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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2000
[ ] 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
incorporation or organization) Identification Number)
2221 Old Oakland Road 95131-1402
San Jose, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number including area code: (408) 321-3600
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, .001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 21, 2001, was
approximately $1,455,000. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 21, 2001 was 59,093,299. The Registrant also had 3,000,000 shares and
3,023,225 shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, respectively, outstanding on such date which is
convertible at any time by the holder into 41,246,312 shares and 41,565,626
shares, respectively, of Common Stock.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
Page
----
Part I
Item 1 Business ........................................................... 3
Item 2 Properties ......................................................... 10
Item 3 Legal Proceedings .................................................. 11
Item 4 Submission of Matters to a Vote of Security Holders ................ 11
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters .......................................................... 12
Item 6 Selected Financial Data ............................................ 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 14
Item 7a Quantitative and Qualitative Disclosures About Market Data ......... 21
Item 8 Financial Statements and Supplemental Data ......................... 22
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 45
Part III
Item 10 Directors and Executive Officers of the Registrant ................. 46
Item 11 Executive Compensation ............................................. 46
Item 12 Security Ownership of Certain Beneficial Owners and Management ..... 46
Item 13 Certain Relationships and Related Transactions ..................... 46
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 46
SIGNATURES ................................................................................. 50
2
PART I
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
Item 1. Business
Integrated Packaging Assembly Corporation ("IPAC") is an independent North
American semiconductor packaging foundry. The Company receives wafers from its
customers and assembles each integrated circuit in a protective plastic package.
The Company's packaging facilities are located in San Jose, California in close
proximity to its customers and the end-users of its customers' products. Due to
intense competitive pressures in the electronics industry, semiconductor
companies are faced with increasingly shorter product life cycles and therefore
have a need to reduce the time it takes to bring a product to market. The
Company believes that its close proximity to its customers promotes quicker
turnaround design, prototype production and final product delivery to its North
American customers, compared to its principal competitors which are primarily
located in Asia. The Company is also the exclusive North American sales and
marketing organization for Orient Semiconductor Electronics, Ltd. ("OSE") of
Taiwan, a public Taiwanese company and the Company's principal stockholder.
Revenues are derived from fees received on the sales of OSE's semiconductor
assembly and test services to customers headquartered in North America. The
Company entered this market in October 1999 with the acquisition of OSE, Inc.
("OSEI").
Manufacturing
Semiconductor Packaging Services
The Company has focused on packages designed for assembly using Surface
Mount Technology ("SMT") in which leads on integrated circuits are soldered to
the surface of the printed circuit board. Within the SMT market, the Company
focuses on high pin-count packages, such as Quad Flat Packages ("QFPs") and Thin
Quad Flat Packages ("TQFPs"). The Company offers eight different QFP and TQFP
families with body sizes ranging from 7x7 mm to 32x32 mm and lead counts from 32
to 256 leads, two Plastic Ball Grid Array ("PBGA")/ Cavity Down Ball Grid Array
("CDBGA") families with body sizes of 27x27 and 35x35 with ball counts from 225
to 532 balls and three Low Profile Fine Pitch Ball Grid Array ("LFBGA")/Thin
Profile Fine Pitch Ball Grid Array ("TFBGA") families with ball counts from 144
to 196 balls. Integrated circuits packaged by the Company are used in the
following applications: personal computers, modems, disk drives, automobiles,
cameras and telecommunications, among others. Since inception, QFPs and TQFPs
have accounted for substantially all of the Company's packaging revenues.
Packaging involves several manufacturing operations, which are highly
automated to facilitate high volume production. The assembly process begins with
the mounting of a finished, tested wafer onto a carrier. After a dicing saw cuts
the wafer into individual die, the cut wafer is moved to a die bonder which
picks each good die off the wafer and bonds it to a lead frame with epoxy resin.
A lead frame is a miniature sheet of metal, generally made of copper with
selective silver plating on which the pattern of input/output (I/0) leads has
been cut. Next, very fine (typically 0.001 inches in diameter) gold wires are
connected to the die and the leads through the use of automated machines known
as wire bonders. These wire leads provide the electrical path necessary for the
device to function. Each die is then encapsulated in a plastic casing and
marked. The leads protruding from the finished casing are then plated with a tin
and lead composition to permit the leads to be connected to the printed circuit
board. At the end of the packaging process, the leads are trimmed and formed
into requisite shapes. After this packaging process is complete, the devices
undergo final inspection and are prepared for shipment.
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The Company shipped approximately 19.8 million devices in 1998,
approximately 15.8 million devices in 1999 and approximately 19.5 million
devices in 2000. Since the fourth quarter of 1996, the Company has had available
manufacturing capacity. The Company's manufacturing capacity utilization is a
function of the mix of different package types produced by the Company at any
one time and the proportion of standard production runs compared to expedited
production runs. Thus, as the Company shifts its production among different
package types or allocates a different amount of available capacity to standard
production runs, the rate of the Company's capacity utilization changes, at
times significantly.
The Company has made substantial investments in expanding its manufacturing
capacity during its operating history, in anticipation of increased future
business. Since early 1997, the Company has incurred net losses as revenues
dropped substantially, while overhead and fixed costs increased, with the result
that there was substantial underutilized manufacturing capacity. The Company
continues to operate with significant underutilized capacity. There can be no
assurance that the Company will receive orders from new or existing customers
that will enable it to utilize such manufacturing capacity in a timely manner.
The Company's inability to generate the additional revenues necessary to
more fully utilize its capacity has had and will continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that its competitive position depends on its ability
to have sufficient capacity to meet anticipated customer demand. Accordingly,
although the Company currently has available manufacturing capacity, the Company
plans to continue to selectively invest to expand such capacity, particularly
through the acquisition of capital equipment, including equipment for new
packages (e.g. Ball Grid Array ("BGA") and Chip Scale Package ("CSP")). There
can be no assurance that the Company will be able to utilize such capacity, that
the cost of such expansion will not exceed management's current estimates or
that such capacity will not exceed the demand for the Company's services. In
addition, expansion of the Company's manufacturing capacity will continue to
significantly increase its fixed costs, and the future profitability of the
Company will depend on its ability to utilize its manufacturing capacity in an
effective manner. The Company's inability to generate the additional production
volume necessary to fully utilize its capacity had a material adverse effect on
its business, financial condition and results of operation since 1997 and would
continue to have a material adverse effect on the Company's future business,
financial condition and results of operations.
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in Asia
or Europe. The Company's operations are significantly dependent upon the
Company's ability to obtain capital equipment for its manufacturing operations
in a timely manner. In this regard, the Company spent approximately $2.6 million
in 2000 and expects to continue spending to purchase capital equipment in 2001.
The Company currently purchases capital equipment from a limited group of
suppliers including Dai-Ichi Seiko Co., Ltd., ESEC SA and Kaijo Corporation. The
Company has no long term agreement with any such supplier and acquires such
equipment on a purchase order basis. The market for capital equipment used in
semiconductor packaging has at times been characterized by intense demand,
limited supply and long delivery cycles. The Company's dependence on such
equipment suppliers poses substantial risks. Should any of the Company's major
suppliers be unable or unwilling to provide the Company with high quality
capital equipment in amounts necessary to meet the Company's requirements, the
Company would experience severe difficulty locating alternative suppliers in a
timely fashion and its operations could be materially adversely affected. Any
problems with such capital equipment or any prolonged delay in equipment
shipments by key suppliers or an inability to locate alternative equipment
suppliers could have a material adverse effect on the Company's business,
financial condition and results of operations and could result in damage to
customer relationships. Moreover, increased levels of demand in the capital
equipment market may
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cause an increase in the price of equipment, further lengthen delivery cycles
and limit the ability of suppliers to adequately service equipment following
delivery, any of which could have an adverse effect on the Company's business,
financial condition or results of operations. In addition, adverse fluctuations
in foreign currency exchange rates, particularly the Japanese yen, could result
in increased prices for capital equipment purchased by the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Quality Control
The Company believes that total quality management is a vital component of
customer satisfaction and internal productivity. The Company has established
quality control systems, which are designed to maintain acceptable manufacturing
yields at high volume production. The Company has also developed a sophisticated
proprietary software program for material resource planning, shop floor control,
work in process tracking, statistical process control and product costing. The
Company obtained certification for its packaging operations pursuant to ISO 9002
in December 1996 and recertification in October 1999.
As of December 31, 2000, the Company's quality control staff consisted of 6
engineers, technicians and other employees who monitor the Company's design and
production processes in order to ensure high quality. These employees include
line inspectors who work with members of the production staff to conduct
examination, testing and fine-tuning of products during the production process.
Quality control personnel are involved from initial design to production. The
quality control staff also collects and analyzes data from various stages of the
production process which is used by the Company for statistical process control.
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, use of defective
raw materials, defective plating services and inadequate sample testing. From
time to time, the Company has experienced lower than anticipated production
yields as a result of such factors. The Company's failure to maintain high
quality production standards or acceptable production yields would likely result
in loss of customers, delays in shipments, increased costs, cancellation of
orders and product returns for rework, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Raw Materials Suppliers
To maintain competitive manufacturing operations, the Company must obtain
from its suppliers, in a timely manner, sufficient quantities of acceptable
materials at expected prices. The Company sources most of its raw materials,
including critical materials such as lead frames and die attach compound, from a
limited group of suppliers. Substantially all molding compound, a critical raw
material, is obtained from a single supplier. From time to time, suppliers have
extended lead times or limited the supply of required materials to the Company
because of supplier capacity constraints and, consequently, the Company has
experienced difficulty in obtaining acceptable raw materials on a timely basis.
In addition, from time to time, the 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
5
supplies in a timely manner or if there were significant increases in the costs
of raw materials that the Company could not pass on to its customers.
Marketing and Sales
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times
(including current 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. There can be no assurance that
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. In recent years, the
Company's need for additional financing, and the uncertainty as to whether such
financing could be obtained, 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.
The Company's marketing and sales efforts are focused on North American
semiconductor companies that design or manufacture IC devices which are used in
applications such as personal computers, modems, disk drives and
telecommunication products. Within such markets, the Company emphasizes
packaging complex, high pin-count products. The Company sells its services
directly through its sales and customer support organization. The Company
assists its customers in evaluating designs with respect to manufacturability
and when appropriate recommends design changes to reduce manufacturing costs and
lead times. The Company also offers lead frame design services for a fee.
To date, the Company has been substantially dependent on a relatively small
number of customers. Specifically, Atmel Semiconductor and Orbit Semiconductor
accounted for 32%, and 5%, respectively, of the Company's revenues in 2000.
Atmel and Orbit accounted for 30% and 15%, respectively, of the Company's
revenues in 1999. Atmel, Cirrus Logic and Ford accounted for 39%, 9% and 11%,
respectively, of the Company's revenues in 1998. The Company anticipates that
significant customer concentration will continue,
6
although the companies which constitute the Company's largest customers may
change from period to period. In this regard, Ford Microelectronics stopped
manufacturing the automotive components that the Company packaged in 1999 and
Atmel Semiconductor has significantly reduced their requirements during the
second half of 2000.
