UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27712
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INTEGRATED PACKAGING ASSEMBLY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0309372
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2221 Old Oakland Road
San Jose, CA 95131-1402
(Address of principal executive offices) (Zip Code)
(408) 321-3600
(Registrant's telephone number, including area code)
----------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Number of shares of common stock outstanding as of May 10, 1999:
14,291,691. As of May 10, 1999, the Company also had 4,000,000 shares
of Series A Convertible Preferred Stock outstanding which is convertible
into 54,995,082 shares of Common Stock.
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TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheet ............................ 3
Condensed Statement of Operations .................. 4
Condensed Statement of Cash Flows .................. 5
Notes to Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
Part II. Other Information
Item 1. Legal Proceedings .................................. 19
Item 4. Defaults Upon Senior Securities .................... 20
Item 6. Exhibits and Reports on Form 8-K ................... 20
Signatures ................................................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Integrated Packaging Assembly Corporation
Condensed Balance Sheet
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 4, December 31,
1999 1998
(Unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $513 $--
Accounts receivable, net...................... 1,820 2,105
Inventory..................................... 1,481 1,704
Prepaid expenses and other current assets..... 786 792
------------ ------------
Total current assets....................... 4,600 4,601
Property and equipment, net...................... 12,912 13,930
Other assets..................................... 210 197
------------ ------------
Total assets............................... $17,722 $18,728
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of bank debt and
notes payable.............................. $15,088 $11,399
Current portion of capital lease obligations.. 3,623 4,324
Accounts payable.............................. 1,756 2,155
Accrued expenses and other liabilities........ 2,657 2,808
------------ ------------
Total current liabilities.................. 23,124 20,686
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Long term debt................................... -- --
------------ ------------
Deferred gain on sale of facilities.............. 1,214 1,249
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Shareholders' equity:
Common Stock, $.001 par value; 75,000,000
shares authorized, 14,291,691 and
14,090,794 shares issued and outstanding... 14 14
Additional paid-in capital.................... 40,624 40,607
Accumulated earnings (deficit)................ (47,254) (43,828)
------------ ------------
Total shareholders' equity (deficit)....... (6,616) (3,207)
------------ ------------
Total liabilities and shareholders' equity. $17,722 $18,728
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Integrated Packaging Assembly Corporation
Condensed Statement of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
April 4, April 5,
1999 1998
------------ ------------
<S> <C> <C>
Revenues........................................... $3,775 $6,965
Cost of revenues................................... 5,491 8,415
------------ ------------
Gross profit (loss)................................ (1,716) (1,450)
Operating expenses:
Selling, general & administrative............... 995 1,057
Research & development.......................... 179 352
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Total operating expenses..................... 1,174 1,409
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Operating income (loss)............................ (2,890) (2,859)
Other income (expense)............................. 3 909
Interest expense................................... (538) (456)
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Income (loss) before income taxes.................. (3,425) (2,406)
Provision for income taxes......................... -- --
------------ ------------
Net income (loss).................................. ($3,425) ($2,406)
============ ============
Per share data:
Net income (loss) per share
Basic........................................ ($0.24) ($0.17)
============ ============
Diluted...................................... ($0.24) ($0.17)
============ ============
Number of shares used to compute per share data
Basic........................................ 14,294 13,991
============ ============
Diluted...................................... 14,294 13,991
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Integrated Packaging Assembly Corporation
Condensed Statement of Cash Flows
Increase (Decrease) Cash
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
April 4, April 5,
1999 1998
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<S> <C> <C>
Cash flows from Operating Activities:
Net income (loss)................................... ($3,425) ($2,406)
Adjustments:
Depreciation and amortization.................... 1,108 2,310
Gain on sale of facilities, net.................. (34) (541)
Changes in assets and liabilities:
Accounts receivable........................... 285 45
Inventory..................................... 223 (1,111)
Prepaid expenses and other assets............. (44) (268)
Accounts payable.............................. (399) (1,023)
Accrued expenses and other liabilities........ (401) (249)
---------- ----------
Net cash provided by (used in) operating
activities.................................... (2,687) (3,243)
---------- ----------
Cash flows provided by (used in) investing activities:
Acquisition of property and equipment............... (2) (3,397)
Proceeds from sale of facilities, net............... -- 7,312
---------- ----------
Net cash provided by (used in) investing
activities.................................... (2) 3,915
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Cash flows provided by (used in) financing activities:
Proceeds from revolving bank line................... 3,390 2,000
Payments on revolving bank line..................... (3,768) 0
Payments under capital lease obligations............ (668) (490)
Payments on note payable............................ (61) (1,167)
Proceeds from note payable and other................ 4,305 --
Proceeds from issuance of common stock, net......... 4 91
---------- ----------
Net cash provided by (used in) financing
activities.................................... 3,202 434
---------- ----------
Net increase (decrease) in cash........................ 513 1,106
Cash and cash equivalents at beginning of period....... -- 2,928
---------- ----------
Cash and cash equivalents at end of period............. $513 $4,034
========== ==========
Supplemental disclosure of cash flow information
Cash paid for interest.............................. $786 $426
</TABLE>
The accompanying notes are an integral part of these financial statements.
