an adverse effect on the Company, its financial performance, or
the competitiveness or customer acceptance of its products.
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of factors
that could materially and adversely affect revenues, gross profit, operating
income and liquidity. These factors include the Company's ability to secure
additional financing, the short term nature of its customers' commitments, the
timing and volume of orders relative to the Company's production capacity,
long lead times for the manufacturing equipment required by the Company,
evolutions in the life cycles of customers' products, timing of expenditures
in anticipation of future orders, lack of a meaningful backlog, effectiveness
in managing production processes, changes in costs and availability of labor,
raw materials and components, costs to obtain materials on an expedited basis,
mix of orders filled, the impact of price competition on the Company's average
selling prices and changes in economic conditions. The occurrence or
continuation of unfavorable changes in any of the preceding factors would
adversely affect the Company's business, financial condition and results of
operations.
Default Upon Senior Securities; Need for Immediate Financing; Risks of
Bankruptcy
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999.
All of the Company's secured creditors commenced legal actions against
the Company seeking monetary damages and recovery of the financed equipment.
In connection with the December 1998 bank financing, the Company obtained
forbearance agreements from the secured creditors through May 31, 1999. The
forbearance agreements require, among other things, that the Company make
monthly payments through May 31, 1999.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, 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, preference 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,
Page 22
<PAGE>
the Company would be required to substantially curtail, cease or liquidate its
operations and reorganize its indebtedness. Although the Company is pursuing
additional equity and debt financing, there can be no assurance that such
financing will be obtained. The Company is also evaluating the possible sale
or merger of the Company, but there can be no assurance that such a
transaction can be completed on terms acceptable to the Company, if at all.
Delisting of Common Stock on Nasdaq National Market
In June 1998, the Company was notified by The Nasdaq Stock Market that
its Common Stock did not comply with Nasdaq's $1.00 minimum bid price
requirement and that the Company's Common Stock would be delisted. Effective
November 18, 1998, the Company's Common Stock was delisted from the Nasdaq
Stock Market. The Common Stock of the Company is currently traded on the OTC
Bulletin Board.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
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 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 estimates that a ten percent increase in
interest rates would cause interest expense to increase by an immaterial
amount.
Page 23
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS:
Page
----
Report of Independent Accountants................................. 25
Balance Sheet as of December 31, 1997 and 1998.................... 26
Statement of Operations for the Years Ended December 31, 1996,
1997 and 1998........................................... 27
Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998........................ 28
Statement of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998........................................... 29
Notes to Financial Statements..................................... 30
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Integrated Packaging Assembly Corporation
In our opinion, the financial statements listed in the accompanying index
on page 24 present fairly, in all material respects, the financial position of
Integrated Packaging Assembly Corporation at December 31, 1997 and 1998, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
February 8, 1999
Page 25
<PAGE>
Integrated Packaging Assembly Corporation
Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $2,928 $--
Accounts receivable, net of allowance for
doubtful accounts of $263 and $263........... 3,096 2,105
Inventory...................................... 2,337 1,704
Prepaid expenses and other current assets...... 757 792
---------- ----------
Total current assets........................... 9,118 4,601
Property and equipment, net...................... 46,127 13,930
Other assets..................................... 237 197
---------- ----------
Total assets................................... $55,482 $18,728
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of bank debt and notes payable. $4,576 $11,399
Current portion of capital lease obligations... 1,972 4,324
Accounts payable............................... 5,478 2,155
Accrued expenses and other liabilities......... 2,969 2,808
---------- ----------
Total current liabilities.................... 14,995 20,686
---------- ----------
Long term portion of notes payable............... 14,166 --
---------- ----------
Long term portion of capital leases obligations.. 83 --
---------- ----------
Deferred gain on sale of facilities.............. -- 1,249
---------- ----------
Commitments and contingencies (notes 1,5 and 10)
Shareholders' equity
Common stock, $.001 par value; 75,000,000
shares authorized; 13,828,348 and 14,090,794
shares issued and outstanding................ 14 14
Additional paid-in capital..................... 40,276 40,607
Accumulated earnings (deficit)................. (14,052) (43,828)
---------- ----------
Total shareholders' equity (deficit)......... 26,238 (3,207)
---------- ----------
Total liabilities and shareholders' equity... $55,482 $18,728
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 26
<PAGE>
Integrated Packaging Assembly Corporation
Statement of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................... $36,402 $19,744 $23,281
Cost of revenues....................... 28,840 24,089 29,114
----------- ----------- -----------
Gross profit (loss)..................... 7,562 (4,345) (5,833)
Operating expenses:
Selling, general & administrative..... 3,488 5,167 4,068
Research & development................ 1,053 1,276 1,101
Provision for impairment of assets.... -- 3,000 18,200
----------- ----------- -----------
Total operating expenses............ 4,541 9,443 23,369
----------- ----------- -----------
Operating income (loss)................. 3,021 (13,788) (29,202)
Interest & other income................. 1,210 971 1,209
Interest expense........................ (1,384) (2,185) (1,783)
----------- ----------- -----------
Income (loss) before income taxes....... 2,847 (15,002) (29,776)
Provision for income taxes.............. (530) -- --
----------- ----------- -----------
Net income (loss)....................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Per Share data:
Net income (loss) per share
Basic............................... $0.20 ($1.08) ($2.12)
=========== =========== ===========
Diluted............................. $0.16 ($1.08) ($2.12)
=========== =========== ===========
Number of shares used to compute
per share data:
Basic................................. 11,730 13,898 14,046
=========== =========== ===========
Diluted............................... 14,157 13,898 14,046
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 27
<PAGE>
Integrated Packaging Assembly Corporation
Statement of Shareholder's Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Earnings
Shares Amount (Deficit) Totals
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............. 2,530 $449 ($1,367) ($918)
Sales of common stock, net of issuance
cost of $935......................... 3,450 23,111 -- 23,111
Conversion of Mandatorily Redeemable
Convertible Preferred Stock into
Common Stock......................... 7,862 15,981 -- 15,981
Common stock issued under stock plans.. 93 182 -- 182
Common stock repurchased under stock
plans................................ (73) (17) -- (17)
Issuance of warrants................... -- 57 -- 57
Amortization of deferred compensation.. -- 48 -- 48
Net income............................. -- -- 2,317 2,317
-------- -------- -------- --------
Balance at December 31, 1996............. 13,862 39,811 950 40,761
Common stock issued under stock plans.. 127 352 -- 352
Common stock repurchased under stock
plans................................ (161) (15) -- (15)
Issuance of warrants................... -- 94 -- 94
Amortization of deferred compensation.. -- 48 -- 48
Net (loss)............................. -- -- (15,002) (15,002)
-------- -------- -------- --------
Balance at December 31, 1997............. 13,828 40,290 (14,052) 26,238
Common stock repurchased under stock
plans................................ 265 152 -- 152
Common stock repurchased under stock
plans................................ (2) (1) -- (1)
Issuance of warrants................... -- 132 -- 132
Amortization of deferred compensation.. -- 48 -- 48
Net (loss)............................. -- -- (29,776) (29,776)
-------- -------- -------- --------
Balance at December 31, 1998............. 14,091 $40,621 ($43,828) ($3,207)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 28
<PAGE>
Integrated Packaging Assembly Corporation
Statement of Cash Flows
Increase (Decrease) Cash
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from Operating Activities:
Net income (loss).............................. 2,317 (15,002) (29,776)
Adjustments:
Depreciation and amortization................ 3,316 6,426 6,957
Write down of impaired assets................ -- 3,000 18,200
Gain on sale of facilities, net.............. -- -- (827)
Changes in assets and liabilities:
Accounts receivable........................ (3,238) 3,045 990
Inventory.................................. 164 (360) 633
Prepaid expenses and other assets.......... (161) (320) (233)
Accounts payable........................... 679 2,944 (3,323)
Accrued expenses and other liabilities..... 1,921 (1,369) 633
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... 4,998 (1,636) (6,746)
--------- --------- ---------
Cash flows provided by (used in) investing
activities:
Acquisition of property and equipment.......... (27,744) (12,351) (1,507)
Purchase of short-term investments............. (25,025) -- --
Sales & redemption of short-term investments... 22,000 3,025 --
Proceeds from sale of facilities, net.......... -- -- 7,312
--------- --------- ---------
Net cash provided by (used in) investing
activities................................. (30,769) (9,326) 5,805
--------- --------- ---------
Cash flows provided by (used in) financing
activities:
Payments under capital lease obligations....... (1,593) (1,958) (990)
Principal payments on note payable............. (1,819) (10,506) (4,639)
Proceeds from note payable..................... 16,300 10,200 3,490
Proceeds from issuance of common stock, net.... 23,276 337 152
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. 36,164 (1,927) (1,987)
--------- --------- ---------
Net increase (decrease) in cash.................. 10,393 (12,889) (2,928)
Cash and cash equivalents at beginning of period. 5,424 15,817 2,928
--------- --------- ---------
Cash and cash equivalents at end of period....... $15,817 $2,928 $--
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for interest......................... $1,240 $2,074 $1,124
Supplemental disclosure of noncash financing
activities
Acquisition of equipment under capital leases.. $147 $-- $3,139
Issuance of warrants........................... $57 $94 $132
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 29
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the "Company"), an
independent semiconductor packaging foundry, was incorporated in California on
April 28, 1992 and reincorporated in Delaware on June 19, 1997. The Company
assembles and packages integrated circuits from wafers consigned by its
customers. The Company's focus is on quad flat packages ("QFPs"), thin quad
flat packages ("TQFPs"), ball grid array packages ("BGAs") and chip scale
packaging ("CSPs"), which are used in complex integrated circuits with high
pin-counts in the personal computer and telecommunications industries. The
Company's operations are considered a single business segment within the
United States.
Basis of Presentation
As a result of a reduction in orders from the Company's customers, the
Company has significant excess production capacity. The reduction in revenues
and underutilization of capacity and resultant underabsorption of fixed costs
resulted in operating losses which have continued into 1999. As a result of
the operating losses and cost of capital additions, the Company believes that
it will need additional financing to meet its projected working capital and
other cash requirements through 1999. While there can be no assurance that
the Company can obtain such financing when needed, the Company has taken
actions to improve liquidity.
In June 1998, the Company was notified by the Nasdaq Stock Market that
its common stock did not comply with Nasdaq's $1.00 minimum bid price
requirement and that the Company's Common Stock would be delisted. Effective
November 18, 1998, the Company's Common Stock was delisted from the Nasdaq
Stock Market. The Common Stock of the Company is currently traded on the OTC
Bulletin Board.
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999.
Certain of the Company's secured creditors commenced legal actions
against the Company seeking monetary damages and recovery of the financed
equipment. In connection with the December 1998 bank financing, the Company
obtained forbearance agreements from the secured creditors through May 31,
1999. The forbearance agreements require, among other things, that the
Company make monthly payments through May 31, 1999.
Page 30
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company does not have any material defenses against these legal
actions. An adverse outcome in any of the actions would have a material
adverse effect on the Company and if the Company forbearance agreements do not
remain in effect for each of the lenders, the Company will be forced to seek
protection under the bankruptcy laws or cease operations.
The Company is in the process of determining compliance of its systems as
part of a program to address the risks related to the Year 2000 problem. The
ability of the Company to complete the program is dependant upon the
availability of sufficient financial resources to address any issue that may
arise. An inability to address the Year 2000 problem may have a material
adverse effect on the Company.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, 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, preference 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.
These financial statements have been prepared on a going concern basis
and, therefore, do not include any adjustment that might result from these
uncertainties.
Fiscal year
In 1997, the Company changed its fiscal year end to December 31. Prior to
1997, the Company's fiscal quarters and year ended on the Sunday nearest the
calendar quarter end and December 31, respectively. For purposes of financial
statement presentation, each fiscal year is presented as having ended on
December 31 and each fiscal quarter is presented as having ended on the
calendar quarter end. Fiscal year 1996 consisted of 52 weeks or 364 days.
Fiscal 1997 consisted of 367 days. Fiscal 1998 consisted of 365 days. The
effect of the different number days in the fiscal years on revenues and net
income (loss) was insignificant.
Cash equivalents and short term investments
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents, and investments
with original maturities of greater than 90 days to be short term investments.
As of December 31, 1997, $1.1 million of the Company's cash and cash
equivalents were restricted as collateral for letters of credit issued during
1997 for the purchase of equipment.
Inventory
Inventory, which primarily consists of raw material supplies such as gold
wire, lead frames and mold compound, is stated at the lower of cost,
determined by the first-in, first-out basis, or market. The Company holds
product on consignment from its customers while services are being performed.
Page 31
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Property and equipment
Property and equipment are recorded at cost. For certain production
machinery and equipment acquired prior to 1997, depreciation 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
estimate is reassessed when facts and circumstances suggest a revision may be
necessary. In all cases the asset will be fully depreciated by the end of its
estimated six-year life. In late 1996, due to lower than expected
utilization, the Company reduced its estimates of the number of units to be
produced over the useful equipment life. Accordingly, the depreciation rate
per unit was increased and was not material to 1996 results. The higher rate
continued into 1997 and will continue until the assets are fully depreciated.
Depreciation for all other property and equipment and all production machinery
and equipment acquired after 1996 is computed using the straight-line method
over the estimated useful lives of the assets, generally 3 to 6 years.
In December 1996, the Company acquired a real estate parcel and
facilities, including the building that it had operated in since 1993, for
$9.2 million. The Company has allocated its purchase cost among land,
buildings and improvements in proportion to fair market value. The building
was depreciated over 30 years, with building improvements depreciated over 5
to 15 years. In January 1998, the real estate parcel and buildings on the
parcel were sold and the Company entered into a lease for the building that it
occupies. See Note 5.
Revenue recognition
Revenue is generally recognized upon shipment. A provision for estimated
future returns is recorded at the time revenue is recognized.
Income taxes
The Company accounts for income taxes using the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or income tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than enactments of changes in the tax law or rates.
Stock options
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation for stock options is generally measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire the
stock. The Company adopted the disclosure only requirements of SFAS 123.
Page 32
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. This
statement simplifies the standards for computing earnings per share (EPS)
previously defined in Accounting Principles Board Opinion No. 15, "Earnings
Per Share." All prior-period earnings per share data has been restated in
accordance with SFAS 128. SFAS 128 requires presentation of both Basic EPS and
Diluted EPS on the face of the Statement of Operations. Basic EPS is computed
by dividing net income (loss) available to common shareholders (numerator) by
the weighted average number of common shares outstanding (denominator) during
the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants, using the
treasury stock method, and convertible preferred stock, using the if-converted
method. In computing Diluted EPS, the average stock price for the period is
used in determining the number of shares assumed to be purchased from the
exercise of stock options and warrants.
