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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 0-27712
INTEGRATED PACKAGING ASSEMBLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 77-03090372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2221 Old Oakland Road
San Jose, California 95131-1402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (408) 321-3600
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, .001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ x ] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 5, 1999, was
approximately $1,164,000. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may under certain
circumstances be deemed to be affiliates. This determination of executive
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 5, 1999 was 14,142,642.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Form 10-K.
Page 1
TABLE OF CONTENTS
Page
Part I
Item 1. Business............................................... 3
Item 2. Properties............................................. 11
Item 3. Legal Proceedings...................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 13
Item 6. Selected Financial Data................................ 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk................................................... 23
Item 8. Financial Statements and Supplemental Data............. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 48
Part III
Item 10. Directors and Executive Officers of the Registrant..... 49
Item 11. Executive Compensation................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 49
Item 13. Certain Relationships and Related Transactions......... 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 49
SIGNATURES........................................................... 52
Page 2
PART I
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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
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Integrated Packaging Assembly Corporation ("IPAC") is a leading
independent North American semiconductor packaging foundry. The Company
receives wafers from its customers and assembles each integrated circuit in a
protective plastic package. The Company's packaging facilities are located in
San Jose, California in close proximity to its customers and the end-users of
its customers' products. Due to intense competitive pressures in the
electronics industry, semiconductor companies are faced with increasingly
shorter product life cycles and therefore have a need to reduce the time it
takes to bring a product to market. The Company believes that its close
proximity to its customers promotes quicker turnaround design, prototype
production and final product delivery to its North American customers,
compared to its principal competitors which are primarily located in Asia.
Manufacturing
Semiconductor Packaging Services
The Company has focused on packages designed for assembly using Surface
Mount Technology ("SMT") in which leads on integrated circuits are soldered to
the surface of the printed circuit board. Within the SMT market, the Company
focuses on high pin-count packages, such as Quad Flat Packages ("QFPs") and
Thin Quad Flat Packages ("TQFPs"). The Company offers twelve different QFP and
TQFP families with body sizes ranging from 7x7 mm to 32x32 mm, and with the
number of leads available in certain package families ranging from 44 to 376
leads. Integrated circuits packaged by the Company are used in the following
applications: personal computers, modems, disk drives, automobiles, cameras
and telecommunications, among others. The Company also offers a limited
number of packages for emerging packaging technologies, such as Ball Grid
Array ("BGA") packages. Since inception, QFPs and TQFPs have accounted for
substantially all of the Company's packaging revenues.
Packaging involves several manufacturing operations, which are highly
automated to facilitate high volume production. The assembly process begins
with the mounting of a finished, tested wafer onto a carrier. After a dicing
saw cuts the wafer into individual die, the cut wafer is moved to a die bonder
which picks each good die off the wafer and bonds it to a lead frame with
epoxy resin. A lead frame is a miniature sheet of metal, generally made of
copper with selective silver plating on which the pattern of input/output
(I/0) leads has been cut. Next, very fine (typically 0.001 inches in
diameter) gold wires are connected to the die and the leads through the use of
automated machines known as wire bonders. These wire leads provide the
electrical path necessary for the device to function. Each die is then
encapsulated in a plastic casing and marked. The leads protruding from the
finished casing are then plated with a tin and lead composition to permit the
leads to be connected to the printed circuit board. At the end of the
packaging process, the leads are trimmed and formed into requisite shapes.
After this packaging process is complete, the devices undergo final inspection
and are prepared for shipment.
The Company has expended substantial resources to significantly expand
its production capacity since inception. The Company shipped approximately
1.6 million devices in 1994, approximately 10.5 million devices in 1995,
approximately 18.1 million devices in 1996, approximately 11.9 million devices
in 1997 and approximately 19.8 million devices in 1998. Since the fourth
quarter of 1996, the Company has had available
Page 3
manufacturing capacity. The Company's manufacturing capacity utilization is a
function of the mix of different package types produced by the Company at any
one time and the proportion of standard production runs compared to expedited
production runs. Thus, as the Company shifts its production among different
package types or allocates a different amount of available capacity to
standard production runs, the rate of the Company's capacity utilization
changes, at times significantly.
The Company has made substantial investments in expanding its
manufacturing capacity during its operating history, in anticipation of
increased future business. Since early 1997, the Company has incurred net
losses as revenues dropped substantially, while overhead and fixed costs
increased, with the result that there was substantial underutilized
manufacturing capacity. The Company continues to operate with significant
underutilized capacity. There can be no assurance that the Company will
receive orders from new or existing customers that will enable it to utilize
such manufacturing capacity in a timely manner.
The Company's inability to generate the additional revenues necessary to
more fully utilize its capacity has had and will continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that its competitive position depends on its ability
to have sufficient capacity to meet anticipated customer demand. Accordingly,
although the Company currently has available manufacturing capacity, the
Company will continue to selectively invest to expand such capacity,
particularly through the acquisition of capital equipment, including equipment
for new packages (e.g. BGA and CSP). There can be no assurance that the
Company will be able to utilize such capacity, that the cost of such expansion
will not exceed management's current estimates or that such capacity will not
exceed the demand for the Company's services. In addition, expansion of the
Company's manufacturing capacity will continue to significantly increase its
fixed costs, and the future profitability of the Company will depend on its
ability to utilize its manufacturing capacity in an effective manner. The
Company's inability to generate the additional production volume necessary to
fully utilize its capacity had a material adverse effect on its business,
financial and results of operation during 1997 and 1998 and would continue to
have a material adverse effect on the Company's future business, financial
condition and results of operations.
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in
Asia or Europe. The Company's operations are significantly dependent upon the
Company's ability to obtain capital equipment for its manufacturing operations
in a timely manner. In this regard, the Company spent $4.6 million, including
$3.1 million under a capital lease, in 1998 and expects to spend up to $3.0
million to purchase capital equipment in 1999. The Company currently
purchases capital equipment from a limited group of suppliers including Dai-
Ichi Seiko Co., Ltd., ESEC SA and Kaijo Corporation. The Company has no long
term agreement with any such supplier and acquires such equipment on a
purchase order basis. The market for capital equipment used in semiconductor
packaging has at times been characterized by intense demand, limited supply
and long delivery cycles. The Company's dependence on such equipment
suppliers poses substantial risks. Should any of the Company's major
suppliers be unable or unwilling to provide the Company with high quality
capital equipment in amounts necessary to meet the Company's requirements, the
Company would experience severe difficulty locating alternative suppliers in a
timely fashion and its operations could be materially adversely affected. In
this regard, in the second half of 1996, the Company experienced problems with
the performance of certain capital equipment which resulted in manufacturing
inefficiencies. These equipment problems had a material adverse effect on the
Company's financial results in the fourth quarter of 1996. Any further
problems with such capital equipment or any prolonged delay in equipment
shipments by key suppliers or an inability to locate alternative equipment
suppliers could have a material adverse effect on the Company's business,
financial condition and results of operations and could result in damage to
customer relationships. Moreover, increased levels of demand in the capital
equipment market may cause an increase in the price of equipment, further
lengthen delivery cycles and
Page 4
limit the ability of suppliers to adequately service equipment following
delivery, any of which could have an adverse effect on the Company's business,
financial condition or results of operations. In addition, adverse
fluctuations in foreign currency exchange rates, particularly the Japanese
yen, could result in increased prices for capital equipment purchased by the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company currently outsources some of its electroplating of the copper
leads protruding from the plastic moldings with a tin and lead composition
from International Lead Frame Corporation, a subsidiary of Mitsui High-Tec,
Inc., and Hytek Finishes, Inc. The Company has no long term agreement with
either supplier and such services are provided on a purchase order basis.
From time to time, the Company's plating subcontractors have experienced
significant manufacturing problems. There can be no assurance that the
Company's subcontractors will not experience manufacturing problems in the
future or that such problems will not result in increased costs or production
delays which could have a material adverse effect on the Company's business,
financial condition and results of operations. In 1998, the Company installed
an advanced electroplating system at a leased facility in Milpitas,
California, approximately 2 miles from the Company's main facility. The
Company currently plates approximately 70% of its devices at this facility.
Quality Control
The Company believes that total quality management is a vital component
of customer satisfaction and internal productivity. The Company has
established quality control systems, which are designed to maintain acceptable
manufacturing yields at high volume production. The Company has also
developed a sophisticated proprietary software program for material resource
planning, shop floor control, work in process tracking, statistical process
control and product costing. The Company obtained certification for its
packaging operations pursuant to ISO 9002 in December 1996.
As of December 31, 1998, the Company's quality control staff consisted of
10 engineers, technicians and other employees who monitor the Company's design
and production processes in order to ensure high quality. These employees
include line inspectors who work with members of the production staff to
conduct examination, testing and fine-tuning of products during the production
process. Quality control personnel are involved from initial design to
production. The quality control staff also collects and analyzes data from
various stages of the production process which is used by the Company for
statistical process control.
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, use of
defective raw materials, defective plating services and inadequate sample
testing. From time to time, the Company has experienced lower than
anticipated production yields as a result of such factors. The Company's
failure to maintain high quality production standards or acceptable production
yields would likely result in loss of customers, delays in shipments,
increased costs, cancellation of orders and product returns for rework, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Raw Materials Suppliers
To maintain competitive manufacturing operations, the Company must
obtain from its suppliers, in a timely manner, sufficient quantities of
acceptable materials at expected prices. The Company sources most of its raw
materials, including critical materials such as lead frames and die attach
compound, from a limited group of suppliers. Substantially all molding
compound, a critical raw material, is obtained from a single supplier. From
time to time, suppliers have extended lead times or limited the supply of
required materials to the Company because of supplier capacity constraints
and, consequently, the Company has experienced difficulty in obtaining
acceptable raw materials on a timely basis. In addition, from time to time,
the
Page 5
Company has rejected materials from those suppliers that do not meet its
specifications, resulting in declines in output or yield. Any interruption in
the availability of or reduction in the quality of materials from these
suppliers would materially adversely affect the Company's business, financial
condition and results of operations. For example, in the second quarter of
fiscal 1996, the Company's revenues were adversely affected by the rejection
of a batch of key material. The Company's ability to respond to increased
orders would also be adversely affected if the Company is not able to obtain
increased supplies of key raw materials.
The Company purchases all of its materials on a purchase order basis and
has no long term contracts with any of its suppliers. There can be no
assurance that the Company will be able to obtain sufficient quantities of raw
materials and other supplies. The Company's business, financial condition and
results of operations would be materially adversely affected if it were unable
to obtain sufficient quantities of raw materials and other supplies in a
timely manner or if there were significant increases in the costs of raw
materials that the Company could not pass on to its customers.
Marketing and Sales
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times,
has been subject to significant economic downturns and characterized by
reduced product demand, rapid erosion of average selling prices and production
over capacity. In addition, rapid technological change, evolving industry
standards, intense competition and fluctuations in end user demand
characterize the markets for integrated circuits. Because the Company's
business is entirely dependent on the requirements of semiconductor companies
for independent packaging foundries, any downturn in the semiconductor
industry is expected to have an adverse effect on the Company's business,
financial condition and results of operations. For example, delays or
rescheduling of orders due to a downturn or anticipated downturn in the
semiconductor industry have in the past and could in the future have a
material adverse effect on the Company's business, operating results and
financial condition.
The semiconductor industry is comprised of different market segments
based on device type and the end use of the device. Accordingly, within the
semiconductor industry, demand for production in a particular segment may be
subject to more significant fluctuations than other segments. If any of the
Company's significant customers are in a segment which has experienced adverse
market conditions, there would be an adverse effect on the Company's business,
financial condition and operating results. In this regard, the Company has
experienced a significant decline in orders since 1996 which the Company
attributes in part to reduced demand for semiconductors manufactured by
certain of the Company's customers that serve, in particular, the personal
computer market. There can be no assurance that this reduced demand, or the
general economic conditions underlying such demand, will not continue to
adversely affect the Company's results of operations. Furthermore, there can
be no assurance that any such continuation or expansion of this reduced demand
will not result in an additional and significant decline in the demand for the
products produced by the Company's customers and a corresponding material
adverse impact on the Company's business, operating results and financial
condition.