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INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands except per share data)
(Unaudited)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the "Company") packages
integrated circuits for companies in the semiconductor industry.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not have the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1998 included in the
Company's Form 10-K/A filed with the Securities and Exchange Commission.
The results of operations for the three month period ended April 4, 1999
are not necessarily indicative of the results that may be expected for any
subsequent period or for the entire year ending December 31, 1999.
NOTE 2. NOTES PAYABLE AND CAPITAL LEASES:
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank
Term Note Payable, Equipment Notes Payable and Line of Credit as well as its
capital leases. Certain of these debt facilities require that the Company
maintain certain financial covenants. Since July 5, 1998, the Company was out
of compliance with certain of these covenants. As a result of the covenant
noncompliance and failure to make scheduled repayments, the entire balance due
has been classified as a current liability.
Also as a result of the defaults, 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
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 1999. These payments have been
made.
On April 29, 1999, subsequent to the end of the first quarter of 1999,
Orient Semiconductor Electronics, Limited ("OSE") purchased 4,000,000 shares
of the Company's Preferred Stock, convertible into 75% (approximately
55,000,000 shares) of the Company's Common Stock on a fully-diluted basis, for
$6.8 million. As part of this transaction, the Company's secured creditors
agreed to terminate their legal actions and have restructured the secured
debt, including debt forgiveness of approximately $3.3 million and extended
payment terms over the next twelve to forty-eight months.
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NOTE 3. BALANCE SHEET COMPONENTS:
(In thousands)
<TABLE>
<CAPTION>
April 4, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Inventory
Raw materials........... $1,319 $1,509
Work in process......... 162 195
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$1,481 $1,704
============ ============
</TABLE>
NOTE 4. INCOME TAXES:
No provision or benefit for income taxes was recorded for the three month
periods ended April 4, 1999 and April 5, 1998, as the Company operated at a
loss.
NOTE 5. NET INCOME (LOSS) PER SHARE:
Net income (loss) per basic and diluted share for the three month periods
ended April 4, 1999 and April 5, 1998 was computed using the weighted average
number of common shares outstanding during the period but excluded the
dilutive potential common shares from assumed conversions because of their
anti-dilutive effect.
NOTE 6. EQUIPMENT IMPAIRMENT CHARGE:
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 requires that long-
lived assets held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of an
asset will not be recovered through expected future cash flows (undiscounted
and before interest) from use of the asset. The amount of impairment loss is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
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NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARD:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new
model for accounting for derivatives and hedging activities and supercedes and
amends a number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's financial statements. The standard is effective for the Company in
fiscal 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The forward-looking
statements contained herein are subject to certain factors that could cause
actual results to differ materially from those reflected in the forward-
looking statements. Such factors include, but are not limited to, those
discussed below and elsewhere in this Report on Form 10-Q.
Overview
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and
resultant underabsorption of fixed costs resulted in operating losses that
have continued into 1999. At the end of the second quarter of 1998, the
Company ceased making scheduled repayments of its debt balances outstanding
relating to its Bank Term Note Payable, Equipment Notes Payable and Line of
Credit as well as its capital leases.
As a result of the defaults, 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 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 1999. These payments have been made.
On April 29, 1999, subsequent to the end of the first quarter of 1999,
Orient Semiconductor Electronics, Limited ("OSE") purchased 4,000,000 shares
of the Company's Preferred Stock, convertible into 75% (approximately
55,000,000 shares) of the Company's Common Stock on a fully-diluted basis, for
$6.8 million. As part of this transaction the Company's secured creditors
agreed to terminate their legal actions and have restructured the secured
debt, including debt forgiveness of approximately $3.3 million and extended
payment terms over the next twelve to forty-eight months.