All of the Company's customers operate in the cyclical semiconductor
business and their order levels may vary significantly from period to period. In
addition, there can be no assurance that such customers or any other customers
will continue to place orders with the Company in the future at the same levels
as in prior periods. There can be no assurance that adverse developments in the
semiconductor industry will not adversely affect the Company's business,
financial condition and results of operations. The loss of one or more of the
Company's customers, or reduced orders by any of its key customers, would
adversely affect the Company's business, financial condition and results of
operations. The Company ships its products in accordance with customer purchase
orders and upon receipt of semiconductor wafers from its customers. The Company
generally ships products within one to seven days after receiving the customer's
wafers, and, accordingly, the Company has not, to date, had a material backlog
of orders. The Company expects that revenues in any quarter will be
substantially dependent upon orders received in that quarter. The Company's
expense levels are based in part on its expectations of future revenues and the
Company may be unable to adjust costs in a timely manner to compensate for any
revenue shortfall.
Competition; Decline in Average Selling Prices
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. 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.
For the past several years, the Company has experienced a decline in the
average selling prices for a number of its products. The Company expects that
average selling prices for its products will continue to decline in the future,
principally due to intense competitive conditions. A decline in average selling
prices of the Company's products, if not offset by reductions in the cost of
producing those products, would continue to decrease the Company's gross margins
and materially and adversely affect the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
able to reduce its cost per unit.
7
Research and Development
The Company's research and development efforts are focused on improving the
efficiency and capabilities of its production processes, and on developing new
packages by making improvements upon commercially available materials and
technology. The Company's research and development efforts are focused on
improving existing technology, such as developing thermally enhanced QFPs that
result in better heat dissipation, and emerging packaging technologies, such as
BGA packages that provide for an increased number of leads per device without
increasing the size of the functional integrated circuit and Chip Scale
Packaging ("CSP"). Although the Company did not ship significant quantities of
BGA devices in 2000, it believes that the increased pin count made available by
BGA technology is an important technology that will enable the Company to
provide new packaging services to its customers. The Company also works closely
with the manufacturers of its packaging equipment in designing and modifying the
equipment used in the Company's production process.
As of December 31, 2000, the Company employed 7 persons in research and
development activities. In addition, other management and operational personnel
are involved in research and development activities. The Company supplements its
research and development efforts with alliances and technology licensing
agreements. For example, the Company is a member of an ARPA-TRP consortium
working to enhance cooperation and participation by United States companies in
assembly and packaging technology. In 2000, 1999 and 1998, the Company's
research and development expenses were approximately $1,308,000, $727,000, and
$1,101,000, respectively. The Company expects to continue to invest significant
resources in research and development.
The Company has focused its manufacturing resources on plastic QFPs for use
with SMT, and the Company has neither the capability nor the intent to provide
services to other substantial segments of the semiconductor packaging market.
For example, the Company has no capacity to manufacture packages for use with
PTH technology, nor does the Company presently intend to manufacture packages
using materials other than plastic, such as ceramic. BGA packaging currently
represents a very small, but increasing, portion of the Company's overall
revenues and a relatively small portion of the overall semiconductor packaging
market. The Company has recently committed to the introduction of an LFBGA
family which the Company believes to be an important new commercially attractive
package for its customers. Technological change in the semiconductor packaging
industry is continuous and in the future semiconductor manufacturers are
expected to require increased technological and manufacturing expertise. The
introduction of new packaging technologies, a reduction or shift away from
QFP's, or the failure of the market for BGA packaging to develop would result in
a material adverse effect on the Company's business, financial condition and
results of operations.
Intellectual Property
The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights relating to its
manufacturing processes. As of December 31, 2000, the Company held twelve U.S.
patents, which expire, between 2012 and 2016, and three additional patent
applications have been filed and are pending. The Company expects to continue to
file patent applications when appropriate to protect its proprietary
technologies; however, the Company believes that its continued success depends
primarily on factors such as the technological skills and innovation of its
personnel rather than on its patents. The process of seeking patent protection
can be expensive and time consuming. There can be no assurance that patents will
be issued from pending or future applications or that, if patents are issued,
they will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
the Company. Moreover, there can be no assurance that any patent rights will be
upheld in the future or that the Company will be able to preserve any of its
other intellectual property rights.
As is typical in the semiconductor industry, the Company may receive
communications from third parties
8
asserting patents on certain of the Company's technologies. In the event any
third party were to make a valid claim and a license were not available on
commercially reasonable terms, the Company's business, financial condition and
results of operations could be materially and adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce patents or other intellectual property
rights of the Company or to defend the Company against claimed infringement of
the rights of others. The failure to obtain necessary licenses or the occurrence
of litigation relating to patent infringement or other intellectual property
matters could have a material adverse effect on the Company's business,
financial condition and results of operations. At December 31, 2000 there was no
litigation relating to patent or other intellectual property matters.
Environmental Matters
The semiconductor packaging process involves a significant amount of
chemicals and gases which are subject to extensive governmental regulations. For
example, liquid waste is produced at the stage at which silicon wafers are diced
into chips with the aid of diamond saws and cooled with running water. In
addition, excess materials on leads and moldings are removed from packaged
semiconductors in the trim and form process. The Company has installed equipment
to collect certain solvents used in connection with its manufacturing process
and has contracted with independent waste disposal companies to remove such
hazardous material.
The Company installed an advanced electroplating system at a leased
facility in Milpitas, California and substantially all of the Company's plating
is performed at such facility. This plating operation involves the use of
significant quantities of certain hazardous substances. Although the Company has
designed procedures to ensure such materials are handled in compliance with
applicable regulations, there can be no assurance that the operation of such
facility will not expose the Company to additional costs in complying with
environmental regulations or result in future liability to the Company.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals used in the Company's
manufacturing process and on the facility occupied by the Company. The Company
believes that its activities conform to present environmental and land use
regulations applicable to its operations and its current facility. Increasing
public attention has, however, been focused on the environmental impact of
semiconductor manufacturing operations and the risk to neighbors of chemical
releases from such operations. There can be no assurance that applicable land
use and environmental regulations will not in the future impose the need for
additional capital equipment or other process requirements upon the Company or
restrict the Company's ability to expand its operations. The adoption of new
ordinances or similar measures or any failure by the Company to comply with
applicable environment and land use regulations or to restrict the discharge of
hazardous substances could subject the Company to future liability or cause its
manufacturing operations to be curtailed or suspended.
The Company's OSEI subsidiary is not involved in manufacturing.
Employees
As of December 31, 2000, the Company had 171 full time employees, 131 of
whom were engaged in manufacturing, 7 in research and development, 15 in sales
and customer service, and 18 in finance and administration. The Company's
employees are not represented by any collective bargaining agreement, and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good. The success of the Company's future operations
depends in large part on the Company's ability to attract and retain highly
skilled technical, manufacturing and management personnel. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel.
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Executive Officers
The executive officers of the Company are as follows:
Name Age Position(s)
- ------------------- --------- --------------------------------------------
Edmond Tseng 54 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Gerald K. Fehr 63 Executive Vice President, Chief Technology
Officer
Vincent R. Lepore 61 Corporate Controller, and Chief Accounting
Officer
Chris BK Ooi 46 Vice President, Operations
Edmond Tseng has been President and Chief Executive Officer of IPAC since
November 2000 and President and Chief Executive Officer of OSE, Inc since 1990.
Mr. Tseng has been a Director and Chairman of the Board of Directors since April
1999. From June 1985 to December 1989, Mr. Tseng served as Director of Packaging
Technology at Condata, Incorporated.
Gerald K. Fehr is a Co-Founder of the Company and has served as Vice
President, Technology of the Company since March 1993 and Executive Vice
President, Chief Technology Officer since December 1997. From January 1991 to
March 1993, Dr. Fehr served as an independent consultant in the semiconductor
packaging industry. Prior to 1991, Dr. Fehr held various management positions in
operations with LSI Logic, Inc., Burroughs Corporation, Fairchild Semiconductor
Corporation and Intel Corporation.
Vincent R. Lepore joined the Company in July 2000 as Corporate Controller,
and Chief Accounting Officer. From January 1994 to July 2000, Mr. Lepore served
as Controller of Center for Systems Management, Inc., a project management
company. From October 1988 to January 1994, Mr. Lepore was Vice President,
Finance and Chief Financial Officer of Dale Seymour Publications, Inc., an
educational publisher.
Chris BK Ooi joined the Company in February 1996 as Director of Engineering
and was appointed the Company's Vice President of Operations in June 1999. From
1994 to 1996, Mr. Ooi was Co-Founder and Executive Vice President of Ampac
Enterprises, a semiconductor sales and marketing company. Prior to 1994, Mr. Ooi
held various positions with National Semiconductor Corporation.
The Company's success depends to a significant extent upon the continued
service of its key management and technical personnel, each of whom would be
difficult to replace. The competition for qualified employees is intense, and
the loss of the services of key personnel or the inability to attract, retain
and motivate qualified new personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships among the directors or officers of the
Company.
Item 2. Properties
The Company's principal operations are located in an approximately 82,000
square foot building which it occupies under a ten year lease. The Company
leases a separate 2,500 square foot building, with an initial term of five
years, approximately 2 miles from the Company's principal facility, for its
advanced electroplating system. The Company also leases space for the sales
offices of OSEI located in Boston, Massachusetts and
10
Phoenix, Arizona. The Company believes its existing facilities are adequate to
meet its needs for the foreseeable future. Since the Company does not currently
operate multiple facilities in different geographic areas, a disruption of the
Company's manufacturing operations resulting from various factors, including
sustained process abnormalities, human error, government intervention or a
natural disaster such as fire, earthquake or flood, could cause the Company to
cease or limit its manufacturing operations and consequently would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter to a vote of security
holders.
11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 21, 2001, there were approximately 374 beneficial owners of the
Company's Common Stock. The Company's Common Stock is listed for quotation on
the OTC Bulletin Board under the Symbol "IPAC." The following table sets forth
for the periods indicated, the high and low prices of the Company's Common
Stock.
Fiscal Year Ended December 31, 1999 High Low
- ------------------------------------------------------------ ----- -----
First Quarter $0.52 $0.08
Second Quarter 0.59 0.23
Third Quarter 0.34 0.17
Fourth Quarter $0.63 $0.13
Fiscal Year Ended December 31, 2000 High Low
- ------------------------------------------------------------ ----- -----
First Quarter $0.66 $0.37
Second Quarter 0.58 0.21
Third Quarter 0.47 0.16
Fourth Quarter $0.37 $0.06
The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the semiconductor
industry, changes in earnings estimates or recommendations by analysts, the
failure of the Company to meet or exceed published earnings estimates or other
events or factors. In addition, the public stock markets have experienced
extreme price and trading volume volatility in recent months. This volatility
has significantly affected the market prices of securities of many high
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future. In addition, the
Company's bank line of credit does not permit the payment of dividends, except
for certain dividends on the Company's A and B Series convertible preferred
stocks. In 2000, the Company paid dividends of $419,000 on the series A
convertible preferred stock by issuing 1,251,063 shares of Common Stock. In
1999, the Company paid dividends of $90,700 on the Series A convertible
preferred stock by issuing 326,022 shares of Common Stock.
The Company has Loan Agreements ("the Agreements") with banks that require
the Company to meet certain covenants including restrictions on payment of
dividends. The Company cannot pay any dividends on the Company's stock other
than dividends payable in the Company's stock and other than dividends payable
on the Company's series A and B convertible preferred stock purchased by OSE.