In addition, the Company has been substantially dependent on a relatively
small number of customers within the semiconductor industry. The high
concentration of business with a limited number of customers has adversely
affected the Company's operating results, when business volume dropped
substantially for several customers. There can be no assurance that such
customers or any other customers will continue to place orders with the
Company in the future at the same levels as in prior periods. The Company's
need for additional financing, and the uncertainty as to whether such
financing can be obtained, has adversely affected the Company's ability to
obtain new customers. The loss of one or more of the Company's customers, or
reduced orders by any of its key customers, would adversely affect the
Company's business, financial condition and
Page 6
results of operations.
The Company's marketing and sales efforts are focused on North American
semiconductor companies that design or manufacture IC devices which are used
in applications such as personal computers, modems, disk drives and
telecommunication products. Within such markets, the Company emphasizes
packaging complex, high pin-count products. The Company sells its services
directly through its sales and customer support organization. The Company
assists its customers in evaluating designs with respect to manufacturability
and when appropriate recommends design changes to reduce manufacturing costs
and lead times. The Company also offers lead frame design services for a fee.
To date, the Company has been substantially dependent on a relatively
small number of customers. Specifically, Atmel, Cirrus Logic and Ford
accounted for 39%, 11%, and 11%, respectively, of the Company's revenues in
1998. Cirrus Logic, Intel Corporation and Atmel accounted for 17%, 16% and
14%, respectively, of the Company's revenues in 1997. Cirrus Logic, Tseng
Laboratories, and Intel Corporation accounted for 32%, 17% and 14%,
respectively, of the Company's revenues in 1996. The Company anticipates that
significant customer concentration will continue, although the companies which
constitute the Company's largest customers may change from period to period.
All of the Company's customers operate in the cyclical semiconductor
business and their order levels may vary significantly from period to period.
In addition, there can be no assurance that such customers or any other
customers will continue to place orders with the Company in the future at the
same levels as in prior periods. In this regard, Ford recently announced that
it will stop manufacturing the automotive components that the Company
packages, by the end of 1999. As a result, the Company does not expect any
significant revenue from Ford during the second half of 1999. There can be no
assurance that adverse developments in the semiconductor industry will not
adversely affect the Company's business, financial condition and results of
operations. The loss of one or more of the Company's customers, or reduced
orders by any of its key customers, would adversely affect the Company's
business, financial condition and results of operations. The Company ships
its products in accordance with customer purchase orders and upon receipt of
semiconductor wafers from its customers. The Company generally ships products
within one to seven days after receiving the customer's wafers, and,
accordingly, the Company has not, to date, had a material backlog of orders.
The Company expects that revenues in any quarter will be substantially
dependent upon orders received in that quarter. The Company's expense levels
are based in part on its expectations of future revenues and the Company may
be unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
Competition; Decline in Average Selling Prices
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. in Taiwan, ANAM in Korea, PT
Astra in Indonesia and Swire Technologies in Hong Kong. Each of these
companies has significantly greater manufacturing capacity, financial
resources, research and development operations, marketing and other
capabilities than the Company and has been operating for a significantly
longer period of time than the Company. Such companies have also established
relationships with many large semiconductor companies which are current or
potential customers of the Company. The Company could face substantial
competition from Asian packaging foundries should one or more of such
companies decide to establish foundry operations in North America. The
Company also faces competition from other independent, North American
packaging foundries. The Company also competes against companies which have
in-house packaging capabilities as current and prospective customers
constantly evaluate the Company's capabilities against the merits of in-house
packaging. Many of the Company's customers are also customers of one or more
of the Company's principal competitors. The principal elements of competition
in the semiconductor packaging market include delivery cycle times, price,
product performance, quality, production yield, responsiveness and
flexibility, reliability and
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the ability to design and incorporate product improvements. The Company
believes it principally competes on the basis of shorter delivery cycle times
it can offer customers due to the close proximity of its manufacturing
facility to its customers' operations and the end users of its customers'
products.
Since mid-1996, the Company has experienced a decline in the average
selling prices for a number of its products. The Company expects that average
selling prices for its products will continue to decline in the future,
principally due to intense competitive conditions. A decline in average
selling prices of the Company's products, if not offset by reductions in the
cost of producing those products, would continue to decrease the Company's
gross margins and materially and adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to reduce its cost per unit.
Research and Development
The Company's research and development efforts are focused on improving
the efficiency and capabilities of its production processes, and on developing
new packages by making improvements upon commercially available materials and
technology. The Company's research and development efforts are focused on
improving existing technology, such as developing thermally enhanced QFPs that
result in better heat dissipation, and emerging packaging technologies, such
as BGA packages that provide for an increased number of leads per device
without increasing the size of the functional integrated circuit and Chip
Scale Packaging ("CSP"). Although the Company did not ship significant
quantities of BGA devices in 1998, it believes that the increased pin count
made available by BGA technology is an important technology that will enable
the Company to provide new packaging services to its customers. The Company
also works closely with the manufacturers of its packaging equipment in
designing and modifying the equipment used in the Company's production
process.
As of December 31, 1998, the Company employed 5 persons in research and
development activities. In addition, other management and operational
personnel are involved in research and development activities. The Company
supplements its research and development efforts with alliances and technology
licensing agreements. For example, the Company is a member of an ARPA-TRP
consortium working to enhance cooperation and participation by United States
companies in assembly and packaging technology. In 1998, 1997 and 1996, the
Company's research and development expenses were approximately $1,101,000,
$1,276,000, and $1,053,000, respectively. The Company expects to continue to
invest significant resources in research and development.
The Company has focused its manufacturing resources on plastic QFPs for
use with SMT, and the Company has neither the capability nor the intent to
provide services to other substantial segments of the semiconductor packaging
market. For example, the Company has no capacity to manufacture packages for
use with PTH technology, nor does the Company presently intend to manufacture
packages using materials other than plastic, such as ceramic. BGA packaging
currently represents a very small, but increasing, portion of the Company's
overall revenues and a relatively small portion of the overall semiconductor
packaging market. Technological change in the semiconductor packaging
industry is continuous and in the future semiconductor manufacturers are
expected to require increased technological and manufacturing expertise. The
introduction of new packaging technologies, a reduction or shift away from
QFP's, or the failure of the market for BGA packaging to develop would result
in a material adverse effect on the Company's business, financial condition
and results of operations.
Intellectual Property
The Company's success depends in part on its ability to obtain patents
and licenses and to preserve other intellectual property rights relating to
its manufacturing processes. As of December 31, 1998, the Company held ten
U.S. patents, which expire, between 2012 and 2015, and four additional patent
applications have been filed and are pending. The Company expects to continue
to file patent applications when appropriate to protect
Page 8
its proprietary technologies; however, the Company believes that its continued
success depends primarily on factors such as the technological skills and
innovation of its personnel rather than on its patents. The process of
seeking patent protection can be expensive and time consuming. There can be
no assurance that patents will issue from pending or future applications or
that, if patents are issued, they will not be challenged, invalidated or
circumvented, or that rights granted thereunder will provide meaningful
protection or other commercial advantage to the Company. Moreover, there can
be no assurance that any patent rights will be upheld in the future or that
the Company will be able to preserve any of its other intellectual property
rights.
As is typical in the semiconductor industry, the Company may receive
communications from third parties asserting patents on certain of the
Company's technologies. The Company has received one such letter from a
competitor. However, in this case and in the event any other third party were
to make a valid claim and a license were not available on commercially
reasonable terms, the Company's business, financial condition and results of
operations could be materially and adversely affected. Litigation, which
could result in substantial cost to and diversion of resources of the Company,
may also be necessary to enforce patents or other intellectual property rights
of the Company or to defend the Company against claimed infringement of the
rights of others. The failure to obtain necessary licenses or the occurrence
of litigation relating to patent infringement or other intellectual property
matters could have a material adverse effect on the Company's business,
financial condition and results of operations.
Environmental Matters
The semiconductor packaging process involves a significant amount of
chemicals and gases which are subject to extensive governmental regulations.
For example, liquid waste is produced at the stage at which silicon wafers are
diced into chips with the aid of diamond saws and cooled with running water.
In addition, excess materials on leads and moldings are removed from packaged
semiconductors in the trim and form process. The Company has installed
equipment to collect certain solvents used in connection with its
manufacturing process and has contracted with independent waste disposal
companies to remove such hazardous material.
In 1998, the Company installed an advanced electroplating system at a
leased facility in Milpitas, California. This plating operation involves the
use of significant quantities of certain hazardous substances. Although the
Company has designed procedures to ensure such materials are handled in
compliance with applicable regulations, there can be no assurance that the
operation of such facility will not expose the Company to additional costs in
complying with environmental regulations or result in future liability to the
Company.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals used in the Company's
manufacturing process and on the facility occupied by the Company. The
Company believes that its activities conform to present environmental and land
use regulations applicable to its operations and its current facility.
Increasing public attention has, however, been focused on the environmental
impact of semiconductor manufacturing operations and the risk to neighbors of
chemical releases from such operations. There can be no assurance that
applicable land use and environmental regulations will not in the future
impose the need for additional capital equipment or other process requirements
upon the Company or restrict the Company's ability to expand its operations.
The adoption of new ordinances or similar measures or any failure by the
Company to comply with applicable environment and land use regulations or to
restrict the discharge of hazardous substances could subject the Company to
future liability or cause its manufacturing operations to be curtailed or
suspended.
Employees
As of December 31, 1998, the Company had 245 full time employees, 218 of
whom were engaged in manufacturing, 5 in research and development, 8 in sales
and customer service and 14 in finance and
Page 9
administration. The Company's employees are not represented by any collective
bargaining agreement, and the Company has never experienced a work stoppage.
The Company believes that its employee relations are good. The success of the
Company's future operations depends in large part on the Company's ability to
attract and retain highly skilled technical, manufacturing and management
personnel. There can be no assurance that the Company will be successful in
attracting and retaining key personnel.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position(s)
- ------------------------ ----- -----------------------------------------
Patrick Verderico 55 President, Chief Executive Officer and
Director
Ernest G. Barrieau II 43 Executive Vice President, Sales and
Marketing
Gerald K. Fehr 61 Executive Vice President, Operations
and Chief Technology Officer
Alfred V. Larrenaga 51 Executive Vice President, Finance and
Chief Financial Officer
Patrick Verderico joined the Company in April 1997 as its Chief Operating
Officer and was appointed the Company's President and Chief Executive Officer
and a Director in July 1997. From 1996 to 1997, Mr. Verderico was Chief
Operating Officer and Executive Vice President of Maxtor Corporation, a disk
drive manufacturer. From 1994 to 1996, Mr. Verderico was Chief Financial
Officer and Vice President Finance and Administration of Creative Technology,
a multi media products company. From 1992 to 1994, Mr. Verderico was Chief
Financial Officer and Vice President Finance and Administration of Cypress
Semiconductor. Prior to 1992, Mr. Verderico held various management positions
in finance and operations with Coopers & Lybrand, Philips Semiconductors and
National Semiconductor. Mr. Verderico is also a Director of Catalyst
Semiconductor and Micro Component Technology, Inc.
Ernest G. Barrieau joined the Company in October 1997 as its Executive
Vice President, Sales and Marketing. From 1996 to 1997, Mr. Barrieau was Vice
President North American Sales of Alphatec Group, a semiconductor packaging
company. From 1991 to 1996, Mr. Barrieau was Corporate Vice President World
Wide Sales and Marketing, and Director of Thai Micro Systems, a semiconductor
packaging company. Prior to 1991, Mr. Barrieau held various management
positions in sales and operations with Amkor Electronics and Fairchild
Semiconductor.
Gerald K. Fehr is a co-founder of the Company and has served as Vice
President, Technology of the Company since March 1993 and Executive Vice
President, Operations and Chief Technology Officer since December 1997. From
January 1991 to March 1993, Dr. Fehr served as an independent consultant in
the semiconductor packaging industry. From March 1981 to January 1991, Dr.
