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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________to _________
Commission file number 0-15858
IMP, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2722142
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2830 North First Street, San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 432-9100
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(Former name, former address and former fiscal year
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at June 30, 2001: 9,046,000
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IMP, Inc.
FORM 10-Q
Three Months Ended June 30, 2001
INDEX
PAGE
Part I: Financial Information (unaudited)
Condensed Balance Sheets as of June 30, 2001 and March 31, 2001 3
Condensed Statements of Operations for the three months ended June 30, 2001 and June 25, 2000 4
Condensed Statements of Cash Flows for the three months ended June 30, 2001 and June 25, 2000 5
Notes to condensed financial statements 6
Management's discussion and analysis of financial condition and results of operations 10
Part II: Other Information
Item 1. Legal Proceedings 17
Item 3. Defaults by the Company on its Senior Securities 17
Item 6. Reports on Form 8-K 17
Signatures 17
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IMP, Inc.
CONDENSED BALANCE SHEETS
(In thousands)
(unaudited)
ASSETS
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
Current assets:
Cash and cash equivalents $ 218 $ 41
Accounts receivable, net of allowances for
doubtful accounts and returns of $2,128
and $2,290, respectively 4,413 2,095
Accounts receivable from related party 329 720
Inventories 7,815 7,462
Other current assets 1,350 1,445
-------- --------
Total current assets 14,125 11,764
Property and equipment:
Leasehold improvements 9,072 9,073
Machinery and equipment 86,105 86,341
-------- --------
95,177 95,414
Less accumulated depreciation and
amortization 89,578 88,897
-------- --------
Net property and equipment 5,599 6,517
Deposits and other long term assets 519 544
-------- --------
Total assets $ 20,243 $ 18,825
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of debt $ 4,284 $ 3,925
Current portion of capital lease obligations 1,654 1,593
Trade accounts payable 5,576 7,183
Accrued payroll and related expenses 1,284 1,325
Other current liabilities 3,456 3,454
-------- --------
Total current liabilities 16,254 17,480
Long term portion of capital lease obligations 528 760
Convertible debentures, net of discount of
$1,400 at June 30, 2001 2,095 3,500
-------- --------
Total Liabilities 18,877 21,740
-------- --------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value;
5,000 shares authorized; no shares issued and
outstanding -- --
Common stock, $0.01 par value; 50,000 shares
authorized; 9,046 shares issued and
outstanding 90 90
Additional paid-in capital 80,399 78,764
Obligation to issue common stock 2,260 40
Accumulated deficit (77,486) (77,912)
Treasury stock; at cost, 203 shares (3,897) (3,897)
-------- --------
Total stockholders' equity (deficit) 1,366 (2,915)
-------- --------
Total liabilities and stockholders' equity $ 20,243 $ 18,825
======== ========
See accompanying notes to unaudited condensed financial statements
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IMP, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
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JUNE 30, 2001 JUNE 25, 2000
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Net revenues:
Component $ 7,382 $ 7,459
Design and engineering services -- 538
-------- --------
7,382 7,997
Cost of revenues
Component $ 3,925 $ 7,328
Design and engineering services -- 238
-------- --------
3,925 7,566
Gross profit 3,457 431
Operating expenses:
Research and development 588 974
Selling, general and administrative 2,020 995
-------- --------
Total operating expenses 2,608 1,969
Income (loss) from operations 849 (1,538)
Interest expense (423) (149)
Other income, net -- 48
-------- --------
Net income (loss) $ 426 $ (1,639)
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Basic net income (loss) per share $ 0.05 $ (.34)
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Diluted net income (loss) per share $ 0.02 $ (.34)
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Shares used in computing basic
net income (loss) per share 9,046 4,775
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Shares used in diluted
net income (loss) per share 21,948 4,775
======== ========
See accompanying notes to unaudited condensed financial statements.
