UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
COMMISSION FILE NUMBER: 0-27712
--------------------------
INTEGRATED PACKAGING ASSEMBLY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0309372
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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
--------- ---------
Number of shares of common stock outstanding as of October 27, 2000, 56,365,382.
As of October 27, 2000, the Company also had 3,000,000 shares of Series A
Convertible Preferred Stock outstanding, which are convertible into 41,246,312
shares of Common Stock.
<PAGE>
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................... 3
Condensed Consolidated Statements of Operations......... 4
Condensed Consolidated Statements of Cash Flows......... 5
Notes to Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........ 11
Part II. Other Information
Item 1. Legal Proceedings...................................... 21
Item 4. Submission of Matters to a Vote of Security Holders.... 21
Item 6. Exhibits and Reports on Form 8-K....................... 21
Signatures......................................................... 22
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Integrated Packaging Assembly Corporation
Condensed Consolidated Balance Sheets
(In thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
October 1, December 31,
2000 1999
------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,997 $ 5,371
Accounts receivable, net of allowance for doubtful accounts
of $174 and $272 30,861 28,295
Inventory 1,044 1,204
Prepaid expense and other current assets 601 603
-------- --------
Total current assets 34,503 35,473
Property and equipment, net 8,598 10,498
Intangible assets, net 5,110 5,659
Other assets 11 18
-------- --------
Total assets $ 48,222 $ 51,648
======== ========
Liiabilities, Mandatorily Redeemable
Convertible Preferred Stock and
Stockholders' Deficit
Current liabilities:
Bank debt and notes payable $ 18,000 $ 17,000
Accounts payable 1,646 2,290
Accounts payable - related parties 34,077 29,801
Accrued expenses and other liabilities 2,525 3,069
-------- --------
Total current liabilities 56,248 52,160
Deferred gain on sale of facilities 1,008 1,111
-------- --------
Total liabilities 57,256 53,271
-------- --------
Mandatorily redeemable convertible
preferred stock 5,100 5,100
-------- --------
Stockholders' deficit:
Common stock, $.001 par value; 200,000,000
shares authorized; 56,365,382 (2000) and
54,414,601 (1999) shares issued and outstanding 56 54
Additional paid-in capital 54,863 54,333
Accumulated deficit (69,053) (61,110)
-------- --------
Total stockholders' deficit (14,134) (6,723)
-------- --------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit $ 48,222 $ 51,648
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE>
Integrated Packaging Assembly Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ --------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 5,794 $ 4,408 $ 19,872 $ 11,836
Cost of revenues 6,014 6,001 18,803 17,039
-------- -------- -------- --------
Gross profit (loss) (220) (1,593) 1,069 (5,203)
-------- -------- -------- --------
Operating expenses:
Selling, general & administrative 1,419 843 5,156 2,917
Research & development 368 181 914 528
Provision for impairment of assets 1,389 -- 1,389 --
-------- -------- -------- --------
Total operating expenses 3,176 1,024 7,459 3,445
-------- -------- -------- --------
Operating loss (3,396) (2,617) (6,390) (8,648)
Interest & other income 46 32 106 59
Interest & other expense (471) (276) (1,353) (1,207)
-------- -------- -------- --------
Loss before extraordinary gain
and preferred stock dividends (3,821) (2,861) (7,637) (9,796)
Extraordinary gain -- 560 -- 2,047
-------- -------- -------- --------
Net loss (3,821) (2,301) (7,637) (7,749)
Preferred stock dividend 102 136 306 227
Deemed dividends on preferred stock -- -- -- 6,800
-------- -------- -------- --------
Net loss applicable to common
stockholders ($ 3,923) ($ 2,437) ($ 7,943) ($14,776)
======== ======== ======== ========
Per share data:
Net loss per share
Basic and diluted ($ 0.07) ($ 0.10) ($ 0.14) ($ 0.84)
======== ======== ======== ========
Number of shares used to
compute per share data
Basic and diluted 56,204 23,934 55,589 17,511
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
Integrated Packaging Assembly Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended
-----------------------------
October 1, October 3,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows used by operating activities