The Report of Independent Accountants included in the Company's 1998
Annual Report on Form 10-K/A contains a going concern statement.
The Company's operating results are affected by a wide variety of factors
that have in the past and could in the future materially and adversely affect
revenues, gross profit and operating income. These factors include the short-
term nature of its customers' commitments, timing and volume of orders
relative to the Company's production capacity, long lead times for the
manufacturing equipment required by the Company, evolutions in the life cycles
of customers' products, timing of expenditures in anticipation of future
orders, lack of a meaningful backlog, effectiveness in managing production
processes, changes in costs and availability of labor, raw materials and
components, costs to obtain materials on an expedited basis, mix of orders
filled, the impact of price competition on the Company's average selling
prices, the Company's ability to secure additional financing, 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
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requirements of semiconductor companies for independent packaging foundries,
any future downturn in the semiconductor industry is expected to have an
adverse effect on the Company's business, financial condition and results of
operations. In this regard, since late 1996, the Company's results of
operations have been materially adversely affected by reduced orders from
several major customers in the PC graphics segment of the semiconductor
industry.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
Therefore, reserves have been recorded for the difference between net carrying
value at historical costs and estimates of fair market value of the assets.
Since 1996, the Company has experienced a decline in the average selling
prices for its services and expects that average-selling prices for its
services will decline in the future, principally due to intense competitive
conditions. A decline in average selling prices of the Company's services, if
not offset by reductions in the cost of performing those services, would
decrease the Company's gross margins and materially and adversely affect the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to reduce its cost per unit.
The Company must continue to hire and train significant numbers of
additional personnel to operate the highly complex capital equipment required
by its manufacturing operations. There can be no assurance that the Company
will be able to hire and properly train sufficient numbers of qualified
personnel or to effectively manage such growth and its failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, since the Company's expense levels
are based in part on anticipated future revenue levels, if revenue were to
fall below anticipated levels, the Company's operating results would be
materially adversely affected.
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues for the three month period ended April 4, 1999 were $3.8
million compared with $7.0 million for the comparable period in the prior
fiscal year. The decrease in revenues in the 1999 period is primarily due to
decreased orders and a reduction in average selling prices due to mix and a
decline in selling prices.
A substantial portion of the Company's net revenues in each quarter
results from shipments during the last month of that quarter, and for that
reason, among others, the Company's revenues are subject to significant
quarterly fluctuations. In addition, the Company establishes its targeted
expenditure levels based on expected revenues. If anticipated orders and
shipments in any quarter do not occur when expected, expenditure levels could
be disproportionately high and the Company's operating results for that
quarter would be materially adversely affected.
Gross Profit
Cost of revenues includes materials, labor, depreciation and overhead
costs associated with semiconductor packaging. Gross profit for the three
month period ended April 4, 1999 consisted of a loss of $1.7 million compared
with loss of $1.5 million for the comparable period in the prior fiscal year.
Gross profit as a percentage of revenues was a negative 45.5% for the three
months ended April 4, 1999, compared to negative 20.8% for the same period of
1998. This decline in gross profit was primarily the result of lower average
selling prices, caused by package mix and industry competition, and low
capacity utilization.
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Depreciation for certain of the Company's machinery and equipment
acquired prior to 1997 is calculated using the units of production method, in
which depreciation is calculated based upon the units produced in a given
period divided by the estimate of total units to be produced over its life
following commencement of use. Such estimates are reassessed periodically
when facts and circumstances suggest a revision may be necessary. In all
cases, the asset will be depreciated by the end of its estimated five or six
year life so that each quarter the equipment is subject to certain minimum
levels of depreciation. Assets acquired beginning in 1997 are depreciated
using the straight-line method. Depreciation and amortization was $1.1
million for the three month period ended April 4, 1999 compared to $2.3
million for the same period in 1998. Depreciation expense decreased
substantially starting with the third quarter of 1998, as a result of the
write down of impaired assets recorded during the second quarter of 1998.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and
management personnel, as well as advertising, public relations, legal, and
accounting costs. Selling, general and administrative expenses decreased 5.9%
to $1.0 million for the three month period ended April 4, 1999 over the
comparable period of 1998. This decrease was due primarily to reduced
spending in administration and the Company's sales and customer service
functions.