Page 33
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations under SFAS 128:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Basic EPS Computation:
Net income (loss).......................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Weighted-average common shares outstanding. 11,730 13,898 14,046
=========== =========== ===========
Basic earnings (loss) per share............ $0.20 ($1.08) ($2.12)
=========== =========== ===========
Diluted EPS Computation:
Net income (loss).......................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Weighted-average common shares outstanding. 11,730 13,898 14,046
Plus shares from assumed conversions:
Convertible preferred stock.............. 1,310 -- --
Effect of dilutive options and warrants.. 1,117 -- --
----------- ----------- -----------
Weighted-average common shares used for
diluted earnings (loss) per share........ 14,157 13,898 14,046
=========== =========== ===========
Diluted earnings (loss) per share.......... $0.16 ($1.08) ($2.12)
=========== =========== ===========
Antidilutive Securities*
Options and warrants outstanding at end of
period................................... 216 2,186 2,501
=========== =========== ===========
Weighted-average exercise price............ $9.49 $3.04 $1.43
=========== =========== ===========
</TABLE>
* Antidilutive securities consist of options and warrants not included in the
computation of dilutive earnings per share because i) the exercise price of
each of these options was greater that the average market price of the
Company's Common Stock during the period or ii) the Company incurred a net
loss during the period resulting in all options and warrants outstanding being
antidilutive.
Use of estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates.
Page 34
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 35
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BALANCE SHEET COMPONENTS:
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Inventory
Raw Materials............................... $2,176 $1,509
Work in process............................. 161 195
---------- ----------
$2,337 $1,704
========== ==========
Property and equipment
Land........................................ $3,827 $--
Buildings and improvements.................. 8,890 701
Machinery and equipment..................... 42,784 29,533
Office and computer equipment............... 793 705
Furniture and fixtures...................... 312 257
Deposits on machinery and equipment......... 595 --
---------- ----------
57,201 31,196
Less: accumulated depreciation.............. (11,074) (17,266)
---------- ----------
$46,127 $13,930
========== ==========
Property and equipment acquired under capital
leases included above
Machinery and equipment..................... $7,819 $8,688
Office and computer equipment............... 36 36
Furniture and fixtures...................... 57 57
---------- ----------
7,912 8,781
Less: accumulated depreciation.............. (3,919) (5,052)
---------- ----------
$3,993 $3,729
========== ==========
Accrued expenses and other liabilities
Accrued payroll and related expenses........ $762 $771
Accrued income tax.......................... 456 456
Other accrued liabilities................... 1,751 1,581
---------- ----------
$2,969 $2,808
========== ==========
</TABLE>
Page 36
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3-RESEARCH AND DEVELOPMENT ARRANGEMENT:
In February 1995, the Company joined a consortium (the "Consortium") of
semiconductor companies which entered into a research and development contract
with the Advance Research Projects Agency (ARPA), a United States Government
agency. Under this agreement, ARPA will provide funds based on the completion
of milestones approved by ARPA and the Consortium. The agreement expired in
1997. Income generated from the research and development contract was
recognized upon the completion of milestones, which approximates the
percentage of completion method. Accordingly, amounts totaling $228,000 and
$123,500 were recognized under this agreement during 1996 and 1997,
respectively, and included in interest and other income. Additionally during
1996, the Company received $289,000 from ARPA which it used to reduce the cost
of equipment acquired. The Company is not obligated to repay funding
regardless of the outcome of its development efforts; however, the agreement
requires the Company to use its best efforts to achieve specified results as
per the agreement. The Company retains ownership of the intellectual property
developed under the contract.
NOTE 4-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 an estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
During the second quarter of 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.
NOTE 5-LEASING ARRANGEMENTS AND COMMITMENTS:
The Company leases certain machinery and equipment, office and computer
equipment, and furniture and fixtures under long-term lease agreements which
are reported as capital leases. The terms of the leases range from three to
five years, with options to purchase or release the equipment at the end of
the respective lease terms. The Company intends to exercise such options.
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
Page 37
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 the end of the second quarter of 1998, the Company ceased making
scheduled payments on its capital leases. All of the lessors have commenced
legal actions against the Company seeking monetary damages and recovery of the
leased equipment. In December 1998, the Company obtained forbearance
agreements from the lessors through May 31, 1999. All capital lease
obligations, including purchase options, are classified as current liabilities
as of December 31, 1998.
The Company incurred rent expense under a noncancelable operating lease
until December 1996 when the Company purchased the facility it had been
leasing. In January 1998, in connection with the sale of its facility (see
Note 5), the Company entered into a noncancelable operating lease for the
82,390 square foot building on the facility that it occupies. The lease is
for ten years, with options to extend. In November 1997, the Company entered
into a noncancelable operating lease for a 2500 square foot portion of a
building for its plating operations. The lease is for five years, with an
option to extend. Rent expense was $216,000, $46,000 and $1,054,000 in 1996,
1997 and 1998, respectively.
Future minimum lease payments over the next five years and thereafter
under operating leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Building
Leases
----------
<S> <C>
Year ending December 31:
1999.......................... $1,059
2000.......................... 1,162
2001.......................... 1,166
2002.......................... 1,264
2003.......................... 1,370
Thereafter.................... 5,405
----------
Total minimum payments........ $11,426
==========
</TABLE>
In 1993, 1994, 1996, and 1998 in connection with arranging capital
leases, the Company issued to the lessors warrants to purchase an aggregate of
628,978 shares of common stock at exercise prices ranging from $0.77 to $8.00.
The estimated value of these warrants at the time of issuance, as determined
by the Company, is being amortized as interest expense over the period the
leases are outstanding. The warrants are exercisable at any time prior to 2001
(28,750 shares), 2003 (100,000 shares), 2004 (328,800 shares) and 2005
(171,428 shares). None of the warrants had been exercised at December 31,
1998.
Page 38
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 6-BANK DEBT and DEBT NOTES PAYABLE:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Bank debt................... $-- $2,816
Bank term note payable...... 2,375 --
Equipment notes payable..... 9,766 8,583
Real estate loan............ 6,601 --
--------- ---------
18,742 11,399
Less current portion........ (4,576) --
--------- ---------
$14,166 $11,399
========= =========
</TABLE>
Bank Debt
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 December 31,
1997, no amounts were outstanding under this line of credit. Borrowings under
the line of credit accrued interest at the bank's prime rate (8.5% per annum
at December 31, 1997) plus 1.25% and were collateralized by the assets of the
Company. The agreement required 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 December
31, 1997, the Company was in compliance with such covenants.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit.
Borrowings under the agreement are collateralized by the assets of the
Company. The agreement was amended in December 1998, and provides, through
June 1, 1999, for borrowing up to the lesser of $2.8 million or 80% of
eligible accounts receivable. The bank charges an administration fee of 0.5%
of the gross accounts receivable factored and a monthly interest charge of
1.25% of the average balance owed. As of December 31, 1998, the Company owed
$1,461,000 under this agreement.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999. The line,
which includes limits on monthly borrowings, accrues interest at the bank's
prime rate (7 3/4% per annum at December 31, 1998). As of December 31, 1998,
$1,355,000 was outstanding under this line.
Bank Term Note Payable
The Company was in default under certain of the required financial
covenants at the end of the second quarter of 1998 and the loan was paid in
full August 1998.
Page 39
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Equipment Notes Payable
In 1995 and 1997, 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% per annum with terms
ranging from 36 to 48 months. Certain of the credit facilities require the
Company to maintain certain financial covenants including minimum tangible net
worth, quarterly revenues and quarterly income before taxes, depreciation and
amortization (EBITDA).
At the end of the second quarter of 1998, the Company ceased making
scheduled payments on the equipment notes and was in default under certain of
the required financial covenants. All of the note holders have commenced
legal actions against the Company seeking monetary damages and recovery of
financial equipment. In connection with the December 1998 bank financing, the
Company obtained forbearance agreements from the note holders through May 31,
1999. All equipment note obligations are classified as current liabilities as
of December 31, 1998.
Real Estate Loans
In December 1996, the Company borrowed $6.5 million from a bank to
provide temporary financing for the acquisition of its facilities. 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. The
Company has classified this loan as long-term at December 31, 1996 based on
the refinancing disclosed as follows.
On March 25, 1997, the Company closed 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 land, buildings and improvements purchased 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. In January 1998, the Company sold
its facility that consisted of land and two buildings with approximately
138,336 square space of building space. Net proceeds from the sale of the
facilities were $7.3 million, net of the elimination of $6.6 million of
mortgage debt, fees, commissions and closing costs.
The Company is now leasing the approximately 82,390 square foot building
on the facility that it occupies. See Note 5.
Warrants
In connection with the bank debt and various loan agreements, the Company
issued to the lenders warrants to purchase an aggregate of 202,483 shares of
common stock at exercise prices ranging from $3.30 to $4.60. The estimated
value of these warrants at the time of issuance, as determined by the Company,
is being amortized as interest expense over the terms of the loans. The
warrants are exercisable at any time prior to 2000 (21,740 shares), 2002
(10,000 shares), 2004 (72,917 shares) and 2005 (97,826 shares). None of the
warrants had been exercised at December 31, 1998.
Page 40
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7-STOCK PLANS:
1993 Stock Option Plan
In April 1993, the Board of Directors and shareholders adopted the 1993
Stock Option Plan (the "Plan") which as amended, provides for the grant of
incentive stock options (ISOs) and nonqualified stock options (NSOs) to
purchase up to 2,514,921 shares of Common Stock. ISOs may be granted to
employees and NSOs may be granted to either employees or consultants. In
accordance with the Plan, the stated exercise price shall not be less than
100% and 85% of the estimated fair market value of Common Stock on the date
of grant for ISOs and NSOs, respectively, as determined by the Board of
Directors. The Plan provides that the options shall be exercisable over a
period not to exceed ten years and shall vest as determined by the Board of
Directors. Substantially all of the options vest 25% one year after the date
of grant and 1/48 each month thereafter. Compensation expense of
approximately $200,000 was recognized on stock options granted between June
and November 1995, and is being amortized over the four year vesting period.
Director Stock Option Plan
In December 1995, the Company adopted a Director Stock Option Plan (the
"Director Plan"). A total of 100,000 shares of Common Stock have been
authorized for issuance under the Director Plan. The Director Plan provides
for the grant of NSOs to non-employee directors of the Company. The Director
Plan provides that each non-employee director who joins the Board will
automatically be granted an NSO to purchase 20,000 shares of Common Stock on
the date upon which such person first becomes a non-employee director (the
"Initial Grant"). In addition, each non-employee director will automatically
receive an NSO to purchase 5,000 shares of Common Stock upon such director's
annual re-election to the Board, provided the director has been a member of
the Board for at least six months upon the date of such re-election (the
"Subsequent Grant"). The Initial Grant vests and becomes exercisable as to 25%
of the shares one year after the date of grant and as to 1/48 of the shares
each month thereafter, and each Subsequent Grant shall become exercisable as
to 1/12 of the shares each month following the date of grant, both subject to
the director's continuous service. The exercise price of all stock options
granted under the Director Plan is equal to the fair market value of the
Company's Common Stock on the date of grant. Options granted under the
Director Plan have a term of ten years. Unless terminated sooner, the Director
Plan will terminate in 2006. Options for 20,000 shares were granted in 1997
under the Director Plan.
1997 Non Statutory Stock Plan
In October 1997, the Board of Directors adopted the 1997 Non-Statutory
Stock Plan, which, as amended, provides for the grant of non-qualified stock
options to purchase up to 750,000 share of Common Stock. The NSOs may only be
granted to non-executive officer employees. In accordance with the Plan, the
stated exercise price shall not be less than 85% of the estimated fair market
value of the Common Stock on the date of grant of the NSO. The options shall
be exercisable over a period not to exceed ten years and shall vest 25% after
the year of grant and 1/48 each month thereafter. Options for 463,000 shares
were granted in 1998 under this plan.
Page 41
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Repricing of Employee Stock Options
As approved by the Board of Directors on January 27, 1998 and effective
as of January 30, 1998, the Company allowed all employee holders of
outstanding stock options to exchange higher priced options for new stock
options at an exercise price of $1.06 per share, the fair market value of the
Company's Common Stock at the close of trading on January 30, 1998. Those
options vested at the time of the exchange would vest on January 31, 1999, and
those options unvested at the time of the exchange would vest on the original
option schedule, but would not be exercisable until January 31, 1999. Options
for 1,035,124 shares were exchanged.
Restricted Common Stock
In September 1995, 398,333 shares of restricted Common Stock were sold to
employees upon exercise of stock options then outstanding. Each unvested
share of this restricted Common Stock is subject to repurchase by the Company
at the employees' exercise price if an employee terminates before such shares
vest. In 1996 and 1997, respectively, 170,312 and 67,082 vested shares were
converted into unrestricted shares, and 73,750 and 55,314 shares were
repurchased by the Company from terminated employees. The remaining 31,875
restricted shares outstanding were fully vested as of December 31, 1998.
1996 Employee Stock Purchase Plan
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted
by the Company's Board of Directors and shareholders in December 1995, and
became effective upon the closing of the Company's initial public offering on
February 28, 1996. Under the Purchase Plan, a total of 400,000 shares of
Common Stock has been reserved for issuance to eligible employees. The
Purchase Plan allows employees to purchase shares through payroll deductions
at 85% of the fair market value of the Common Stock at the beginning or the
end of the applicable twelve-month purchase period. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the U.S. Internal Revenue Code. Unless terminated sooner, the Purchase Plan
will terminate ten years from its effective date. During 1996, 1997, and
1998, respectively, 25,062, 59,656 and 155,051 shares, respectively, were
issued under the Plan.
Page 42
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Summary of Option Activity
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category for each of the
years ended December 31, 1996, 1997, and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at Jan. 1......... 550,633 $1.04 890,200 $4.85 1,599,154 $3.18
Options granted..... 484,848 $8.74 1,295,745 $3.03 1,498,124 $1.02
Options canceled.... (68,126) $0.33 (519,829) $5.90 (1,307,386) $3.76
Options exercised... (77,155) $6.04 (66,962) $1.35 (109,895) $0.22
---------- -------- ---------- -------- ----------- --------
Options outstanding
at Dec. 31........ 890,200 $4.85 1,599,154 $3.18 1,679,997 $1.00
========== ======== ========== ======== =========== ========
Options exercisable
at Dec. 31........ 147,944 $0.88 219,400 $4.52 592,322 $0.91
========== ======== ========== ======== =========== ========
Available for grant
at Dec. 31........ 509,301 483,385 792,647
========== ========== ===========
</TABLE>
Significant option groups outstanding at December 31, 1998, after giving
effect to the repricing discussed previously, and the related weighted average
exercise price and remaining contractual life information are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Outstanding Exercisable Remaining
Options with exercise ------------------ ------------------ Life
prices ranging from Shares Price Shares Price (Years)
- ------------------------ ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.97............ 337,404 $0.51 146,525 $0.32 8
$1.00 - $1.50............1,294,093 $1.06 436,806 $1.06 9
$1.59 - $3.50............ 48,000 $2.54 8,637 $3.06 9
$9.50.................... 500 $9.50 354 $9.50 7
---------- ------- ---------- ------- ----------
Options outstanding
at Dec. 31.............1,679,997 $1.00 592,322 $0.91 8
========== ======= ========== ======= ==========
</TABLE>
Fair Value of Stock Options and Employee Purchase Rights
The Company has four stock option plans, which reserve shares of Common
Stock for issuance to employees, officers, directors and consultants. The
Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized in the
accompanying statement of operations for the stock option plans, except for
$200,000 which was recognized on stock options granted between June and
November 1995, and which is being amortized over a four year vesting period.