Net loss ($ 7,637) ($ 7,749)
Adjustments:
Depreciation and amortization 3,408 3,266
Provision for excess and obsolete inventory 367 --
Provision for impairment of assets 1,389 --
Gain on sale of facilities, net (103) (104)
Extraordinary gain on debt restructure -- (2,047)
Changes in assets and liabilities
Accounts receivable (2,568) (611)
Inventories (207) 689
Other assets 9 (34)
Accounts payable and accounts
payable related party 3,632 203
Accrued liabilities (440) (455)
------- --------
Net cash used in operating activities (2,150) (6,842)
------- --------
Cash flows used in investing activities
Capital expenditures (2,348) (79)
------- --------
Net cash used in investing activities (2,348) (79)
------- --------
Cash flows from financing activities
Proceeds from revolving bank line -- 25,817
Payments on revolving bank line -- (18,328)
Payments under capital lease obligations -- (694)
Payments on note payable -- (9,629)
Proceeds from note payable and other 1,000 4,890
Proceeds from issuance of common stock, net 124 19
Proceeds from issuance of preferred stock, net -- 6,498
------- --------
Net cash provided by financing activities 1,124 8,573
------- --------
Net increase (decrease) in cash (3,374) 1,652
Cash and cash equivalents at beginning of period 5,371 --
------- --------
Cash and cash equivalents at end of period $ 1,997 $ 1,652
======= ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,353 $ 1,207
Common stock issued for preferred stock dividend 408 91
Deemed dividends on preferred stock -- 6,800
Issuance and repricing of warrants in conjunction with debt
forgiveness $ -- $ 790
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the "Company") was incorporated
in California on April 28, 1992 and reincorporated in Delaware on June 19, 1997.
The Company operates within two segments of the semiconductor industry: (1)
manufacturing and (2) distribution.
Within manufacturing, 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.
Within distribution, the Company is the exclusive North American sales and
marketing organization for Orient Semiconductor Electronics, Ltd. ("OSE") of
Taiwan, a public Taiwanese company and the Company's controlling shareholder.
Revenues are fees received on the sales of OSE's semiconductor assembly and test
services to customers headquartered in North America. The Company entered this
segment of the market in October 1999 with the acquisition of OSE, Inc.
("OSEI").
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, 1999 included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the nine month period ended October 1, 2000
are not necessarily indicative of the results that may be expected for any
subsequent period or for the entire year ending December 31, 2000.
The Company has experienced fluctuating levels of demand, reduced average
selling prices, ongoing net losses, and negative cash flows from operating
activities. The Company has $18 million owing on lines of credit that have
matured but have been extended while refinancing negotiations take place. The
lines of credit are currently guaranteed by OSE and any refinancing would be
subject to ongoing support from OSE. Management believes it may require
additional cash form private placements or other sources of liquidity to meet
the Company's projected working capital and other cash requirements. As a result
of these circumstances, the Company's independent accountants opinion on the
Company's December 31, 1999 consolidated financial statements includes an
explanatory paragraph to indicate that these matters raise substantial doubt
about this Company's ability to continue as a going concern.
Page 6
<PAGE>
NOTE 2. BALANCE SHEET COMPONENTS:
(In thousands)
<TABLE>
<CAPTION>
October 1, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Inventory
Raw materials $ 953 $1,072
Work in process 91 132
------ ------
$1,044 $1,204
====== ======
</TABLE>
NOTE 3. PROVISION FOR IMPAIRMENT OF ASSETS:
During the quarter ended October 1, 2000, the Company, in accordance with
SFAS 121, "Accounting for the Impairment of Long-lived Assets and Long-lived
Assets to be Disposed of", recorded a provision for impairment of its
manufacturing equipment of $1,389,000. The Company reviewed the recoverability
of it's manufacturing equipment based on expected future cash flows
(undiscounted and before interest) from use of these assets and determined
the impairment loss of the difference between the net book value of the assets
and the estimated fair value of the related assets.