12
Item 6. Selected Financial Data
Year Ended December 31, (1)
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenues $ 36,402 $ 19,744 $ 23,281 $ 17,441 $ 24,167
Cost of revenue 28,840 24,089 29,114 23,500 23,117
-------- -------- -------- -------- --------
Gross profit (loss) 7,562 (4,345) (5,833) (6,059) 1,050
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative 3,488 5,167 4,068 3,651 7,215
Research and development 1,053 1,276 1,101 727 1,308
Provision for impairment of assets -- 3,000 18,200 -- 1,389
-------- -------- -------- -------- --------
Total operating expenses 4,541 9,443 23,369 4,378 9,912
-------- -------- -------- -------- --------
Operating income (loss) 3,021 (13,788) (29,202) (10,437) (8,862)
Interest and other income 1,210 971 1,209 72 159
Interest expense (1,384) (2,185) (1,783) (1,555) (1,836)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary gains 2,847 (15,002) (29,776) (11,920) (10,539)
Provision for income taxes (530) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary gains 2,317 (15,002) (29,776) (11,920) (10,539)
Extraordinary gains -- -- -- 2,047 --
-------- -------- -------- -------- --------
Net income (loss) 2,317 (15,002) (29,776) (9,873) (10,539)
Preferred stock dividend -- -- -- (308) (413)
Deemed dividends on preferred stock -- -- -- (6,800) --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
stockholders $ 2,317 ($15,002) ($29,776) ($16,981) ($10,952)
======== ======== ======== ======== ========
Net income (loss) per share (1):
Basic $ 0.20 ($ 1.08) ($ 2.12) ($ 0.68) ($ 0.20)
Diluted $ 0.16 ($ 1.08) ($ 2.12) ($ 0.68) ($ 0.20)
Number of shares used to compute per share data (1):
Basic 11,730 13,898 14,046 24,957 55,676
Diluted 14,157 13,898 14,046 24,957 55,676
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $ 15,614 ($ 5,877) ($16,085) ($16,687) ($17,959)
Total assets 69,639 55,482 18,728 51,648 40,677
Long-term obligations / deferred
gains 16,926 14,249 1,249 1,111 973
Mandatorily redeemable convertible
preferred stock -- -- -- 5,100 11,100
Total stockholders' deficit $ 40,761 $ 26,238 ($ 3,207) ($ 6,723) ($17,124)
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine shares used in computing per share amounts.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward looking statements
contained herein are subject to certain factors that could cause actual results
to differ materially from those reflected in the forward looking statements.
Such factors include, but are not limited to, those discussed as follows and
elsewhere in this Report on Form 10-K.
Overview
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and
resultant underabsorption of fixed costs resulted in operating losses that have
continued into 2000. As a result of these circumstances, the Company's
independent accountants' opinion on the Company's December 31, 2000 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, Orient Semiconductor Electronics, Limited ("OSE") purchased
4,000,000 shares of the Company's Series A Convertible Preferred Stock,
convertible into 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 restructured the Company's secured
debt.
OSEI was a privately held corporation that serves as the exclusive North
American distributor of OSE, a public Taiwanese company and the Company's
principal stockholder. OSEI derives its revenues exclusively from fees received
on the sales of OSE's semiconductor assembly and test services to customers
headquartered in North America. On October 29, 1999, the Company acquired OSEI
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 to the OSEI shareholders. As a result of the transaction, the distributor,
OSEI, is being operated as a wholly owned subsidiary of the Company. The Company
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
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
14
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.
The Company may be significantly impacted by the political, economic and
military conditions in Taiwan due to the Company's subsidiary, OSEI, being a
distributor for OSE whose operations are principally located in Taiwan. Taiwan
and the Republic of China 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 OSEI's business by interrupting or
delaying production or shipment of products OSEI distributes. 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.
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 one that occurred in Taiwan in September 1999, 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.
Results of Operations For The Years Ended December 31, 1998, 1999 and 2000
The following table sets forth, for the periods indicated, certain items in
the Company's statement of operations as a percentage of revenues:
1998 1999 2000
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 125.0 134.7 95.7
------ ------ ------
Gross profit (loss) (25.0) (34.7) 4.3
------ ------ ------
Operating expenses:
Selling, general and administrative 17.5 20.9 29.9
Research and development 4.7 4.2 5.4
Provision for impairment of assets 78.2 -- 5.7
------ ------ ------
Total operating expenses 100.4 25.1 41.0
------ ------ ------
Operating loss (125.4) (59.8) (36.7)
Interest and other income 5.2 0.4 0.7
Interest expense (7.7) (8.9) (7.6)
------ ------ ------
Loss before extraordinary
gain and preferred stock dividends (127.9) (68.3) (43.6)
Extraordinary gain -- 11.7 --
------ ------ ------
Net loss before preferred stock
dividends (127.9)% (56.6)% (43.6)%
====== ====== ======
15
Revenues
The Company recognizes revenues upon shipment of products to its customers.
Revenues increased 38.6% to $24.2 million in 2000, from $17.4 million in 1999.
The revenues in 2000 include $7.6 million attributable to the new distribution
segment revenues resulting from the acquisition of OSEI. Revenues decreased
25.1% to $17.4 million in 1999, from $23.3 million in 1998. The increase in
revenues in 2000 was primarily due to the inclusion of the new distribution
segment revenues of OSEI for the entire year. The decrease in revenues in 1999
was primarily due to decreased sales orders and a reduction in average selling
prices due to changes in product mix and competitive pricing issues.
A substantial portion of the Company's net revenues in each quarter results
from shipments during the last month of that quarter, and for that reason, among
others, the Company's revenues are subject to significant quarterly
fluctuations. In addition, the Company establishes its targeted expenditure
levels based on expected revenues. If anticipated orders and shipments in any
quarter do not occur when expected, expenditure levels could be
disproportionately high and the Company's operating results for that quarter
would be materially adversely affected.
Gross Profit (Loss)
Cost of revenues includes materials, labor, depreciation and overhead costs
associated with semiconductor packaging. There is no cost of service related to
the distribution revenue. Gross profit of $1.0 million in 2000 was a $7.1
million improvement over the ($6.1) million gross loss in 1999. Gross loss
increased to $(6.1) million in 1999 from ($5.8) million in 1998. Gross profit
(loss) as a percentage of revenues was 4.3% in 2000, (34.7%) in 1999, and
(25.0%) in 1998. The distribution segment recorded a gross profit of $7.6
million in 2000 and $1.2 million in 1999. Excluding the distribution segment,
the gross loss of ($6.6) million in 2000 was a $0.7 million improvement over the
1999 gross loss of ($7.3) million, and 1999 was a $1.5 million increase over the
1998 gross loss. The decrease in gross loss for 2000 was due to the reduction in
employee work force as a result of the October company wide reorganization. The
increase in gross loss in 1999 was primarily the result of decreased sales
orders and lower average selling prices, caused by changes in product mix and
industry competition which offset the reduction in material, labor, and
depreciation expenses.
Depreciation for certain production machinery and equipment acquired prior
to 1997 is calculated using the units of production method, in which
depreciation is calculated based upon the units produced in a given period
divided by the estimate of total units to be produced over its life following
commencement of use. Such estimate is reassessed when facts and circumstances
suggest a revision may be necessary. Based upon reduced utilization of machinery
and equipment in relation to plan, the estimate for total throughput was reduced
in late 1996 causing the depreciation rate per unit to increase in late 1996.
Such higher depreciation rate continued into 1997 and 1998. In all cases, the
assets will be fully depreciated by the end of their estimated six year life.
Compared with straight line depreciation, the units of production method
generally results in lower depreciation expense during the early life of the
equipment and relatively higher depreciation expense once the equipment is in
full production. All machinery and equipment acquired after 1996 is depreciated
using the straight line depreciation method.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and management
personnel, as well as advertising, public relations, legal and facilities costs.
Selling, general and administrative expenses were $7.2 million in 2000, $3.7
million in 1999 and $4.1 million in 1998. The selling, general and
administrative expenses in 2000 and 1999 includes $4.1
16
million and $0.5 million, respectively, attributable to OSEI. Excluding OSEI,
selling, general and administrative expenses decreased by $0.6 million in 2000
as compared to 1999 due to reduced spending. The decrease in 1999, compared to
1998, was due primarily to reduced spending in sales and administration.
As a percentage of revenues, selling, general and administrative expenses
increased to 29.9% in 2000 compared to 20.9% in 1999 and to 17.5% in 1998. The
fluctuation in percentages reflects the changes resulting from the acquisition
of OSEI.
Research and Development
Research and development expenses consist primarily of the costs associated
with research and development personnel, the cost of related materials and
services, and the depreciation of development equipment. Research and
development expenses were $1.3 million in 2000, $0.7 million in 1999 and $1.1
million in 1998.
As a percentage of revenues, research and development expenses were 5.4% in
2000, 4.2% in 1999, and 4.7% in 1998. The changes in such expenses as a
percentage of revenues reflected changes in absolute spending and revenue.
Impairment of Assets
In 1998 and 2000, the Company recorded charges to operations related to the
impairment of its manufacturing equipment of $18.2 million and $1.4 million,
respectively. The impairment is a result of continued adverse economic
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the estimation that the
carrying value of the manufacturing equipment will not be fully recovered.
Interest and Other Income
Interest income in 2000, 1999, and 1998, was $147,000, $58,000, and
$83,000, respectively. The increase in 2000 were due to higher investment
balances as a result of the increase in the activity of the distribution
segment. The reduction in 1999 as compared to 1998 was due to lower investment
balances, which resulted from the losses from operations and capital
expenditures. In 1998, other income included a gain of $700,000 from the sale of
the land and building not occupied by the Company. In 1998, other income also
included $124,000, which was earned from development work with a semiconductor
industry consortium and approximately $158,000 from non-recurring engineering
services.
Interest Expense
Interest expense consists primarily of interest payable on bank debt, and
capital leases and term loans secured by equipment. Interest expense for 2000,
1999, and 1998 was $1.8 million, $1.6 million, and $1.8 million, respectively.
Provision for Income Taxes
In 2000, 1999, and 1998, the Company did not recognize any tax benefits
from net operating loss carryforwards. The Company recognizes deferred tax
assets if realization of such assets is more likely than not. Based upon
available data, which includes the Company's historical operating performance
and the reported cumulative net losses in prior years, the Company has provided
a full valuation allowance against the Company's net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
17
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 liabilities subject to the April 1999 restructuring were settled for less
than recorded amounts. Accordingly, this transaction resulted in an
extraordinary gain of $560,000.
Deemed Dividends on Preferred Stock
In 1999, the Company recorded a deemed dividend on preferred stock of $6.8
million. The deemed dividend results from the conversion price of the
convertible preferred stock issued to OSE being less than the market price of
the common stock on the date of the transaction. The deemed dividend related to
the transaction has been recognized as a result of the preferred stock being
immediately convertible at the discretion of the holder.
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 ("TQFPs"). Distribution comprises the North American
sales, marketing and technical support organization for OSE. Commissions are
earned from the direct sales efforts in the "direct channel" for the
semiconductor assembly and test service of OSE. The customers are mainly US
headquartered manufacturers of high-tech products such as video components, chip
sets, graphics chips and logic components.
Manufacturing Distribution Total
------------ ------------ ---------
2000:
Revenues $16,521 $7,646 $24,167
Net profit (loss) ($14,704) $4,165 ($10,539)
1999:
Revenues $16,227 $1,214 $17,441
Net profit (loss) ($10,627) $ 754 ($ 9,873)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established a new model
for accounting for derivative and hedging activities. The Company has reviewed
the impact of the implementation of SFAS 133 on the consolidated financial
statements of the Company and determined that the impact was not material.