Fehr served as Director of Packaging and Assembly for LSI Logic, Inc., a
semiconductor company. From June 1978 to March 1981, Dr. Fehr served as
Manager of Packaging Operations of Burroughs, a semiconductor company. From
May 1975 to June 1978, Dr. Fehr served as Manager of Packaging Operations of
Fairchild, a semiconductor corporation. From 1968 to 1975, Dr. Fehr served as
Manager of Assembly and Packaging for Intel Corporation.
Alfred V. Larrenaga joined the Company in August 1997 as Vice President,
Finance and Chief Financial Officer and became Executive Vice President,
Finance and Chief Financial Officer in April 1998. From 1988 to 1997, Mr.
Larrenaga was Senior Vice President and Chief Financial Officer of Southwall
Technologies Inc., a thin film technology company. Prior to 1988, Mr.
Larrenaga held various management positions in finance with Asyst Technologies
Inc., the Farinon Division of Harris Corporation and Arthur Andersen & Co.
LLP.
Page 10
The Company's success depends to a significant extent upon the continued
service of its key management and technical personnel, each of whom would be
difficult to replace. The competition for qualified employees is intense, and
the loss of the services of key personnel or the inability to attract, retain
and motivate qualified new personnel could have a material adverse effect on
the Company's business, financial condition and results of operations.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
Item 2. Properties
- -------------------
In January 1998, the Company sold its facility, which consisted of land
and two buildings comprising approximately 138,000 square feet, and entered
into a lease, with a initial term of ten years, for the approximately 82,000
square foot building which it occupies and it uses for its manufacturing
operations, executive offices and product development. In November 1997, the
Company leased a separate 2,500 square foot building, approximately 2 miles
from the Company's principal facility, for its advanced electroplating system.
The Company believes its existing facilities are adequate to meet its needs
for the foreseeable future. Since the Company does not currently operate
multiple facilities in different geographic areas, a disruption of the
Company's manufacturing operations resulting from various factors, including
sustained process abnormalities, human error, government intervention or a
natural disaster such as fire, earthquake or flood, could cause the Company to
cease or limit its manufacturing operations and consequently would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 3. Legal Proceedings
- --------------------------
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities
require that the Company maintain certain financial covenants. The Company
has been out of compliance with certain of these covenants since the second
quarter of 1998. As a result of the covenant noncompliance and failure to
make scheduled repayments, the Company is in default under these agreements.
On October 13, 1998, Comerica Bank commenced an action against the
Company in Superior Court, Santa Clara County, California (Case #CV 777252).
Comerica seeks monetary damages of approximately $2,000,000 and recovery of
leased personal property. The Company has stipulated to the entry of a Writ
of Possession and Comerica Bank has agreed to forbear execution of the Writ
until after May 31, 1999.
On September 22, 1998, Heller Financial, Inc. commenced an action against
the Company in Superior Court, Santa Clara County, California (Case # CV
776830). Heller Financial, Inc. seeks monetary damages of approximately
$1,050,000 and recovery of leased personal property. The Company has
stipulated to the entry of a Writ of Possession and Heller Financial, Inc. has
agreed to forbear an execution of the Writ until after May 31, 1999.
On September 28, 1998, The CIT Group/Equipment Financing, Inc. commenced
an action against the Company in Superior Court, Santa Clara County,
California (Case # CV 776836). The CIT Group/Equipment Financing, Inc. seeks
monetary damages of approximately $1,250,000 and recovery of leased personal
property. The Company has stipulated to the entry of a Writ of Possession and
the CIT Group/Equipment Financing, Inc. has agreed to forbear execution of the
Writ until after May 31, 1999.
On November 18, 1998, Transamerica Business Credit Corporation commenced
an action against the Company in Superior Court, Santa Clara County,
California, (Case # CV778142). Transamerica seeks monetary damages of
approximately $3,800,000 and recovery of leased personal property. The
Company has
Page 11
stipulated to the entry of a Writ of Possession and Transamerica has agreed to
forbear execution of the Writ until after May 31, 1999.
On November 24, 1998, Phoenix Leasing Incorporated commenced an action
against the Company in Superior Court, San Francisco County, California (Case
#CV999461). Phoenix seeks monetary damages of approximately $240,000 and
recovery of leased personal property. The Company has stipulated to the entry
of a Writ of Possession and Phoenix Leasing has agreed to forbear the
execution of the Writ until after May 31, 1999.
The Company has also entered into forbearance agreements through May 31,
1999 with three other secured creditors who have not yet commenced litigation
against the Company.
The Company does not have any material defenses to these actions. An
adverse outcome in any of these actions would have a material adverse effect
on the Company. If the forbearance agreements with the creditors do not
remain in effect, the Company will be forced to seek protection under the
bankruptcy laws or cease operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable.
Page 12
Part II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company effected the initial public offering of its Common Stock on
February 28, 1996. As of February 11, 1999, there were approximately 1,500
beneficial owners of the Company's Common Stock. The Company's Common Stock
was delisted from the Nasdaq Stock Market in November 1998. The Company's
Common Stock is listed for quotation on the OTC Bulletin Board under the
Symbol "IPAC." The following table sets forth for the periods indicated, the
high and low prices of the Company's Common Stock.
High Low
---------- ----------
Fiscal Year Ended December 31, 1997
First Quarter......................... $8.50 $3.50
Second Quarter........................ 5.00 2.50
Third Quarter......................... 4.00 2.00
Fourth Quarter........................ 2.50 0.50
Fiscal Year Ended December 31, 1998
First Quarter......................... $1.59 $0.69
Second Quarter........................ 1.37 0.50
Third Quarter......................... 1.00 0.13
Fourth Quarter........................ 0.25 0.06
The trading price of the Company's Common Stock is expected to continue
to be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
semiconductor industry, changes in earnings estimates or recommendations by
analysts, the failure of the Company to meet or exceed published earnings
estimates or other events or factors. In addition, the public stock markets
have experienced extreme price and trading volume volatility in recent months.
This volatility has significantly affected the market prices of securities of
many high technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future.
Page 13
Item 6. Selected Financial Data
- --------------------------------
Year Ended December 31, (1)
-------- -------- -------- --------- ---------
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Revenues........................ $3,451 $20,764 $36,402 $19,744 $23,281
Cost of revenue................. 3,438 15,627 28,840 24,089 29,114
-------- -------- -------- --------- ---------
Gross profit (loss)............. 13 5,137 7,562 (4,345) (5,833)
Operating expenses:
Selling, general and
administrative.............. 1,309 2,229 3,488 5,167 4,068
Research and development...... 170 694 1,053 1,276 1,101
Provision for impairment
of assets.................... -- -- -- 3,000 18,200
-------- -------- -------- --------- ---------
Total operating expenses.... 1,479 2,923 4,541 9,443 23,369
-------- -------- -------- --------- ---------
Operating income (loss)......... (1,466) 2,214 3,021 (13,788) (29,202)
Interest and other income....... 54 551 1,210 971 1,209
Interest expense................ (674) (1,074) (1,384) (2,185) (1,783)
-------- -------- -------- --------- ---------
Income (loss) before income
taxes......................... (2,086) 1,691 2,847 (15,002) (29,776)
Provision for income taxes...... -- (141) (530) -- --
-------- -------- -------- --------- ---------
Net income (loss)...............$(2,086) $1,550 $2,317 $(15,002) $(29,776)
======== ======== ======== ========= =========
Diluted net income (loss)
per share (1)................. ($1.02) $0.16 $0.16 ($1.08) ($2.12)
======== ======== ======== ========= =========
Number of shares used to
compute diluted per share
data (1)...................... 2,051 9,603 14,157 13,898 14,046
======== ======== ======== ========= =========
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
Balance Sheet Data:
Working capital............... $2,075 $4,773 $15,614 ($5,877) ($16,086)
Total assets.................. 13,310 28,260 69,639 55,482 18,728
Long-term obligations /
deferred gains.............. 5,371 7,015 16,926 14,249 1,249
Mandatorily redeemable
convertible preferred stock. 8,020 15,981 -- -- --
Total shareholders' equity
(deficit)................... (2,764) (918) 40,761 26,238 (3,207)
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine shares used in computing per share amounts.
Page 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The forward looking
statements contained herein are subject to certain factors that could cause
actual results to differ materially from those reflected in the forward
looking statements. Such factors include, but are not limited to, those
discussed as follows and elsewhere in this Report on Form 10-K.
Overview
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and
resultant underabsorption of fixed costs resulted in operating losses that
have continued throughout 1998. At the end of the second quarter of 1998, the
Company ceased making scheduled repayments of its debt balance outstanding
relating to its Equipment Notes Payable and its capital leases. Certain of
these debt facilities require that the Company maintain certain financial
covenants. The Company has been out of compliance with certain of these
covenants since the second quarter of 1998. As a result of the covenant
noncompliance and failure to make scheduled repayments, the entire balance due
has been classified as a current liability since June 1998. Certain of the
Company's secured creditors commenced legal actions against the Company
seeking monetary damages and recovery of the financed equipment. In December
1998 the Company entered into a $7 million bank line of credit that is
guaranteed by a third party and the Company obtained forbearance agreements
from its secured creditors through May 31, 1999. The forbearance agreements
require, among other things, that the Company make monthly payments through
May 31, 1999. The Company does not have any material defenses against the
legal actions brought by its secured creditors. An adverse outcome in any of
the actions would have a material adverse effect on the Company and if the
forbearance agreements do not remain in effect for each of these lenders, the
Company will be forced to seek protection under the bankruptcy laws or cease
operations. As a result of the operating losses and cost of capital
additions, the Company is currently seeking immediate additional financing to
meet its projected working capital and other cash requirements. The Report of
Independent Accountants included on page 25 contains a going concern
statement.
The Company's operating results are affected by a wide variety of factors
that have in the past and could in the future materially and adversely affect
revenues, gross profit and operating income. These factors include the
Company's ability to secure additional financing, the short-term nature of its
customers' commitments, timing and volume of orders relative to the Company's
production capacity, long lead times for the manufacturing equipment required
by the Company, evolutions in the life cycles of customers' products, timing
of expenditures in anticipation of future orders, lack of a meaningful
backlog, effectiveness in managing production processes, changes in costs and
availability of labor, raw materials and components, costs to obtain materials
on an expedited basis, mix of orders filled, the impact of price competition
on the Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the preceding factors have in the past and may
in the future adversely affect the Company's business, financial condition and
results of operations.
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times,
has been subject to significant economic downturns and characterized by
reduced product demand, rapid erosion of average selling prices and excess
production capacity. In addition, rapid technological change, evolving
industry standards, intense competition and fluctuations in end-user demand
characterize the markets for integrated circuits. Since the Company's
business is entirely dependent on the requirements of semiconductor companies
for independent packaging
Page 15
foundries, any future downturn in the semiconductor industry is expected to
have an adverse effect on the Company's business, financial condition and
results of operations. In this regard, since late 1996, the Company's results
of operations have been materially adversely affected by reduced orders from
several major customers in the PC graphics segment of the semiconductor
industry.
To date, the Company has been substantially dependent on a relatively
small number of customers. Specifically Atmel, Cirrus Logic and Ford
accounted for 39%, 11%, and 11%, respectively, of the Company's revenues in
1998. Cirrus Logic, Intel Corporation and Atmel accounted for 17%, 16% and
14%, respectively, of the Company's revenues in 1997. Cirrus Logic, Tseng
Laboratories, and Intel Corporation account for 32%, 17%, and 14%,
respectively, of the Company's revenues in 1996. The Company anticipates
significant customer concentration will continue, although the companies which
constitute the Company's largest customer may change from period to period.
In this regard, Ford recently announced that it will stop manufacturing the
automotive component that the Company packages, by the end of 1999. As a
result, the Company does not expect any significant revenue from Ford during
the second half of 1999.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
charges related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
Since 1996, the Company has experienced a decline in the average selling
prices for its services and expects that average-selling prices for its
services will decline in the future, principally due to intense competitive
conditions. A decline in average selling prices of the Company's services, if
not offset by reductions in the cost of performing those services, would
decrease the Company's gross margins and materially and adversely affect the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to reduce its cost per unit.