NOTE 4. INCOME TAXES:
No provision or benefit for federal income taxes was recorded for the nine
month period ended October 1, 2000 as the Company operated at a loss.
NOTE 5. NET LOSS PER SHARE:
Net loss per basic and diluted share for the nine month periods ended
October 1, 2000 and October 3, 1999 was computed using the weighted average
number of common shares outstanding during the period but excluded the dilutive
potential common shares from assumed conversions because of their anti-dilutive
effect. Dilutive potential common shares include outstanding stock options,
warrants and convertible preferred stock. At October 1, 2000, there were options
and warrants outstanding to purchase an aggregate of 12,836,253 shares of Common
Stock. At October 3, 1999 there were options and warrants outstanding to
purchase an aggregate of 8,064,000 shares of Common Stock. At October 1, 2000
and October 3, 1999 there were 3,000,000 shares of convertible preferred stock
outstanding which are convertible into 41,246,312 shares of Common Stock.
NOTE 6. SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company issued 4,000,000 shares of Series A mandatorily redeemable
convertible preferred stock "Series A Preferred" to OSE on April 29, 1999. Each
share of Series A Preferred is convertible into 13.7487705 shares of the
Company's Common Stock at the option of the holder. On August 4, 1999, OSE
converted 1,000,000 shares of Series A Preferred into 13,748,771 shares of the
Company's Common Stock. The holders of shares of Series A Preferred are entitled
to dividends at the rate of $0.136 per annum
Page 7
<PAGE>
per share payable semiannually on July 1 and January 1 each year. The dividends
on Series A preferred are payable in cash, shares of Common Stock or any
combination of cash and shares of Common Stock, at the option of the holders of
Series A Preferred. The shares of Series A Preferred are mandatorily redeemable
for $1.70 per share in the event of any liquidation, dissolution, or winding up
of the Company.
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARDS:
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 mode for
accounting for derivatives and hedging activities. In July 1999, the Financial
Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." ("SFAS 137"). SFAS 137 deferred the effective date of SFAS
133 until the first fiscal quarter beginning after June 15, 2000. The Company
has reviewed the impact of the implementation of SFAS 133 on the consolidated
financial statements of the Company and has determined that the impact will not
be material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the Staff's views in applying generally
accepted principles to revenue recognition in financial statements. The Company
has until the fourth quarter of 2000 to comply with the guidance in SAB 101. The
implementation of SAB 101 on the consolidated financial statements of the
Company is not expected to be material.
Page 8
<PAGE>
NOTE 8. SEGMENTS
The Company has two segments, manufacturing and distribution. Manufacturing
comprises the semiconductor packaging services of 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 ("QFP"),
thin Quad Flat packages ("TQFP"), ball grid array packages ("BGAs") and Chip
Scale packaging ("CSPs"). Distribution comprises the North American sales,
marketing and technical support organization for OSE. Fees are earned from the
sales for the semiconductor assembly and test service of OSE to customers
headquartered in North America.
<TABLE>
<CAPTION>
(In thousands) Manufacturing Distribution Eliminations Total
------------------ ----------------- --------------- ---------------
Three months ending October 1, 2000:
<S> <C> <C> <C>
Revenues $ 3,719 $ 2,075 $ - $ 5,794
Interest & other income 3 195 (152) 46
Interest & other expense (623) - 152 (471)
Depreciation and amortization 972 188 - 1,160
Net income (loss) (5,513) 1,692 - (3,821)
Total assets 16,721 43,327 (11,826) 48,222
Expenditures for additions to
long-lived assets $490 $10 $ - $ 500
</TABLE>
<TABLE>
<CAPTION>
(In thousands) Manufacturing Distribution Eliminations Total
------------------ ----------------- --------------- ---------------
Nine months ending October 1, 2000:
<S> <C> <C> <C>
Revenues $13,987 $ 5,885 $ - $19,872
Interest & other income 13 336 (243) 106
Interest & other expense (1,596) - 243 (1,353)
Depreciation and amortization 2,845 563 - 3,408
Net income (loss) (10,912) 3,275 - (7,637)
Total assets 16,721 43,327 (11,826) 48,222
Expenditures for additions to
long-lived assets $ 2,323 $ 25 $ - $ 2,348
</TABLE>
Prior to the fourth quarter of 1999, the Company's only operations consisted of
the manufacturing segment.