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IMP, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
THREE MONTHS ENDED
------------------------
JUNE 30, JUNE 25,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 426 $(1,639)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 684 565
Fees for late payments of capital lease 14 --
Amortization of debt discount 228 --
Provision for doubtful accounts 566 --
Provision for obsolete and slow moving inventory -- 182
Changes in operating assets and liabilities:
Accounts receivable (2,884) 1,208
Accounts receivable from related party 391 (574)
Inventories (353) (9)
Other current assets 95 (213)
Deposits and other long term assets 25 15
Trade accounts payable (1,355) 184
Other current liabilities 2 479
Accrued payroll and related expenses (41) (196)
------- -------
Net cash provided by (used in) operating activities (2,202) 2
------- -------
Cash flows from investing activities:
Net cash used for investing activities
for purchases of property and equipment (16) (174)
------- -------
Cash flows from financing activities:
Net repayments of short-term advance from related parties (513) --
Net proceeds (repayments) from revolving credit facility 872 (943)
Proceeds from equipment notes payable -- 1,732
Repayments of equipment notes payable -- (2,048)
Principal payments under capital lease obligations (184) (524)
Advance proceeds from issuance of common stock 2,220 --
Proceeds from issuance of common stock -- 3,861
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Net cash used in financing activities 2,395 2,077
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Net increase in cash and cash equivalents 177 1,905
Cash and cash equivalents at beginning of period 41 261
------- -------
Cash and cash equivalents at end of period $ 218 $ 2,166
======= =======
Supplemental information:
Cash paid during the period for interest $ 78 $ 149
======= =======
Acquisition of equipment under capital lease obligations $ -- $ 18
======= =======
Discount on convertible debentures $ 1,635 $ --
======= =======
Return of equipment and reduction of accounts payable $ 252 $ --
======= =======
See accompanying notes to unaudited condensed financial statements.
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IMP, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
IMP, Inc. (the "Company") has prepared the accompanying unaudited interim
condensed financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. The results of operations
for the quarter ended June 30, 2001 are not necessarily indicative of the
results to be expected for the entire year. These financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2001.
Teamasia Semiconductors (India) Ltd, ("Teamasia"), a private corporation
headquartered in India, owns 51% of the common stock of the Company on a fully
diluted basis.
In 2001, the Company changed its year end to March 31. Prior to the year ended
March 31, 2001, the Company's fiscal year ended on the Sunday nearest to March
31.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has failed to make various
scheduled payments due under its credit facility, equipment notes payable and
its capital lease obligations. As a result the Company is in default with
respect to these agreements as well as the revolving credit facility entered
into on April 30, 1999 due to a cross default clause in the revolving credit
facility agreement.
During the fiscal year ended March 31, 2001 and the three months ended June 30,
2001, management actively negotiated with the Company's creditors. As a result
of these negotiations, the Company was able to bring current, refinance or pay
off certain of its debt and lease obligations using cash from sales of stock and
convertible debentures. As of June 30, 2001, the Company remained in default of
its revolving credit facility and equipment notes with an aggregate balance of
$2.6 million and was past due on all capital lease obligations.
The indebtedness related to agreements in which the Company is in default is
classified as current on the Company's balance sheets as of June 30, 2001 and
March 31, 2001 because such creditors and lessors continue to have the right to
effectively declare the principal amount of the Company's indebtedness to be
immediately due and payable (or to exercise an equivalent remedy with respect to
a capitalized lease).
On May 10, 2001, the Company entered into a Memorandum of Understanding ("MOU")
with Teamasia and an investor group led by the Chairman of the Company's Board
of Directors ("investor group") to purchase 72% of the equity of the Company.
The general terms of the MOU are as follows:
- the due date of the $3.5 million convertible debenture held by Teamasia was
extended to no earlier than May 2002;
- the Company agreed to issue warrants to Teamasia to purchase 1,599,000
shares of common stock at an exercise price of $0.22;
- the interest rate on the convertible debenture was raised from 0% to prime;
- the Company agreed to sell to the investor group shares of common stock
representing 72% of the Company's fully diluted equity for $6.0 million. A
total of $2,220,000 was received prior to June 30, 2000 and the remainder
was received in July, 2001.