As a percentage of revenues, selling, general and administrative expenses
increased from 15.2% for the first quarter of 1998 to 26.4% in the first
quarter of 1999 This increase was primarily due to the lower revenue level in
1999.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, the cost of related
materials and services, and the depreciation of development equipment.
Research and development expenses decreased 49.1% to $179,000 for the three
month period ended April 4, 1999 over the comparable period in 1998. This
decrease was primarily due to reduced spending.
As a percentage of revenues, research and development expenses decreased
from 5.1% in the first quarter of 1998 to 4.7% in the first quarter of 1999.
This decrease reflects the higher revenue level in 1998 and containment of the
absolute level of research and development expenses.
Write Down of Impaired Assets
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the fact that the value
of the manufacturing equipment will not be fully recovered. The fair value of
manufacturing equipment was based upon an independent estimate of fair values.
Therefore, reserves have been recorded for the difference between net carrying
value at historical costs and estimates of fair market value of the assets.
Interest and Other Income (Expense)
Net interest and other income are primarily comprised of interest expense
on equipment financing, offset by interest earnings from investments in cash
equivalents and short-term investments. Interest and other income resulted in
net other expense of $535,000 for the three month period ended April 4, 1999
compared to net other income of $453,000 for the three month period ended
April 5, 1998. For the three months ended April 4, 1998,
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interest and other income included a gain of $700,000 from the sale of the
land and building not occupied by the Company. Interest expense increased
primarily due to an increased level of borrowing.
Provision for Income Taxes
The Company did not record a provision for income tax for the three month
period ended April 4, 1999 and April 5, 1998 as the Company operated at a
loss.
Liquidity and Capital Resources
During the three month period ended April 4, 1999, the Company's net cash
used in operations was $2.7 million. Net cash used in operations was comprised
primarily of a net loss of $3.4 million, partially offset by $1.1 million of
non-cash charges for depreciation and amortization and a net decrease in
working capital items of $370,000. The net decrease in working capital items
primarily reflected a decreases in accounts payable and accrued expenses which
were partially offset by decreases in accounts receivable and inventory. As
of April 4, 1999, the Company had cash and cash equivalents of $513,000.
The Company had capital expenditures of only $2,000 during the first
three months of 1999. The Company expects to spend approximately $500,000 on
capital expenditures during the remainder of 1999 for the acquisition of
equipment. Most of the Company's production equipment has been funded either
through capital leases or term loans secured by production equipment. The
Company acquired $3.7 million and $4.0 million of production equipment through
capital leases in 1993 and 1994 respectively, which leases expire from
December 1997 to January 1999. The production equipment acquired in 1995 and
1996 was funded through several term loans. The Company borrowed $4.9 million
and $9.8 million on such term loans in 1995 and 1996, respectively. During
the third quarter of 1997, the Company borrowed $3.5 million on such term
loans for the purchase of production equipment.
In 1997, 1996 and 1995, the Company entered into borrowing facilities
with a number of lenders, allowing the Company to finance 70% to 80% of the
cost of collateralized machinery and equipment. Borrowings under these
facilities accrued interest at rates ranging from 7.75% to 14.0% with terms
ranging from 36 to 48 months. The Company borrowed an aggregate of $3.5
million, $9.8 million and $4.9 million through these facilities in 1997, 1996
and 1995, respectively.
In March 1997, the Company secured a mortgage loan with an insurance
company, which provided the Company with a $6.7 million five year term loan.
The loan was secured by the real estate and buildings purchased by the Company
in December 1996. The loan accrued interest at 8.5%, and was payable in equal
monthly installments of $58,000, with a balloon payment of $5.9 million due
after five years. The proceeds of this mortgage loan were used to pay off and
retire the $6.5 million real estate loan which was entered into in December
1996 to provide temporary financing for the acquisition of the Company's
building complex. The loan accrued interest at 2.25% over the rate for 30 day
certificates of deposit and was collateralized by a certificate of deposit of
equivalent value.
In December 1997, the Company entered into a line of credit agreement
with a bank that provided, through December 1998, for borrowings up to the
lesser of $5,000,000 or 80% of eligible accounts receivable. Borrowings under
the line of credit accrue interest at the bank's prime rate (8.5% at
December 31, 1997) plus 1.25% and are collateralized by the assets of the
Company. The agreement requires the Company to maintain certain financial
covenants, including a liquidity ratio, minimum tangible net worth, maximum
debt to tangible net worth, quarterly profitability and prohibits the Company
from the payment of dividends without prior approval by the bank. Since July
5, 1998, the Company has not been in compliance with such covenants.