Page 9
<PAGE>
NOTE 9. SUBSEQUENT EVENTS:
EXTENSION OF BANK DEBT
On October 29, 2000 the bank extended the maturity of the Company's $7
million promissory note on similar terms and conditions through November 29,
2000. On October 31, 2000 the banks extended the maturity of the Company's $11
million promissory note on similar terms and conditions through November 30,
2000.
RESTRUCTURING
In October 2000, the Company implemented a reduction in workforce of 86
employees as part of a restructuring of its manufacturing operations to levels
more suitable for expected market conditions. The Company plans to record a
restructuring charge related to this reorganization in the fourth quarter of
2000.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements
contained herein are subject to certain factors that could cause actual results
to differ materially from those reflected in the forward-looking statements.
Such factors include, but are not limited to, those discussed below in "Certain
Factors Affecting Operating Results" 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 underutilization of capacity and resultant under absorption of
fixed costs resulted in operating losses that have continued into 2000. As a
result of these circumstances, the Company's independent accountants' opinion on
the Company's December 31, 1999 financial statements includes an explanatory
paragraph indicating that these matters raise substantial doubt about the
Company's ability to continue as a going concern.
In April 1999, OSE purchased 4,000,000 shares of the Company's Series A
Preferred Stock, convertible into 75% (approximately 55,000,000 shares) of the
Company's outstanding Common Stock on a fully diluted basis, for $6.8 million.
On July 23, 1999, the Company entered into a $7 million bank line of credit.
This line is guaranteed by OSE and was available to finance operations and
working capital needs.
On September 29, 1999, the Company entered into an $11 million bank line of
credit. This line is guaranteed by OSE and is available to finance operations
and working capital needs through October 31, 2000. On October 29 and October
31, 2000, the banks extended the $7 million and $11 million lines of credit
respectively on similar terms and conditions through November 29 and November
30, 2000, respectively. It is the Company's intent, in discussions with the
Bank, to consolidate the $7 million and $11 million lines of credit into a
single credit line that would be payable on November 30, 2001.
On October 29, 1999, the Company acquired the North American distributor of
OSE in a stock for stock exchange valued at approximately $4.7 million. In
connection with the acquisition, the Company issued 25,910,090 shares of Common
Stock. As a result of the transaction, the distributor, OSE, Inc. ("OSEI"), is
now operated as a wholly owned subsidiary of the Company. OSEI was a privately
held corporation that serves as the exclusive North American distributor of OSE.
OSEI derives its earnings from fees received on the sales of OSE's semiconductor
assembly and test services to customers headquartered in North America. The
Company has reported consolidated results with OSEI since the acquisition date.
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, operating income and liquidity. 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
Page 11
<PAGE>
capacity. In addition, rapid technological change, evolving industry standards,
intense competition and fluctuations in end-user demand characterize the markets
for integrated circuits. Since the Company's business is entirely dependent on
the requirements of semiconductor companies for independent packaging foundries,
any future downturn in the semiconductor industry is expected to have an adverse
effect on the Company's business, financial condition and results of operations.
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.
In recent years, 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. In
October, 2000 the Company implemented a company wide reorganization resulting in
a reduction in workforce of 86 employees which represented approximately 30% of
the total workforce.
During the quarter ended October 1, 2000, the Company, in accordance with
SFAS 121, "Accounting for the Impairment of Long-lived Assets and Long-lived
Assets to be Disposed of", recorded a provision for impairment of its
manufacturing equipment of $1,389,000. The Company reviewed the recoverability
of its manufacturing equipment based on expected future cash flows (undiscounted
and before interest) from use of these assets and determined the impairment loss
of the difference between the net book value of the assets and the estimated
fair value of the related assets.