In January 1996, The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation".
Page 43
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Stock Option Plan, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1996, 1997
and 1998 respectively: dividend yield of 0% in all three years; expected life
of 4 years for each year; expected volatility of 57%, 65% and 65%; and risk-
free interest rates of 6.2%, 6.1% and 5.8%. The weighted-average fair value
of those stock options granted in 1996, 1997 and 1998 was $4.33, $1.72 and
$0.55 per option, respectively.
The fair value of the employees' purchase rights for the Purchase Plan,
which was initiated on February 28, 1996, was estimated at the beginning of
the offering period using the Black-Scholes option pricing model with the
following assumptions used for 1996, 1997, and 1998, respectively: dividend
yield of 0%; an expected life of six months; expected volatility of 56%, 65%
and 65%; and risk-free interest rate of 5.3%. The weighted-average fair value
of these purchase rights granted in 1996, 1997 and 1998 was $2.20, $3.12 and
$0.64, respectively, per right.
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its stock
option plans and stock purchase plan, the Company's net income (loss) and
income (loss) per share would have been reduced to the following pro forma
amounts (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) as reported........... $2,317 ($15,002) ($29,776)
Net income (loss), pro forma............ $1,923 ($15,708) ($30,633)
Net income (loss) per share as reported
Basic................................. $0.20 ($1.08) ($2.12)
Diluted............................... $0.16 ($1.08) ($2.12)
Net income (loss) per share, pro forma
Basic................................. $0.16 ($1.13) ($2.18)
Diluted............................... $0.13 ($1.13) ($2.18)
</TABLE>
The pro forma amounts reflect compensation expense related to 1996, 1997
and 1998 stock option grants and purchase rights only. In future years, the
annual pro forma compensation expense will increase relative to the fair value
of stock options granted in those future years.
Page 44
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8-INCOME TAXES:
In 1997 and 1998, the Company incurred net operating losses and recorded
no provision for income taxes. The tax provision for 1996 current taxes
consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
----------
<S> <C>
Current:
Federal........................... $13
State............................. 169
----------
182
----------
Deferred:
Federal........................... 489
State............................. (141)
----------
348
----------
$530
==========
</TABLE>
The tax provision reconciles to the amount computed by multiplying income
before tax by the U.S. statutory rate (34%) as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
----------
<S> <C>
Provision at statutory rate......... $968
Benefits of carryforwards........... (68)
State taxes, net of federal benefit. 175
Use of valuation allowance.......... (475)
Other............................... (70)
----------
$530
==========
</TABLE>
Deferred income tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1998
---------- ----------
<S> <C> <C>
Federal and state credit carryforwards..... $1,689 $2,437
Federal and state net operating loss
carryforwards............................ 8,631 14,282
Provisions for impaired assets............. -- 7,568
Leases, treated as operating for tax....... (1,592) (2,961)
Depreciation............................... (3,165) (4,154)
Reserves and accruals...................... 587 763
Other...................................... (201) (16)
---------- ----------
Deferred tax assets (liability)............ 5,949 17,919
Less valuation allowance................... (5,949) (17,919)
---------- ----------
Net deferred tax asset (liability)....... $-- $--
========== ==========
</TABLE>
Page 45
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
At December 31, 1998, the Company had federal and state net operating
loss and tax credit carryforwards ("NOLs") of approximately $35,000,000 and
$20,000,000, respectively, which can be used to reduce future taxable income.
These NOLs expire through 2014, if not utilized. The availability and timing
of these carry forwards to offset the taxable income maybe limited due to the
occurrence of certain events, including change of ownership.
The Tax Reform Act of 1996 limits the use of NOLs in certain situations
where changes occur in the stock ownership of a company. The Company
experienced such an ownership change as a result of the Company's initial
public offering in 1996, resulting in a limitation of the annual utilization
of the NOLs generated through the date of the initial public offering.
NOTE 9-CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
Concentration of credit risk
The Company performs ongoing credit evaluations of its customers, which
are semiconductor companies, and maintains reserves for estimated credit
losses. Write-offs of accounts receivable were insignificant in all periods
presented. At December 31, 1997, four customers accounted for 19%, 15%, 13%
and 10%, respectively, of accounts receivable. At December 31, 1998, two
customer accounted for 27% and 16%, respectively.
Significant customers
<TABLE>
<CAPTION>
Year Ended December 31,
------- ------- -------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Customers comprising 10% or more of the
Company's revenues for the periods indicated:
A......................................... 2% 14% 39%
B......................................... 32% 17% 11%
C......................................... --% 1% 11%
D......................................... 14% 16% 1%
E......................................... 17% 4% 1%
</TABLE>
NOTE 10-LEGAL PROCEEDINGS:
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
Certain of the Company's secured creditors commenced legal actions
against the Company seeking
Page 46
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
monetary damages and recovery of the financed equipment. In connection with
the December 1998 financing, the Company obtained forbearance agreements from
the secured creditors through May 31, 1999. The forbearance agreements
require, among other things, that the Company make monthly payments through
May 31, 1999.
The Company does not have any material defenses against these legal
actions. An adverse outcome in any of the actions would have a material
adverse effect on the Company and if the Company cannot obtain further
extensions from all of these Plaintiffs, it will be forced to seek protection
under the bankruptcy laws or cease operations.
NOTE 11-SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997:
Net revenues................ $5,575 $3,953 $4,214 $6,002
Gross profit (loss)......... (920) (1,086) (1,244) (1,095)
Net income (loss)........... (2,473) (6,088) (3,271) (3,170)
Net income (loss) per share
Basic..................... (0.18) (0.44) (0.23) (0.23)
Diluted................... (0.18) (0.44) (0.23) (0.23)
1998:
Net revenues................ 6,965 5,759 5,816 4,741
Gross profit (loss)......... (1,450) (2,142) (1,114) (1,127)
Net income (loss)........... (2,406) (21,943) (2,637) (2,790)
Net income (loss) per share
Basic..................... (0.17) (1.57) (0.19) (0.20)
Diluted................... (0.17) (1.57) (0.19) (0.20)
</TABLE>
Per share amounts, based on average shares outstanding and potential
dilutive shares each quarter, may not add to the total for the year.
Page 47
<PAGE>
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
Not applicable.
Page 48
<PAGE>
PART III
--------
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) Executive Officers - See the section entitled "Executive Officers
in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in
the Proxy Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
- --------------------------------
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
14(a) Exhibits
- ---------------
Exhibit
Number Description of Document
- ------- -----------------------
3.1! Restated Articles of Incorporation.
3.4! Bylaws, as amended.
10.1! Form of Indemnification Agreement.
10.2!* 1993 Stock Option Plan and form of Stock Option Agreement.
10.3!* 1996 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4!* 1996 Director Stock Option Plan and form of Stock Option
Agreement.
10.5! Registration Rights Agreement dated March 24, 1993, as amended.
10.6! Lease Agreement dated June 16, 1993 between the Company and
WVP Income Plus VI.
10.7! Sublease Agreement dated July 15, 1995 between the Company and
Peripheral Computer Support, Inc.
10.8! Loan and Security Agreement dated September 15, 1995 between
the Company and The CIT Group/Equipment Financing, Inc.
10.9! Warrant to Purchase Series A Preferred Stock, issued to MMC/
GATX Partnership No. 1 as of October 7, 1993, as amended.
10.10! Warrant to Purchase Series A Preferred Stock, issued to
Phoenix Leasing Incorporated as of October 7, 1993.
10.11! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of March 10, 1994.
10.12! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.13! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.14! Warrant to Purchase Series A Preferred Stock, issued to CIT
Group/Equipment Financing, Inc. as of September 15, 1995.
10.15! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of January 3, 1996.
10.16!! Sublease Agreement between the Company and Peripheral Computer
Support dated March 8, 1996.
10.17!!! Warrant to Purchase Common Stock, issued to MMC/GATX
Partnership No. 1, dated September 5, 1997.
10.18!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.19!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.20!!! Lease Agreement dated November 1, 1997, between the Company and
Jaswinder S. Saini and Surinder K. Saini.
10.21!!!! Purchase and Sale Agreement dated November 20, 1997, between
the Company and Lincoln Property Company N.C., Inc.
10.22!!!! Lease Agreement dated January 20, 1997, between the Company and
Lincoln Property Company N.C., Inc.
10.23* 1997 Nonstatutory Stock Option Plan and form of Stock Option
Agreement.
10.24!!!!! Amended and Restated Loan and Security Agreement dated December
31, 1997 between the Company and Silicon Valley Bank.
10.25!!!!! Warrant to Purchase Stock, issued to Silicon Valley Bank as of
December 31, 1997.
10.26 Accounts Receivable Purchase Agreement dated October 27, 1998,
between the Company and Silicon Valley Bank.
10.27 Accounts Receivable Purchase Agreement Modification Agreement
dated December 8, 1998, between the Company and Silicon Valley
Bank.
10.28 Accounts Receivable Purchase Agreement Modification dated
December 16, 1998, between the Company and Silicon Valley Bank.
10.29 Loan and Security Agreement dated as of December 16, 1998,
between the Company and Silicon Valley Bank.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page 51).
27.1 Financial Data Schedule.
! Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (file no. 333-326-LA), as amended, filed on
January 17, 1996.
!! Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
!!! Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
!!!! Incorporated by reference from the Registrant's Current Report on
Form 8-K, filed on January 30, 1997.
!!!!! Incorporated by reference from the Registrant's Annual Report on
Form 10-K, for the year ended December 31, 1997.
Page 50
<PAGE>
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form.
(b) Reports on Form 8-K.
None
(c) Exhibits.
See Item 14(a) hereof.
(d) Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable or the required information is shown in the financial statements or
the notes thereto.
Page 51
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
San Jose, State of California, on March 8, 1999.
INTEGRATED PACKAGING ASSEMBLY CORPORATION
By: /s/ ALFRED V. LARRENAGA
-------------------------------
Alfred V. Larrenaga
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Patrick Verderico and Alfred V.
Larrenaga, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all
amendments to said Report.
In accordance with the Exchange Act, this report has been signed below on
March 8, 1999 by the following persons on behalf of the Registrant and in the
capacities indicated.
Signature Title
- ---------------------------------- -------------------------------------
/s/ PATRICK VERDERICO President and Chief Executive Officer
- ----------------------------------
Patrick Verderico (Principal Executive Officer)
/s/ ALFRED V. LARRENAGA Chief Financial Officer
- ----------------------------------
Alfred V. Larrenaga (Principal Financial and
Accounting Officer)
/s/ PHILIP R. CHAPMAN Director
- ----------------------------------
Philip R. Chapman
/s/ GILL COGAN Director
- ----------------------------------
Gill Cogan
/s/ ERIC A. YOUNG Director
- ----------------------------------
Eric A. Young
Page 52
<PAGE>
EXHIBIT 10.26
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, Ca. 95054
(408) 654-1000 - Fax (408) 980-6410
ACCOUNTS RECEIVABLE PURCHASE AGREEMENT
This Accounts Receivable Purchase Agreement (the "Agreement") is made
on this Nineth day of October 1998, by and between Silicon Valley Financial
Services (a division of Silicon Valley Bank) ("Buyer") having a place of
business at the address specified above and Integrated Packaging Assembly
Corporation, a California corporation, ("Seller") having its principal place
of business and chief executive office at
Street Address: 2221 Old Oakland Road
City: San Jose
County: Santa Clara
State: California
Zip code: 95131
Phone: 408/321-3600
1. Definitions. When used herein, the following terms shall have the
following meanings.
1.1. "Account Balance" shall mean, on any given day, the gross amount
of all Purchased Receivables unpaid on that day.
1.2. "Account Debtor" shall have the meaning set forth in the
California Uniform Commercial Code and shall include any person liable on
any Purchased Receivable, including without limitation, any guarantor of the
Purchased Receivable and any issuer of a letter of credit or banker's
acceptance.
1.3. "Adjustments" shall mean all discounts, allowances, returns,
disputes, counterclaims, offsets, defenses, rights of recoupment, rights of
return, warranty claims, or short payments, asserted by or on behalf of any
Account Debtor with respect to any Purchased Receivable.
1.4. "Administrative Fee" shall have the meaning as set forth in
Section 3.3 hereof.
1.5. "Advance" shall have the meaning set forth in Section 2.2 hereof.
1.6. "Collateral" shall have the meaning set forth in Section 8
hereof.
1.7. "Collections" shall mean all good funds received by Buyer from
or on behalf of an Account Debtor with respect to
Purchased Receivables.
1.8 "Compliance Certificate" shall mean a certificate, in a form
provided by Buyer to Seller, which contains the certification of the chief
financial officer of Seller that, among other things, the representations
and warranties set forth in this Agreement are true and correct as of the
date such certificate is delivered.
Page 1
<PAGE>
1.9. "Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. "Finance Charges" shall have the meaning set forth in Section
3.2 hereof.
1.11. "Invoice Transmittal" shall mean a writing signed by an
authorized representative of Seller which accurately identifies the
receivables which Buyer, at its election, may purchase, and includes for
each such receivable the correct amount owed by the Account Debtor, the name
and address of the Account Debtor, the invoice number, the invoice date and
the account code.
1.12. "Obligations" shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due or
payable by Seller to Buyer of any kind or nature, present or future, arising
under or in connection with this Agreement or under any other document,
instrument or agreement, whether or not evidenced by any note, guarantee or
other instrument, whether arising on account or by overdraft, whether direct
or indirect (including those acquired by assignment) absolute or contingent,
primary or secondary, due or to become due, now owing or hereafter arising,
and however acquired; including, without limitation, all Advances, Finance
Charges, Administrative Fees, interest, Repurchase Amounts, fees, expenses,
professional fees and attorneys. fees and any other sums chargeable to
Seller hereunder or otherwise.
1.13. "Purchased Receivables" shall mean all those accounts,
receivables, chattel paper, instruments, contract rights, documents, general
intangibles, letters of credit, drafts, bankers acceptances, and rights to
payment, and all proceeds thereof (all of the foregoing being referred to as
"receivables"), arising out of the invoices and other agreements identified
on or delivered with any Invoice Transmittal delivered by Seller to Buyer
which Buyer elects to purchase and for which Buyer makes an Advance.
1.14. "Refund" shall have the meaning set forth in Section 3.5 hereof.
1.15. "Reserve" shall have the meaning set forth in Section 2.4
hereof.
1.16. "Repurchase Amount" shall have the meaning set forth in Section
4.2 hereof.
1.17. "Reconciliation Date" shall mean the last calendar day of each
Reconciliation Period.
1.18. "Reconciliation Period" shall mean each calendar month of every
year.
2. Purchase and Sale of Receivables.
2.1. Offer to Sell Receivables. During the term hereof, and provided
that there does not then exist any Event of Default or any event that with
notice, lapse of time or otherwise would constitute an Event of Default,
Seller may request that Buyer purchase receivables and Buyer may, in its
sole discretion, elect to purchase receivables. Seller shall deliver to
Buyer an Invoice Transmittal with respect to any receivable for which a
request for purchase is made. An authorized representative of Seller shall
sign each Invoice Transmittal delivered to Buyer. Buyer shall be entitled
to rely on all the information provided by Seller to Buyer on or with the
Invoice Transmittal and to rely on the signature on any Invoice Transmittal
as an authorized signature of Seller.