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Certain events have occurred which may have an impact on the Company's ability
to continue as a going concern, including:
In June 2001, International Rectifier Corporation (IR) notified the
Company that they are canceling future orders. The final shipments of
products to IR will occur in August 2001. Revenues from IR for the
year ended March 31, 2001 and three months ended June 30, 2001 totaled
$9.3 million and $1.9 million, respectively. The impact of this
cancellation could have significant negative impact on the results of
operations of the Company.
On July 10, 2001, CIT gave notice of termination and acceleration and
demand for repayment for both the revolving credit facility and the
term loan. This cancellation results from defaults under both the CIT
agreement and related forbearance letters. CIT has declared all
obligations due and payable as of July 11, 2001. All amounts due to
CIT were repaid on August 13, 2001. No new financing has been secured.
On July 26, 2001, the Company attended a hearing with Nasdaq
representatives to discuss the delisting of the Company's common
stock. The reasons for the delisting include low stock price over a
continual period of time, late filings of Forms 10-K and 10-Q and the
financial weaknesses of the Company. As a result of this hearing, the
Company agreed to meet certain filing deadlines in connection with its
reporting obligations under the Securities Exchange Act of 1934,
maintain certain financial requirements and effect a reverse stock
split. The Company has been unable to meet the agreed upon reporting
deadlines.
The Company incurred net losses of $10.5 million for the year ended March 31,
2001 and earned $0.4 million for the three months ended June 30, 2001. At June
30, 2001, the Company had stockholders' equity of $1,366,000. Management has put
in place plans to reduce the costs of operating the business, improve the
operating efficiency of the Company's manufacturing facility and obtain new
customers. If the Company is unable to successfully continue to meet its
obligations under the renegotiated payment terms on its borrowings, or if
management's operating plans do not materialize, this could significantly and
adversely impact the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty
NOTE 2 -- REVENUE RECOGNITION
Component revenues are recognized as products are shipped except for sales
through distributors, which are recognized on a sell-through basis. Design and
engineering service revenues are recognized under design and engineering
contracts once defined development phases are completed by the Company and
accepted by the customers.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
accounting principles generally accepted in the United States of America to
revenue recognition in financial statements. Under SAB No. 101, no revenue can
be recognized unless there is persuasive evidence of an arrangement, the fee is
fixed or determinable, delivery has occurred and collectibility is probable. The
Company adopted SAB No. 101 in the fourth quarter of fiscal year 2001, effective
January 1, 2001. The adoption of SAB No. 101 did not have an impact on the
Company's financial statements.
NOTE 3 -- CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with a
maturity of three months or less at the date of purchase to be cash and cash
equivalents. The fair market value of these highly liquid instruments
approximates cost at June 30, 2001 and March 31, 2001.
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, the revolving credit facility,
accounts payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying values of the note payable
and capital lease obligations approximate fair value.
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NOTE 4 -- INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in first-out basis) or market.
Inventories consist of the following (in thousands):
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
Raw materials $ 542 $ 848
Work-in-process 4,461 4,490
Finished goods 2,812 2,124
------ ------
$7,815 $7,462
------ ------
During the quarter ended June 30, 2001, the Company re-evaluated the practical
production capacity of its fabrication facility in light of measures taken to
reduce the costs and improve the efficiency of the manufacturing process, and
considering the steep decline in the semiconductor market during the first six
months of 2001. Prior to the quarter ended June 30, 2001, the practical capacity
of the Company's fabrication facility was estimated to be approximately 3,000
wafers per week. After re-evaluating the production capacity of the fabrications
facility in light of changes made to the production process, reductions in
headcount and other considerations, management estimates the current production
capacity to be approximately 1,200 wafers per week. Accordingly, to the extent
actual production is at or near 1,200 per week, overhead absorption is higher
than it would have been using the estimated production capacity of 3,000 wafers
per week.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are amortized and depreciated
using the straight-line method over the shorter of the period of the lease for
leasehold improvements or the estimated useful lives of the assets. The
estimated useful life of equipment is five years.