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On January 20, 1998, the Company completed the sale of its facilities,
which consists of land and two buildings with a total of 138,336 square feet
of building space, and agreed to lease back the 82,290 square foot building
that it occupies. Net proceeds from the sale were $7.3 million, net of the
elimination of $6.6 million of mortgage debt, fees, commissions and closing
costs. The results for the first quarter of 1998 include a gain of $700,000
from the sale of the land and building not occupied by the Company. The
remaining gain of approximately $1,400,000 will be amortized as a reduction
of lease expense over the initial ten year term of the lease for the building
that the Company occupies.
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.
During the three months ended April 4, 1999, $3.2 million was provided in
financing activities. This resulted primarily from proceeds from a revolving
line of credit for $7.7 million, offset by payments of $4.5 million on the
revolving line of credit, notes payable and capital leases.
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank
Term Note Payable, Equipment Notes Payable and Line of Credit as well as its
capital leases. Certain of these debt facilities require that the Company
maintain certain financial covenants. At April 4, 1999, the Company was out
of compliance with certain of these covenants. As a result of the covenant
noncompliance and failure to make scheduled repayments, the entire balance due
as of April 4, 1999, $12.0 million, has been classified as a current liability
at April 4, 1999.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement provides, as amended, through March 31, 2000, for borrowings up to
the lesser of $3.5 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, as amended, is guaranteed by a third party and is
available to finance operations and working capital needs through March 31,
2000. The line provides for monthly borrowings and interest acquired at the
bank's prime rate, (7 3/4% per annum at April 4, 1999).
As a result of the defaults, 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 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 1999. These payments have been made.
On April 29, 1999, subsequent to the end of the first quarter of 1999,
Orient Semiconductor Electronics, Limited ("OSE") purchased 4,000,000 shares
of the Company's Preferred Stock, convertible into 75% (approximately
55,000,000 shares) of the Company's Common Stock on a fully-diluted basis, for
$6.8 million. As part of this transaction the Company's secured creditors
agreed to terminate their legal actions and have restructured the secured
debt, including debt forgiveness of approximately $3.3 million and extended
payment terms over the next twelve to forty-eight months.
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Year 2000 Readiness Disclosure
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.
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.
Contingency planning will be performed in conjunction with the planning,
testing and integration of the Company's Year 2000 compliance project. For
each mission critical vendor or trading partner that has not responded on
Year 2000 compliance to the Company's satisfaction by July 31, 1999, a
contingency plan will be developed. If, during a follow-up survey scheduled
for the third quarter of 1999, it appears that compliance is behind schedule
or problematic, the contingency plan will be implemented. This is expected
to be completed by the middle of the fourth quarter of 1999.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
The Company's operating results are affected by a wide variety of factors
that could materially and adversely affect revenues, gross profit, operating
income and liquidity. These factors include the short term nature of its
customers' commitments, the timing and volume of orders relative to the
Company's production capacity, long lead times for the manufacturing equipment
required by the Company, evolutions in the life cycles of customers' products,
timing of expenditures in anticipation of future orders, lack of a meaningful
backlog, effectiveness in
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<PAGE>
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, the Company's ability to secure additional financing,
and changes in economic conditions. The occurrence or continuation of
unfavorable changes in any of the above factors would adversely affect the
Company's business, financial condition and results of operations. In
addition, the following factors pose risks to the Company:
Dependence on the Semiconductor Industry; Customer Concentration
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times,
has been subject to significant economic downturns and characterized by
reduced product demand, rapid erosion of average selling prices and production
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 results of operations.