REVENUES
The Company recognizes revenues upon shipment of products to its customers
for the manufacturing segment. For the distribution segment, revenues are
derived from fees received on the sales of OSE's semiconductor assembly and test
services to customers headquartered in North America and revenues are recognized
on a net basis upon shipment by OSE.
Revenues for the three and nine month periods ended October 1, 2000 for the
manufacturing segment were $3.7 million and $14.0 million compared with $4.4
million and $11.8 million for the comparable periods in the prior fiscal year.
The decrease in revenues for the three month period is primarily due to
decreased customer orders and a reduction in average selling prices due to
changes in product mix and a decline in unit selling prices. The increase in
revenues for the nine month period is primarily due to increased customer
orders, partially offset by a reduction in average selling prices due to changes
in product mix and a decline in unit selling prices.
Revenues for the three and nine month periods ended October 1, 2000 for the
distribution segment were $2.1 million and $5.9 million, respectively. There
were no revenues for the distribution segment in the prior year since OSEI was
not consolidated with the Company until October 29, 1999.
A substantial portion of the Company's net revenues in each quarter result
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.
Page 12
<PAGE>
GROSS PROFIT
Cost of revenues includes materials, labor, depreciation and overhead
costs. Gross loss for the three and gross profit for the nine month periods
ended October 1, 2000 was $0.2 million and $1.1 million respectively compared
with gross losses of $1.6 million and $5.2 million for the comparable periods in
the prior fiscal year. Gross loss as a percentage of revenues was 3.8% for the
three month period ended October 1, 2000 compared to a gross loss of 36.1% for
the same period of 1999. Gross profit as a percentage of revenues was 5.4% for
the nine month period ended October 1, 2000 compared to a gross loss that was
44.0% of revenues for the same period of 1999. The increase in gross profit for
the three month period was primarily the result of profit contribution by the
Company's distribution segment of $2.1 million, partially offset by decreased
revenue for the Company's manufacturing segment and by lower average selling
prices, caused by changes in package mix and industry competition. The increase
in gross profit for the nine month period was primarily the result of profit
contribution of $5.9 million by the Company's distribution segment and increased
revenue for the Company's manufacturing segment, partially offset by lowered
average selling prices. Low capacity utilization was partially offset by lower
labor and manufacturing overhead costs.
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 $1.2 million and $3.4 million for the
three and nine month periods ended October 1, 2000 compared to $1.1 million and
$3.3 million for the same periods in 1999. Included in these amounts for the
current year is $0.2 million and $0.5 million respectively for the three and
nine month periods, relating to amortization of intangible assets arising from
the purchase of OSEI in 1999.
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 increased 68.3% to $1.4
million and 76.8% to $5.2 million for the three and nine month periods ended
October 1, 2000, respectively, from $0.8 million and $2.9 million for the
comparable periods of 1999. The selling, general and administrative expenses for
the three and nine month periods ended October 1, 2000 includes $0.6 million and
$2.9 million, respectively, attributable to the Company's distribution segment.
During the three months ended October 1, 2000, expenditures for selling, general
and administrative expenses were offset by reversal of $0.4 million of the
allowance for doubtful accounts due to the collection of overdue accounts
receivable. The $0.6 million decrease, excluding the distribution segment, for
the nine month period was due primarily to decreased spending in the sales
function and administration activities.
As a percentage of revenues, selling, general and administrative expenses
increased to 24.5% in the third quarter of 2000 from 19.1% for the third
quarter of 1999 and increased to 25.9% for the first nine months of 2000 from
24.6% for the comparable period in 1999. This increase was primarily due to the
distribution segment. Excluding the distribution segment, selling general and
administrative expenses as a percentage of revenue for the nine month period
ended October 1, 2000 decreased to 15.8% from 24.6% for the comparable period in
1999.