The Company must continue to hire and train significant numbers of
additional personnel to operate the highly complex capital equipment required
by its manufacturing operations. There can be no assurance that the Company
will be able to hire and properly train sufficient numbers of qualified
personnel or to effectively manage such growth and its failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, since the Company's expense levels
are based in part on anticipated future revenue levels, if revenue were to
fall below anticipated levels, the Company's operating results would be
materially adversely affected.
Page 16
Results of Operations
The following table sets forth, for the periods indicated, certain items
in the Company's statement of operations as a percentage of revenues:
Year Ended December 31,
----------------------------------
1996 1997 1998
---------- ----------- -----------
Revenues.................................. 100.0% 100.0% 100.0%
Cost of revenues.......................... 79.2 122.0 125.0
---------- ----------- -----------
Gross profit (loss)....................... 20.8 (22.0) (25.0)
Operating expenses:
Selling, general and administrative.... 9.6 26.2 17.5
Research and development............... 2.9 6.4 4.7
Provision for impairment of assets..... -- 15.2 78.2
---------- ----------- -----------
Total operating expenses............ 12.5 47.8 100.4
---------- ----------- -----------
Operating income (loss)................... 8.3 (69.8) (125.4)
Interest and other income................. 3.3 4.9 5.2
Interest expense.......................... (3.8) (11.1) (7.7)
---------- ----------- -----------
Income (loss) before income taxes......... 7.8 (76.0) (127.9)
Provision for income taxes................ (1.4) -- --
---------- ----------- -----------
Net income (loss)......................... 6.4% (76.0)% (127.9)%
========== =========== ===========
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues increased 18% to $23.3 million in 1998, from $19.7
million in 1997. Revenues decreased 46% to $19.7 million in 1997, from $36.4
million in 1996. The increase in revenues in 1998 was primarily due to
increased orders offset in part by a reduction in average selling prices due
to changes in product mix and a decline in selling prices. The decrease in
1997 revenues was primarily due to lower orders from customers, coupled with
operational problems in quality and delivery.
A substantial portion of the Company's net revenues in each quarter
results from shipments during the last month of that quarter, and for that
reason, among others, the Company's revenues are subject to significant
quarterly fluctuations. In addition, the Company establishes its targeted
expenditure levels based on expected revenues. If anticipated orders and
shipments in any quarter do not occur when expected, expenditure levels could
be disproportionately high and the Company's operating results for that
quarter would be materially adversely affected.
Gross Profit (Loss)
Cost of revenues includes materials, labor, depreciation and overhead
costs associated with semiconductor packaging. Gross (loss) increased to
$(5.8) million in 1998 from ($4.3) million in 1997. Gross profit was $7.6
million in 1996. Gross profit (loss) as a percentage of revenues was (25.0%)
in 1998, (22.0%) in 1997 and 20.8% in 1996. These declines in gross profit
were primarily the result of lower average selling prices, caused by changes
in product mix and industry competition, and higher costs for depreciation,
labor and manufacturing overhead and low capacity utilization.
Depreciation for certain production machinery and equipment acquired
prior to 1997 is calculated using the units of production method, in which
depreciation is calculated based upon the units produced in a given period
Page 17
divided by the estimate of total units to be produced over its life following
commencement of use. Such estimate is reassessed when facts and circumstances
suggest a revision may be necessary. Based upon reduced utilization of
machinery and equipment in relation to plan, the estimate for total throughput
was reduced in late 1996 causing the depreciation rate per unit to increase in
late 1996. Such higher depreciation rate continued into 1997 and 1998. In
all cases, the asset will be fully depreciated by the end of its estimated six
year life. Compared with straight line depreciation, the units of production
method generally results in lower depreciation expense during the early life
of the equipment and relatively higher depreciation expense once the equipment
is in full production. All machinery and equipment acquired after 1996 is
depreciated using the straight line depreciation method. After the write down
of impaired assets (see "Write Down of Impaired Assets" on page 18) in June
1998, depreciation expense for the second half of 1998 was significantly lower
than the first half of 1998.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and
management personnel, as well as advertising, public relations, legal and
facilities costs. Selling, general and administrative expenses were $4.1
million in 1998, $5.2 million in 1997 and $3.5 million in 1996. The decrease
in 1998, compared to 1997, was due primarily to reduced spending in
administration and sales. The increase in 1997, compared to 1996, was due
primarily to increases in staff, marketing efforts, and facilities to support
the Company's expansion.
As a percentage of revenues, selling, general and administrative expenses
decreased to 17.5% in 1998 compared to 26.2% in 1997. In 1996, the percentage
was 9.6%. The fluctuation in percentages reflects the changes in absolute
spending and revenue.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, the cost of related
materials and services, and the depreciation of development equipment.
Research and development expenses were $1.1 million in 1998, $1.3 million in
1997, and $1.1 million in 1996.
As a percentage of revenues, research and development expenses were 4.7%
in 1998, 6.4% in 1997 and 2.9% in 1996. The changes in such expenses as a
percentage of revenues reflected changes in absolute spending and revenue.
Write Down of Impaired Assets
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in the estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
During the second quarter of 1997, the Company took a $3 million charge
for impaired assets. This charge included a $2.4 million reserve related to
equipment used for the production of certain products with limited future
demand, and a $500,000 reserve for the cancellation of purchase orders for
equipment which the Company has determined to be surplus in relation to
current demand.
Page 18
Interest and Other Income
Interest income in 1998, 1997, and 1996 was $83,000, $573,000, and
$982,000, respectively. The reductions were due to lower investment balances,
which resulted from the losses from operations and capital expenditures.
Interest income for 1996, was the result of interest earned on proceeds from
the Company's initial public offering which was completed in February 1996. In
1998, other income included a gain of $700,000 from the sale of the land and
building not occupied by the Company. See "Liquidity and Capital Resources".
In 1997 and 1996, other income included $124,000 and $228,000, which was
earned for development work with a semiconductor industry consortium. In
1997, other income also included approximately $270,000 from the sublease of a
portion of the Company's facilities complex, which was sold in 1998.
Interest Expense
Interest expense consists primarily of interest payable on bank debt, and
capital leases and term loans secured by equipment. The Company has financed
its manufacturing equipment primarily through capital leases and term loans
secured by equipment with terms ranging from four to five years, and carrying
imputed interest rates ranging from 7.5% to 15.5% per annum. Interest
expense for 1998, 1997, and 1996 was $1.8 million, $2.2 million and $1.4
million, respectively.
Provision for Income Taxes
In 1998 and 1997, due to the losses from operations, the Company recorded
no tax provision. The Company's provision for taxes in 1996 was $530,000,
representing an effective tax rate of approximately 19%. The effective tax
rate represents alternative minimum tax ("AMT") resulting from limits on the
use of net operating loss carry forwards for AMT purposes and tax accelerated
depreciation on all machinery and equipment.
Liquidity and Capital Resources
During 1998, the Company's net cash used in operations was $6.7 million.
Net cash used in operations was comprised primarily of a net loss of $29.8
million, partially offset by $7.0 million of non-cash charges for depreciation
and amortization and write down of impaired assets of $18.2 million and a net
decrease in working capital items of $2.1 million. The net decrease in
working capital items primarily reflected a $3.3 million reduction in accounts
payable and the reclassification of long-term debt to current liabilities as a
result of the covenant non-compliance and the failure to make scheduled
payments, as discussed previously. As of December 31, 1998, the Company had
no cash balance and is operating under bank lines obtained in October and
December 1998.
The Company had capital expenditures of $4.6 million, including $3.1
million under a capital lease, during 1998. The capital expenditures were
incurred primarily for the purchase of production equipment and improvements
to the Company's facilities. Most of the Company's production equipment has
been funded either through capital leases or term loans secured by production
equipment. The production equipment acquired in 1995 and 1996 was funded
through several term loans. The Company borrowed $4.9 million and $9.8
million on such term loans in 1995 and 1996, respectively. During 1997, the
Company borrowed $3.5 million on such term loans for the purchase of
production equipment.
In March 1997, the Company secured a mortgage loan with an insurance
company, which provided the Company with a $6.7 million five year term loan.
The loan was secured by the real estate and buildings purchased by the Company
in December 1996. The loan accrued interest at 8.5%, and was payable in equal
monthly installments of $58,000, with a balloon payment of $5.9 million due
after five years. The proceeds of this mortgage loan were used to pay off and
retire the $6.5 million real estate loan which was entered into
Page 19
in December 1996 to provide temporary financing for the acquisition of the
Company's building complex. The loan accrued interest at 2.25% over the rate
for 30 day certificates of deposit and was collateralized by a certificate of
deposit of equivalent value.
In December 1997, the Company entered into a line of credit agreement
with a bank that provided, for borrowings up to the lesser of $5,000,000 or
80% of eligible accounts receivable. Borrowings under the line of credit
accrued interest at the bank's prime rate (8.5% per annum at December 31,
1997) plus 1.25% and were collateralized by the assets of the Company. The
agreement requires the Company to maintain certain financial covenants,
including a liquidity ratio, minimum tangible net worth, maximum debt to
tangible net worth, quarterly profitability and prohibited the Company from
the payment of dividends without prior approval by the bank. Since July 5,
1998, the Company has not been in compliance with such covenants. This line
was replaced with an accounts receivable factoring agreement in October 1998.
On January 20, 1998, the Company completed the sale of its facilities,
which consists of land and two buildings with a total of 138,336 square feet
of building space, and agreed to lease back the 82,290 square foot building
that it occupies. Net proceeds from the sale were $7.3 million, net of the
elimination of $6.6 million of mortgage debt, fees, commissions and closing
costs. The sale and lease back transaction resulted in a gain of $2,100,000,
of which $700,000 from the sale of the land and building not occupied by the
Company was recognized in the first quarter of 1998. The remaining gain of
approximately $1,400,000 will be amortized as a reduction of lease expense
over the initial ten year term of the lease for the building that the Company
occupies.
In June 1998, the Company entered in a capital lease for approximately
$3.1 million of production equipment. The lease expires in 2002. In
conjunction with the lease, the Company issued warrants to purchase 171,428
shares of common stock at $1.31 per share and are exercisable for seven years.
The warrants were valued at $132,000 using a Black-Scholes valuation model.
At December 31, 1998, the aggregate principal and interest amount
outstanding under all equipment loans was $12.9 million. Certain of the
credit facilities require the Company to maintain certain financial covenants
including minimum tangible net worth, a ratio of total liabilities to tangible
net worth, and quarterly revenues and quarterly income before interest, taxes,
depreciation and amortization (EBITDA). At December 31, 1998, the Company was
not in compliance with such covenants.
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable. The bank charges an administration fee of 0.5% of the gross
accounts receivable factored and a monthly interest charge of 1.25% of the
average balance owed.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999. The line
provides for monthly borrowings and interest acquired at the bank's prime
rate, (7 3/4% per annum at December 31, 1998).
Page 20
Certain of the Company's secured creditors commenced legal actions
against the Company seeking monetary damages and recovery of the financed
equipment. In connection with the December 1998 bank financing, the Company
obtained forbearance agreements from the secured creditors through May 31,
1999. The forbearance agreements require, among other things, that the
Company make monthly payments through May 31, 1999.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, however, that financing will be
available on terms acceptable to the Company, if at all. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders will be substantially diluted and such equity
securities may have rights, preference or privileges senior to those of the
holders of the Company's Common Stock. If adequate funds are not available on
acceptable terms, the Company's business, financial condition and results of
operations would be materially adversely affected. In such event, the Company
would be required to substantially curtail, cease or liquidate its operations
and reorganize its indebtedness. Although the Company is pursuing additional
equity and debt financing, there can be no assurance that such financing will
be obtained. The Company is also evaluating the possible sale or merger of
the Company, but there can be no assurance that such a transaction can be
completed on terms acceptable to the Company, if at all.