18
Liquidity and Capital Resources
During 2000, the Company's net cash used in operations was $6.6 million.
Net cash used in operations was comprised primarily of a net loss of $10.5
million and a net decrease in working capital of $1.8 million partially offset
by $4.4 million and $1.4 million of non-cash charges for depreciation and
amortization and writedown of impaired assets, respectively. The decrease in
working capital is primarily due to the acquisition of OSEI. The net decrease in
working capital items reflected a $7.2 million decrease in accounts payable,
which was partially offset by a $5.4 million decrease in accounts receivable. As
of December 31, 2000, the Company had a cash balance of $3.3 million and is
operating under bank lines obtained in July and September 1999.
In 2000, $2.6 million was used by investing activities for capital
expenditures which were incurred primarily for the purchase of production
equipment. Most of the Company's production equipment has historically been
funded either through capital leases or term loans secured by production
equipment and future expenditure is expected to be funded out of internal cash
flow.
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. In conjunction with the lease, the Company
issued warrants to purchase 171,428 shares of common stock at $1.31 per share
and which are exercisable for seven years. The warrants were valued at $132,000
using a Black-Scholes valuation model. These warrants were repriced in 1999 to
an exercise price of $0.1236 per share as part of a debt restructure. This lease
was paid in full in September 1999.
In 2000, $7.1 million was provided in financing activities. This resulted
primarily from net proceeds from issuance of preferred stock to OSE for $6.0
million, proceeds from borrowings of $1.0 million, and sale of common stock for
$0.1 million to employees.
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 required that the Company maintain
certain financial covenants. At July 5, 1998, the Company was out of compliance
with certain of these covenants. As a result of the covenant noncompliance and
failure to make scheduled repayments, the entire balance due as of July 5, 1998,
$12.0 million, was classified as a current liability. At April 29, 1999, the
Company restructured this debt and was in compliance with the covenants.
In April 1999, OSE purchased 4,000,000 shares of the Company's Series A
Redeemable Preferred Stock, convertible into 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 Company's secured debt, including debt forgiveness. On August
4, 1999, OSE converted 1,000,000 preferred shares into 13,748,771 shares of
common stock. On December 26, 2000, OSE purchased 3,023,225 shares of the
Company's Series B Redeemable Preferred Stock convertible into approximately
42,000,000 shares of the Company's Common Stock for $6.0 million.
19
As part of the restructuring of secured debt, certain creditors were issued
warrants to purchase a total of approximately 1.5 million shares of common stock
at a price of $0.1236 per share. In addition, warrants to purchase a total of
244,345 shares of common stock held by secured creditors were repriced from
exercise prices ranging from $0.77 to $3.30 per share of common stock to $0.1236
per share. The fair value as determined using a Black-Scholes valuation model of
the warrants issued and the incremental value of the repriced warrants was
$790,000.
The Company had a $7 million bank line of credit that was guaranteed by OSE
and was available to finance operations and working capital needs through
February 15, 2001. Borrowings under the line of credit accrue interest at the
bank's prime rate (8.50% and 9.50% at December 31, 1999 and 2000, respectively)
less 0.25%. In 1999, the Company used the proceeds of this line to terminate and
completely pay off an existing restructured $7 million line of credit.
The Company also had a line of credit agreement with two banks that
provides through February 15, 2001, for borrowing up to a total of $11 million.
Borrowings under the line of credit accrue interest at the bank prime rate
(8.50% and 9.50% at December 31, 1999 and 2000, respectively) plus 0.75% and are
collateralized by the assets of the Company. This agreement requires the Company
to maintain certain financial covenants and restricts the payment of cash
dividends. At December 31, 2000, the Company borrowed the entire amount of the
$11 million credit facility.
On September 29, 1999, the Company paid off all the secured creditors of
the debt restructured on April 29, 1999 using the aforementioned lines of
credit.
On February 15, 2001, the Company entered into an amended line of credit
agreement with two banks that provides for advances up to the lesser of $18
million (committed revolving credit line) or the advance rate against qualified
accounts receivable (as defined). Over advances under this agreement are
immediately payable to the lender. This line of credit expires on August 15,
2001. Borrowings under this line of credit accrue interest at the banks prime
rate plus 0.50% and are collateralized by the assets of the Company and are
guaranteed by OSE.
The Company believes that existing cash balances together with the renewal
of existing finance facilities will be sufficient to meet its projected working
capital and other cash requirements at least through the fourth quarter of 2001.
The Company believes that its existing line of credit of $18.0 million which
expires on August 15, 2001 will be extended because they are guaranteed by the
Company's principal stockholder, OSE. There can be no assurances, however, that
the bank lines will be renewed or that working capital requirements, or other
events will not cause the Company to seek more capital, or capital sooner than
currently expected. There can be no assurance that such continuing and or
additional financing will available when needed or, if available, will be
available on satisfactory terms. As a result, this could have a material adverse
effect on the financial position and results of operations of the Company.
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of factors
that could materially and adversely affect revenues, gross profit, operating
income and liquidity. These factors include the Company's ability to secure
additional financing, the short term nature of its customers' commitments, the
timing and volume of orders relative to the Company's production capacity, long
lead times for the manufacturing equipment required by the Company, evolutions
in the life cycles of customers' products, timing of expenditures in
anticipation of future orders, lack of a meaningful backlog, effectiveness in
managing production processes, changes in costs and availability of labor, raw
materials and components, costs to obtain materials on an expedited basis, mix
of orders filled, the impact of price competition on the Company's average
selling prices and changes in economic conditions. The occurrence or
continuation of
20
unfavorable changes in any of the preceding factors would adversely affect the
Company's business, financial condition and results of operations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company has various debt instruments outstanding that mature in August
2001. Certain of these instruments have interest rates that are based on
associated rates that may fluctuate over time based on economic changes in the
environment, such as the Prime Rate. The Company is subject to interest rate
risk, and could be subjected to increased interest payments if market interest
rates fluctuate. The Company estimates that a ten percent increase in interest
rates would cause interest expense to increase by an immaterial amount.
21
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Page
Report of Independent Certified Public Accountants ...................... 23
Consolidated Balance Sheets as of December 31, 1999 and 2000 ............ 25
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000 ...................................... 26
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1998, 1999 and 2000 ...................................... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000 ...................................... 28
Notes to Consolidated Financial Statements .............................. 29
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
Integrated Packaging Assembly Corporation:
We have audited the accompanying consolidated balance sheet of Integrated
Packaging Assembly Corporation (a Delaware corporation) and subsidiary as of
December 31, 2000, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Packaging Assembly Corporation and subsidiary as of December 31, 2000, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of
$10,539,000 during the year ended December 31, 2000, and, as of that date, the
Company's current liabilities exceeded its current assets by $17,959,000 and its
total liabilities exceeded its total assets by $6,024,000. These factors, among
others, as discussed in Note 1 to the consolidated financial statements, raised
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Grant Thornton LLP
San Jose, California
March 16, 2001
23
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Integrated Packaging Assembly Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Integrated Packaging Assembly Corporation and its subsidiary at December 31,
1999, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. We have not audited the consolidated financial
statements of Integrated Packaging Assembly Corporation for any period
subsequent to December 31, 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Integrated Packaging Assembly Corporation is a member of a group of
affiliated companies owned by Orient Semiconductor Electronics, Ltd of Taiwan
("OSE") and, as disclosed in Note 13 to the consolidated financial statements,
OSE is guarantor of certain debts of the Company, and the Company had certain
other transactions with OSE. It is possible that the terms of these transactions
are not the same as those that would result from transactions among wholly
unrelated parties.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
March 9, 2000
24
Integrated Packaging Assembly Corporation
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
-----------------------
1999 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 5,371 $ 3,300
Accounts receivable, net of allowance for
doubtful accounts of $272 and $299, respectively 28,295 22,867
Inventory 1,204 839
Prepaid expenses and other current assets 603 763
-------- --------
Total current assets 35,473 27,769
Property and equipment, net 10,498 7,969
Intangible assets, net of accumulated amortization of $118 and
$849, respectively 5,659 4,928
Other assets 18 11
-------- --------
Total assets $ 51,648 $ 40,677
======== ========
Liabilities, Mandatorily Redeemable Convertible Preferred Stock
and Stockholders' Deficit
Current liabilities:
Bank debt $ 17,000 $ 18,000
Accounts payable 2,290 667
Accounts payable - related party 29,801 24,189
Accrued expenses and other liabilities 3,069 2,872
-------- --------
Total current liabilities 52,160 45,728
Deferred gain on sale of facilities 1,111 973
-------- --------
Total liabilities 53,271 46,701
-------- --------
Mandatorily redeemable convertible preferred stock 5,100 11,100
-------- --------
Commitments and contingencies (note 5)
Stockholders' deficit
Common stock, $.001 par value;
200,000,000 shares authorized; 54,414,601 (1999)
and 56,373,299 (2000) shares issued and outstanding 54 56
Additional paid-in capital 54,333 54,882
Accumulated deficit (61,110) (72,062)
-------- --------
Total stockholders' deficit (6,723) (17,124)
-------- --------
Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders' deficit $ 51,648 $ 40,677
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
25
Integrated Packaging Assembly Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
Revenues $ 23,281 $ 17,441 $ 24,167
Cost of revenues 29,114 23,500 23,117
-------- -------- --------
Gross profit (loss) (5,833) (6,059) 1,050
-------- -------- --------
Operating expenses:
Selling, general & administrative 4,068 3,651 7,215
Research & development 1,101 727 1,308
Provision for impairment of assets 18,200 -- 1,389
-------- -------- --------
Total operating expenses 23,369 4,378 9,912
-------- -------- --------
Operating loss (29,202) (10,437) (8,862)
Interest and other income 1,209 72 159
Interest expense (1,783) (1,555) (1,836)
-------- -------- --------
Loss before extraordinary
gains and preferred dividends (29,776) (11,920) (10,539)
Extraordinary gains -- 2,047 --
-------- -------- --------
Net loss (29,776) (9,873) (10,539)
Preferred stock dividend -- (308) (413)
Deemed dividend on preferred stock -- (6,800) --
-------- -------- --------
Net loss applicable to
common stockholders ($29,776) ($16,981) ($10,952)
======== ======== ========
Per share data:
Net loss applicable to common stockholders
before extraordinary gains per share -
Basic and diluted ($ 2.12) ($ 0.76) ($ 0.20)
Extraordinary gains per share -
Basic and diluted -- 0.08 --
-------- -------- --------
Net loss applicable to common stockholders
per share -
Basic and diluted ($ 2.12) ($ 0.68) ($ 0.20)
======== ======== ========
Number of shares used to compute per share data:
Basic and diluted 14,046 24,957 55,676
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
Integrated Packaging Assembly Corporation
Consolidated Statements of Stockholders' Deficit
(In thousands)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Totals
------- --- -------- -------- --------
Balance at December 31, 1997 13,981 $14 $ 40,276 ($14,052) $ 26,238
Common stock issued under stock plans 265 -- 152 -- 152
Common stock repurchased under stock plans (2) -- (1) -- (1)
Issuance of warrants -- -- 132 -- 132
Amortization of deferred compensation -- -- 48 -- 48
Net loss -- -- -- (29,776) (29,776)
------- --- -------- -------- --------