Page 13
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the costs associated
with research and development personnel, the cost of related materials and
services, and the depreciation of development equipment. Research and
development expenses increased 103.3% to $0.4 million and 73.1% to $0.9 million
for the three and nine month periods ended October 1, 2000, respectively, over
the comparable periods in 1999. This increase is primarily due to increased
spending for new product development.
As a percentage of revenues, research and development expenses increased to
6.3% in the third quarter of 2000 from 4.1% in the third quarter of 1999 and
increased to 4.6% for the first nine months of 2000 from 4.5% for the comparable
period in 1999. The increase was primarily due to higher spending for new
product development.
INTEREST AND OTHER INCOME
Interest and other income is primarily comprised of interest earnings from
investments in cash equivalents. Interest and other income was $46,000 and
$106,000 for the three and nine month periods ended October 1, 2000,
respectively, compared to $32,000 and $59,000 for the three and nine month
periods ended October 3, 1999. Interest income in 2000 includes $93,000
attributable to the distribution segment.
INTEREST EXPENSE
Interest expense consists primarily of interest payable on bank debt.
Interest expense was $0.5 million and $1.4 million for the three and nine month
periods ended October 1, 2000, respectively, compared to $0.3 million and $1.2
million for the three and nine month periods ended October 3, 1999. Interest
expense increased from 1999 due to the replacement in 1999 of certain secured
debt with increased lines of credit guaranteed by OSE.
PROVISION FOR INCOME TAXES
The Company did not record a provision for federal income tax for the nine
month period ended October 1, 2000 as the Company operated at a loss.
EXTRAORDINARY GAIN
In April 1999, the Company's secured creditors agreed to restructure the
Company's secured debt, including debt forgiveness. As a result, the Company
recorded an extraordinary gain of $1,487,000.
In September 1999, the Company entered into a loan and security agreement
with Far East National Bank and Bank SinoPac, Los Angeles Branch. As a result
the secured creditors subject to the April 1999 restructure were paid all
remaining principal amounts. Accordingly this transaction resulted in an
extraordinary gain of $560,000.
DEEMED DIVIDENDS ON PREFERRED STOCK
During the second quarter of 1999, the Company recorded a deemed dividend
on preferred stock of $6.8 million. This is the result of the conversion price
of the convertible preferred stock issued to OSE during the quarter being less
than the market price of the common stock on the date of the transaction. All
deemed dividends related to the transaction have been recognized during the
second quarter as a result of the preferred stock being immediately convertible
at the discretion of the holder.
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<PAGE>
SEGMENT REPORTING
The Company has two segments, manufacturing and distribution. Manufacturing
comprises the semiconductor packaging services of 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 ("QFP")
and thin Quad Flat packages ("TQFP") "), ball grid array packages ("BGAs") and
Chip Scale packaging ("CSPs"). Distribution comprises the North American sales,
marketing and technical support organization for OSE. Fees are earned from the
sales of the semiconductor assembly and test service of OSE to customers
headquartered in North America.
<TABLE>
<CAPTION>
(In thousands) Manufacturing Distribution Eliminations Total
------------------ ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Three months ending October 1, 2000:
Revenues $ 3,719 $ 2,075 $ - $ 5,794
Interest & other income 3 195 (152) 46
Interest & other expense (623) - 152 (471)
Depreciation and amortization 972 188 - 1,160
Net income (loss) (5,513) 1,692 - (3,821)
Total assets 16,721 43,327 (11,826) 48,222
Expenditures for additions to
long-lived assets $ 490 $ $10 $ - $ 500
</TABLE>
<TABLE>
<CAPTION>
(In thousands) Manufacturing Distribution Eliminations Total
------------------ ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Nine months ending October 1, 2000:
Revenues $13,987 $ 5,885 $ - $19,957
Interest & other income 13 336 (243) 106
Interest & other expense (1,596) - 243 (1,353)
Depreciation and amortization 2,845 563 - 3,408
Net income (loss) (10,912) 3,275 - (7,637)
Total assets 16,721 43,327 (11,826) 48,222
Expenditures for additions to
long-lived assets $ 2,323 $ 25 $ - $ 2,348
</TABLE>
Prior to the fourth quarter of 1999, the Company's only operations consisted of
the manufacturing segment.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended October 1, 2000, the Company's net cash
used in operations was $2.2 million. Net cash used in operations was comprised
primarily of a net loss of $7.6 million, partially offset by $3.4 million of
non-cash charges for depreciation and amortization, provision for impairment of
assets of $1.4 million and a provision of excess and obsolete inventory of $0.3
million and a net decrease in working capital items of $0.3 million. The net
decrease in working capital items primarily reflected a $3.6 million increase in
accounts payable and accounts payable related party, which was partially offset,
by a $2.6 million increase in accounts receivable and a $0.5 million increase in
accrued liabilities. As of October 1, 2000, the Company had cash and cash
equivalents of $1.9 million and is operating under bank lines that mature on
November 29, 2000 and November 30, 2000.