Year 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of a
single century, the 1900s. Any program so created may read or attempt to
read, "00" as the year 1900. There are two other related issues which could
also, lead to incorrect calculations or failure, such as (i) some systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the year 2000 is a leap year. Accordingly, some computer hardware and
software including programs embedded within machinery and parts will need to
be modified prior to the year 2000 in order to remain functional. To address
the issue, the Company created an internal task force to assess its state of
readiness for possible "Year 2000" issues and take the necessary actions to
ensure Year 2000 compliance. The task force has and continues to evaluate
internal business systems, production equipment, software and other components
which affect the Company's products, and the Company's vulnerability to
possible "Year 2000" exposures due to suppliers' and other third parties' lack
of preparedness for the year 2000.
The Company is in the process of assessing its production equipment and
its information system and does not anticipate any material Year 2000 issues
from its equipment or its own information system, databases or programs.
Certain software packages are currently being upgraded to compliant versions.
The costs incurred to date and expected to be incurred in the future are not
material to the Company's financial condition or result of operations. In
addition, the Company has been in contact with its suppliers and other third
parties to determine the extent to which they may be vulnerable to "Year 2000"
issues. As this assessment progresses, matters may come to the Company's
attention, which could give rise to the need for remedial measures which have
not yet been identified. As a contingency, the Company may replace the
suppliers and third party vendors who cannot demonstrate to the Company that
their products or services will be Year 2000 compliant. The Company cannot
currently predict the potential effect of third parties' "Year 2000" issues on
its business.
Page 21
The Company believes that its Year 2000 compliance project will be
completed in advance of the Year 2000 date transition and will not have a
material adverse effect on the Company's financial condition or overall trends
in the results of operations. However, there can be no assurance that
unexpected delays or problems, including the failure to ensure Year 2000,
compliance by systems or products supplied to the Company by a third party,
will not have an adverse effect on the Company, its financial performance, or
the competitiveness or customer acceptance of its products.
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of factors
that could materially and adversely affect revenues, gross profit, operating
income and liquidity. These factors include the Company's ability to secure
additional financing, the short term nature of its customers' commitments, the
timing and volume of orders relative to the Company's production capacity,
long lead times for the manufacturing equipment required by the Company,
evolutions in the life cycles of customers' products, timing of expenditures
in anticipation of future orders, lack of a meaningful backlog, effectiveness
in managing production processes, changes in costs and availability of labor,
raw materials and components, costs to obtain materials on an expedited basis,
mix of orders filled, the impact of price competition on the Company's average
selling prices and changes in economic conditions. The occurrence or
continuation of unfavorable changes in any of the preceding factors would
adversely affect the Company's business, financial condition and results of
operations.
Default Upon Senior Securities; Need for Immediate Financing; Risks of
Bankruptcy
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999.
All of the Company's secured creditors commenced legal actions against
the Company seeking monetary damages and recovery of the financed equipment.
In connection with the December 1998 bank financing, the Company obtained
forbearance agreements from the secured creditors through May 31, 1999. The
forbearance agreements require, among other things, that the Company make
monthly payments through May 31, 1999.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, however, that financing will be
available on terms acceptable to the Company, if at all. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders will be substantially diluted and such equity
securities may have rights, preference or privileges senior to those of the
holders of the Company's Common Stock. If adequate funds are not available on
acceptable terms, the Company's business, financial condition and results of
operations would be materially adversely affected. In such event,
Page 22
the Company would be required to substantially curtail, cease or liquidate its
operations and reorganize its indebtedness. Although the Company is pursuing
additional equity and debt financing, there can be no assurance that such
financing will be obtained. The Company is also evaluating the possible sale
or merger of the Company, but there can be no assurance that such a
transaction can be completed on terms acceptable to the Company, if at all.
Delisting of Common Stock on Nasdaq National Market
In June 1998, the Company was notified by The Nasdaq Stock Market that
its Common Stock did not comply with Nasdaq's $1.00 minimum bid price
requirement and that the Company's Common Stock would be delisted. Effective
November 18, 1998, the Company's Common Stock was delisted from the Nasdaq
Stock Market. The Common Stock of the Company is currently traded on the OTC
Bulletin Board.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company has various debt instruments outstanding that mature by
2002. Certain of these instruments have interest rates that are based on
associated rates that may fluctuate over time based on economic changes in the
environment, such as the Prime Rate. The Company is subject to interest rate
risk, and could be subjected to increased interest payments if market interest
rates fluctuate. The Company estimates that a ten percent increase in
interest rates would cause interest expense to increase by an immaterial
amount.
Page 23
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS:
Page
----
Report of Independent Accountants................................. 25
Balance Sheet as of December 31, 1997 and 1998.................... 26
Statement of Operations for the Years Ended December 31, 1996,
1997 and 1998........................................... 27
Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998........................ 28
Statement of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998........................................... 29
Notes to Financial Statements..................................... 30
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 24
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Integrated Packaging Assembly Corporation
In our opinion, the financial statements listed in the accompanying index
on page 24 present fairly, in all material respects, the financial position of
Integrated Packaging Assembly Corporation at December 31, 1997 and 1998, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
February 8, 1999
Page 25
Integrated Packaging Assembly Corporation
Balance Sheet
(In thousands, except share data)
Year Ended
December 31,
--------------------
1997 1998
---------- ----------
Assets
Current assets:
Cash and cash equivalents...................... $2,928 $--
Accounts receivable, net of allowance for
doubtful accounts of $263 and $263........... 3,096 2,105
Inventory...................................... 2,337 1,704
Prepaid expenses and other current assets...... 757 792
---------- ----------
Total current assets........................... 9,118 4,601
Property and equipment, net...................... 46,127 13,930
Other assets..................................... 237 197
---------- ----------
Total assets................................... $55,482 $18,728
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of bank debt and notes payable. $4,576 $11,399
Current portion of capital lease obligations... 1,972 4,324
Accounts payable............................... 5,478 2,155
Accrued expenses and other liabilities......... 2,969 2,808
---------- ----------
Total current liabilities.................... 14,995 20,686
---------- ----------
Long term portion of notes payable............... 14,166 --
---------- ----------
Long term portion of capital leases obligations.. 83 --
---------- ----------
Deferred gain on sale of facilities.............. -- 1,249
---------- ----------
Commitments and contingencies (notes 1,5 and 10)
Shareholders' equity
Common stock, $.001 par value; 75,000,000
shares authorized; 13,828,348 and 14,090,794
shares issued and outstanding................ 14 14
Additional paid-in capital..................... 40,276 40,607
Accumulated earnings (deficit)................. (14,052) (43,828)
---------- ----------
Total shareholders' equity (deficit)......... 26,238 (3,207)
---------- ----------
Total liabilities and shareholders' equity... $55,482 $18,728
========== ==========
The accompanying notes are an integral part of the financial statements.
Page 26
Integrated Packaging Assembly Corporation
Statement of Operations
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
Revenues............................... $36,402 $19,744 $23,281
Cost of revenues....................... 28,840 24,089 29,114
----------- ----------- -----------
Gross profit (loss)..................... 7,562 (4,345) (5,833)
Operating expenses:
Selling, general & administrative..... 3,488 5,167 4,068
Research & development................ 1,053 1,276 1,101
Provision for impairment of assets.... -- 3,000 18,200
----------- ----------- -----------
Total operating expenses............ 4,541 9,443 23,369
----------- ----------- -----------
Operating income (loss)................. 3,021 (13,788) (29,202)
Interest & other income................. 1,210 971 1,209
Interest expense........................ (1,384) (2,185) (1,783)
----------- ----------- -----------
Income (loss) before income taxes....... 2,847 (15,002) (29,776)
Provision for income taxes.............. (530) -- --
----------- ----------- -----------
Net income (loss)....................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Per Share data:
Net income (loss) per share
Basic............................... $0.20 ($1.08) ($2.12)
=========== =========== ===========
Diluted............................. $0.16 ($1.08) ($2.12)
=========== =========== ===========
Number of shares used to compute
per share data:
Basic................................. 11,730 13,898 14,046
=========== =========== ===========
Diluted............................... 14,157 13,898 14,046
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
Page 27
Integrated Packaging Assembly Corporation
Statement of Shareholder's Equity
(In thousands)
Accumulated
Common Stock Earnings
Shares Amount (Deficit) Totals
-------- -------- -------- --------
Balance at December 31, 1995............. 2,530 $449 ($1,367) ($918)
Sales of common stock, net of issuance
cost of $935......................... 3,450 23,111 -- 23,111
Conversion of Mandatorily Redeemable
Convertible Preferred Stock into
Common Stock......................... 7,862 15,981 -- 15,981
Common stock issued under stock plans.. 93 182 -- 182
Common stock repurchased under stock
plans................................ (73) (17) -- (17)
Issuance of warrants................... -- 57 -- 57
Amortization of deferred compensation.. -- 48 -- 48
Net income............................. -- -- 2,317 2,317
-------- -------- -------- --------
Balance at December 31, 1996............. 13,862 39,811 950 40,761
Common stock issued under stock plans.. 127 352 -- 352
Common stock repurchased under stock
plans................................ (161) (15) -- (15)
Issuance of warrants................... -- 94 -- 94
Amortization of deferred compensation.. -- 48 -- 48
Net (loss)............................. -- -- (15,002) (15,002)
-------- -------- -------- --------
Balance at December 31, 1997............. 13,828 40,290 (14,052) 26,238
Common stock repurchased under stock
plans................................ 265 152 -- 152
Common stock repurchased under stock
plans................................ (2) (1) -- (1)
Issuance of warrants................... -- 132 -- 132
Amortization of deferred compensation.. -- 48 -- 48
Net (loss)............................. -- -- (29,776) (29,776)
-------- -------- -------- --------
Balance at December 31, 1998............. 14,091 $40,621 ($43,828) ($3,207)
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
Page 28
Integrated Packaging Assembly Corporation
Statement of Cash Flows
Increase (Decrease) Cash
(In thousands)
Year Ended December 31,
-----------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from Operating Activities:
Net income (loss).............................. 2,317 (15,002) (29,776)
Adjustments:
Depreciation and amortization................ 3,316 6,426 6,957
Write down of impaired assets................ -- 3,000 18,200
Gain on sale of facilities, net.............. -- -- (827)
Changes in assets and liabilities:
Accounts receivable........................ (3,238) 3,045 990
Inventory.................................. 164 (360) 633
Prepaid expenses and other assets.......... (161) (320) (233)
Accounts payable........................... 679 2,944 (3,323)
Accrued expenses and other liabilities..... 1,921 (1,369) 633
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... 4,998 (1,636) (6,746)
--------- --------- ---------
Cash flows provided by (used in) investing
activities:
Acquisition of property and equipment.......... (27,744) (12,351) (1,507)
Purchase of short-term investments............. (25,025) -- --
Sales & redemption of short-term investments... 22,000 3,025 --
Proceeds from sale of facilities, net.......... -- -- 7,312
--------- --------- ---------
Net cash provided by (used in) investing
activities................................. (30,769) (9,326) 5,805
--------- --------- ---------
Cash flows provided by (used in) financing
activities:
Payments under capital lease obligations....... (1,593) (1,958) (990)
Principal payments on note payable............. (1,819) (10,506) (4,639)
Proceeds from note payable..................... 16,300 10,200 3,490
Proceeds from issuance of common stock, net.... 23,276 337 152
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. 36,164 (1,927) (1,987)
--------- --------- ---------
Net increase (decrease) in cash.................. 10,393 (12,889) (2,928)
Cash and cash equivalents at beginning of period. 5,424 15,817 2,928
--------- --------- ---------
Cash and cash equivalents at end of period....... $15,817 $2,928 $--
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for interest......................... $1,240 $2,074 $1,124
Supplemental disclosure of noncash financing
activities
Acquisition of equipment under capital leases.. $147 $-- $3,139
Issuance of warrants........................... $57 $94 $132
The accompanying notes are an integral part of the financial statements.
Page 29
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the "Company"), an
independent semiconductor packaging foundry, was incorporated in California on
April 28, 1992 and reincorporated in Delaware on June 19, 1997. The Company
assembles and packages integrated circuits from wafers consigned by its
customers. The Company's focus is on quad flat packages ("QFPs"), thin quad
flat packages ("TQFPs"), ball grid array packages ("BGAs") and chip scale
packaging ("CSPs"), which are used in complex integrated circuits with high
pin-counts in the personal computer and telecommunications industries. The
Company's operations are considered a single business segment within the
United States.