Page 2
<PAGE>
2.2. Acceptance of Receivables. Buyer shall have no obligation to
purchase any receivable listed on an Invoice Transmittal. Buyer may
exercise its sole discretion in approving the credit of each Account Debtor
before buying any receivable. Upon acceptance by Buyer of all or any of the
receivables described on any Invoice Transmittal, Buyer shall pay to Seller
80 (%) percent of the face amount of each receivable Buyer desires to
purchase. Such payment shall be the "Advance" with respect to such
receivable. Buyer may, from time to time, in its sole discretion, change
the percentage of the Advance. Upon Buyer's acceptance of the receivable
and payment to Seller of the Advance, the receivable shall become a
"Purchased Receivable". It shall be a condition to each Advance that (i)
all of the representations and warranties set forth in Section 6 of this
Agreement be true and correct on and as of the date of the related Invoice
Transmittal and on and as of the date of such Advance as though made at
and as of each such date, and (ii) no Event of Default or any event or
condition that with notice, lapse of time or otherwise would constitute an
Event of Default shall have occurred and be continuing, or would result from
such Advance. Notwithstanding the foregoing, in no event shall the
aggregate amount of all Purchased Receivables outstanding at any time exceed
Three Million Five Hundred Thousand and No/100***** Dollars ($3,500,000.00).
2.3. Effectiveness of Sale to Buyer. Effective upon Buyer's payment
of an Advance, and for and in consideration therefor and in consideration of
the covenants of this Agreement, Seller hereby absolutely sells, transfers
and assigns to Buyer, all of Seller's right, title and interest in and to
each Purchased Receivable and all monies due or which may become due on or
with respect to such Purchased Receivable. Buyer shall be the absolute
owner of each Purchased Receivable. Buyer shall have, with respect to any
goods related to the Purchased Receivable, all the rights and remedies of an
unpaid seller under the California Uniform Commercial Code and other
applicable law, including the rights of replevin, claim and delivery,
reclamation and stoppage in transit.
2.4. Establishment of a Reserve. Upon the purchase by Buyer of each
Purchased Receivable, Buyer shall establish a reserve. The reserve shall be
the amount by which the face amount of the Purchased Receivable exceeds the
Advance on that Purchased Receivable (the "Reserve"); provided, the Reserve
with respect to all Purchased Receivables outstanding at any one time shall
be an amount not less than 20 (%) percent of the Account Balance at that
time and may be set at a higher percentage at Buyer's sole discretion. The
reserve shall be a book balance maintained on the records of Buyer and shall
not be a segregated fund.
3. Collections, Charges and Remittances.
3.1. Collections. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a daily
basis; provided, that if Seller is in default under this Agreement, Buyer
shall apply all Collections to Seller's Obligations hereunder in such order
and manner as Buyer may determine. If an item of collection is not honored
or Buyer does not receive good funds for any reason, the amount shall be
included in the Account Balance as if the Collections had not been received
and Finance Charges under Section 3.2 shall accrue thereon.
3.2. Finance Charges. On each Reconciliation Date Seller shall pay to
Buyer a finance charge in an amount equal to (a)
1.50 (%) percent per month of the average daily Account Balance outstanding
during the applicable Reconciliation Period, and (b) an additional .25 (%)
percent per month effective December 1, 1998 (the "Finance Charges"). Buyer
shall deduct the accrued Finance Charges from the Reserve as set forth in
Section 3.5 below.
Page 3
<PAGE>
3.1 Administrative Fee. On each Reconciliation Date Seller shall pay
to Buyer an Administrative Fee equal to (a) .50 (%) percent of the face
amount of each Purchased Receivable first purchased during that
Reconciliation Period, and (b) an additional .25 (%) percent of the face
amount of each Purchased Receivable effective December 1, 1998 (the
"Administrative Fee"). Buyer shall deduct the Administrative Fee from the
Reserve as set forth in Section 3.5 below.
3.1.1 Success Fee. In the event of a sale of all or
substantially all of the assets or stock of Integrated Packaging Assembly
Corporation, Integrated Packaging Assembly Corporation or its successor or
acquirer shall, on or before the date of closing of such sale, pay to SVFS a
fee equal to the following:
(A) .50 (%) percent of the amount of line if sale occurs on
or before November 16, 1998.
(B) 1.00 (%) percent of the amount of line if sales occurs
on or before December 18, 1998, and 2.00 (%) percent of the amount of line
thereafter.
3.4. Accounting. Buyer shall prepare and send to Seller after the
close of business for each Reconciliation Period, an accounting of the
transactions for that Reconciliation Period, including the amount of all
Purchased Receivables, all Collections, Adjustments, Finance Charges, and
the Administrative Fee. The accounting shall be deemed correct and
conclusive unless Seller makes written objection to Buyer within thirty (30)
days after the Buyer mails the accounting to Seller.
3.5. Refund to Seller. Provided that there does not then exist an
Event of Default or any event or condition that with notice, lapse of time
or otherwise would constitute an Event of Default, Buyer shall refund to
Seller by check after the Reconciliation Date, the amount, if any, which
Buyer owes to Seller at the end of the Reconciliation Period according to
the accounting prepared by Buyer for that Reconciliation Period (the
"Refund"). The Refund shall be an amount equal to:
(A) (1) the Reserve as of the beginning of that Reconciliation
Period, plus
(2) the Reserve created for each Purchased Receivable
purchased during that Reconciliation Period, minus
(B) The total for that Reconciliation Period of
(1) the Administrative Fee;
(2) Finance Charges;
(3) Adjustments;
(4) Repurchase Amounts, to the extent Buyer has agreed to
accept payment thereof by deduction from
the Refund;
(5) the Reserve for the Account Balance as of the first day
of the following Reconciliation Period in the minimum percentage set forth
in Section 2.4 hereof; and
(6) all amounts due, including professional fees and
expenses, as set forth in Section 12 for which oral or written demand has
been made by Buyer to Seller during that Reconciliation Period to the extent
Buyer has agreed to accept payment thereof by deduction from the Refund.
Page 4
<PAGE>
In the event the formula set forth in this Section 3.5 results in an amount
due to Buyer from Seller, Seller shall make such payment in the same manner
as set forth in Section 4.3 hereof for repurchases. If the formula set
forth in this Section 3.5 results in an amount due to Seller from Buyer,
Buyer shall make such payment by check, subject to Buyer's rights under
Section 4.3 and Buyer's rights of offset and recoupment.
4. Recourse and Repurchase Obligations.
4.1. Recourse. Buyer's acquisition of Purchased Receivables from
Seller shall be with full recourse against Seller. In the event the
Obligations exceed the amount of Purchased Receivables and Collateral,
Seller shall be liable for any deficiency.
4.2 Seller's Agreement to Repurchase. Seller agrees to pay to Buyer
on demand, the full face amount, or any unpaid portion, of any Purchased
Receivable:
(A) which remains unpaid ninety (90) calendar days after the
invoice date; or
(B) which is owed by any Account Debtor who has filed, or has had
filed against it, any bankruptcy case, assignment for the benefit of
creditors, receivership, or insolvency proceeding or who has become
insolvent (as defined in the United States Bankruptcy Code) or who is
generally not paying its debts as such debts become due; or
(C) with respect to which there has been any breach of warranty
or representation set forth in Section 6 hereof or any breach of any
covenant contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any
discount, allowance, return, dispute, counterclaim, offset, defense, right
of recoupment, right of return, warranty claim, or short payment; together
with all reasonable attorneys. and professional fees and expenses and all
court costs incurred by Buyer in collecting such Purchased Receivable and/or
enforcing its rights under, or collecting amounts owed by Seller in
connection with, this Agreement (collectively, the "Repurchase Amount").
4.3. Seller's Payment of the Repurchase Amount or Other Amounts Due
Buyer. When any Repurchase Amount or other amount owing to Buyer becomes
due, Buyer shall inform Seller of the manner of payment which may be any one
or more of the following in Buyer's sole discretion: (a) in cash
immediately upon demand therefor; (b) by delivery of substitute invoices
and an Invoice Transmittal acceptable to Buyer which shall thereupon become
Purchased Receivables; (c) by adjustment to the Reserve pursuant to Section
3.5 hereof; (d) by deduction from or offset against the Refund that would
otherwise be due and payable to Seller; (e) by deduction from or offset
against the amount that otherwise would be forwarded to Seller in respect
of any further Advances that may be made by Buyer; or (f) by any
combination of the foregoing as Buyer may from time to time choose.
4.4. Seller's Agreement to Repurchase All Purchased Receivables. Upon
and after the occurrence of an Event of Default, Seller shall, upon Buyer's
demand (or, in the case of an Event of Default under Section 9(B),
immediately without notice or demand from Buyer) repurchase all the
Purchased Receivables then outstanding, or such portion thereof as Buyer
may demand. Such demand may, at Buyer's option, include and Seller shall
pay to Buyer immediately upon demand, cash in an amount equal to the Advance
with respect to each Purchased Receivable then outstanding together with all
accrued Finance Charges, Adjustments, Administrative Fees, attorney's and
professional fees, court costs and expenses as provided for herein, and any
other Obligations. Upon receipt of payment in full of the Obligations,
Buyer shall immediately instruct Account Debtors to pay Seller directly, and
return to Seller any Refund due to Seller. For the purpose of calculating
any Refund due under this Section only, the Reconciliation Date shall be
deemed to be the date Buyer receives payment in good funds of all the
Obligations as provided in this Section 4.4.
Page 5
<PAGE>
5. Power of Attorney. Seller does hereby irrevocably appoint Buyer and
its successors and assigns as Seller's true and lawful attorney in fact, and
hereby authorizes Buyer, regardless of whether there has been an Event of
Default, (a) to sell, assign, transfer, pledge, compromise, or discharge
the whole or any part of the Purchased Receivables; (b) to demand, collect,
receive, sue, and give releases to any Account Debtor for the monies due or
which may become due upon or with respect to the Purchased Receivables and
to compromise, prosecute, or defend any action, claim, case or proceeding
relating to the Purchased Receivables, including the filing of a claim or
the voting of such claims in any bankruptcy case, all in Buyer's name or
Seller's name, as Buyer may choose; (c) to prepare, file and sign Seller's
name on any notice, claim, assignment, demand, draft, or notice of or
satisfaction of lien or mechanics. lien or similar document with respect to
Purchased Receivables; (d) to notify all Account Debtors with respect to
the Purchased Receivables to pay Buyer directly; (e) to receive, open, and
dispose of all mail addressed to Seller for the purpose of collecting the
Purchased Receivables; (f) to endorse Seller's name on any checks or other
forms of payment on the Purchased Receivables; (g) to execute on behalf of
Seller any and all instruments, documents, financing statements and the like
to perfect Buyer's interests in the Purchased Receivables and Collateral;
and (h) to do all acts and things necessary or expedient, in furtherance of
any such purposes. If Buyer receives a check or item which is payment for
both a Purchased Receivable and another receivable, the funds shall first be
applied to the Purchased Receivable and, so long as there does not exist an
Event of Default or an event that with notice, lapse of time or otherwise
would constitute an Event of Default, the excess shall be remitted to
Seller. Upon the occurrence and continuation of an Event of Default, all of
the power of attorney rights granted by Seller to Buyer hereunder shall be
applicable with respect to all Purchased Receivables and all Collateral.
6. Representations, Warranties and Covenants.
6.1. Receivables. Warranties, Representations and Covenants. To
induce Buyer to buy receivables and to render its services to Seller, and
with full knowledge that the truth and accuracy of the following are being
relied upon by the Buyer in determining whether to accept receivables as
Purchased Receivables, Seller represents, warrants, covenants and agrees,
with respect to each Invoice Transmittal delivered to Buyer and each
receivable described therein, that:
(A) Seller is the absolute owner of each receivable set forth in
the Invoice Transmittal and has full legal right to sell, transfer and
assign such receivables;
(B) The correct amount of each receivable is as set forth in the
Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the
fulfillment of any obligation or contract, past or future and any and
all obligations required of the Seller have been fulfilled as of the date of
the Invoice Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is
based on an actual sale and delivery of goods and/or services actually
rendered, is presently due and owing to Seller, is not past due or in
default, has not been previously sold, assigned, transferred, or pledged,
and is free of any and all liens, security interests and encumbrances other
than liens, security interests or encumbrances in favor of Buyer or any
other division or affiliate of Silicon Valley Bank;
Page 6
<PAGE>
(E) There are no defenses, offsets, or counterclaims against any
of the receivables, and no agreement has been made under which the Account
Debtor may claim any deduction or discount, except as otherwise stated in
the Invoice Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer
and shall be collected by Buyer, but if for any reason it should be paid to
Seller, Seller shall promptly notify Buyer of such payment, shall hold any
checks, drafts, or monies so received in trust for the benefit of Buyer, and
shall promptly transfer and deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also the
right to require endorsement by Seller, on all payments received in
connection with each Purchased Receivable and any proceeds of Collateral;
(H) Seller, and to Seller's best knowledge, each Account Debtor
set forth in the Invoice Transmittal, are and shall remain solvent as that
term is defined in the United States Bankruptcy Code and the California
Uniform Commercial Code, and no such Account Debtor has filed or had filed
against it a voluntary or involuntary petition for relief under the United
States Bankruptcy Code;
(I) Each Account Debtor named on the Invoice Transmittal will
not object to the payment for, or the quality or the quantity of the subject
matter of, the receivable and is liable for the amount set forth on the
Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified, after
acceptance by Buyer, that the Purchased Receivable has been transferred to
and is payable to Buyer, and Seller shall not take or permit any action to
countermand such notification; and
(K) All receivables forwarded to and accepted by Buyer after the
date hereof, and thereby becoming Purchased Receivables, shall comply with
each and every one of the foregoing representations, warranties, covenants
and agreements referred to above in this Section 6.1.
6.2. Additional Warranties, Representations and Covenants. In
addition to the foregoing warranties, representations and covenants, to
induce Buyer to buy receivables and to render its services to Seller, Seller
hereby represents, warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant, or permit
any lien or security interest in any Purchased Receivables or Collateral to
or in favor of any other party, without Buyer's prior written consent;
(B) The Seller's name, form of organization, chief executive
office, and the place where the records concerning all Purchased Receivables
and Collateral are kept is set forth at the beginning of this Agreement,
Collateral is located only at the location set forth in the beginning of
this Agreement, or, if located at any additional location, as set forth on a
schedule attached to this Agreement, and Seller will give Buyer at least
thirty (30) days prior written notice if such name, organization, chief
executive office or other locations of Collateral or records concerning
Purchased Receivables or Collateral is changed or added and shall execute
any documents necessary to perfect Buyer's interest in the Purchased
Receivables and the Collateral;
(C) Seller shall (i) pay all of its normal gross payroll for
employees, and all federal and state taxes, as and when due, including
without limitation all payroll and withholding taxes and state sales taxes;
(ii) deliver at any time and from time to time at Buyer's request, evidence
satisfactory to Buyer that all such amounts have been paid to the proper
taxing authorities; and (iii) if requested by Buyer, pay its payroll and
related taxes through a bank or an independent payroll service acceptable to
Buyer.