In the nine month period ended October 1, 2000, investing activities used
$2.3 million for capital expenditures. The Company expects to spend and has
commitments outstanding for approximately $0.3 million for capital expenditures
during the remainder of 2000 for the acquisition of equipment. The Company's
future expenditures are expected to be funded out of internal cash flow.
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<PAGE>
During the nine months ended October 1, 2000, $1.1 million was provided in
financing activities. This resulted primarily from proceeds from borrowings of
$1.0 million and $0.1 million from proceeds of issuance of common stock.
The Company has experienced fluctuating levels of demand, reduced average
selling prices, ongoing net losses, and negative cash flows from operating
activities. The Company has $18 million owing on lines of credit that have
matured but have been extended while refinancing negotiations take place. The
lines of credit are currently guaranteed by OSE and any refinancing would be
subject to ongoing support from OSE. Management believes it may require
additional cash from private placements or other sources of liquidity to meet
the Company's projected working capital and other cash requirements. There can
be no assurance that such additional financing will be available when needed or,
if available, will be available on satisfactory terms.
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 underutilization of capacity and resultant under absorption of
fixed costs resulted in operating losses that have continued into 2000. As a
result of these circumstances, the Company's independent accountants' opinion on
the Company's December 31, 1999 financial statements includes an explanatory
paragraph indicating that these matters raise substantial doubt about the
Company's ability to continue as a going concern.
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 productions 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 proceeding factors would
adversely affect the Company's business, financial condition and results of
operations.
CUSTOMER CONCENTRATION
The Company has been substantially dependent on a relatively small number
of customers within the semiconductor industry. During the third quarter of
2000, Atmel Semiconductor accounted for approximately 30% of the Company's
revenues. During the first nine months of 2000, Atmel Semiconductor accounted
for approximately 36% of the Company's revenues. There can be no assurance that
such customer or any other customers will continue to place orders with the
Company in the future at the same levels as in prior periods. The loss of one or
more of the Company's customers, or reduced orders by any of its key customers,
would likely adversely affect the Company's business, financial condition and
results of operations.
UNDERUTILIZATION OF MANUFACTURING CAPACITY; HIGH FIXED COSTS
The Company 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
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<PAGE>
as revenues dropped substantially, with the result that there was substantial
underutilized manufacturing capacity. The Company continues to operate with
significant underutilized capacity. There can be no assurance that the Company
will receive orders from new or existing customers that will enable it to
utilize such manufacturing capacity in a timely manner. The Company's inability
to generate the additional revenues necessary to more fully utilize its capacity
has had and will continue to have a material adverse effect on the Company's
business, financial condition and results of operations.
PRODUCT QUALITY AND RELIABILITY; PRODUCTION YIELDS
The semiconductor packaging process is complex and product quality and
reliability are subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, errors in the
design of equipment and related tooling, use of defective raw materials,
defective plating services and inadequate sample testing. From time to time, the
Company has experienced and expects to experience lower than anticipated
production yields as a result of such factors. The Company's failure to achieve
high quality production or acceptable production yields would likely result in
loss of customers, delays in shipments, increased costs, cancellation of orders
and product returns for rework, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that it has improved its production quality, however, there
can be no assurance that production quality will continue to improve in the
future.