Basis of Presentation
As a result of a reduction in orders from the Company's customers, the
Company has significant excess production capacity. The reduction in revenues
and underutilization of capacity and resultant underabsorption of fixed costs
resulted in operating losses which have continued into 1999. As a result of
the operating losses and cost of capital additions, the Company believes that
it will need additional financing to meet its projected working capital and
other cash requirements through 1999. While there can be no assurance that
the Company can obtain such financing when needed, the Company has taken
actions to improve liquidity.
In June 1998, the Company was notified by the Nasdaq Stock Market that
its common stock did not comply with Nasdaq's $1.00 minimum bid price
requirement and that the Company's Common Stock would be delisted. Effective
November 18, 1998, the Company's Common Stock was delisted from the Nasdaq
Stock Market. The Common Stock of the Company is currently traded on the OTC
Bulletin Board.
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the Company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit. The
agreement was amended in December 1998, and provides, through June 1, 1999,
for borrowings up to the lesser of $2.8 million or 80% of eligible accounts
receivable.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999.
Certain of the Company's secured creditors commenced legal actions
against the Company seeking monetary damages and recovery of the financed
equipment. In connection with the December 1998 bank financing, the Company
obtained forbearance agreements from the secured creditors through May 31,
1999. The forbearance agreements require, among other things, that the
Company make monthly payments through May 31, 1999.
Page 30
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company does not have any material defenses against these legal
actions. An adverse outcome in any of the actions would have a material
adverse effect on the Company and if the Company forbearance agreements do not
remain in effect for each of the lenders, the Company will be forced to seek
protection under the bankruptcy laws or cease operations.
The Company is in the process of determining compliance of its systems as
part of a program to address the risks related to the Year 2000 problem. The
ability of the Company to complete the program is dependant upon the
availability of sufficient financial resources to address any issue that may
arise. An inability to address the Year 2000 problem may have a material
adverse effect on the Company.
The Company is currently seeking immediate additional financing, to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance, however, that financing will be
available on terms acceptable to the Company, if at all. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders will be substantially diluted and such equity
securities may have rights, preference or privileges senior to those of the
holders of the Company's Common Stock. If adequate funds are not available on
acceptable terms, the Company's business, financial condition and results of
operations would be materially adversely affected. In such event, the Company
would be required to substantially curtail, cease or liquidate its operations
and reorganize its indebtedness. Although the Company is pursuing additional
equity and debt financing, there can be no assurance that such financing will
be obtained. The Company is also evaluating the possible sale or merger of
the Company, but there can be no assurance that such a transaction can be
completed on terms acceptable to the Company, if at all.
These financial statements have been prepared on a going concern basis
and, therefore, do not include any adjustment that might result from these
uncertainties.
Fiscal year
In 1997, the Company changed its fiscal year end to December 31. Prior to
1997, the Company's fiscal quarters and year ended on the Sunday nearest the
calendar quarter end and December 31, respectively. For purposes of financial
statement presentation, each fiscal year is presented as having ended on
December 31 and each fiscal quarter is presented as having ended on the
calendar quarter end. Fiscal year 1996 consisted of 52 weeks or 364 days.
Fiscal 1997 consisted of 367 days. Fiscal 1998 consisted of 365 days. The
effect of the different number days in the fiscal years on revenues and net
income (loss) was insignificant.
Cash equivalents and short term investments
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents, and investments
with original maturities of greater than 90 days to be short term investments.
As of December 31, 1997, $1.1 million of the Company's cash and cash
equivalents were restricted as collateral for letters of credit issued during
1997 for the purchase of equipment.
Inventory
Inventory, which primarily consists of raw material supplies such as gold
wire, lead frames and mold compound, is stated at the lower of cost,
determined by the first-in, first-out basis, or market. The Company holds
product on consignment from its customers while services are being performed.
Page 31
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Property and equipment
Property and equipment are recorded at cost. For certain production
machinery and equipment acquired prior to 1997, depreciation is calculated
using the units of production method, in which depreciation is calculated
based upon the units produced in a given period divided by the estimate of
total units to be produced over its life following commencement of use. Such
estimate is reassessed when facts and circumstances suggest a revision may be
necessary. In all cases the asset will be fully depreciated by the end of its
estimated six-year life. In late 1996, due to lower than expected
utilization, the Company reduced its estimates of the number of units to be
produced over the useful equipment life. Accordingly, the depreciation rate
per unit was increased and was not material to 1996 results. The higher rate
continued into 1997 and will continue until the assets are fully depreciated.
Depreciation for all other property and equipment and all production machinery
and equipment acquired after 1996 is computed using the straight-line method
over the estimated useful lives of the assets, generally 3 to 6 years.
In December 1996, the Company acquired a real estate parcel and
facilities, including the building that it had operated in since 1993, for
$9.2 million. The Company has allocated its purchase cost among land,
buildings and improvements in proportion to fair market value. The building
was depreciated over 30 years, with building improvements depreciated over 5
to 15 years. In January 1998, the real estate parcel and buildings on the
parcel were sold and the Company entered into a lease for the building that it
occupies. See Note 5.
Revenue recognition
Revenue is generally recognized upon shipment. A provision for estimated
future returns is recorded at the time revenue is recognized.
Income taxes
The Company accounts for income taxes using the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or income tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than enactments of changes in the tax law or rates.
Stock options
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation for stock options is generally measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire the
stock. The Company adopted the disclosure only requirements of SFAS 123.
Page 32
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Net income (loss) per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997. This
statement simplifies the standards for computing earnings per share (EPS)
previously defined in Accounting Principles Board Opinion No. 15, "Earnings
Per Share." All prior-period earnings per share data has been restated in
accordance with SFAS 128. SFAS 128 requires presentation of both Basic EPS and
Diluted EPS on the face of the Statement of Operations. Basic EPS is computed
by dividing net income (loss) available to common shareholders (numerator) by
the weighted average number of common shares outstanding (denominator) during
the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants, using the
treasury stock method, and convertible preferred stock, using the if-converted
method. In computing Diluted EPS, the average stock price for the period is
used in determining the number of shares assumed to be purchased from the
exercise of stock options and warrants.
Page 33
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations under SFAS 128:
(In thousands, except per share amounts) Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
Basic EPS Computation:
Net income (loss).......................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Weighted-average common shares outstanding. 11,730 13,898 14,046
=========== =========== ===========
Basic earnings (loss) per share............ $0.20 ($1.08) ($2.12)
=========== =========== ===========
Diluted EPS Computation:
Net income (loss).......................... $2,317 ($15,002) ($29,776)
=========== =========== ===========
Weighted-average common shares outstanding. 11,730 13,898 14,046
Plus shares from assumed conversions:
Convertible preferred stock.............. 1,310 -- --
Effect of dilutive options and warrants.. 1,117 -- --
----------- ----------- -----------
Weighted-average common shares used for
diluted earnings (loss) per share........ 14,157 13,898 14,046
=========== =========== ===========
Diluted earnings (loss) per share.......... $0.16 ($1.08) ($2.12)
=========== =========== ===========
Antidilutive Securities*
Options and warrants outstanding at end of
period................................... 216 2,186 2,501
=========== =========== ===========
Weighted-average exercise price............ $9.49 $3.04 $1.43
=========== =========== ===========
* Antidilutive securities consist of options and warrants not included in the
computation of dilutive earnings per share because i) the exercise price of
each of these options was greater that the average market price of the
Company's Common Stock during the period or ii) the Company incurred a net
loss during the period resulting in all options and warrants outstanding being
antidilutive.
Use of estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates.
Page 34
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Recently Issued Accounting Standard:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new
model for accounting for derivatives and hedging activities and supercedes and
amends a number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's financial statements. The standard is effective for the Company in
fiscal 2000.
Page 35
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BALANCE SHEET COMPONENTS:
(In thousands)
December 31,
---------------------
1997 1998
---------- ----------
Inventory
Raw Materials............................... $2,176 $1,509
Work in process............................. 161 195
---------- ----------
$2,337 $1,704
========== ==========
Property and equipment
Land........................................ $3,827 $--
Buildings and improvements.................. 8,890 701
Machinery and equipment..................... 42,784 29,533
Office and computer equipment............... 793 705
Furniture and fixtures...................... 312 257
Deposits on machinery and equipment......... 595 --
---------- ----------
57,201 31,196
Less: accumulated depreciation.............. (11,074) (17,266)
---------- ----------
$46,127 $13,930
========== ==========
Property and equipment acquired under capital
leases included above
Machinery and equipment..................... $7,819 $8,688
Office and computer equipment............... 36 36
Furniture and fixtures...................... 57 57
---------- ----------
7,912 8,781
Less: accumulated depreciation.............. (3,919) (5,052)
---------- ----------
$3,993 $3,729
========== ==========
Accrued expenses and other liabilities
Accrued payroll and related expenses........ $762 $771
Accrued income tax.......................... 456 456
Other accrued liabilities................... 1,751 1,581
---------- ----------
$2,969 $2,808
========== ==========
Page 36
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3-RESEARCH AND DEVELOPMENT ARRANGEMENT:
In February 1995, the Company joined a consortium (the "Consortium") of
semiconductor companies which entered into a research and development contract
with the Advance Research Projects Agency (ARPA), a United States Government
agency. Under this agreement, ARPA will provide funds based on the completion
of milestones approved by ARPA and the Consortium. The agreement expired in
1997. Income generated from the research and development contract was
recognized upon the completion of milestones, which approximates the
percentage of completion method. Accordingly, amounts totaling $228,000 and
$123,500 were recognized under this agreement during 1996 and 1997,
respectively, and included in interest and other income. Additionally during
1996, the Company received $289,000 from ARPA which it used to reduce the cost
of equipment acquired. The Company is not obligated to repay funding
regardless of the outcome of its development efforts; however, the agreement
requires the Company to use its best efforts to achieve specified results as
per the agreement. The Company retains ownership of the intellectual property
developed under the contract.
NOTE 4-EQUIPMENT IMPAIRMENT CHARGE:
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 requires that long-
lived assets held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of an
asset will not be recovered through expected future cash flows (undiscounted
and before interest) from use of the asset. The amount of impairment loss is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets.
During the second quarter of 1998, the Company recorded charges related
to the impairment of its manufacturing equipment of $18.2 million. These
adjustments related to recording reserves against the carrying value of
manufacturing equipment. The impairment is a result of continued adverse
conditions in the semiconductor industry, and historical as well as forecasted
manufacturing equipment underutilization, resulting in an estimation that the
value of the manufacturing equipment will not be fully recovered. The fair
value of manufacturing equipment was based upon an independent estimate of
fair values.
During the second quarter of 1997, the Company took a $3 million charge
for impaired assets. This charge included a $2.4 million reserve related to
equipment used for the production of certain products with limited future
demand, and a $500,000 reserve for the cancellation of purchase orders for
equipment which the Company has determined to be surplus in relation to
current demand.
NOTE 5-LEASING ARRANGEMENTS AND COMMITMENTS:
The Company leases certain machinery and equipment, office and computer
equipment, and furniture and fixtures under long-term lease agreements which
are reported as capital leases. The terms of the leases range from three to
five years, with options to purchase or release the equipment at the end of
the respective lease terms. The Company intends to exercise such options.
In June 1998, the Company entered in a capital lease for approximately
$3.1 million of production equipment. The lease expires in 2002. In
conjunction with the lease, the Company issued warrants to
Page 37
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
purchase 171,428 shares of common stock at $1.31 per share and are exercisable
for seven years. The warrants were valued at $132,000 using a Black-Scholes
valuation model.
At the end of the second quarter of 1998, the Company ceased making
scheduled payments on its capital leases. All of the lessors have commenced
legal actions against the Company seeking monetary damages and recovery of the
leased equipment. In December 1998, the Company obtained forbearance
agreements from the lessors through May 31, 1999. All capital lease
obligations, including purchase options, are classified as current liabilities
as of December 31, 1998.