Page 7
<PAGE>
(D) Seller has not, as of the time Seller delivers to Buyer an
Invoice Transmittal, or as of the time Seller accepts any Advance from
Buyer, filed a voluntary petition for relief under the United States
Bankruptcy Code or had filed against it an involuntary petition for relief;
(E) If Seller owns, holds or has any interest in, any
copyrights (whether registered, or unregistered), patents or trademarks,
and licenses of any of the foregoing, such interest has been disclosed to
Buyer and is specifically listed and identified on a schedule to this
Agreement, and Seller shall immediately notify Buyer if Seller hereafter
obtains any interest in any additional copyrights, patents, trademarks or
licenses that are significant in value or are material to the conduct of its
business; and
(F) Seller shall provide Buyer with a Compliance Certificate
(i) on a monthly basis to be received by Buyer no later than the fifth
business day following each calendar month, and; (ii) on a more frequent
or other basis if and as requested by Buyer; and
(G) Seller shall provide Buyer with Monthly Financial
Statements(Balance Sheet, Income Statement and Statement of Cash Flow) to be
received by Buyer no later than the twentieth business day following each
month end; and
(H) Seller shall provide Buyer with a weekly cash flow update on
the first business day of every week.
7. Adjustments. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall
promptly advise Buyer and shall, subject to the Buyer's approval, resolve
such disputes and advise Buyer of any adjustments. Unless the disputed
Purchased Receivable is repurchased by Seller and the full Repurchase Amount
is paid, Buyer shall remain the absolute owner of any Purchased Receivable
which is subject to Adjustment or repurchase under Section 4.2 hereof, and
any rejected, returned, or recovered personal property, with the right to
take possession thereof at any time. If such possession is not taken by
Buyer, Seller is to resell it for Buyer's account at Seller's expense with
the proceeds made payable to Buyer. While Seller retains possession of said
returned goods, Seller shall segregate said goods and mark them "property of
Silicon Valley Financial Services".
8. Security Interest. To secure the prompt payment and performance to
Buyer of all of the Obligations, Seller hereby grants to Buyer a continuing
lien upon and security interest in all of Seller's now existing or
hereafter arising rights and interest in the following , whether now owned
or existing or hereafter created, acquired, or arising, and wherever located
(collectively, the "Collateral"):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, letters of credit, bankers acceptances, drafts,
checks, cash, securities, and general intangibles (including, without
limitation, all claims, causes of action, deposit accounts, guaranties,
rights in and claims under insurance policies (including rights to premium
refunds), rights to tax refunds, copyrights, patents, trademarks, rights in
and under license agreements, and all other intellectual property);
(B) All inventory, including Seller's rights to any returned or
rejected goods, with respect to which Buyer shall have all the rights of
any unpaid seller, including the rights of replevin, claim and delivery,
reclamation, and stoppage in transit;
Page 8
<PAGE>
(C) All monies, refunds and other amounts due Seller, including,
without limitation, amounts due Seller under this Agreement (including
Seller's right of offset and recoupment);
(D) All equipment, machinery, furniture, furnishings, fixtures, tools,
supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like (including
oil and gas);
(F) All accessions to, substitutions for, and replacements of, all of
the foregoing;
(G) All books and records pertaining to all of the foregoing; and
(H) All proceeds of the foregoing, whether due to voluntary or
involuntary disposition, including insurance proceeds.
Seller is not authorized to sell, assign, transfer or otherwise convey
any Collateral without Buyer's prior written consent, except for the sale of
finished inventory in the Seller's usual course of business. Seller agrees
to sign UCC financing statements, in a form acceptable to Buyer, and any
other instruments and documents requested by Buyer to evidence, perfect, or
protect the interests of Buyer in the Collateral. Seller agrees to deliver
to Buyer the originals of all instruments, chattel paper and documents
evidencing or related to Purchased Receivables and Collateral.
Buyer acknowledges that its security interest in certain of the
Seller's assets will be junior to the existing liens of Comerica Bank,
Phoenix Leasing Incorporated, Copelco Capital, Comdisco, Inc., MMC/GATX
Partnership No. 1, Heller Financial, Transamerica Business Credit
Corporation, The CIT Group, Nissho Iwai American Corporation, APIC Yamada
Corporation, Mitsui High-tec Inc., and ICOS Vision Systems, Inc.
9. Default. The occurrence of any one or more of the following shall
constitute an Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or any assignment
for the benefit of creditors, or appointment of a receiver or custodian for
any of its assets;
(C) If there occurs a material impairment in the perfection or
priority of the Buyer's security interest in the Collateral or in the value
of such Collateral which is not covered by adequate insurance or (ii) if the
Bank determines, in its reasonable opinion, based upon information available
to it that Borrower's financial condition has materially deteriorated.
(D) Any involuntary lien, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or any Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to Buyer's
satisfaction within ten (10) days after Buyer has given Seller oral or
written notice thereof; provided, that if such breach is incapable of being
cured it shall constitute an immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default
under, any term of any document, instrument or agreement evidencing a debt,
obligation or liability of any kind or character of Seller, now or hereafter
existing, in favor of Buyer or any division or affiliate of Silicon Valley
Bank, regardless of whether such debt, obligation or liability is direct or
indirect, primary or secondary, joint, several or joint and several, or
fixed or contingent, together with any and all renewals and extensions of
such debts, obligations and liabilities, or any part thereof;
(G) An event of default shall occur under any guaranty executed by
any guarantor of the Obligations of Seller to Buyer under this Agreement,
or any material provision of any such guaranty shall for any reason cease to
be valid or enforceable or any such guaranty shall be repudiated or
terminated, including by operation of law;
Page 9
<PAGE>
(H) Any creditor that has entered into a subordination agreement with
Buyer shall breach any of the terms of or not comply with such subordination
agreement.
10. Remedies Upon Default. Upon the occurrence of an Event of Default,
(1) without implying any obligation to buy receivables, Buyer may cease
buying receivables or extending any financial accommodations to Seller; (2)
all or a portion of the Obligations shall be, at the option of and upon
demand by Buyer, or with respect to an Event of Default described in Section
9(B), automatically and without notice or demand, due and payable in full;
and (3) Buyer shall have and may exercise all the rights and remedies under
this Agreement and under applicable law, including the rights and remedies
of a secured party under the California Uniform Commercial Code, all the
power of attorney rights described in Section 5 with respect to all
Collateral, and the right to collect, dispose of, sell, lease, use, and
realize upon all Purchased Receivables and all Collateral in any commercial
reasonable manner. Seller and Buyer agree that any notice of sale required
to be given to Seller shall be deemed to be reasonable if given five (5)
days prior to the date on or after which the sale may be held. In the event
that the Obligations are accelerated hereunder, Seller shall repurchase all
of the Purchased Receivables as set forth in Section 4.4.
11. Accrual of Interest. If any amount owed by Seller hereunder is not
paid when due, including, without limitation, amounts due under Section 3.5,
Repurchase Amounts, amounts due under Section 12, and any other Obligations,
such amounts shall bear interest at a per annum rate equal to the per annum
rate of the Finance Charges until the earlier of (i) payment in good funds
or (ii) entry of a final judgment thereof, at which time the principal
amount of any money judgment remaining unsatisfied shall accrue interest at
the highest rate allowed by applicable law.
12. Fees, Costs and Expenses; Indemnification. The Seller will pay to
Buyer immediately upon demand all fees, costs and expenses (including
fees of attorneys and professionals and their costs and expenses) that
Buyer incurs or may from time to time impose in connection with any of
the following: (a) preparing, negotiating, administering, and enforcing this
Agreement or any other agreement executed in connection herewith,
including any amendments, waivers or consents in connection with any of the
foregoing, (b) any litigation or dispute (whether instituted by Buyer,
Seller or any other person) in any way relating to the Purchased
Receivables, the Collateral, this Agreement or any other agreement executed
in connection herewith or therewith, (d) enforcing any rights against Seller
or any guarantor, or any Account Debtor, (e) protecting or enforcing its
interest in the Purchased Receivables or the Collateral, (f) collecting the
Purchased Receivables and the Obligations, and (g) the representation of
Buyer in connection with any bankruptcy case or insolvency proceeding
involving Seller, any Purchased Receivable, the Collateral, any Account
Debtor, or any guarantor. Seller shall indemnify and hold Buyer harmless
from and against any and all claims, actions, damages, costs, expenses, and
liabilities of any nature whatsoever arising in connection with any of the
foregoing.
Page 10
<PAGE>
13. Severability, Waiver, and Choice of Law. In the event that any
provision of this Agreement is deemed invalid by reason of law, this
Agreement will be construed as not containing such provision and the
remainder of the Agreement shall remain in full force and effect. Buyer
retains all of its rights, even if it makes an Advance after a default. If
Buyer waives a default, it may enforce a later default. Any consent or
waiver under, or amendment of, this Agreement must be in writing. Nothing
contained herein, or any action taken or not taken by Buyer at any time,
shall be construed at any time to be indicative of any obligation or
willingness on the part of Buyer to amend this Agreement or to grant to
Seller any waivers or consents. This Agreement has been transmitted by
Seller to Buyer at Buyer's office in the State of California and has been
executed and accepted by Buyer in the State of California. This Agreement
shall be governed by and interpreted in accordance with the internal laws of
the State of California.
14. Account Collection Services. Certain Account Debtors may require or
prefer that all of Seller's receivables be paid to the same address and/or
party, or Seller and Buyer may agree that all receivables with respect to
certain Account Debtors be paid to one party. In such event Buyer and
Seller may agree that Buyer shall collect all receivables whether owned by
Seller or Buyer and (provided that there does not then exist an Event of
Default or event that with notice, lapse or time or otherwise would
constitute an Event of Default, and subject to Buyer's rights in the
Collateral) Buyer agrees to remit to Seller the amount of the receivables
collections it receives with respect to receivables other than Purchased
Receivables. It is understood and agreed by Seller that this Section does
not impose any affirmative duty on Buyer to do any act other than to turn
over such amounts. All such receivables and collections are Collateral and
in the event of Seller's default hereunder, Buyer shall have no duty to
remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have the rights of a secured party
under the California Uniform Commercial Code.
15. Notices. All notices shall be given to Buyer and Seller at the
addresses or faxes set forth on the first page of this Agreement and shall
be deemed to have been delivered and received: (a) if mailed, three (3)
calendar days after deposited in the United States mail, first class,
postage pre-paid, (b) one (1) calendar day after deposit with an overnight
mail or messenger service; or (c) on the same date of confirmed
transmission if sent by hand delivery, telecopy, telefax or telex.
In addition, all notices to Seller shall be made to the following
address:
Craig M. Primm
Murray & Murray, A Professional Corporation
3030 Hansen Way, Suite 200
Palo Alto, CA 94303-1009
Facsimile: 650/852-9244
Telephone: 650/852-9000
16. Jury Trial. SELLER AND BUYER EACH HEREBY (a) WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL ON ANY CLAIM OR ACTION ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, ANY RELATED AGREEMENTS, OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY; (b) RECOGNIZE AND AGREE THAT
THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO
THIS AGREEMENT; AND (c) REPRESENT AND WARRANT THAT IT HAS REVIEWED THIS
WAIVER, HAS DETERMINED FOR ITSELF THE NECESSITY TO REVIEW THE SAME WITH ITS
LEGAL COUNSEL, AND KNOWINGLY AND VOLUNTARILY WAIVES ALL RIGHTS TO A JURY
TRIAL.
Page 11
<PAGE>
17. Term and Termination. The term of this Agreement shall be for one (1)
year from the date hereof, and from year to year thereafter unless
terminated in writing by Buyer or Seller. Seller and Buyer shall each have
the right to terminate this Agreement at any time. Notwithstanding the
foregoing, any termination of this Agreement shall not affect Buyer's
security interest in the Collateral and Buyer's ownership of the Purchased
Receivables, and this Agreement shall continue to be effective, and Buyer's
rights and remedies hereunder shall survive such termination, until all
transactions entered into and Obligations incurred hereunder or in
connection herewith have been completed and satisfied in full.
18. Titles and Section Headings. The titles and section headings used
herein are for convenience only and shall not be used in interpreting this
Agreement.
19. Other Agreements. The terms and provisions of this Agreement shall
not adversely affect the rights of Buyer or any other division or affiliate
of Silicon Valley Bank under any other document, instrument or agreement.
The terms of such other documents, instruments and agreements shall remain
in full force and effect notwithstanding the execution of this Agreement.
In the event of a conflict between any provision of this Agreement and any
provision of any other document, instrument or agreement between Seller on
the one hand, and Buyer or any other division or affiliate of Silicon Valley
Bank on the other hand, Buyer shall determine in its sole discretion which
provision shall apply. Seller acknowledges specifically that any security
agreements, liens and/or security interests currently securing payment of
any obligations of Seller owing to Buyer or any other division or affiliate
of Silicon Valley Bank also secure Seller's obligations under this
Agreement, and are valid and subsisting and are not adversely affected by
execution of this Agreement. Seller further acknowledges that (a) any
collateral under other outstanding security agreements or other documents
between Seller and Buyer or any other division or affiliate of Silicon
Valley Bank secures the obligations of Seller under this Agreement and (b)
a default by Seller under this Agreement constitutes a default under other
outstanding agreements between Seller and Buyer or any other division or
affiliate of Silicon Valley Bank.
Page 12
<PAGE>
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
(408) 654-1000 - Fax (408) 980-6410
CERTIFICATION of OFFICERS
The undersigned, being all the officers of Integrated Packaging
Assembly Corporation, a California corporation (the "Corporation"), hereby
certify to Silicon Valley Financial Services, a division of Silicon Valley
Bank ("SVFS") that:
1. The correct name of the Corporation is Integrated Packaging
Assembly Corporation , as set forth in the Articles of Incorporation.
2. The Corporation was incorporated on April 28, 1992, under the laws
of the State of
California , and is in good standing under such laws.
3. The Corporation's place of business and chief executive office
being the place at which the Corporation maintains its books and records
pertaining to accounts, accounts receivables, contract rights, chattel
paper, general intangibles, instruments, documents, inventory, and
equipment, is located at:
2221 Old Oakland Road
San Jose, California 95131
4. The Corporation has other places of business at the following
addressees:
5. There is no provision in the Certificate of Incorporation,
Articles of Incorporation, or Bylaws of the Corporation, or in the laws of
the State of its incorporation, requiring any vote or consent of
shareholders to authorize the sale of receivables or the grant of a security
interest in any assets of the Corporation. Such power is vested exclusively
in the Corporation's Board of Directors.
6. The officers of the Corporation, and their respective titles and
signatures are as follows:
7. Except as indicated in this paragraph 7, each of the officers
listed in paragraph 6 has signatory powers with respect to all the
Corporation's transactions with SVFS. Explanation of exceptions:
8. The undersigned shall give SVFS prompt written notice of any
change or amendment with respect to any of the foregoing. Until such
written notice is received by SVFS, SVFS shall be entitled to rely upon the
foregoing in all respects.
IN WITNESS WHEREOF, the undersigned have executed this Certification
of Officers on 10/09/98.