Underutilization of Manufacturing Capacity; High Fixed Costs
The Company has made substantial investments in expanding its
manufacturing capacity during its operating history, in anticipation of
increased future business. Since early 1997, the Company has incurred net
losses as revenues dropped substantially, while overhead and fixed costs
increased, with the result that there was substantial underutilized
manufacturing capacity. The Company continues to operate with significant
underutilized capacity. There can be no assurance that the Company will
receive orders from new or existing customers that will enable it to utilize
such manufacturing capacity in a timely manner. The Company's inability to
generate the additional
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<PAGE>
revenues necessary to more fully utilize its capacity has had and will
continue to have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Quality and Reliability; Production Yields
The semiconductor packaging process is complex and product quality and
reliability are subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, errors in the
design of equipment and related tooling, use of defective raw materials,
defective plating services and inadequate sample testing. From time to time,
the Company has experienced and expects to experience lower than anticipated
production yields as a result of such factors. The Company's failure to
achieve high quality production or acceptable production yields would likely
result in loss of customers, delays in shipments, increased costs,
cancellation of orders and product returns for rework, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that it has improved its
production quality, however, there can be no assurance that production quality
will continue to improve in the future.
Dependence on Raw Materials Suppliers
To maintain competitive manufacturing operations, the Company must obtain
from its suppliers, in a timely manner, sufficient quantities of acceptable
materials at expected prices. The Company sources most of its raw materials,
including critical materials such as lead frames and die attach compound, from
a limited group of suppliers. Substantially all molding compound, a critical
raw material, is obtained from a single supplier. From time to time,
suppliers have extended lead times or limited the supply of required materials
to the Company because of supplier capacity constraints and, consequently, the
Company has experienced difficulty in obtaining acceptable raw materials on a
timely basis. In addition, from time to time, the Company has rejected
materials from those suppliers that do not meet its specifications, resulting
in declines in output or yield. Any interruption in the availability of or
reduction in the quality of materials from these suppliers would materially
adversely affect the Company's business, financial condition and results of
operations. The Company's ability to respond to increased orders would also
be adversely affected if the Company is not able to obtain increased supplies
of key raw materials.
The Company purchases all of its materials on a purchase order basis and
has no long term contracts with any of its suppliers. There can be no
assurance that the Company will be able to obtain sufficient quantities of raw
materials and other supplies. The Company's business, financial condition and
results of operations would be materially adversely affected if it were unable
to obtain sufficient quantities of raw materials and other supplies in a
timely manner or if there were significant increases in the costs of raw
materials that the Company could not pass on to its customers.
Competition; Decline in Average Selling Prices
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. in Taiwan, ANAM in Korea, PT
Astra in Indonesia and Swire Technologies in Hong Kong. Each of these
companies has significantly greater manufacturing capacity, financial
resources, research and development operations, marketing and other
capabilities than the Company and has been operating for a significantly
longer period of time than the Company. Such companies have also established
relationships with many large semiconductor companies which are current or
potential customers of the Company. The Company could face substantial
competition from Asian packaging foundries should one or more of such
companies decide to establish foundry operations in North America. The
Company also faces competition from other independent, North American
packaging foundries. The Company also competes against companies which have
in-house packaging capabilities as current and prospective customers
constantly evaluate
Page 16
<PAGE>
the Company's capabilities against the merits of in-house packaging. Many of
the Company's customers are also customers of one or more of the Company's
principal competitors. The principal elements of competition in the
semiconductor packaging market include delivery cycle times, price, product
performance, quality, production yield, responsiveness and flexibility,
reliability and the ability to design and incorporate product improvements.
The Company believes it principally competes on the basis of shorter delivery
cycle times it can offer customers due to the close proximity of its
manufacturing facility to its customers' operations and the end users of its
customers' products.
Since mid-1996, the Company has experienced a decline in the average
selling prices for a number of its products. The Company expects that average
selling prices for its products will continue to decline in the future,
principally due to intense competitive conditions. A decline in average
selling prices of the Company's products, if not offset by reductions in the
cost of producing those products, would decrease the Company's gross margins
and materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will be able to reduce its cost per unit.