The Company incurred rent expense under a noncancelable operating lease
until December 1996 when the Company purchased the facility it had been
leasing. In January 1998, in connection with the sale of its facility (see
Note 5), the Company entered into a noncancelable operating lease for the
82,390 square foot building on the facility that it occupies. The lease is
for ten years, with options to extend. In November 1997, the Company entered
into a noncancelable operating lease for a 2500 square foot portion of a
building for its plating operations. The lease is for five years, with an
option to extend. Rent expense was $216,000, $46,000 and $1,054,000 in 1996,
1997 and 1998, respectively.
Future minimum lease payments over the next five years and thereafter
under operating leases at December 31, 1998 are as follows (in thousands):
Building
Leases
----------
Year ending December 31:
1999.......................... $1,059
2000.......................... 1,162
2001.......................... 1,166
2002.......................... 1,264
2003.......................... 1,370
Thereafter.................... 5,405
----------
Total minimum payments........ $11,426
==========
In 1993, 1994, 1996, and 1998 in connection with arranging capital
leases, the Company issued to the lessors warrants to purchase an aggregate of
628,978 shares of common stock at exercise prices ranging from $0.77 to $8.00.
The estimated value of these warrants at the time of issuance, as determined
by the Company, is being amortized as interest expense over the period the
leases are outstanding. The warrants are exercisable at any time prior to 2001
(28,750 shares), 2003 (100,000 shares), 2004 (328,800 shares) and 2005
(171,428 shares). None of the warrants had been exercised at December 31,
1998.
Page 38
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 6-BANK DEBT and DEBT NOTES PAYABLE:
December 31,
--------------------
1997 1998
--------- ---------
Bank debt................... $-- $2,816
Bank term note payable...... 2,375 --
Equipment notes payable..... 9,766 8,583
Real estate loan............ 6,601 --
--------- ---------
18,742 11,399
Less current portion........ (4,576) --
--------- ---------
$14,166 $11,399
========= =========
Bank Debt
In December 1997, the Company entered into a line of credit agreement
with a bank, which provides, through December 1998, for borrowings up to the
lesser of $5,000,000 or 80% of eligible accounts receivable. At December 31,
1997, no amounts were outstanding under this line of credit. Borrowings under
the line of credit accrued interest at the bank's prime rate (8.5% per annum
at December 31, 1997) plus 1.25% and were collateralized by the assets of the
Company. The agreement required the Company to maintain certain financial
covenants, including a liquidity ratio, minimum tangible net worth, maximum
debt to tangible net worth, quarterly profitability and prohibits the Company
from the payment of dividends without prior approval by the bank. At December
31, 1997, the Company was in compliance with such covenants.
In October 1998, the Company entered into an accounts receivable
factoring agreement with its bank that replaced its bank line of credit.
Borrowings under the agreement are collateralized by the assets of the
Company. The agreement was amended in December 1998, and provides, through
June 1, 1999, for borrowing up to the lesser of $2.8 million or 80% of
eligible accounts receivable. The bank charges an administration fee of 0.5%
of the gross accounts receivable factored and a monthly interest charge of
1.25% of the average balance owed. As of December 31, 1998, the Company owed
$1,461,000 under this agreement.
In December 1998, the Company obtained an additional $7 million bank line
of credit. This line, which is guaranteed by a third party, is available to
finance operations and working capital needs through May 31, 1999. The line,
which includes limits on monthly borrowings, accrues interest at the bank's
prime rate (7 3/4% per annum at December 31, 1998). As of December 31, 1998,
$1,355,000 was outstanding under this line.
Bank Term Note Payable
The Company was in default under certain of the required financial
covenants at the end of the second quarter of 1998 and the loan was paid in
full August 1998.
Page 39
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Equipment Notes Payable
In 1995 and 1997, the Company entered into borrowing facilities with a
number of lenders, allowing the Company to finance 70% to 80% of the cost of
collateralized machinery and equipment. Borrowings under these facilities
accrued interest at rates ranging from 7.75% to 14.0% per annum with terms
ranging from 36 to 48 months. Certain of the credit facilities require the
Company to maintain certain financial covenants including minimum tangible net
worth, quarterly revenues and quarterly income before taxes, depreciation and
amortization (EBITDA).
At the end of the second quarter of 1998, the Company ceased making
scheduled payments on the equipment notes and was in default under certain of
the required financial covenants. All of the note holders have commenced
legal actions against the Company seeking monetary damages and recovery of
financial equipment. In connection with the December 1998 bank financing, the
Company obtained forbearance agreements from the note holders through May 31,
1999. All equipment note obligations are classified as current liabilities as
of December 31, 1998.
Real Estate Loans
In December 1996, the Company borrowed $6.5 million from a bank to
provide temporary financing for the acquisition of its facilities. The loan
accrued interest at 2.25% over the rate for 30 day certificates of deposit and
was collateralized by a certificate of deposit of equivalent value. The
Company has classified this loan as long-term at December 31, 1996 based on
the refinancing disclosed as follows.
On March 25, 1997, the Company closed a mortgage loan with an insurance
company, which provided the Company with a $6.7 million five year term loan.
The loan was secured by the land, buildings and improvements purchased in
December 1996. The loan accrued interest at 8.5% and was payable in equal
monthly installments of $58,000 with a balloon payment of $5.9 million due
after five years. The proceeds of this mortgage loan were used to pay off and
retire the $6.5 million real estate loan. In January 1998, the Company sold
its facility that consisted of land and two buildings with approximately
138,336 square space of building space. Net proceeds from the sale of the
facilities were $7.3 million, net of the elimination of $6.6 million of
mortgage debt, fees, commissions and closing costs.
The Company is now leasing the approximately 82,390 square foot building
on the facility that it occupies. See Note 5.
Warrants
In connection with the bank debt and various loan agreements, the Company
issued to the lenders warrants to purchase an aggregate of 202,483 shares of
common stock at exercise prices ranging from $3.30 to $4.60. The estimated
value of these warrants at the time of issuance, as determined by the Company,
is being amortized as interest expense over the terms of the loans. The
warrants are exercisable at any time prior to 2000 (21,740 shares), 2002
(10,000 shares), 2004 (72,917 shares) and 2005 (97,826 shares). None of the
warrants had been exercised at December 31, 1998.
Page 40
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7-STOCK PLANS:
1993 Stock Option Plan
In April 1993, the Board of Directors and shareholders adopted the 1993
Stock Option Plan (the "Plan") which as amended, provides for the grant of
incentive stock options (ISOs) and nonqualified stock options (NSOs) to
purchase up to 2,514,921 shares of Common Stock. ISOs may be granted to
employees and NSOs may be granted to either employees or consultants. In
accordance with the Plan, the stated exercise price shall not be less than
100% and 85% of the estimated fair market value of Common Stock on the date
of grant for ISOs and NSOs, respectively, as determined by the Board of
Directors. The Plan provides that the options shall be exercisable over a
period not to exceed ten years and shall vest as determined by the Board of
Directors. Substantially all of the options vest 25% one year after the date
of grant and 1/48 each month thereafter. Compensation expense of
approximately $200,000 was recognized on stock options granted between June
and November 1995, and is being amortized over the four year vesting period.
Director Stock Option Plan
In December 1995, the Company adopted a Director Stock Option Plan (the
"Director Plan"). A total of 100,000 shares of Common Stock have been
authorized for issuance under the Director Plan. The Director Plan provides
for the grant of NSOs to non-employee directors of the Company. The Director
Plan provides that each non-employee director who joins the Board will
automatically be granted an NSO to purchase 20,000 shares of Common Stock on
the date upon which such person first becomes a non-employee director (the
"Initial Grant"). In addition, each non-employee director will automatically
receive an NSO to purchase 5,000 shares of Common Stock upon such director's
annual re-election to the Board, provided the director has been a member of
the Board for at least six months upon the date of such re-election (the
"Subsequent Grant"). The Initial Grant vests and becomes exercisable as to 25%
of the shares one year after the date of grant and as to 1/48 of the shares
each month thereafter, and each Subsequent Grant shall become exercisable as
to 1/12 of the shares each month following the date of grant, both subject to
the director's continuous service. The exercise price of all stock options
granted under the Director Plan is equal to the fair market value of the
Company's Common Stock on the date of grant. Options granted under the
Director Plan have a term of ten years. Unless terminated sooner, the Director
Plan will terminate in 2006. Options for 20,000 shares were granted in 1997
under the Director Plan.
1997 Non Statutory Stock Plan
In October 1997, the Board of Directors adopted the 1997 Non-Statutory
Stock Plan, which, as amended, provides for the grant of non-qualified stock
options to purchase up to 750,000 share of Common Stock. The NSOs may only be
granted to non-executive officer employees. In accordance with the Plan, the
stated exercise price shall not be less than 85% of the estimated fair market
value of the Common Stock on the date of grant of the NSO. The options shall
be exercisable over a period not to exceed ten years and shall vest 25% after
the year of grant and 1/48 each month thereafter. Options for 463,000 shares
were granted in 1998 under this plan.
Page 41
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Repricing of Employee Stock Options
As approved by the Board of Directors on January 27, 1998 and effective
as of January 30, 1998, the Company allowed all employee holders of
outstanding stock options to exchange higher priced options for new stock
options at an exercise price of $1.06 per share, the fair market value of the
Company's Common Stock at the close of trading on January 30, 1998. Those
options vested at the time of the exchange would vest on January 31, 1999, and
those options unvested at the time of the exchange would vest on the original
option schedule, but would not be exercisable until January 31, 1999. Options
for 1,035,124 shares were exchanged.
Restricted Common Stock
In September 1995, 398,333 shares of restricted Common Stock were sold to
employees upon exercise of stock options then outstanding. Each unvested
share of this restricted Common Stock is subject to repurchase by the Company
at the employees' exercise price if an employee terminates before such shares
vest. In 1996 and 1997, respectively, 170,312 and 67,082 vested shares were
converted into unrestricted shares, and 73,750 and 55,314 shares were
repurchased by the Company from terminated employees. The remaining 31,875
restricted shares outstanding were fully vested as of December 31, 1998.
1996 Employee Stock Purchase Plan
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted
by the Company's Board of Directors and shareholders in December 1995, and
became effective upon the closing of the Company's initial public offering on
February 28, 1996. Under the Purchase Plan, a total of 400,000 shares of
Common Stock has been reserved for issuance to eligible employees. The
Purchase Plan allows employees to purchase shares through payroll deductions
at 85% of the fair market value of the Common Stock at the beginning or the
end of the applicable twelve-month purchase period. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the U.S. Internal Revenue Code. Unless terminated sooner, the Purchase Plan
will terminate ten years from its effective date. During 1996, 1997, and
1998, respectively, 25,062, 59,656 and 155,051 shares, respectively, were
issued under the Plan.
Page 42
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Summary of Option Activity
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category for each of the
years ended December 31, 1996, 1997, and 1998.
1996 1997 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ----------- --------
Options outstanding
at Jan. 1......... 550,633 $1.04 890,200 $4.85 1,599,154 $3.18
Options granted..... 484,848 $8.74 1,295,745 $3.03 1,498,124 $1.02
Options canceled.... (68,126) $0.33 (519,829) $5.90 (1,307,386) $3.76
Options exercised... (77,155) $6.04 (66,962) $1.35 (109,895) $0.22
---------- -------- ---------- -------- ----------- --------
Options outstanding
at Dec. 31........ 890,200 $4.85 1,599,154 $3.18 1,679,997 $1.00
========== ======== ========== ======== =========== ========
Options exercisable
at Dec. 31........ 147,944 $0.88 219,400 $4.52 592,322 $0.91
========== ======== ========== ======== =========== ========
Available for grant
at Dec. 31........ 509,301 483,385 792,647
========== ========== ===========
Significant option groups outstanding at December 31, 1998, after giving
effect to the repricing discussed previously, and the related weighted average
exercise price and remaining contractual life information are as follows:
Weighted
Average
Outstanding Exercisable Remaining
Options with exercise ------------------ ------------------ Life
prices ranging from Shares Price Shares Price (Years)
- ------------------------ ---------- ------- ---------- ------- ----------
$0.10 - $0.97............ 337,404 $0.51 146,525 $0.32 8
$1.00 - $1.50............1,294,093 $1.06 436,806 $1.06 9
$1.59 - $3.50............ 48,000 $2.54 8,637 $3.06 9
$9.50.................... 500 $9.50 354 $9.50 7
---------- ------- ---------- ------- ----------
Options outstanding
at Dec. 31.............1,679,997 $1.00 592,322 $0.91 8
========== ======= ========== ======= ==========
Fair Value of Stock Options and Employee Purchase Rights
The Company has four stock option plans, which reserve shares of Common
Stock for issuance to employees, officers, directors and consultants. The
Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized in the
accompanying statement of operations for the stock option plans, except for
$200,000 which was recognized on stock options granted between June and
November 1995, and which is being amortized over a four year vesting period.