Balance at December 31, 1998 14,244 14 40,607 (43,828) (3,207)
Common stock issued under stock plans 190 -- 20 -- 20
Common stock repurchased under stock
plans (4) -- (1) -- (1)
Issuance and repricing of warrants -- -- 790 -- 790
Beneficial conversion feature on
redeemable preferred stock -- -- 6,800 -- 6,800
Accretion of redeemable preferred stock -- -- -- (7,101) (7,101)
Preferred stock dividend 326 -- 91 -- 91
Conversion of preferred stock 13,749 14 1,686 -- 1,700
Acquisition of OSE, Inc. 25,910 26 4,292 -- 4,318
Amortization of deferred compensation -- -- 48 -- 48
Preferred dividends -- -- -- (308) (308)
Net loss -- -- -- (9,873) (9,873)
------- --- -------- -------- --------
Balance at December 31, 1999 54,415 54 54,333 (61,110) (6,723)
Common stock issued under stock plans 707 1 131 -- 132
Preferred dividends declared -- -- -- (413) (413)
Preferred dividends paid in stock 1,251 1 418 -- 419
Net loss -- -- -- (10,539) (10,539)
------- --- -------- -------- --------
Balance at December 31, 2000 56,373 $56 $ 54,882 ($72,062) ($17,124)
======= === ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
Integrated Packaging Assembly Corporation
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
Net loss ($29,776) ($ 9,873) ($10,539)
Depreciation and amortization 6,957 4,458 4,442
Impairment of equipment 18,200 -- 1,389
Gain on sale of facilities, net (827) (138) (138)
Loss on disposal of equipment -- 96 12
Extraordinary gains on debt restructure -- (2,047) --
Changes in assets and liabilities (in 1999, net of
effects of acquisition):
Accounts receivable 990 (4,018) 5,428
Inventory 633 500 365
Prepaid expenses and other assets (233) 196 (153)
Accounts payable and accounts payable- related party (3,323) 6,097 (7,235)
Accrued expenses and other liabilities 633 (1,012) (191)
-------- -------- --------
Net cash used in operating activities (6,746) (5,741) (6,620)
-------- -------- --------
Cash flows provided by (used in) investing activities:
Acquisition of property and equipment (1,507) (608) (2,583)
Cash acquired -- 1,346 --
Proceeds from sale of facilities, net 7,312 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 5,805 738 (2,583)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Payments under capital lease obligations (990) (694) --
Proceeds from note payable 3,490 4,890 --
Principal payments on note payable (4,639) (9,629) --
Proceed from bank credit lines -- 27,617 1,000
Payments under bank credit lines -- (18,328) --
Proceeds from issuance of mandatorily redeemable
preferred stock, net of issuance costs -- 6,499 6,000
Proceeds from issuance of common stock 152 19 132
-------- -------- --------
Net cash provided by (used in) financing activities (1,987) 10,374 7,132
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,928) 5,371 (2,071)
Cash and cash equivalents at beginning of year 2,928 -- 5,371
-------- -------- --------
Cash and cash equivalents at end of year $-- $ 5,371 $ 3,300
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,124 $ 2,070 $ 1,836
Supplemental disclosure of noncash financing activities
Acquisition of equipment under capital leases $ 3,139 $ -- $--
Issuance and repricing of warrants $ 132 $ 790 $--
Common stock issued for preferred stock dividend $-- $ 91 $419
Deemed dividend on preferred stock $-- $ 6,800 $--
Issuance of common stock on OSE, Inc acquisition $-- $ 4,318 $--
Conversion of preferred stock to common stock $-- $ 1,700 $--
Accretion of redeemable preferred stock $-- $ 7,101 $--
The accompanying notes are an integral part of these consolidated financial
statements
28
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 stockholder.
Revenues are derived exclusively from fees received on the sales of OSE's
semiconductor assembly and test services to customers headquartered in North
America in accordance with a distribution agreement. The Company entered this
segment of the market in October 1999 with the acquisition of OSE, Inc.
("OSEI").
Basis of Presentation
As a result of a reduction in orders from the Company's customers, the
Company has significant excess production capacity. The reduction in revenues
and underutilization of capacity and resultant underabsorption of fixed costs
resulted in operating losses which have continued into 2000. As a result of the
operating losses and cost of capital additions, the Company believes that it
will fund its projected working capital and other cash requirements through 2001
out of operating activities and renewal of existing financing facilities as a
result of expected ongoing guarantees from OSE. There can be no assurance that
the Company can obtain additional financing when needed.
At December 31, 2000, the Company has two lines of credit which provide for
borrowings up to a total of $18.0 million, of which $18.0 million is
outstanding. Both of the lines of credit expire on February 15, 2001.
On February 15, 2001, the Company entered into an amended line of credit
agreement with two banks that provide for advances up to the lesser of $18
million (committed revolving credit line) or the advance rate against qualified
accounts receivable (as defined). Over advances under this agreement are
immediately payable to the lender. This line of credit expires on August 15,
2001. Borrowings under this line of credit accrue interest at the banks' prime
rate plus .50%, are collateralized by the assets of the Company, and are
guaranteed by OSE.
The Company will seek to renew its bank lines of credit. The Company
believes that it will be successful in renewing this line due to the continuing
guarantee of OSE, its principal stockholder. There can be no assurance that the
lines will be renewed, that OSE will continue to guarantee certain borrowings or
other financing will be available when needed. If adequate funds are not
available, the Company may be required to substantially curtail, cease or
liquidate its operations and reorganize its indebtedness.
These financial statements have been prepared on a going concern basis and,
therefore, do not include any adjustment that might result from these
uncertainties.
29
Risks and uncertainties
The Company may be significantly impacted by the political, economic and
military conditions in Taiwan due to the Company's subsidiary, OSEI, being a
distributor for OSE whose operations are principally located in Taiwan. Taiwan
and the Republic of China 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 OSEI's business by interrupting or
delaying production or shipment of products OSEI distributes. Any kind of
activity of this nature or even rumors of such activity could severely and
negatively impact the Company's operations, revenues and operating results.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of intercompany balances and
transactions.
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents, and investments with
original maturities of greater than 90 days to be short term investments.
Financial instruments
The carrying amounts reported for cash and cash equivalents, accounts
receivable and accounts payable are considered to approximate fair values based
upon the short maturities of these financial instruments. The carrying amount of
borrowings under the lines of credit are also considered to approximate fair
values as the interest rates on the borrowings adjust to the banks reference
rate.
Inventory
Inventory, which primarily consists of raw material supplies such as gold
wire, lead frames and mold compound, is stated at the lower of cost, determined
by the first-in, first-out basis, or market. The Company holds product on
consignment from its customers while services are being performed.
Property and equipment
Property and equipment are recorded at cost. For certain production
machinery and equipment acquired prior to 1997, depreciation is calculated using
the units of production method, in which depreciation is calculated based upon
the units produced in a given period divided by the estimate of total units to
be produced over its life following commencement of use. Such estimate is
reassessed when facts and circumstances suggest a revision may be necessary. In
all cases, the asset will be fully depreciated by the end of its estimated
six-year life. Depreciation for all other property and equipment and all
production machinery and equipment acquired after 1996 is computed using the
straight-line method over the estimated useful lives of the assets, generally 3
to 6 years.
The Company's buildings were being depreciated over 30 years, with building
improvements depreciated over 5 to 15 years. In January 1998, the real estate
parcel and buildings were sold, and the Company entered into a lease to continue
to occupy such building. (See Note 5).
30
Long-lived assets
Long-lived assets include property and equipment and intangible assets.
Whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, the Company estimates the future cash
flows, undiscounted and without interest charges, expected to result from the
use of those assets and their eventual cash position. If the sum of the expected
future cash flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount over
the fair value of the assets.
Revenue recognition
Revenue is generally recognized upon shipment. A provision for estimated
future returns and sales discounts is recorded at the time revenue is
recognized. As a result of the acquisition of OSEI, the Company became a
distributor for OSE. The nature of the distributor transactions is such that the
Company does not bear the risks and rewards of ownership of the product being
distributed and is compensated in a manner similar to a commission. Accordingly,
revenue relating to the Company's distribution agreement is recognized on a net
basis. From the date of acquisition of OSEI through December 31, 2000 the net
revenue recorded was $8.8 million, on gross billings of $183.2 million.
Income taxes
The Company accounts for income taxes using the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or income tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
Stock based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation for stock options is generally measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock. The
Company adopted the disclosure only requirements of SFAS 123.
Comprehensive income
There was no difference between the Company's net loss and its total
comprehensive loss for the periods reported in these financial statements.
31
Net loss per share
Basic EPS is computed by dividing net loss available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options
and warrants, using the treasury stock method, and convertible preferred stock,
using the if-converted method. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options and warrants.
Antidilutive securities consist of options and warrants not included in the
computation of diluted earnings per share because the Company incurred a net
loss during the period resulting in all options, warrants and convertible
preferred stock outstanding being antidilutive.
Year Ended December 31, 2000
---------------------------------------------
1998 1999 2000
---------- ---------- ----------
Antidilutive Securities:
Convertible preferred stock -- 3,000 6,023
========== ========== ==========
Options and warrants outstanding at end of
period 2,501 11,478 12,739
========== ========== ==========
Weighted-average exercise price of options and warrants $ 1.43 $ 0.50 $ 0.48
========== ========== ==========
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates.
Recent Accounting Pronouncements
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 established a new model for
accounting for derivative 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; January 1, 2001
for calendar year companies. 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 was not material.
32
NOTE 2 - BALANCE SHEET COMPONENTS:
(In thousands)
December 31,
-----------------------
1999 2000
-------- --------
Inventory
Raw materials $ 2,201 $ 2,088
Work in process 132 120
-------- --------
Subtotal $ 2,333 $ 2,208
Allowance for obsolescence (1,129) (1,369)
-------- --------
Total $ 1,204 $ 839
======== ========
Property and equipment
Buildings and improvements $ 709 $ 697
Machinery and equipment 29,924 30,983
Office and computer equipment 1,032 1,135
Furniture and fixtures 276 289
-------- --------
31,941 33,104
Less: accumulated depreciation and amortization (21,443) (25,135)
-------- --------
$ 10,498 $ 7,969
======== ========
Accrued expenses and other liabilities
Accrued payroll and related expenses $ 1,190 $ 753
Other accrued liabilities 1,879 2,119
-------- --------
$ 3,069 $ 2,872
======== ========
NOTE 3 - EQUIPMENT IMPAIRMENT CHARGE:
In 1998 and 2000, the Company recorded charges of $18.2 million and $1.4
million, respectively, related to the impairment of its manufacturing equipment
and accordingly, reduced the carrying value of such manufacturing equipment. The
impairment is a result of continued adverse economic conditions in the
semiconductor industry, and historical as well as forecasted manufacturing
equipment underutilization, resulting in an estimation that the carrying 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.
33
NOTE 4 - ACQUISITION OF THE NORTH AMERICAN DISTRIBUTOR OF ORIENT SEMICONDUCTOR
ELECTRONICS, LTD.
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 its
Common Stock with a fair market value of $4.3 million. As a result of the
transaction, the distributor, OSEI, operates as a wholly owned subsidiary of the
Company.
OSEI was a privately held corporation that serves as the exclusive North
American distributor of OSE, a public Taiwanese company and the Company's
principal stockholder. OSEI derives its revenues from fees earned exclusively
from the sales of OSE's semiconductor assembly and test services to customers
headquartered in North America. The Company reported consolidated results with
OSEI since the acquisition date.