Design and Engineering of New Products
The Company believes that its competitive position depends substantially
on its ability to design new semiconductor packages in high demand and to
develop manufacturing capabilities for such products. These products include
Ball Grid Array (BGA) packages, Chip Scale Packages (CSP), and Thin Quad Flat
Pack (TQFP) packages. The Company plans to continue to make investments in
the development and design of such packages, and to develop its expertise and
capacity to manufacture such products. There can be no assurance that the
Company will be able to utilize such new designs or be able to utilize such
manufacturing capacity in a timely manner, that the cost of such development
will not exceed management's current estimates or that such capacity will not
exceed the demand for the Company's services. In addition, the allocation of
Company resources into such development costs will continue to increase the
Company's operating expenses and fixed costs. The Company's inability to
generate the additional revenues necessary to make use of such developments
and investments would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on a Limited Number of Equipment Suppliers
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in
Asia or Europe. The Company's operations utilize a substantial amount of this
capital equipment. Accordingly, the Company's operations are highly dependent
on its ability to obtain high quality capital equipment from a limited number
of suppliers. The Company has no long term agreement with any such supplier
and acquires such equipment on a purchase order basis. This dependence
creates substantial risks. Should any of the Company's major suppliers be
unable or unwilling to provide the Company with high quality capital equipment
in amounts necessary to meet the Company's requirements, the Company would
experience severe difficulty locating alternative suppliers in a timely
fashion and its ability to place new product lines into volume production
would be materially adversely affected. A prolonged delay in equipment
shipments by key suppliers or an inability to locate alternative equipment
suppliers would have a material adverse effect on the Company's business,
financial condition and results of operations and could result in damage to
customer relationships. In this regard, problems with the quality of certain
capital equipment affected the Company's ability to package semiconductors for
certain customers in a timely manner at acceptable yields, with the result
that the Company's business, operating results and financial condition were
adversely affected in 1996 and 1997.
Page 17
<PAGE>
Dependence on Single Manufacturing Facility
The Company's current manufacturing operations are located in a single
facility in San Jose, California. Because the Company does not currently
operate multiple facilities in different geographic areas, a disruption of the
Company's manufacturing operations resulting from various factors, including
sustained process abnormalities, human error, government intervention or a
natural disaster such as fire, earthquake or flood, could cause the Company to
cease or limit its manufacturing operations and consequently would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 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.
On April 29, 1999, Orient Semiconductor Electronics, Limited ("OSE")
purchased 4,000,000 shares of the Company's Preferred Stock, convertible into
75% (approximately 55,000,000 shares) of the Company's Common Stock on a
fully-diluted basis, for $6.8 million. As part of this transaction the
Company's secured creditors agreed to terminate their legal actions and have
restructured the secured debt, including debt forgiveness of approximately
$3.3 million and extended payment terms over the next twelve to forty-eight
months.
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<PAGE>
ITEM 4. DEFAULT UPON SENIOR SECURITIES
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balances outstanding relating to its Bank
Term Note Payable, Equipment Notes Payable and Line of Credit as well as its
capital leases. As a result of the failure to make scheduled repayments, the
entire balance due, $12.0 million, has been classified as a current liability
at April 4, 1999.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, as amended, which is guaranteed by a third party, is
available to finance operations and working capital needs through March 31,
2000. The line provides for monthly borrowings and interest acquired at the
bank's prime rate, (7 3/4% per annum at April 4, 1999).
On April 29, 1999, subsequent to the end of the first quarter of 1999,
OSE purchased 4,000,000 shares of the Company's Preferred Stock on a fully-
diluted basis, convertible into 75% (approximately 55,000,000 shares) of the
Company's Common Stock, for $6.8 million. As part of this transaction the
Company's secured creditors agreed to terminate their legal actions and have
restructured the secured debt, including debt forgiveness of approximately
$3.3 million and extended payment terms over the next twelve to forty-eight
months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Changes in Control of Registrant, filed on May 7, 1999.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Packaging Assembly Corporation
Date: May 10, 1999 /s/ Alfred V. Larrenaga
----------------------------------
Alfred V. Larrenaga
Executive Vice President
and Chief Financial Officer
Page 21
<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-Q for the three month period ending
April 4, 1999 and is qualified in its entirety by
reference to such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-04-1999
<PERIOD-TYPE> 3-MOS
<CASH> 513
<SECURITIES> 0
<RECEIVABLES> 2,058
<ALLOWANCES> (238)
<INVENTORY> 1,481
<CURRENT-ASSETS> 4,600
<PP&E> 31,197
<DEPRECIATION> (18,285)
<TOTAL-ASSETS> 17,722
<CURRENT-LIABILITIES> 23,124
<BONDS> 0
0
0
<COMMON> 40,638
<OTHER-SE> (47,254)
<TOTAL-LIABILITY-AND-EQUITY> 17,722
<SALES> 3,775
<TOTAL-REVENUES> 3,775
<CGS> 5,491
<TOTAL-COSTS> 5,491
<OTHER-EXPENSES> 1,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 538
<INCOME-PRETAX> (3,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,425)
<EPS-PRIMARY> ($0.24)
<EPS-DILUTED> ($0.24)
</TABLE>