In January 1996, The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation".
Page 43
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Stock Option Plan, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1996, 1997
and 1998 respectively: dividend yield of 0% in all three years; expected life
of 4 years for each year; expected volatility of 57%, 65% and 65%; and risk-
free interest rates of 6.2%, 6.1% and 5.8%. The weighted-average fair value
of those stock options granted in 1996, 1997 and 1998 was $4.33, $1.72 and
$0.55 per option, respectively.
The fair value of the employees' purchase rights for the Purchase Plan,
which was initiated on February 28, 1996, was estimated at the beginning of
the offering period using the Black-Scholes option pricing model with the
following assumptions used for 1996, 1997, and 1998, respectively: dividend
yield of 0%; an expected life of six months; expected volatility of 56%, 65%
and 65%; and risk-free interest rate of 5.3%. The weighted-average fair value
of these purchase rights granted in 1996, 1997 and 1998 was $2.20, $3.12 and
$0.64, respectively, per right.
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its stock
option plans and stock purchase plan, the Company's net income (loss) and
income (loss) per share would have been reduced to the following pro forma
amounts (in thousands, except per share amounts):
1996 1997 1998
----------- ----------- -----------
Net income (loss) as reported........... $2,317 ($15,002) ($29,776)
Net income (loss), pro forma............ $1,923 ($15,708) ($30,633)
Net income (loss) per share as reported
Basic................................. $0.20 ($1.08) ($2.12)
Diluted............................... $0.16 ($1.08) ($2.12)
Net income (loss) per share, pro forma
Basic................................. $0.16 ($1.13) ($2.18)
Diluted............................... $0.13 ($1.13) ($2.18)
The pro forma amounts reflect compensation expense related to 1996, 1997
and 1998 stock option grants and purchase rights only. In future years, the
annual pro forma compensation expense will increase relative to the fair value
of stock options granted in those future years.
Page 44
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8-INCOME TAXES:
In 1997 and 1998, the Company incurred net operating losses and recorded
no provision for income taxes. The tax provision for 1996 current taxes
consists of the following (in thousands):
December 31,
1996
----------
Current:
Federal........................... $13
State............................. 169
----------
182
----------
Deferred:
Federal........................... 489
State............................. (141)
----------
348
----------
$530
==========
The tax provision reconciles to the amount computed by multiplying income
before tax by the U.S. statutory rate (34%) as follows (in thousands):
December 31,
1996
----------
Provision at statutory rate......... $968
Benefits of carryforwards........... (68)
State taxes, net of federal benefit. 175
Use of valuation allowance.......... (475)
Other............................... (70)
----------
$530
==========
Deferred income tax assets comprise the following (in thousands):
December 31,
1997 1998
---------- ----------
Federal and state credit carryforwards..... $1,689 $2,437
Federal and state net operating loss
carryforwards............................ 8,631 14,282
Provisions for impaired assets............. -- 7,568
Leases, treated as operating for tax....... (1,592) (2,961)
Depreciation............................... (3,165) (4,154)
Reserves and accruals...................... 587 763
Other...................................... (201) (16)
---------- ----------
Deferred tax assets (liability)............ 5,949 17,919
Less valuation allowance................... (5,949) (17,919)
---------- ----------
Net deferred tax asset (liability)....... $-- $--
========== ==========
Page 45
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
At December 31, 1998, the Company had federal and state net operating
loss and tax credit carryforwards ("NOLs") of approximately $35,000,000 and
$20,000,000, respectively, which can be used to reduce future taxable income.
These NOLs expire through 2014, if not utilized. The availability and timing
of these carry forwards to offset the taxable income maybe limited due to the
occurrence of certain events, including change of ownership.
The Tax Reform Act of 1996 limits the use of NOLs in certain situations
where changes occur in the stock ownership of a company. The Company
experienced such an ownership change as a result of the Company's initial
public offering in 1996, resulting in a limitation of the annual utilization
of the NOLs generated through the date of the initial public offering.
NOTE 9-CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
Concentration of credit risk
The Company performs ongoing credit evaluations of its customers, which
are semiconductor companies, and maintains reserves for estimated credit
losses. Write-offs of accounts receivable were insignificant in all periods
presented. At December 31, 1997, four customers accounted for 19%, 15%, 13%
and 10%, respectively, of accounts receivable. At December 31, 1998, two
customer accounted for 27% and 16%, respectively.
Significant customers
Year Ended December 31,
------- ------- -------
1996 1997 1998
------- ------- -------
Customers comprising 10% or more of the
Company's revenues for the periods indicated:
A......................................... 2% 14% 39%
B......................................... 32% 17% 11%
C......................................... --% 1% 11%
D......................................... 14% 16% 1%
E......................................... 17% 4% 1%
NOTE 10-LEGAL PROCEEDINGS:
At the end of the second quarter of 1998, the Company ceased making
scheduled repayments of its debt balance outstanding relating to its Equipment
Notes Payable and its capital leases. Certain of these debt facilities require
that the company maintain certain financial covenants. The Company has been
out of compliance with certain of these covenants since the second quarter of
1998. As a result of the covenant noncompliance and failure to make scheduled
repayments, the entire balance due has been classified as a current liability
since June 1998.
Certain of the Company's secured creditors commenced legal actions
against the Company seeking
Page 46
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
monetary damages and recovery of the financed equipment. In connection with
the December 1998 financing, the Company obtained forbearance agreements from
the secured creditors through May 31, 1999. The forbearance agreements
require, among other things, that the Company make monthly payments through
May 31, 1999.
The Company does not have any material defenses against these legal
actions. An adverse outcome in any of the actions would have a material
adverse effect on the Company and if the Company cannot obtain further
extensions from all of these Plaintiffs, it will be forced to seek protection
under the bankruptcy laws or cease operations.
NOTE 11-SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1998 is as follows:
First Second Third Fourth
--------- --------- --------- ---------
1997:
Net revenues................ $5,575 $3,953 $4,214 $6,002
Gross profit (loss)......... (920) (1,086) (1,244) (1,095)
Net income (loss)........... (2,473) (6,088) (3,271) (3,170)
Net income (loss) per share
Basic..................... (0.18) (0.44) (0.23) (0.23)
Diluted................... (0.18) (0.44) (0.23) (0.23)
1998:
Net revenues................ 6,965 5,759 5,816 4,741
Gross profit (loss)......... (1,450) (2,142) (1,114) (1,127)
Net income (loss)........... (2,406) (21,943) (2,637) (2,790)
Net income (loss) per share
Basic..................... (0.17) (1.57) (0.19) (0.20)
Diluted................... (0.17) (1.57) (0.19) (0.20)
Per share amounts, based on average shares outstanding and potential
dilutive shares each quarter, may not add to the total for the year.
Page 47
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
Not applicable.
Page 48
PART III
--------
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) Executive Officers - See the section entitled "Executive Officers
in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in
the Proxy Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
- --------------------------------
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
14(a) Exhibits
- ---------------
Exhibit
Number Description of Document
- ------- -----------------------
3.1! Restated Articles of Incorporation.
3.4! Bylaws, as amended.
10.1! Form of Indemnification Agreement.
10.2!* 1993 Stock Option Plan and form of Stock Option Agreement.
10.3!* 1996 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4!* 1996 Director Stock Option Plan and form of Stock Option
Agreement.
10.5! Registration Rights Agreement dated March 24, 1993, as amended.
10.6! Lease Agreement dated June 16, 1993 between the Company and
WVP Income Plus VI.
10.7! Sublease Agreement dated July 15, 1995 between the Company and
Peripheral Computer Support, Inc.
10.8! Loan and Security Agreement dated September 15, 1995 between
the Company and The CIT Group/Equipment Financing, Inc.
10.9! Warrant to Purchase Series A Preferred Stock, issued to MMC/
GATX Partnership No. 1 as of October 7, 1993, as amended.
10.10! Warrant to Purchase Series A Preferred Stock, issued to
Phoenix Leasing Incorporated as of October 7, 1993.
10.11! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of March 10, 1994.
10.12! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.13! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.14! Warrant to Purchase Series A Preferred Stock, issued to CIT
Group/Equipment Financing, Inc. as of September 15, 1995.
10.15! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of January 3, 1996.
10.16!! Sublease Agreement between the Company and Peripheral Computer
Support dated March 8, 1996.
10.17!!! Warrant to Purchase Common Stock, issued to MMC/GATX
Partnership No. 1, dated September 5, 1997.
10.18!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.19!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.20!!! Lease Agreement dated November 1, 1997, between the Company and
Jaswinder S. Saini and Surinder K. Saini.
10.21!!!! Purchase and Sale Agreement dated November 20, 1997, between
the Company and Lincoln Property Company N.C., Inc.
10.22!!!! Lease Agreement dated January 20, 1997, between the Company and
Lincoln Property Company N.C., Inc.
10.23* 1997 Nonstatutory Stock Option Plan and form of Stock Option
Agreement.
10.24!!!!! Amended and Restated Loan and Security Agreement dated December
31, 1997 between the Company and Silicon Valley Bank.
10.25!!!!! Warrant to Purchase Stock, issued to Silicon Valley Bank as of
December 31, 1997.
10.26 Accounts Receivable Purchase Agreement dated October 27, 1998,
between the Company and Silicon Valley Bank.
10.27 Accounts Receivable Purchase Agreement Modification Agreement
dated December 8, 1998, between the Company and Silicon Valley
Bank.
10.28 Accounts Receivable Purchase Agreement Modification dated
December 16, 1998, between the Company and Silicon Valley Bank.
10.29 Loan and Security Agreement dated as of December 16, 1998,
between the Company and Silicon Valley Bank.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page 51).
27.1 Financial Data Schedule.
! Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (file no. 333-326-LA), as amended, filed on
January 17, 1996.
!! Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
!!! Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
!!!! Incorporated by reference from the Registrant's Current Report on
Form 8-K, filed on January 30, 1997.
!!!!! Incorporated by reference from the Registrant's Annual Report on
Form 10-K, for the year ended December 31, 1997.
Page 50
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form.
(b) Reports on Form 8-K.
None
(c) Exhibits.
See Item 14(a) hereof.
(d) Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable or the required information is shown in the financial statements or
the notes thereto.
Page 51
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
San Jose, State of California, on March 8, 1999.
INTEGRATED PACKAGING ASSEMBLY CORPORATION
By: /s/ ALFRED V. LARRENAGA
-------------------------------
Alfred V. Larrenaga
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Patrick Verderico and Alfred V.
Larrenaga, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all
amendments to said Report.
In accordance with the Exchange Act, this report has been signed below on
March 8, 1999 by the following persons on behalf of the Registrant and in the
capacities indicated.
Signature Title
- ---------------------------------- -------------------------------------
/s/ PATRICK VERDERICO President and Chief Executive Officer
- ----------------------------------
Patrick Verderico (Principal Executive Officer)
/s/ ALFRED V. LARRENAGA Chief Financial Officer
- ----------------------------------
Alfred V. Larrenaga (Principal Financial and
Accounting Officer)
/s/ PHILIP R. CHAPMAN Director
- ----------------------------------
Philip R. Chapman
/s/ GILL COGAN Director
- ----------------------------------
Gill Cogan
/s/ ERIC A. YOUNG Director
- ----------------------------------
Eric A. Young
Page 52