The purchase price of $4.7 million, which includes acquisition costs of
$0.4 million, was accounted for using the purchase method of accounting, which
means that the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair values at the date of the
acquisition. The fair value of the assets of OSEI and a summary of the
consideration exchanged for these assets is as follows (in thousands):
Assets acquired:
Tangible assets, primarily cash and
accounts receivable $ 23,642
Distributor contract 3,557
Workforce 280
Goodwill 1,940
Liabilities assumed (24,711)
--------
Total purchase price $ 4,708
========
The amount allocated to the distributor contract and the workforce is
amortized on a straight line basis over ten years and three years, respectively.
The goodwill recorded on the acquisition is amortized over its expected life of
seven years.
Summarized below are the unaudited pro forma results of IPAC as though OSEI
had been acquired at the beginning of periods presented. Adjustments have been
made for the estimated increases in amortization related to the purchase of the
distributor contract, workforce and goodwill, and other appropriate pro forma
adjustments. Non-recurring transactions have been excluded from the results of
both periods presented.
1998 1999
-------- --------
Net revenues $25,352 $19,630
Net loss ($30,104) ($11,972)
Net loss per share - basic and diluted ($0.75) ($0.26)
The above amounts are based on certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies of scale
which might be achieved from combined operations. The pro forma financial
information presented above is not necessarily indicative of either the results
of operations that would have occurred had the acquisition taken place at the
beginning of the periods presented or of future results of operations of the
combined companies.
34
NOTE 5 - LEASING ARRANGEMENTS AND COMMITMENTS:
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 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
Company recognized 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 is being
amortized as a reduction of lease expense over the initial ten year term of the
lease for the building that the Company occupies.
On November 14, 2000, the Company entered into a sublease agreement with a
subsidiary of OSE for the lease of 16,480 square feet of building space through
January 19, 2008.
The Company has a noncancelable operating lease for a 2,500 square foot
portion of a building for its plating operations. The lease is for five years,
with an option to extend.
The Company acquired a 3,805 square foot leased facility as a result of the
OSEI acquisition. The lease was canceled in 2000 at no cost to the Company and
the OSEI operations occupy the space in the Company's facility.
Rent expense was $1,054,000, $1,529,000 and $1,549,000 in 1998, 1999 and
2000, respectively.
Net future minimum lease payments over the next five years and thereafter
under operating leases at December 31, 2000 are as follows (in thousands):
Lease Sublease Net Future
Payment Income Min. Lease Payment
------- ------- ------------------
Year ending December 31:
2001 $1,166 $ 653 $ 513
2002 1,265 704 561
2003 1,196 704 492
2004 1,316 757 559
2005 1,316 758 558
Thereafter 2,895 1,637 1,258
------ ------ ------
Total minimum payments $9,154 $5,213 $3,941
====== ====== ======
NOTE 6 - BANK DEBT
Bank debt
The Company entered into a Business Loan Agreement and Promissory Note (the
Agreement). Under the Agreement the Company has borrowed $7.0 million and the
borrowings under the Agreement are collateralized by the assets of the Company
and are guaranteed by OSE and repayable on February 15, 2001. Under the
Agreement, the Company is required to meet certain covenants including
restrictions on changes in ownership and payment of dividends. Borrowings under
the Agreement accrue interest at the bank's prime rate (9.50% at December 31,
2000) less 0.25%. Interest is payable monthly.
The Company entered into a loan and security agreement with two banks that
provides through February 15, 2001 for borrowings up to a total of $11,000,000
(the Facility). Borrowings under the Facility accrue interest at the bank's
prime rate (9.50% at December 31, 2000) plus 0.75%. Interest is payable monthly.
35
Borrowing is collateralized by the assets of the Company and is guaranteed by
OSE. The Facility requires the Company to meet certain financial covenants,
including certain net income/loss levels, restrictions on the payment of cash
dividends and restrictions on a change in control of the Company. The Company
did not meet the financial covenant conditions for 2000, and the banks have
given the Company a wavier for this non-compliance through February 15, 2001. At
December 31, 2000, the Company had drawn down the entire $11 million.
On February 15, 2001, the Company entered into an amended line of credit
agreement with the two banks that provides for advances up to the lesser of $18
million (committed revolving credit line) or the advance rate against qualified
accounts receivable (as defined). Over advances under this agreement are
immediately payable to the lender. The Company estimates, that as of February
28, 2001, the amount of the over advance is approximately $6 million. This line
of credit expires on August 15, 2001, and replaces the Company's $7 million and
$11 million facilities, which expired on February 15, 2001. Borrowings under
this line of credit accrue interest at the banks' prime rate plus 0.50% and are
collateralized by the assets of the Company and are guaranteed by OSE.
Equipment Notes Payable
During 1998, due to covenant noncompliance and failure to make scheduled
repayments, the Company defaulted on its equipment notes payable. As part of the
April 1999 transaction outlined in Note 7, under which the Company issued Series
A mandatorily redeemable convertible preferred stock, the Company's secured
creditors agreed to restructure the secured debt, including debt forgiveness,
extended payment terms and terminate related legal actions. As a result of the
April debt restructuring, the Company recorded an extraordinary gain of
$1,487,000.
In September 1999, when the Facility was obtained, it was used to settle
amounts due to secured creditors that were subject to the April 1999 debt
restructuring for less than the recorded amounts. This transaction resulted in
an extraordinary gain of $560,000.
NOTE 7 - PREFERRED STOCK:
The Company has 10,000,000 shares of preferred stock authorized at December
31, 2000.
During 1999 and 2000, the Board of Directors designated 4,000,000 shares
and 3,023,225 shares of the preferred stock, as Series A convertible preferred
stock and Series B convertible preferred stock, respectively with a par value of
$.001.
The Company issued 4,000,000 shares of Series A mandatorily redeemable
convertible preferred stock (Series A Preferred) to OSE on April 29, 1999 for
proceeds of $6,499,000, net of issuance costs of $301,000. Each share of Series
A Preferred is initially 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 with a value of $1,700,000 into
13,748,771 shares of the Company's common stock.
The Company issued 3,023,225 shares of Series B mandatorily redeemable
convertible preferred stock (Series B Preferred) to OSE on December 26, 2000 for
proceeds of $6,000,000. Each share of Series B Preferred is initially
convertible into 13.7487705 shares of the Company's common stock at the option
of the holder. The proceeds were used to reduce the accounts payable to OSE.
The holders of shares of Series A Preferred and Series B Preferred are
entitled to dividends at the rate of $0.136 and $0.159, respectively, per annum
per share payable semiannually on July 1 and January 1 each year. The dividends
on Series A and Series B 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 and Series B Preferred. The Series A Preferred and Series B
Preferred are mandatorily redeemable for $1.70 and $1.98 respectively, per share
in the event of any liquidation, dissolution, or winding up of the Company.
36
In 1999, the Company recorded a deemed dividend on Series A Preferred stock
of $6.8 million. This is the result of the effective 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. The deemed
dividend related to the transaction has been recognized during the second
quarter as a result of the preferred stock being immediately convertible at the
discretion of the holder. The conversion price of the Series B Preferred stock
issued to OSE in 2000 was not less than the market price of the common stock on
the date of the transaction and, accordingly, no deemed dividend was recorded.
NOTE 8 - STOCK PLANS:
Stock Option Plan
The Company has a Stock Option Plan (the "Plan") which as amended, provides
for the grant of incentive stock options (ISOs) and nonqualified stock options
(NSOs) to purchase up to 2,514,921 shares of Common Stock. ISOs may be granted
to employees and NSOs may be granted to either employees or consultants. In
accordance with the Plan, the stated exercise price shall not be less than 100%
and 85% of the estimated fair market value of Common Stock on the date of grant
for ISOs and NSOs, respectively, as determined by the Board of Directors. The
Plan provides that the options shall be exercisable over a period not to exceed
ten years and shall vest as determined by the Board of Directors. Substantially
all of the options vest 25% one year after the date of grant and 1/48 each month
thereafter. There is no deferred compensation balance at December 31, 1999 and
2000.
In 1999, the Plan was amended to increase the amount of options that may be
granted by 17,485,079 to an aggregate of 20,000,000. In addition, the number of
shares that may be granted to any employee in any one fiscal year was increased
from 250,000 shares to 2,000,000 shares and the number of shares that may be
granted to an employee upon initial employment was increased from 250,000 shares
to 2,000,000 shares.
Director Stock Option Plan
The Company has a Director Stock Option Plan (the "Director Plan") that
authorizes for issuance a total of 100,000 shares of Common Stock. The Director
Plan provides for the grant of NSOs to non-employee directors of the Company.
The Director Plan provides that each non-employee director who joins the Board
will automatically be granted an NSO to purchase 20,000 shares of Common Stock
on the date upon which such person first becomes a non-employee director (the
"Initial Grant"). In addition, each non-employee director will automatically
receive an NSO to purchase 5,000 shares of Common Stock upon such director's
annual re-election to the Board, provided the director has been a member of the
Board for at least six months upon the date of such re-election (the "Subsequent
Grant"). The Initial Grant vests and becomes exercisable as to 25% of the shares
one year after the date of grant and as to 1/48 of the shares each month
thereafter, and each Subsequent Grant shall become exercisable as to 1/12 of the
shares each month following the date of grant, both subject to the director's
continuous service. The exercise price of all stock options granted under the
Director Plan is equal to the fair market value of the Company's Common Stock on
the date of grant. Options granted under the Director Plan have a term of ten
years. Unless terminated sooner, the Director Plan will terminate in 2006.
Options for 20,000 shares were granted in 1997 under the Director Plan. This
Director Stock Option Plan is no longer being used as it was replaced by the
1999 Director Stock Option Plan.
37
1999 Director Option Plan
In September 1999, the Company adopted the 1999 Director Option Plan (the
"1999 Director Plan"). A total of 4,000,000 shares of Common Stock have been
authorized for issuance under the 1999 Director Plan. The 1999 Director Plan
provides for the grant of NSOs to non-employee directors of the Company. The
1999 Director Plan provides that each non-employee director who joins the Board
will automatically be granted an NSO to purchase 100,000 shares of Common Stock
on the date upon which such person first becomes a non-employee director. In
addition, each non-employee director will automatically receive an NSO to
purchase 100,000 shares of common Stock upon such directors' annual reelection
to the Board if the director has served on the Board for at least six months as
of the date of the reelection. All options granted under the 1999 Director Plan
will have an exercise price equal to the fair value of the Common Stock on the
date of grant and will be fully vested and exercisable on the date of grant. The
options will have a term of ten years. Options for 400,000 and 300,000 shares
were granted in 1999 and 2000, respectively. At December 31, 2000 there were
3,300,000 options available for grant.
Non-Statutory Stock Plan
The Company has a Non-Statutory Stock Plan, which, as amended, provides for
the grant of non-qualified stock options to purchase up to 750,000 share of
Common Stock. The NSOs may only be granted to non-executive officer employees.
In accordance with the Plan, the stated exercise price shall not be less than
85% of the estimated fair market value of the Common Stock on the date of grant
of the NSO. The options shall be exercisable over a period not to exceed ten
years and shall vest 25% one year after the year of grant and 1/48 each month
thereafter. Options for 463,000 shares were granted in 1998 under this plan and
27,000 were granted in 1999.