SELLER: Integrated Packaging Assembly Corporation
By
------------------------------------------------
Title
---------------------------------------------
BUYER: Silicon Valley Financial Services
By
------------------------------------------------
Title
---------------------------------------------
Page 13
<PAGE>
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
(408) 654-1000 - Fax (408) 980-6410
CERTIFICATION OF OFFICERS
The undersigned, being all the officers of Integrated Packaging
Assembly Corporation, a California corporation (the "Corporation"), hereby
certify to Silicon Valley Financial Services, a division of Silicon Valley
Bank ("SVFC") that:
1. The correct name of the Corporation is Integrated Packaging
Assembly Corporation, as set forth in the Articles of Incorporation.
2. The Corporation was incorporated on April 28, 1992, under the laws
of the State of California, and is in good standing under such laws.
3. The Corporation's place of business and chief executive office
being the place at which the Corporation maintains its books and records
pertaining to accounts, accounts receivables, contract rights, chattel
paper, general intangibles, instruments, documents, inventory, and
equipment, is located at:
2221 Old Oakland Road
San Jose, California 95131
4. The Corporation has other places of business at the following
addresses:
None
5. There is no provision in the Certificate of Incorporation, Articles
of Incorporation, or Bylaws of the Corporation, or in the laws of the State
of its incorporation, requiring any vote or consent of shareholders to
authorize the sale of receivables or the grant of a security interest in any
assets of the Corporation. Such power is vested exclusively in the
Corporation's Board of Directors.
6. The officers of the Corporation, and their respective titles and
signatures are as follows:
President:
----------------------------------------
(Signature)
Vice President:
----------------------------------------
(Signature)
Secretary:
----------------------------------------
(Signature)
Treasurer:
----------------------------------------
(Signature)
Other Officer:
Title:
----------------------------------------
(Signature)
Page 14
<PAGE>
7. Except as indicated in this paragraph 7, each of the officers
listed in paragraph 6 has signatory powers with respect to all the
Corporation's transactions with SVFS. Explanation of exceptions:
8. The undersigned shall give SVFS prompt written notice of any change
or amendment with respect to any of the foregoing. Until such written
notice is received by SVFS, SVFS shall be entitled to rely upon the
foregoing in all respects.
IN WITNESS WHEREOF, the undersigned have executed this Certification of
Officers on 10/09/98.
President:
----------------------------------------
Vice President:
----------------------------------------
Secretary:
----------------------------------------
Treasurer:
----------------------------------------
Page 15
<PAGE>
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
(408) 654-1000 - Fax (408) 980-6410
SECRETARY'S CERTIFICATE OF RESOLUTION
The undersigned, as Secretary of Integrated Packaging Assembly
Corporation, a California corporation (the "Corporation"), hereby
certifies to Silicon Valley Financial Services that at a meeting duly
convened at which a quorum was present the following resolutions were
adopted by the Board of Directors of the Corporation and that such
resolutions have not been modified, amended, or rescinded in any respect and
are in full force and effect as of today's date.
RESOLVED, that this corporation be and hereby is authorized to sell
this corporation's accounts receivable to Silicon Valley Financial Services,
a division of Silicon Valley Bank, and to grant Silicon Valley Financial
Services a security interest in this corporation's assets, including,
without limitation, accounts, accounts receivable, contract rights, chattel
paper, general intangibles, instruments, documents, letters of credit,
drafts, inventory and equipment, presently owned or hereafter acquired
and proceeds and products of the foregoing (the "Collateral," as defined in
the Factoring Agreement).
RESOLVED, that this corporation be and hereby is authorized and
directed to execute and deliver certain agreements in connection with the
sale of receivables, and granting of security interests in the Collateral to
Silicon Valley Financial Services including, without limitations, a
Factoring Agreement and UCC-1 financing statement.
RESOLVED, that the following named officers of this corporation
("Authorized Officers") be, and any of them hereby are, authorized,
empowered, and directed to execute and deliver to Silicon Valley Financial
Services on behalf of this corporation all such further agreements and
instruments as may be deemed necessary or advisable in order to fully
effectuate the purposes and intent of the foregoing resolutions.
Print Names of Authorized Officers: Title:
- ----------------------------------------- -------------------------
- ----------------------------------------- -------------------------
- ----------------------------------------- -------------------------
- ----------------------------------------- -------------------------
- ----------------------------------------- -------------------------
- ----------------------------------------- -------------------------
RESOLVED, that the Secretary or Assistant Secretary of this corporation
be, and hereby is authorized, empowered and directed to certify to the
passage of the foregoing resolutions under the seal of this corporation.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate this
Nineth day of October 1998.
----------------------------------------------
Signature
Secretary of Integrated Packaging Assembly Corporation
Page 16
<PAGE>
EXHIBIT 10.27
ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT
This Accounts Receivable Purchase Modification Agreement is entered
into as of December 8, 1998, by and between Integrated Packaging Assembly
Corporation (the "Seller") whose address is 2221 Old Oakland Road, San Jose,
California 95131 and Silicon Valley Financial Services, a division of
Silicon Valley Bank ("Buyer"), whose address is 3003 Tasman Drive, Santa
Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Seller to Buyer, Seller is indebted to Buyer pursuant to,
among other documents, a Accounts Receivable Purchase Agreement, dated
October 9 , 1998 by and between Seller and Buyer ( the "Accounts Receivable
Purchase Agreement"). Capitalized terms used without definition herein
shall have the meanings assigned to them in the Accounts Receivable Purchase
Agreement.
Hereinafter, all indebtedness owing by Seller to Buyer shall be
referred to as the "Indebtedness" and the Accounts Receivable Purchase
Agreement and any and all other documents executed by Seller in favor of
Buyer shall be referred to as the "Existing Documents".
2. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Accounts Receivable Purchase Agreement,
effective as of December 1, 1998:.
The first sentence of Section 3.2. shall be amended as follows:
On each Reconciliation Date Seller shall pay to Buyer a finance
charge in an amount equal to 1.25 (%) percent per month of the average daily
Account Balance outstanding during the applicable Reconciliation Period
(the "Finance Charges").
The first sentence of Section 3.3. shall be amended as follows:
On each Reconciliation Date Seller shall pay to Buyer an
administrative fee equal to .50 (%) percent of the face amount of each
Purchased Receivable first purchased during that Reconciliation Period (the
"Administrative Fee").
The first sentence of Section 17 shall be amended as follows:
This Agreement shall be terminated June 1, 1999 unless terminated
in writing by Buyer or Seller at a sooner date.
Page 1
<PAGE>
3. CONSISTENT CHANGES. The Existing Documents are each hereby amended
wherever necessary to reflect the changes described above.
4. NO DEFENSES OF SELLER. Seller agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
5. CONTINUING VALIDITY. Seller understands and agrees that in modifying
the existing Indebtedness, Buyer is relying upon Seller's representations,
warranties, and agreements, as set forth in the Existing Documents. Except
as expressly modified pursuant to this Accounts Receivable Purchase
Modification Agreement, the terms of the Existing Documents remain unchanged
and in full force and effect. Buyer's agreement to modifications to the
existing Indebtedness pursuant to this Accounts Receivable Purchase
Modification Agreement in no way shall obligate Buyer to make any future
modifications to the Indebtedness. Nothing in this Accounts Receivable
Purchase Modification Agreement shall constitute a satisfaction of the
Indebtedness. It is the intention of Buyer and Seller to retain as liable
parties all makers and endorsers of Existing Documents, unless the party is
expressly released by Buyer in writing. No maker, endorser, or guarantor
will be released by virtue of this Accounts Receivable Purchase Modification
Agreement. The terms of this paragraph apply not only to this Accounts
Receivable Purchase Modification Agreement, but also to any subsequent
Accounts Receivable Purchase modification agreements.
This Accounts Receivable Purchase Modification Agreement is executed as of
the date first written above.
SELLER: BUYER:
Integrated Packaging Assembly Silicon Valley Financial Services,
Corporation a division of Silicon Valley Bank
By: By:
-------------------------------- ----------------------------------
Name: Name:
------------------------------ --------------------------------
Title: Title:
----------------------------- -------------------------------
Page 2
<PAGE>
EXHIBIT 10.28
ACCOUNTS RECEIVABLE PURCHASE MODIFICATION AGREEMENT
This Accounts Receivable Purchase Modification Agreement is entered
into as of December 15, 1998, by and between Integrated Packaging Assembly
Corporation (the "Seller") whose address is 2221 Old Oakland Road, San Jose,
California 95131 and Silicon Valley Financial Services, a division of
Silicon Valley Bank ("Buyer"), whose address is 3003 Tasman Drive, Santa
Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Seller to Buyer, Seller is indebted to Buyer pursuant to,
among other documents, a Accounts Receivable Purchase Agreement, dated
October 9, 1998, by and between Seller and Buyer (the "Accounts Receivable
Purchase Agreement") and further modified by that Accounts Receivable
Purchase Modification Agreement dated December 8, 1998. Capitalized terms
used without definition herein shall have the meanings assigned to them in
the Accounts Receivable Purchase Agreement.
Hereinafter, all indebtedness owing by Seller to Buyer shall be referred to
as the "Indebtedness" and the Accounts Receivable Purchase Agreement and
any and all other documents executed by Seller in favor of Buyer shall be
referred to as the "Existing Documents".
2. DESCRIPTION OF CHANGE IN TERMS.
Modification(s) to Accounts Receivable Purchase Agreement, effective as
of the date first written above:.
The following shall be added Section 6.2.:
(I) Quarterly, Seller agrees to provide Buyer with an Account
Receivable Audit (the "Audit"). The Audit is to be performed at Seller's
expense by an acceptable party (the "Auditor") to Buyer.
(J) Seller shall provide Buyer with an accounts payable report
from Seller's Account Debtor's consisting of open invoices to Seller, which
equates to 20% of Seller's Account Balance, on a monthly basis to be
received by Buyer no later than the tenth day following each calendar month.
(K) Seller shall provide Buyer with an invoice and purchase order
for those certain receivables that Seller wishes Buyer to purchase.
3. CONSISTENT CHANGES. The Existing Documents are each hereby amended
wherever necessary to reflect the changes described above.
Page 1
<PAGE>
4. NO DEFENSES OF SELLER. Seller agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
5. CONTINUING VALIDITY. Seller understands and agrees that in modifying
the existing Indebtedness, Buyer is relying upon Seller's representations,
warranties, and agreements, as set forth in the Existing Documents. Except
as expressly modified pursuant to this Accounts Receivable Purchase
Modification Agreement, the terms of the Existing Documents remain unchanged
and in full force and effect. Buyer's agreement to modifications to the
existing Indebtedness pursuant to this Accounts Receivable Purchase
Modification Agreement in no way shall obligate Buyer to make any future
modifications to the Indebtedness. Nothing in this Accounts Receivable
Purchase Modification Agreement shall constitute a satisfaction of the
Indebtedness. It is the intention of Buyer and Seller to retain as liable
parties all makers and endorsers of Existing Documents, unless the party is
expressly released by Buyer in writing. No maker, endorser, or guarantor
will be released by virtue of this Accounts Receivable Purchase Modification
Agreement. The terms of this paragraph apply not only to this Accounts
Receivable Purchase Modification Agreement, but also to any subsequent
Accounts Receivable Purchase modification agreements.
This Accounts Receivable Purchase Modification Agreement is executed as of
the date first written above.
SELLER: BUYER:
Integrated Packaging Assembly Silicon Valley Financial Services,
Corporation a division of Silicon Valley Bank
By: By:
-------------------------------- -------------------------------
Name: Name:
------------------------------ -----------------------------
Title: Title:
----------------------------- ----------------------------
Page 2
<PAGE>
EXHIBIT 10.29
LOAN AND SECURITY AGREEMENT
between
INTEGRATED PACKAGING ASSEMBLY CORPORATION
and
SILICON VALLEY FINANCIAL SERVICES,
a Division of Silicon Valley Bank
TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION 1
1.1. Definitions 1
1.2. Accounting and Other Terms 7
1.3. No Presumption Against Any Party 7
2. LOAN AND TERMS OF PAYMENT 8
2.1. Credit Extensions 8
2.2. Overadvances 9
2.3. Default Rates, Payments, and Calculations 9
2.4. Crediting Payments 9
2.5. Fees 9
2.6. Additional Costs 10
2.7. Term 10
3. CONDITIONS OF LOANS 10
3.1. Conditions Precedent to Initial Credit Extension 10
3.2. Conditions Precedent to all Loans Credit Extensions 11
4. CREATION OF SECURITY INTEREST 11
4.1. Grant of Security Interest 11
4.2. Delivery of Additional Documentation Required 11
4.3. Right to Inspect 12
5. REPRESENTATIONS AND WARRANTIES 12
5.1. Due Organization and Qualification 12
5.2. Due Authorization; No Conflict 12
5.3. No Prior Encumbrances 12
5.4. Intellectual Property 12
5.5. Name; Location of Chief Executive Office 13
5.6. Financial Statements 13
5.7. Regulatory Compliance 13
5.8. Environmental Condition 13
5.9. Taxes 13
5.10. Subsidiaries 13
5.11. Government Consents 14
5.12. Full Disclosure 14
Page 73
<PAGE>
6. AFFIRMATIVE COVENANTS 14
6.1. Good Standing 14
6.2. Government Compliance 14
6.3. Financial Statements, Reports, Certificates 14
6.4. Taxes 15
6.5. Insurance 15
6.6. Principal Depository 15
6.7. Registration of Intellectual Property Rights 15
6.8. Further Assurances 16
7. NEGATIVE COVENANTS 16
7.1. Dispositions 16
7.2. Changes in Business, Ownership, or Management,
Business Locations 16
7.3. Mergers or Acquisitions 16
7.4. Indebtedness 17
7.5. Distributions 17
7.6. Investments 17
7.7. Transactions with Affiliates 17
7.8. Intellectual Property Agreements 17
7.9. Subordinated Debt 17
7.10. Compliance 17
8. EVENTS OF DEFAULT 17
8.1. Payment Default 18
8.2. Covenant Default 18
8.3. Insolvency 18
8.4. Misrepresentations 18
8.5. Guaranty 18
9. BANK'S RIGHTS AND REMEDIES 18
9.1. Rights and Remedies 18
9.2. Power of Attorney 20
9.3. Accounts Collection 20
9.4. Bank Expenses 20
9.5. Bank's Liability for Collateral 21
9.6. Remedies Cumulative 21
9.7. Demand; Protest 21
10. NOTICES 21
11. CHOICE OF LAW AND VENUE; WAIVER OF JURY TRIAL 22
12. GENERAL PROVISIONS 22
12.1. Successors and Assigns 22
12.2. Indemnification 22
12.3. Time of Essence 22
12.4. Severability of Provisions 22
12.5. Amendments in Writing, Integration 22
12.6. Counterparts 23
12.7. Survival 23
12.8. Confidentiality 23
Page 74
<PAGE>
This LOAN AND SECURITY AGREEMENT, dated as of December ___, 1998 is between
SILICON VALLEY FINANCIAL SERVICES, a division of Silicon Valley Bank
("Bank") and INTEGRATED PACKAGING ASSEMBLY CORPORATION, a Delaware
corporation ("Borrower").