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.
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<PAGE>
COMPETITION
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. and Siliconware in Taiwan, Amkor
Technology and ChipPAC in Korea, and other subcontractors in Singapore, Taiwan,
Malaysia and Indonesia. Each of these companies has significantly greater
manufacturing capacity, financial resources, research and development
operations, marketing and other capabilities than the Company and has been
operating for a significantly longer period of time than the Company. Such
companies have also established relationships with many large semiconductor
companies which are current or potential customers of the Company. The Company
could face substantial competition from Asian packaging foundries should one or
more of such companies decide to establish foundry operations in North America.
The Company also faces competition from other independent, North American
packaging foundries. The Company also competes against companies which have
in-house packaging capabilities as current and prospective customers constantly
evaluate the Company's capabilities against the merits of in-house packaging.
Many of the Company's customers are also customers of one or more of the
Company's principal competitors. The principal elements of competition in the
semiconductor packaging market include delivery cycle times, price, product
performance, quality, production yield, responsiveness and flexibility,
reliability and the ability to design and incorporate product improvements. The
Company believes it principally competes on the basis of shorter delivery cycle
times it can offer customers due to the close proximity of its manufacturing
facility to its customers' operations and the end users of its customers'
products.
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
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<PAGE>
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.
RELIANCE ON RENEWAL OF CREDIT FACILITY
The Company is in discussions with its bank to consolidate its $7 million
and $11 million lines of credit into a single credit line that would be payable
on November 30, 2001. Prior to such discussions, the credit lines are available
to finance operations and working capital needs through November 29 and 30,
2000, respectively. Should the Company's lending institution prove unwilling to
consolidate or extend the existing credit lines, or if such efforts are subject
to prolonged delay, such event would have a material adverse effect on the
Company's business, financial condition, operating results and liquidity.
DEPENDENCE UPON A SINGLE GEOGRAPHIC AREA
The Company's current manufacturing operations are located in San Jose and
Milpitas, California. The two facilities are one and one half miles apart and
comprise the total manufacturing capability of the Company. 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.
ABILITY TO IDENTIFY, RECRUIT AND RETAIN ADDITIONAL PERSONNEL
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.
DEPENDENCE UPON TAIWAN
The Company may be significantly affected by the political, economic and
military conditions in Taiwan. The Company's distribution segment is a
distributor for OSE, whose operations are principally located in Taiwan. Taiwan
and the People's Republic of China (PRC) are continuously engaged in political
disputes and both countries have recently conducted military exercises in or
near the other's territorial waters and airspace. Such disputes may continue and
even escalate, resulting in economic embargo, a disruption in shipping or even
military hostilities. This could severely harm our distribution business by
interrupting or delaying production or shipment of products that we distribute.
Any kind of activity of this nature or even rumors of such activity could
severely and negatively impact the Company's operations, revenues, operating
results, and stock price.
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<PAGE>
EARTHQUAKE OR OTHER NATURAL DISASTERS
The Company's facilities are located in California near major earthquake
faults. In addition, some of the Company's suppliers are located near earthquake
sensitive areas. In the event of a major earthquake or other natural disaster
near its facilities, the Company's operations could be harmed. Similarly, a
major earthquake or other natural disaster near the Company's suppliers, like
the ones that occurred in Taiwan in September 1999 and June 2000, could disrupt
the operations of those suppliers, which could limit the availability of
products for the Company to distribute and harm the Company's business.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED PACKAGING ASSEMBLY CORPORATION
Date: November 20, 2000 /s/ EDMOND TSENG
----------------------------------------
Edmond Tseng
President and Chief Executive Officer,
/s/ VINCENT R. LEPORE
----------------------------------------
Vincent R. Lepore
Acting Chief Financial Officer,
Controller, and Chief Accounting Officer
Page 22