Repricing of Employee Stock Options
As approved by the Board of Directors on January 27, 1998 and effective as
of January 30, 1998, the Company allowed all employee holders of outstanding
stock options to exchange higher priced options for new stock options at an
exercise price of $1.06 per share, the fair market value of the Company's Common
Stock at the close of trading on January 30, 1998. Those options vested at the
time of the exchange would vest on January 31, 1999, and those options unvested
at the time of the exchange would vest on the original option schedule, but
would not be exercisable until January 31, 1999. Options for 1,035,124 shares
were exchanged.
Restricted Common Stock
The Company sold 398,333 shares of restricted Common Stock to employees
upon exercise of stock options then outstanding. Each unvested share of this
restricted Common Stock is subject to repurchase by the Company at the
employees' exercise price if an employee terminates before such shares vest. In
1997, 67,082 vested shares were converted into unrestricted shares and 55,314
shares were repurchased by the Company from terminated employees. The remaining
31,875 restricted shares outstanding were fully vested as of December 31, 1998.
Employee Stock Purchase Plan
The Company's Stock Purchase Plan (the "Purchase Plan") was adopted by the
Company's Board of Directors and stockholders in December 1995, and became
effective upon the closing of the Company's initial public offering on February
28, 1996. Under the Purchase Plan, a total of 400,000 shares of Common Stock has
been reserved for issuance to eligible employees. The Purchase Plan allows
employees to purchase shares through payroll deductions at 85% of the fair
market value of the Common Stock at the beginning or the end of the applicable
twelve-month purchase period. The Purchase Plan is intended to
38
qualify as an "employee stock purchase plan" under Section 423 of the U.S.
Internal Revenue Code. Unless terminated sooner, the Purchase Plan will
terminate ten years from its effective date. During 1998, 1999, and 2000,
respectively, 155,051, 185,292 and 841,579 shares, respectively, were issued
under the Plan.
On September 3, 1999, the Purchase Plan was amended to increase the number of
shares available for issuance by 1,600,000 shares to an aggregate of 2,000,000
shares.
Summary of Option Activity
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category for each of the
years ended December 31, 1998, 1999 and 2000.
1998 1999 2000
----------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------- ----- --------- ----- ---------- -----
Options outstanding
at Jan. 1 1,599,154 $3.18 1,679,997 $1.00 9,146,842 $0.44
Options granted 1,498,124 $1.02 7,957,376 $0.36 2,500,000 0.32
Options canceled (1,307,386) $3.76 (485,948) $1.06 (1,199,437) 0.37
Options exercised (109,895) $0.22 (4,583) $0.22 (17,667) 0.24
---------- ----- --------- ----- ---------- -----
Options outstanding
at Dec. 31 1,679,997 $1.00 9,146,842 $0.44 10,429,738 $0.42
========== ===== ========= ===== ========== =====
Options exercisable
at Dec. 31 592,322 $0.91 809,841 $0.93 3,418,076 $0.51
========== ===== ========= ===== ========== =====
Available for grant
at Dec. 31 792,647 14,908,048 13,607,485
========== ========== ==========
Significant option groups outstanding at December 31, 2000, after giving
effect to the repricing discussed previously, and the related weighted average
exercise price and remaining contractual life information are as follows:
Outstanding Exercisable Weighted
Weighted Weighted Average
Average Average Remaining
Options with exercise Exercise Exercise Life
prices ranging from: Shares Price Shares Price (Years)
- -------------------------- ------------------ ------------- --------------- --------------- ----------------
$0.10 - $0.23 1,396,228 $0.20 528,135 $0.23 8
0.24 - 0.31 4,754,876 0.26 1,372,845 0.26 9
0.41 - 0.59 3,325,385 0.56 691,633 0.54 9
0.63 - 2.19 949,749 1.04 822,349 1.04 6
2.20 500 2.20 500 2.20 5
3.00 1,500 3.00 1,218 3.00 7
3.06 1,000 3.06 896 3.06 7
$9.50 500 9.50 500 9.50 5
------------------ ------------- --------------- --------------- ----------------
Options outstanding
at Dec. 31, 2000 10,429,738 $0.42 3,418,076 $0.51 8
================== ============= =============== =============== ================
39
Fair Value of Stock Options and Employee Purchase Rights
The Company has four stock option plans, which reserve shares of Common
Stock for issuance to employees, officers, directors and consultants. The
Company applies APB Opinion 25 and related interpretations in accounting for its
plans. No compensation cost has been recognized in the accompanying statement of
operations for the stock option plans, except for $200,000 which was recognized
on stock options granted in 1995, and which was amortized over a four year
vesting period.
For the Stock Option Plans, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1998, 1999 and
2000, respectively: dividend yield of 0% in all three years; expected life of 4
years for each year; expected volatility of 65%, 310% and 705%; and risk-free
interest rates of 5.8%, 5.75% and 4.74%. The weighted-average fair value of
those stock options granted in 1998, 1999 and 2000 was $0.55, $0.40 and $0.27
per option, respectively.
The fair value of the employees' purchase rights for the Purchase Plan,
which was initiated on February 28, 1996, was estimated at the beginning of the
offering period using the Black-Scholes option pricing model with the following
assumptions used for 1998, 1999 and 2000, respectively: dividend yield of 0%; an
expected life of six months; expected volatility of 65%, 310% and 705%; and
risk-free interest rate of 5.3% in 1998, 4.8% in 1999 and 4.63% in 2000. The
weighted-average fair value of these purchase rights granted in 1998, 1999 and
2000 was $0.64, $0.15 and $0.20, respectively, per right.
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its stock
option plans and stock purchase plan, the Company's net loss and loss per share
would have been increased to the following pro forma amounts (in thousands,
except per share amounts):
1998 1999 2000
----------------- ---------------- ---------------
Net loss applicable to common shareholders
as reported (in thousands) ($29,776) ($16,981) ($10,952)
Net loss applicable to common shareholders, pro forma ($30,633) ($17,881) ($12,827)
Net loss applicable to common shareholders
per share as reported
Basic and diluted ($2.12) ($0.68) ($0.20)
Net loss applicable to common shareholders
per share, pro forma
Basic and diluted ($2.18) ($0.72) ($0.23)
40
NOTE 9 - WARRANTS:
In 1993, 1994, 1996 and 1998, in connection with acquiring equipment under
capital leases, the Company issued warrants to the lessors to purchase an
aggregate of 628,978 shares of common stock at exercise prices ranging from
$0.77 to $8.00 per share. The estimated value of these warrants at the time of
issuance, as determined by the Company, was amortized as interest expense over
the period the leases were outstanding.
In 1995 and 1997, in connection with bank debt and various loan agreements,
the Company issued warrants to the lenders to purchase an aggregate of 202,483
shares of common stock at exercise prices ranging from $3.30 to $4.60. The
estimated value of these warrants at the time of issuance, as determined by the
Company, was amortized as interest expense over the terms of the loans.
As part of the April 1999 restructuring of secured debt, certain creditors
were issued warrants to purchase a total of 1,500,000 shares of common stock at
a price of $0.1236 per share. In addition, warrants to purchase a total of
244,345 shares of common stock held by secured creditors were repriced from
exercise prices ranging from $0.77 to $3.30 per share of common stock to $0.1236
per share. The fair value as determined using a Black-Scholes valuation model of
the warrants issued and the incremental value of the repriced warrants was
$790,000. The value of the warrants and incremental value of the repriced
warrants was offset against the outstanding debt.
The outstanding warrants are exercisable at any time prior to 2001 (28,450
shares), 2002 (10,000 shares), 2003 (100,000 shares), 2004 (401,717 shares),
2005 (269,254 shares) and 2006 (1,500,000 shares). None of the warrants had been
exercised at December 31, 2000.
NOTE 10 - INCOME TAXES:
In 1998, 1999 and 2000, the Company incurred net operating losses and
recorded no provision for income taxes.
Deferred income tax assets comprise the following (in thousands):
December 31,
1999 2000
---------------- ----------------
Federal and state credit carryforwards $2,653 $ 2,676
Federal and state net operating loss
carryforwards 9,011 21,930
Provision for impaired assets 7,462 8,021
Leases, treated as operating for tax (2,907) (2,396)
Depreciation (4,585) (3,994)
Reserves and accruals 910 1,506
Other (359) (320)
--------------- ---------------
Deferred tax assets 12,185 27,423
Less valuation allowance (12,185) (27,423)
--------------- ---------------
Net deferred tax asset
$ -- $ --
================ ===============
The deferred tax assets valuation at December 31, 1999 and 2000 is
attributable to federal and state deferred tax assets. Management believes that
sufficient uncertainty exists with regard to the realizability of these tax
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and a lack of carryback
capacity to realize these assets. Based on the
41
absence of objective evidence, management is unable to assert that it is more
likely than not that the Company will generate sufficient taxable income to
realize the Company's net deferred tax asssets.
At December 31, 2000, the Company had federal and state net operating loss
and tax credit forwards ("NOLs") of approximately $60,000,000 and $27,000,000,
respectively, which can be used to reduce future taxable income. The federal
NOLs, state NOLs and federal and state credits expire through 2020, 2010 and
2019 respectively, if not utilized. The availability and timing of these carry
forwards to offset the taxable income maybe limited due to the occurrence of
certain events, including change of ownership.
The Tax Reform Act of 1996 limits the use of NOLs in certain situations
where changes occur in the stock ownership of a company. The Company experienced
such an ownership change as a result of the Company's initial public offering in
1996, resulting in a limitation of the annual utilization of the NOLs generated
through the date of the initial public offering. Another such ownership charge
was experienced as a result of the issue of Series A and B convertible preferred
stock in 1999 and 2000 (Note 7), respectively, resulting in a limitation of the
annual utilization of the NOLs generated through the date of issuance of Series
A and Series B convertible preferred stock.
NOTE 11 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
Concentration of credit risk
The Company performs ongoing credit evaluations of its customers, which are
semiconductor companies, and maintains reserves for estimated credit losses.
Write-offs of accounts receivable were insignificant in all periods presented.
At December 31, 1999, two customers accounted for 32% and 18%, respectively. At
December 31, 2000, three customers accounted for 21%, 20% and 13%, respectively.
Significant customers
Year Ended December 31,
----------------------------------------
1998 1999 2000
------------- ------------ -------------
Customers comprising 10% or
more of the Company's revenues
for the periods indicated:
A 39% 30% 32%
B 9% 15% 5%
C 11% 3% 2%
NOTE 12 - 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")
and thin Quad Flat packages ("TQFPs"). Distribution comprises the North American
sales, marketing and technical support organization for OSE. Commissions are
earned from the sales for the semiconductor assembly and test service of OSE.
The customers are mainly US headquartered manufacturers of high-tech products
such as video components, chip sets, graphics chips and logic components.