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1. Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person,
and each of such Person's senior executive officers, directors, partners
and, for any Person that is a limited liability company, such Persons,
managers and members.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency
Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Collateral" means the property described on Exhibit A attached
hereto.
Page 1
<PAGE>
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect
to undrawn letters of credit issued for the account of that Person; and
(iii) all obligations arising under any interest rate, currency or commodity
swap agreement, interest rate cap agreement, interest rate collar agreement,
or other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided that such
amount shall not in any event exceed the maximum amount of the obligations
under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Revolving Loan, or any other
extension of credit by Bank for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its
Subsidiaries, as at such date, plus, to the extent not already included
therein, all outstanding Credit Extensions made under this Agreement,
including all Indebtedness that is payable upon demand or within one year
from the date of determination thereof unless such Indebtedness is renewable
or extendable at the option of Borrower or any Subsidiary to a date more
than one year from the date of determination, but excluding Subordinated
Debt.
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
Page 2
<PAGE>
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning set forth in Section 8.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Guarantor" means any present or future guarantor of the
Obligations, including, without limitation, CONFIDENTIAL.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works, and all license fees and royalties
arising from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
Page 3
<PAGE>
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance
or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance (or any agreement to grant any of the
foregoing, whether or not contingent on the happening of any future event).
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to time.
"Mask Works" means all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired;
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan
Documents, (iii) the value or priority of Bank's security interests in the
Collateral.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement,
whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability,
or obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of
the same.
Page 4
<PAGE>
"Payment Date" means the last calendar day of each month.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or
any State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the
date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service,
Inc., and (iii) certificates of deposit maturing no more than one (1) year
from the date of investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date or arising under
this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as
a whole, and any interest or title of a lessor, licensor or under any lease
or license provided that such leases, subleases, licenses and sublicenses do
not prohibit the grant of the security interest granted hereunder; and
Page 5
<PAGE>
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Responsible Officer" means each of the Chief Executive Officer,
the President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Commitment" means a credit extension of up to
$6,950,000.00.
"Revolving Loan" means a loan advance under the Revolving
Commitment.
"Revolving Maturity Date" means June 1, 1999.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than 50% of the voting stock or other equity interests
is owned or controlled, directly or indirectly, by such Person.
"Total Liabilities" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that
should, in accordance with GAAP be classified as liabilities on the
consolidated balance sheet of Borrower, including in any event all
Indebtedness, but specifically excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same
and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.
Page 6
<PAGE>
"UCC" means the California Uniform Commercial Code.
"Year 2000 Problem" means the inability of computers, as well as
embedded microchips in non-computing devices, to properly perform date-
sensitive functions with respect to certain dates prior to and after
December 31, 1999.
1.2. Accounting and Other Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and
all calculations and determinations made hereunder shall be made in
accordance with GAAP. When used herein, the term "financial statements"
shall include the notes and schedules thereto. In the computation of
periods of time from a specified date to a later specified date, the word
"from" means "from and including" and the words "to" and "until" each mean
"to but excluding." Periods of days referred to in this Agreement shall be
counted in calendar days unless otherwise stated. References to the plural
include the singular and to the singular include the plural, references to
any gender include any other gender, the part includes the whole, the term
"including" is not limiting, and the term "or" has, except where otherwise
indicated, the inclusive meaning represented by the phrase "and/or." The
words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. Article, section, subsection, clause, exhibit
and schedule references are to this Agreement, unless otherwise specified.
All of the exhibits and schedules attached hereto shall be deemed
incorporated herein by reference. All terms contained in this Agreement
which are not otherwise specifically defined herein (including the term
"good faith") shall have the meanings provided by the UCC to the extent the
same are used or defined therein.
1.3. No Presumption Against Any Party. Neither this Agreement nor
any other Loan Document nor any uncertainty or ambiguity herein or therein
shall be construed or resolved using any presumption against any party
hereto or thereto, whether under any rule of construction or otherwise. On
the contrary, this Agreement and the other Loan Documents have been reviewed
by each of the parties and their counsel and, in the case of any ambiguity
or uncertainty, shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
Page 7
<PAGE>
2. LOAN AND TERMS OF PAYMENT
2.1. Credit Extensions. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower
hereunder. Borrower shall also pay interest on the unpaid principal amount
of such Loans at rates in accordance with the terms hereof.
2.1.1. (a) Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Revolving Loans to Borrower in an
aggregate outstanding amount not to exceed the Revolving Commitment,
provided, however, that the aggregate amount of the Revolving Loans made in
each of the hereafter described time periods shall not exceed the amount
hereafter specified for such time period: (i) $1,454,200.00 during the
period from December 1, 1998 to December 31, 1999; (ii) $2,020,700.00 during
the period from January 1, 1999 to January 31, 1999; (iii) $1,194,600.00
during the period from February 1, 1999 to February 28, 1999;
(iv) $1,314,500.00 during the period from March 1, 1999 to April 4, 1999;
(v) $585,200.00 during the period from April 5, 1999 to May 2, 1999; and
(vi) $603,900.00 during the period from May 3, 1999 to May 30, 1999.
Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1 may be repaid and reborrowed at any time during
the term of this Agreement.
(b) Whenever Borrower desires a Revolving Loan,
Borrower will notify Bank by facsimile transmission or telephone no later
than 3:00 p.m. Pacific time, on the Business Day that such Revolving Loan is
to be made, and Borrower shall simultaneously deliver a copy of each such
notice to the Guarantor. Each such notification shall be promptly confirmed
by a Payment/Loan Form in substantially the form of Exhibit B hereto. Bank
is authorized to make Loans under this Agreement, based upon instructions
received from a Responsible Officer or a designee of a Responsible Officer,
or without instructions if in Bank's discretion such Loans are necessary to
meet Obligations which have become due and remain unpaid. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer or a designee thereof, and
Borrower shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the amount
of Loans made under this Section 2.1 to Borrower's deposit account.
(c) Interest Rate. Except as set forth in Section
2.3(b), the outstanding principal amount of the Revolving Loans shall bear
interest, on the average daily balance thereof, at a per annum rate equal to
the Prime Rate.
(d) The Revolving Commitment shall terminate on the
Revolving Maturity Date, at which time all Revolving Loans and accrued
interest thereon shall be immediately due and payable.
Page 8
<PAGE>
2.2. Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1, of this
Agreement is greater than the Revolving Commitment, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.3. Default Rates, Payments, and Calculations.
(a) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate
equal to five percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(b) Payments. Interest hereunder shall be due and
payable on each Payment Date. Borrower hereby authorizes Bank to debit any
accounts with Bank, including, without limitation, Account Number
for payments of principal and interest due on the Obligations and any other
amounts owing by Borrower to Bank. Bank will notify Borrower of all debits
which Bank has made against Borrower's accounts. Any such debits against
Borrower's accounts in no way shall be deemed a set-off. Any interest not
paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.
(c) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest
hereunder shall be increased or decreased effective as of 12:01 a.m. on the
day the Prime Rate is changed, by an amount equal to such change in the
Prime Rate. All interest chargeable under the Loan Documents shall be
computed on the basis of a 360-day year for the actual number of days
elapsed.
2.4. Crediting Payments . Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After
the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment, whether directed to
Borrower's deposit account with Bank or to the Obligations or otherwise,
shall be immediately applied to conditionally reduce Obligations, but shall
not be considered a payment in respect of the Obligations unless such
payment is of immediately available federal funds or unless and until such
check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any wire transfer
or payment received by Bank after 12:00 noon Pacific time shall be deemed to
have been received by Bank as of the opening of business on the immediately
following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the
next Business Day, and additional fees or interest, as the case may be,
shall accrue and be payable for the period of such extension.
2.5. Fees. Borrower shall pay to Bank the following:
(a) Due Diligence Fee. A Due Diligence Fee equal to
$ 1,000.00, which fee shall be due on the Closing Date and shall be fully
earned and non-refundable (the prior receipt of which by Bank is hereby
acknowledged by Bank); and
Page 9
<PAGE>
(b) Bank Expenses. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through
the date hereof, including reasonable attorneys' fees and expenses, and,
after the date hereof, all Bank Expenses, including reasonable attorneys.
fees and expenses, as and when they become due.
2.6. Additional Costs. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments
of principal or interest or any other amounts payable hereunder by Borrower
or otherwise with respect to the transactions contemplated hereby (except
for taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect
to its performance under this Agreement, and the result of any of the
foregoing is to increase the cost to Bank, reduce the income receivable by
Bank or impose any expense upon Bank with respect to any loans, Bank shall
notify Borrower thereof. Borrower agrees to pay to Bank the amount of such
increase in cost, reduction in income or additional expense as and when such
cost, reduction or expense is incurred or determined, upon presentation by
Bank of a statement of the amount and setting forth Bank's calculation
thereof, all in reasonable detail, which statement shall be deemed true and
correct absent manifest error.
2.7. Term. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7,
shall continue in full force and effect until the Loans and all interest
thereon have been fully and finally paid. Notwithstanding the foregoing,
Bank shall have the right to terminate its obligation to make Loans under
this Agreement immediately and without notice upon the occurrence and during
the continuance of an Event of Default.
3. CONDITIONS OF LOANS
3.1. Conditions Precedent to Initial Credit Extension. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) a guaranty by the Guarantor;
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and
(f) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
Page 10
<PAGE>
3.2. Conditions Precedent to all Loans Credit Extensions. The
obligation of Bank to make each Credit Extension, including the initial Loan
Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Loan Form as
provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of
the date of such Payment/Loan Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Default shall
have occurred and be continuing, or would result from such Credit Extension.
The making of each Credit Extension shall be deemed to be a representation
and warranty by Borrower on the date of such Credit Extension as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1. Grant of Security Interest. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and
all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Except as set
forth in the Schedule, such security interest constitutes a valid, first
priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof. Notwithstanding termination of this Agreement,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
4.2. Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order
to fully consummate all of the transactions contemplated under the Loan
Documents.
Page 11
<PAGE>
4.3. Right to Inspect. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to
time during Borrower's usual business hours, to inspect Borrower's Books and
to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of,
or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1. Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the
laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its
business or its ownership of property requires that it be so qualified.
5.2. Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound, except
to the extent that certain intellectual property agreements prohibit the
assignment of the rights thereunder to a third party without Borrower's or
other party's consent and the Loan Documents constitute an assignment.
5.3. No Prior Encumbrances. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4. Intellectual Property. Borrower is the sole owner of the
Intellectual Property Collateral, except for non-exclusive licenses granted
by Borrower to its customers in the ordinary course of business. Each of
the Patents is valid and enforceable, and no part of the Intellectual
Property Collateral has been judged invalid or unenforceable, in whole or in
part, and no claim has been made that any part of the Intellectual Property
Collateral violates the rights of any third party. Except for and upon the
filing with the United States Patent and Trademark Office with respect to
the Patents and Trademarks and the Register of Copyrights with respect to
the Copyrights and Mask Works necessary to perfect the security interests
created hereunder, and except as has been already made or obtained, no
authorization, approval or other action by, and no notice to or filing with,
any United States governmental authority or United States regulatory body is
required either (i) for the grant by Borrower of the security interest
granted hereby or for the execution, delivery or performance of Loan
Documents by Borrower in the United States or (ii) for the perfection in the
United States or the exercise by Bank of its rights and remedies hereunder.
Page 12
<PAGE>
5.5. Name; Location of Chief Executive Office. Except as disclosed
in the Schedule, Borrower has not done business and will not without at
least 30 days prior written notice to Bank do business under any name other
than that specified on the signature page hereof. The chief executive
office of Borrower is located at the address indicated in Section 10 hereof.
5.6. Financial Statements. All consolidated financial statements
related to Borrower and any Subsidiary that have been delivered by Borrower
to Bank fairly present in all material respects Borrower's consolidated
financial condition as of the date thereof and Borrower's consolidated
results of operations for the period then ended.
5.7. Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in
Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act
of 1940. Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations T and
U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable
to it, violation of which could have a Material Adverse Effect.
5.8. Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to
the best of Borrower's knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with
applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any
environmental protection statute has attached to any revenues or to any real
or personal property owned by Borrower or any Subsidiary; and neither
Borrower nor any Subsidiary has received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal,
state or other governmental agency concerning any action or omission by
Borrower or any Subsidiary resulting in the release, or other disposition of
hazardous waste or hazardous substances into the environment.
5.9. Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid,
or has made adequate provision for the payment of, all taxes reflected
therein, except those being contested in good faith by proper proceedings
with adequate reserves under GAAP.
5.10. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
Page 13
<PAGE>
5.11. Government Consents. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that
are necessary for the continued operation of Borrower's business as
currently conducted.
5.12. Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1. Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the
extent consistent with prudent management of Borrower's business, in force
all licenses, approvals and agreements, the loss of which could have a
Material Adverse Effect.
6.2. Government Compliance. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect.
6.3. Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) within five days of filing, copies of all statements,
reports and notices sent or made available generally by Borrower to its
security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission;
(b) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result
in damages or costs to Borrower or any Subsidiary of $100,000.00 or more;
(c) prompt notice of any material change in the composition of the
Intellectual Property Collateral, including, but not limited to, any
subsequent ownership right of Borrower in or to any Copyright, Patent or
Trademark not specified in any intellectual property security agreement
between Borrower and Bank or knowledge of an event that materially adversely
effects the value of the Intellectual Property Collateral; and (d) such
budgets, sales projections, operating plans or other financial information
as Bank may reasonably request from time to time.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six months unless an Event of Default has
occurred and is continuing.
Page 14
<PAGE>
6.4. Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrower will make, and will cause
each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon
request, furnish Bank with proof satisfactory to Bank indicating that
Borrower or a Subsidiary has made such payments or deposits; provided that
Borrower or a Subsidiary need not make any payment if the amount or validity
of such payment is (I) contested in good faith by appropriate proceedings ,
(ii) is reserved against (to the extent required by GAAP) by Borrower and
(iii) no lien other than a Permitted Lien results.
6.5. Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as
ordinarily insured against by other owners in similar businesses conducted
in the locations where Borrower's business is conducted on the date hereof.
Borrower shall also maintain insurance relating to Borrower's ownership and
use of the Collateral in amounts and of a type that are customary to
businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as are reasonably
satisfactory to Bank. All such policies of property insurance shall contain
a lender's loss payable endorsement, in a form satisfactory to Bank, showing
Bank as an additional loss payee thereof and all liability insurance
policies shall show the Bank as an additional insured, and shall specify
that the insurer must give at least 20 days notice to Bank before canceling
its policy for any reason. At Bank's request, Borrower shall deliver to
Bank certified copies of such policies of insurance and evidence of the
payments of all premiums therefor. All proceeds payable under any such
policy shall, at the option of Bank, be payable to Bank to be applied on
account of the Obligations.
6.6. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.7. Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered
(to the extent not already registered) with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, all
intellectual property owned by Borrower within 30 days of the date of this
Agreement. Borrower shall register or cause to be registered with the
United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those additional intellectual property rights
developed or acquired by Borrower from time to time in connection with any
product prior to the sale or licensing of such product to any third party,
including without limitation revisions or additions to any intellectual
property now owned by Borrower.