42
(in thousands): Manufacturing Distribution Eliminations Total
------------------- --------------- -------------------------------
2000:
Revenues $16,521 $7,646 $24,167
Interest income 12 591 (456) 147
Interest expense (2,292) -- 456 (1,836)
Depreciation and amortization 3,691 751 4,442
Net income (loss) (14,704) 4,165 (10,539)
Accounts receivable, net 1,446 21,421 22,867
Total assets 16,072 34,090 (9,485) 40,677
Expenditures for additions to
long-lived assets $2,518 $45 $2,563
1999:
Revenues $16,227 $1,214 $17,441
Interest income 60 12 72
Interest expense (1,555) -- (1,555)
Depreciation and amortization 4,355 123 4,478
Extraordinary gain 2,047 -- 2,047
Net income (loss) (10,627) 754 (9,873)
Accounts receivable, net 2,701 25,594 28,295
Total assets 20,446 35,910 (4,708) 51,648
Expenditures for additions to
long-lived assets $606 $2 $608
- ----------------------------------------------------------------------------------------------------------
Prior to the acquisition of OSEI, the Company's only operations consisted
of the manufacturing segment.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company is a member of a group of affiliated companies owned by Orient
Semiconductor Electronics, Ltd of Taiwan ("OSE"). Significant related party
transactions with OSE and its affiliates are as follows:
Guarantor of Debt
OSE is guarantor for two debt agreements outlined in Note 6
Acquisition of OSEI
OSE was a significant shareholder in OSEI. Accordingly, when the Company
acquired OSEI, as outlined in Note 4, OSE received approximately 4.9 million
shares of the Company's common stock for its shares in OSEI.
Distributor
All the revenue of OSEI, the Company's subsidiary, is earned as a result of
being a distributor for OSE. The revenue under the distribution agreement is
based on a fixed percentage of the value of the semiconductor assembly and test
services provided to customers in OSEI's distribution area of entities
headquartered in North America. For the year ended December 31, 2000, OSEI
purchased $151.3 million in product and services from OSE and affiliates and
sold them to its customers for $158.9 million. From the date of acquisition of
OSEI
43
through December 31, 1999, OSEI purchased $23.1 million in product and services
from OSE and its affiliates and sold them to its customers for $24.3 million.
Accordingly, OSEI recorded revenue of $1.2 million and $7.6 million in 1999 and
2000, respectively. Under the distribution agreement, OSEI is required to remit
amounts collected from customers, less its commission to OSE. As of December 31,
2000 accouints receivable includes approximately $20.4 million, that when
collected, will be remitted to OSE, pursuant to the distribution agreement.
While OSEI is responsible for the collection of accounts receivable from its
customers it has obtained certain guarantees from OSE which reduce OSEI's
exposure to credit risk. OSEI normally makes payments to OSE for purchases after
OSEI has collected the related accounts receivable from its customer. Pursuant
to the amended line of credit agreement (Note 6), payment from customers are to
be remitted directly to the lender.
Sublease With Affiliate
The Company has a sublease with an affiliate Company as outlined in Note 5.
Preferred Series A and Series B Stock
The Company sold Series A and Series B stock to OSE as outlined in Note 7.
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
YEAR ENDED
DECEMBER 31,
2000 First Second Third Fourth Total
- ---------------------------- ---------- ---------- ----------- ---------- ------------
Revenues $7,075 $7,003 $5,794 $4,295 $24,167
Gross profit (loss) 468 821 (220) (19) 1,050
Net loss applicable to ($2,006) ($2,014) ($3,923) ($3,009) ($10,952)
common shareholders
Net loss per common share ($0.04) ($0.04) ($0.07) ($0.05) ($0.20)
Stock price
High $0.66 $0.58 $0.47 $0.37 $0.66
Low $0.37 $0.21 $0.16 $0.06 $0.06
Quarter end close $0.37 $0.23 $0.27 $0.08 $0.08
YEAR ENDED
DECEMBER 31,
1999
- ----------------------------
Revenues $3,775 $3,653 $4,408 $5,605 $17,441
Gross loss (1,716) (1,894) (1,593) (856) (6,059)
Net loss to applicable ($3,425) ($8,914) ($2,437) ($2,205) ($16,981)
common shareholders
Net loss per common share ($0.24) ($0.62) ($0.10) ($0.04) ($0.68)
Stock price
High $0.52 $0.59 $0.34 $0.63 $0.63
Low $0.08 $0.23 $0.17 $0.13 $0.08
Quarter end close $0.30 $0.28 $0.25 $0.55 $0.55
44
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
The Company incorporates herein by reference the information concerning
changes in and disagreements with accountants or accounting and financial
disclosure contained in the November 20, 2000 Form 8-K.
45
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the "Proxy Statement"), not later than 120
days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers - See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in
the Proxy Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
14(a) Exhibits
Exhibit
Number Description of Document
-------------------------------------------------------------------------------------------------------------
3.1! Restated Articles of Incorporation.
3.4! Bylaws, as amended.
10.1! Form of Indemnification Agreement
10.2!* 1993 Stock Option Plan and form of Stock Option Agreement.
10.3!* 1996 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4!* 1996 Director Stock Option Plan and form of Stock Option
Agreement.
10.5! Registration Rights Agreement dated March 24, 1993, as amended.
46
10.6! Warrant to Purchase Series A Preferred Stock, issued to MMC/GATX
Partnership No. 1 as of October 7, 1993, as amended.
10.7! Warrant to Purchase Series A Preferred Stock, issued to Phoenix
Leasing Incorporated as of October 7, 1993.
10.8! Warrant to Purchase Series A Preferred Stock, issued to Comdisco,
Inc. as of March 10, 1994.
10.9! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.10! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.11! Warrant to Purchase Series A Preferred Stock, issued to The CIT
Group/Equipment Financing, Inc. as of September 15, 1995.
10.12! Warrant to Purchase Series A Preferred Stock, issued to Comdisco,
Inc. as of January 3, 1996.
10.13!!! Warrant to Purchase Common Stock, issued to MMC/GATX Partnership
No. 1, dated September 5, 1997.
10.14!!! Amendment to Warrant to Purchase Series A Preferred Stock, issued
to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.15!!! Amendment to Warrant to Purchase Series A Preferred Stock, issued
to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.16!!! Lease Agreement dated November 1, 1997, between the Company and
Jaswinder S. Saini and Surinder K. Saini.
10.17!!!! Purchase and Sale Agreement dated November 20, 1997, between the
Company and Lincoln Property Company N.C., Inc.
10.18!!!! Lease Agreement dated January 20, 1997, between the Company and
Lincoln Property Company N.C., Inc.
10.19* 1997 Nonstatutory Stock Options Plan and form of Stock Option
Agreement.
10.20!!!!! Warrant to Purchase Stock, issued to Silicon Valley Bank as of
December 31, 1997.
10.21!!!!!!! Promissory Note dated July 23, 1999, between the Company and
Bank SinoPac
10.22!!!!!!!! Loan and Security Agreement dated as of September 17, 1999, between
the Company and Bank SinoPac and Far East National Bank.
10.23** Exclusive Sales Distributor Agreement between OSE, Inc. and Orient
Semiconductor Electronics Limited dated as of October 29, 1999.
10.24!!!!!!!! Amendment to Loan and Security Agreement dated as of
September 17, 1999 between the Company and Bank SinoPac,
Los Angeles Branch and Far East National Bank.
10.25!!!!!!!! Amendment to Business Loan Agreement and Promissory Note dated
as of November 8, 1999 between the Company and Bank SinoPac.
10.26*** Amendment to Warrant to Purchase Common Stock, issued to Transamerica
Business Credit Corporation, dated May 1, 1999.
10.27*** Warrant to Purchase Common Stock, issued to Transamerica Business Credit
Corporation, dated May 1, 1999.
47
10.28*** Amendment to Warrant to Purchase Series A Preferred Stock, issued to
MMC/GATX Partnership No. 1, dated May 1, 1999.
10.29*** Amendment to Warrant to Purchase Series A Preferred Stock, issued to
MMC/GATX Partnership No. 1, dated May 1, 1999.
10.30*** Amendment to Warrant to Purchase Common Stock, issued to
MMC/GATX Partnership No. 1, dated May 1, 1999.
10.31*** Warrant to Purchase Common Stock, issued to MMC/GATX Partnership No. 1,
dated May 1, 1999.
10.32**** Certificate of Designation for the Company's Series A Stock
10.33***** Business Loan Agreement and Promissory Note, dated March 23, 2000 between
the Company and Bank Sino Pac, Los Angeles Branch
10.34***** Amendment to Business Loan Agreement and Promissory Note, dated March 23,
2000 between the Company and Sino Pac, Los Angeles Branch
10.35***** Acquisition of OSEI, filed on May 11, 2000
10.36 Change in Terms Agreement, dated July 26, 2000 between the Company and Bank
Sino Pac, Los Angeles Branch.
10.37 Change in Terms Agreement, dated September 21, 2000 between the Company
and Bank Sino Pac, Los Angeles Branch.
10.38 Change in Terms Agreement, dated September 29, 2000 between the Company and Far East
National Bank.
10.39 Change in Terms Agreement, dated October 29, 2000 between the Company and Bank
Sino Pac, Los Angeles Branch.
10.40 Change in Terms Agreement, dated October 31, 2000 between the Company and
Far East National Bank.
10.41 Amended and Restated Loan and Security Agreement, dated December 1, 2000
between the Company and Bank Sino Pac, Los Angeles Branch and Far East National Bank.
10.42 Business Loan Agreement, dated November 29, 2000 between the Company and Bank Sino Pac,
Los Angeles Branch
10.43 Certificate of Designation, dated December 21, 2000 for the Company's Series B
Convertible Preferred Stock.
23.1 Consent of Grant Thornton LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney.
---------------- -------------------------------------------------------------------------------------------------
! Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (file no. 333-326-LA), as amended,
filed on January 17,1996.
!! Incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
!!! Incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
!!!! Incorporated by reference from the Registrant's
Current Report on Form 8-K, filed on January 30, 1997.
48
!!!!! Incorporated by reference from the Registrant's Annual
Report on Form 10-K, for the year ended December 31,
1997.
!!!!!! Incorporated by reference from the Registrant's Annual
Report on Form 10-K, for the year ended December 31,
1998.
!!!!!!! Incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 4, 1999.
!!!!!!!! Incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
October 3, 1999.
* Management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
form.
** Incorporated by reference to the Company's Current
Report on Form 8-K filed on November 15, 1999.
*** Incorporated by reference from the Registrant's Annual Report on Form
10K, for the year * ended December 31, 1999.
**** Incorporated by reference from the Registrant's Current Report on Form 8-KA,
filed on May 7, 1999
***** Incorporated by reference from the Registrant's Quarterly Report on
10Q for the quarter * ended April 2, 2000.
(b) Reports on Form 8-K.
Acquisition of OSEI, filed on November 15, 1999
Amendment to acquisition of OSEI, filed on January 14, 2000
Change in independent accountants filed on November 20, 2000
(c) Exhibits.
See Item 14(a) hereof.
49
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on March 30, 2001.
INTEGRATED PACKAGING ASSEMBLY CORPORATION
By: /s/ EDMONG TSENG
----------------------
Edmond Tseng
Chairman, President, Chief Executive
Officer and Director
By: /s/ VINCENT R. LEPORE
----------------------
Vincent R. Lepore
Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Edmond Tseng and Vincent R.
Lepore, and each of them acting individually, as his attorney-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
In accordance with the Exchange Act, this report has been signed below on
March 30, 2001 by the following persons on behalf of the Registrant and in the
capacities indicated.
/s/ EDMOND TSENG Chairman, President, Chief Executive
Edmond Tseng Officer, and Director
(Principal Executive Officer)
/s/ VINCENT R. LEPORE Chief Accounting Officer
Vincent R. Lepore (Principal Accounting Officer)
/s/ DONALD W. BROOKS Director
Donald W. Brooks
/s/ EDWARD S. DUH Director
Edward S. Duh
/s/ CALVIN LEE Director
Calvin Lee
/s/ PATRICK VERDERICO Director
Patrick Verderico
50