Page 15
<PAGE>
(b) Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request
to perfect Bank's security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain
the validity and enforceability of the Trademarks, Patents, Copyrights, and
Mask Works, (ii) use its best efforts to detect infringements of the
Trademarks, Patents, Copyrights and Mask Works and promptly advise Bank in
writing of material infringements detected and (iii) not allow any
Trademarks, Patents, Copyrights, or Mask Works to be abandoned, forfeited or
dedicated to the public without the written consent of Bank, which shall not
be unreasonably withheld, unless Bank determines that reasonable business
practices suggest that abandon-ment is appropriate.
(d) Bank shall have the right, but not the
obligation, to take, at Borrower's sole expense, any actions that Borrower
is required under this Section 6.8 to take but which Borrower fails to take,
after 15 days' notice to Borrower. Borrower shall reimburse and indemnify
Bank for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this Section 6.7.
6.8. Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further
action as may reasonably be requested by Bank to effect the purposes of this
Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any
Loans, Borrower will not do any of the following:
7.1. Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries
to Transfer, all or any part of its business or property, other than
Transfers: (i) of inventory in the ordinary course of business, (ii) of
non-exclusive licenses and similar arrangements for the use of the property
of Borrower or its Subsidiaries in the ordinary course of business; (iii)
that constitute payment of normal and usual operating expenses in the
ordinary course of business;; or (iii) of worn-out or obsolete Equipment.
7.2. Changes in Business, Ownership, or Management, Business
Locations. Engage in any business, or permit any of its Subsidiaries to
engage in any business, other than the businesses currently engaged in by
Borrower and any business substantially similar or related thereto (or
incidental thereto), or suffer a material change in Borrower's ownership or
management. Borrower will not, without at least 30 days prior written
notification to Bank, relocate its chief executive office or add any new
offices or business locations.
7.3. Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person.
Page 16
<PAGE>
7.4. Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5. Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any
capital stock.
7.6. Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.7. Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to
Borrower than would be obtained in an arm's length transaction with a
non-affiliated Person.
7.8. Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way prevent the creation of a security
interest in Borrower's rights and interests in any property included within
the definition of the Intellectual Property Collateral acquired under such
contracts, except to the extent that such provisions are necessary in
Borrower's exercise of its reasonable business judgement.
7.9. Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
7.10. Compliance. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one
of its important activities, the business of extending credit for the
purpose of purchasing or carrying margin stock, or use the proceeds of any
Loan for such purpose; fail to meet the minimum funding requirements of
ERISA; permit a Reportable Event or Prohibited Transaction, as defined in
ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or
violate any other law or regulation, which violation could have a Material
Adverse Effect; or permit any of its Subsidiaries to do any of the
foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an "Event of
Default" by Borrower under this Agreement:
Page 17
<PAGE>
8.1. Payment Default. If Borrower fails to pay, when due, any of the
Obligations, and such default is not cured within five days after receipt by
Borrower of notice of such default.
8.2. Covenant Default.
(a) If Borrower fails to perform any obligation under
Sections 6.3, 6.5, 6.6, or 6.7 or violates any of the covenants contained in
Article 7 of this Agreement, and such default is not cured within ten days
after receipt by Borrower of notice of such default, or
(b) If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or
agreement contained in this Agreement or in any of the Loan Documents and
as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten days
after receipt by Borrower of notice of such default; provided that if the
default cannot by its nature be cured within the ten day period or cannot
after diligent attempts by Borrower be cured within such 10 day period, and
such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case
exceed 30 days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an
Event of Default (provided that no Loans will be required to be made during
such cure period);
8.3. Insolvency. If an Insolvency Proceeding is commenced by
Borrower, or if an Insolvency Proceeding is commenced against Borrower and
is not dismissed or stayed within 30 days (provided that no Loans will be
made prior to the dismissal of such Insolvency Proceeding);
8.4. Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate or writing delivered
to Bank by Borrower or any Person acting on Borrower's behalf pursuant to
this Agreement or to induce Bank to enter into this Agreement or any other
Loan Document.
8.5. Guaranty. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any Guarantor fails
to perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement
exists now or hereafter in any warranty or representation set forth in any
guaranty of all or a portion of the Obligations or in any certificate
delivered to Bank in connection with such guaranty, or any of the
circumstances described in Section 8.3 occurs with respect to any Guarantor.
9. BANK'S RIGHTS AND REMEDIES
9.1. Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without
notice of its election and without demand, do any one or more of the
following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
Page 18
<PAGE>
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement or under any other
agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Without notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter
the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or lien which in Bank's
determination appears to be prior or superior to its security interest and
to pay all expenses incurred in connection therewith. With respect to any
of Borrower's premises, Borrower hereby grants Bank a license to enter such
premises and to occupy the same, without charge in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or other-wise;
(e) Without notice to Borrower set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a non-
exclusive, royalty-free license or other right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, Borrower's labels,
patents, copyrights, mask works, rights of use of any name, trade secrets,
trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank's exercise of its rights under this Section
9.1, Borrower's rights under all licenses and all franchise agreements shall
inure to Bank's benefit;
(g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or
on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable, and apply the proceeds
thereof to the Obligations in whatever manner or order it deems appropriate;
(h) Bank may credit bid and purchase at any public
sale, or at any private sale as permitted by law;
(i) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower; and
Page 19
<PAGE>
(j) Bank shall have a non-exclusive, royalty-free
license to use the Intellectual Property Collateral to the extent reasonably
necessary to permit Bank to exercise its rights and remedies upon the
occurrence of an Event of Default.
9.2. Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of
payment or security that may come into Bank's possession; (c) sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle,
and adjust all claims under and decisions with respect to Borrower's
policies of insurance; and (e) settle and adjust disputes and claims
respecting the accounts directly with account debtors, for amounts and upon
terms which Bank determines to be reasonable; (f) to modify, in its sole
discretion, any intellectual property security agreement entered into
between Borrower and Bank without first obtaining Borrower's approval of or
signature to such modification by amending Exhibit A, Exhibit B, Exhibit C,
and Exhibit D, thereof, as appropriate, to include reference to any right,
title or interest in any Copyrights, Patents, Trademarks, Mask Works
acquired by Borrower after the execution hereof or to delete any reference
to any right, title or interest in any Copyrights, Patents, Trademarks, or
Mask Works in which Borrower no longer has or claims any right, title or
interest; (g) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Borrower where permitted by law; and (h)
to transfer the Intellectual Property Collateral into the name of Bank or a
third party to the extent permitted under the UCC provided Bank may exercise
such power of attorney to sign the name of Borrower on any of the documents
described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each
and every one of Bank's rights and powers, being coupled with an interest,
is irrevocable until all of the Obligations have been fully repaid and
performed and Bank's obligation to provide Loans hereunder is terminated.
9.3. Accounts Collection. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds
to Borrower of Bank's security interest in such funds and verify the amount
of such Account. Borrower shall collect all amounts owing to Borrower for
Bank, receive in trust all payments as Bank's trustee, and if requested or
required by Bank, immediately deliver such payments to Bank in their
original form as received from the account debtor, with proper endorsements
for deposit.
9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up
such reserves under the Revolving Commitment as Bank deems necessary to
protect Bank from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type discussed in Section 6.6 of this
Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at
the then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by
Bank to make similar payments in the future or a waiver by Bank of any Event
of Default under this Agreement.
Page 20
<PAGE>
9.5. Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause;
(c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall
be borne by Borrower.
9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth
herein as provided under the UCC, by law, or in equity. No exercise by
Bank of one right or remedy shall be deemed an election, and no waiver by
Bank of any Event of Default on Borrower's part shall be deemed a continuing
waiver. No delay by Bank shall constitute a waiver, election, or
acquiescence by it. No waiver by Bank shall be effective unless made in a
written document signed on behalf of Bank and then shall be effective only
in the specific instance and for the specific purpose for which it was
given.
9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower may
in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements
and other informational documents which may be sent by first-class mail,
postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return
receipt requested, or by telefacsimile to Borrower or to Bank, as the case
may be, at its addresses set forth below for such party on the signature
pages hereof. The parties hereto may change the address at which they are
to receive notices hereunder, by notice in writing in the foregoing manner
given to the other.
Page 21
<PAGE>
11. CHOICE OF LAW AND VENUE; WAIVER OF JURY TRIAL
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1. Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of
the parties; provided that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which
consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell,
transfer, negotiate, or grant participation in all or any part of, or any
interest in, Bank's obligations, rights and benefits hereunder.
12.2. Indemnification. Borrower shall , indemnify ,defend, protect
and hold harmless Bank and its officers, employees, and agents against: (a)
all obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by the Loan
Documents; and (b) all losses or Bank Expenses in any way suffered,
incurred, or paid by Bank as a result of or in any way arising out of,
following, or consequential to transactions between Bank and Borrower
whether under the Loan Documents, or otherwise (including without limitation
reasonable attorneys fees and expenses), except for losses caused by Bank's
gross negligence or willful misconduct.
12.3. Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4. Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
12.5. Amendments in Writing, Integration. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All
prior agreements, understandings, representations, warranties, and
negotiations between the parties hereto with respect to the subject matter
of this Agreement, if any, are merged into this Agreement and the Loan
Documents.
Page 22
<PAGE>
12.6. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7. Survival. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify
Bank with respect to the expenses, damages, losses, costs and liabilities
described in Section 12.2 shall survive until all applicable statute of
limitations periods with respect to actions that may be brought against Bank
have run; provided that so long as the obligations referred to in the first
sentence of this Section 12.7 have been satisfied, and Bank has no
commitment to make any Credit Extensions or to make any other loans to
Borrower, Bank shall release all security interests granted hereunder and
redeliver all Collateral held by it in accordance with applicable law.
12.8. Confidentiality. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its
own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they
have entered into a comparable confidentiality agreement in favor of
Borrower and have delivered a copy to Borrower, (iii) as required by law,
regulations, rule or order, subpoena, judicial order or similar order,
(iv) as may be required in connection with the examination, audit or similar
investigation of Bank, and (v) as Bank may deem appropriate in connection
with the exercise of any remedies hereunder. Confidential information
hereunder shall not include information that either: (a) is in the public
domain or in the knowledge or possession of Bank when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank through no fault
of Bank; or (b) is disclosed to Bank by a third party, provided Bank does
not have actual knowledge that such third party is prohibited from
disclosing such information.
Page 23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
INTEGRATED PACKAGING ASSEMBLY CORPORATION,
a Delaware corporation
By
------------------------------------------
Title
---------------------------------------
Address for Notices:
2221 Old Oakland Road
San Jose, CA 95131
Attention: Patrick Verderico
SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
By
-----------------------------------------
Title
--------------------------------------
Address for Notices:
3003 Tasman Drive
Santa Clara, CA 95054
Attention: Richelle Medina
Page 24
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of
Borrower, whether now existing or hereafter acquired or created and wherever
located, in and to the following:
(a) All goods, equipment, machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing;
(b) All inventory, merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
including such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing
any of the above;
(c) All contract rights, general intangibles, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All accounts, contract rights, royalties, license rights and all
other forms of obligations owing to Borrower, whether or not arising out of
the sale or lease of goods, the licensing of technology or the rendering of
services by Borrower, and whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and
chattel paper and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished; all trade secret rights,
including all rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information; all mask work or
similar rights available for the protection of semiconductor chips; all
claims for damages by way of any past, present and future infringement of
any of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
Page 25
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/LOAN ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: (408) TIME:
----------------
FROM:
BORROWER'S NAME
FROM:
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE
PHONE:
----------------------
FROM: ACCOUNT #
------------------------------
TO: ACCOUNT #
------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (Loan) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects
as of the date of the telephone request for and Loan confirmed by this Loan
Request; provided that those representations and warranties expressly
referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY:
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester:
Authorized Signature (Bank)
Phone #
DISBURSEMENT REQUEST AND AUTHORIZATION
TO: SILICON VALLEY BANK
FROM: ("Borrower")
------------------------------
Page 26
<PAGE>
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a
principal amount up to $ .
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for
business.
SPECIFIC PURPOSE. The specific purpose of this loan is: .
----------------
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $
Undisbursed Funds $
Principal $
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $
Loan Fee $
Receivables Audit $
Other Charges Paid in Cash: $
UCC Search Fees $
UCC Filing Fees $
Patent Filing Fees $
Trademark Filing Fees $
Copyright Filing Fees $
Outside Counsel Fees and Expenses $
[ESTIMATE, DO NOT LEAVE BLANK]
Total Charges Paid in Cash $
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______ the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
Page 27
<PAGE>
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF ________________,19____.
BORROWER:
By:
----------------------------------------
Authorized Officer
AGREEMENT TO PROVIDE INSURANCE
TO: SILICON VALLEY BANK
FROM: INTEGRATED PACKAGING ASSEMBLY CORPORATION ("Borrower")
INSURANCE REQUIREMENTS. Borrower understands that insurance coverage is
required in connection with the extending of a loan or the providing of
other financial accommodations to Borrower by Bank. These requirements are
set forth in the Loan Documents. The following minimum insurance coverages
must be provided on the following described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be cancelled or diminished without a minimum of 20 days
prior written notice to Bank.
INSURANCE COMPANY. Borrower may obtain insurance from any insurance
company Borrower may choose that is reasonably acceptable to Bank. Borrower
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Borrower agrees to deliver to Bank, on
or before closing, evidence of the required insurance as provided above,
with an effective date of_________________,19____, or earlier. Borrower
acknowledges and agrees that if Borrower fails to provide any required
insurance or fails to continue such insurance in force, Bank may do so at
Borrower's expense as provided in the Loan and Security Agreement. The cost
of such insurance, at the option of Bank, shall be payable on demand or
shall be added to the indebtedness as provided in the security document.
BORROWER ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE
INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE
COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, BORROWER'S EQUITY IN THE
COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
Page 28
<PAGE>
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Borrower authorizes Bank to provide to any person (including any insurance
agent or company) all information Bank deems appropriate, whether regarding
the Collateral, the loan or other financial accommodations, or both.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
____________________,19____.
BORROWER:
By:
-------------------------------
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
Page 29
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Numbers 333-49365, 333-30457 and 333-05571) of
Integrated Packaging Assembly Corporation of our report dated February 8,
1999 appearing on page 25 of this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 8, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the Condensed Statement of Operations,
the Condensed Balance Sheet and the accompanying Notes
To The Condensed Financial Statements included in the
Company's Form 10-K for the year ended December 31, 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> DEC-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,368
<ALLOWANCES> (263)
<INVENTORY> 1,704
<CURRENT-ASSETS> 4,601
<PP&E> 31,196
<DEPRECIATION> (17,266)
<TOTAL-ASSETS> 18,728
<CURRENT-LIABILITIES> 20,686
<BONDS> 0
0
0
<COMMON> 40,622
<OTHER-SE> (43,829)
<TOTAL-LIABILITY-AND-EQUITY> 18,728
<SALES> 23,281
<TOTAL-REVENUES> 23,281
<CGS> 29,114
<TOTAL-COSTS> 29,114
<OTHER-EXPENSES> 23,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,783
<INCOME-PRETAX> (29,776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,776)
<EPS-PRIMARY> ($2.12)
<EPS-DILUTED> ($2.12)
</TABLE>