The Company evaluates recoverability of its long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
SFAS No. 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced for the costs of disposal. No losses from impairment have been
recognized in the quarters ended June 30, 2001 and June 25, 2000.
NOTE 6 - EARNINGS PER SHARE
Earnings per share are calculated in accordance with the provisions of SFAS No.
128 "Earnings per Share." SFAS No. 128 requires the Company to report both basic
and diluted earnings per share. Basic EPS is computed by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. For the periods presented, no adjustments
to net income (loss) reported in the condensed statements of operations were
necessary to determine net loss available to common stockholders.
Options to purchase 2,152,000 and 1,383,000 shares of common stock were
outstanding at June 30, 2001 and June 25, 2000, respectively, but do not impact
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares during the three months ended June
30, 2001 and June 25, 2000. Warrants to purchase 1,907,724 shares of common
stock were outstanding at June 30, 2001. Of these, 308,724 warrants are
anti-dilutive and are excluded from the diluted earnings per share calculation.
Of the remaining warrants, 604,930 have been considered in computation of
diluted earnings per share based on the treasury stock method weighted for the
period outstanding.
In addition, 12.2 million shares have been included in diluted earnings per
share for common stock that the Company is obligated to issue, based on the
treasury stock method weighted for the period outstanding.
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NOTE 7 - LEASING ARRANGEMENTS AND COMMITMENTS
The Company leases certain machinery and equipment under long-term lease
agreements which are reported as capital leases. The terms of the leases range
from four to five years, with purchase options at the end of the respective
lease terms. The Company leases its San Jose facility under a non-cancelable
operating lease which will expire in December 2006. The lease requires the
Company to pay tax, insurance and maintenance expenses. Rental expense is
recorded using the straight-line method.
NOTE 8 - RELATED PARTY TRANSACTIONS
Two members of the Board of Directors have an ownership interest in Teamasia.
Their combined ownership is approximately 22%.
As part of the stock purchase agreement entered into in October 1999, Teamasia
agreed to purchase wafers from the Company commencing with the Company's third
fiscal quarter 2000. This agreement further stipulates that Teamasia's purchase
commitments are not to be less than 25% of the Company's installed capacity for
the fourth fiscal quarter 2000 and the first and second fiscal quarters 2001. To
date, Teamasia has not met the minimum purchase commitment.
Transactions and balances with Teamasia are as follows (in thousands):
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
Revenue for the three months ended $ -- $ 246
Accounts receivable as of 329 720
Short term advance as of 739 1,253
Convertible debenture, net of discount of
$1.4 million at June 30, 2001 2,095 3,500
In November 2000, Teamasia loaned the Company $1.2 million under a convertible
debenture originally due on May 28, 2001. Under its original terms, the
debenture was non-interest bearing and convertible into 685,714 shares of common
stock at Teamasia's option, representing a conversion ratio equal to $1.75 per
share.
In December 2000, Teamasia loaned the Company an additional $2.3 million under a
convertible debenture originally due on June 18, 2001. Under its original terms,
the debenture was non-interest bearing and convertible into 1,314,286 shares of
common stock, at Teamasia's option, representing a conversion ratio equal to
$1.75 per share
In May 2001, a Memorandum of Understanding (MOU) was entered into with Teamasia
that modified the terms of the convertible debentures as follows:
- the due date for both debentures was extended until no earlier than May
2002;
- the Company agreed to issue warrants to Teamasia to purchase 1,599,000
shares of common stock at an exercise price of $0.22;
- the interest rate was raised to prime; and
- the convertible debentures are convertible into common stock, at
Teamasia's option, at a conversion ratio equal to $0.69 per share.
Under the MOU, the Company is required to issue warrants once the $6.0 million
is received. Because the terms of the warrants were fixed at the time the MOU
was executed, the issuance of the warrants was recorded. The convertible
debentures and warrants have been recorded based on their relative fair values.
The fair value of the warrants was determined using the Black-Scholes pricing
model using the following assumptions: 221% volatility; zero dividends; 6.4%
risk free interest rate; and 3 year term.
The Company also determined that the convertible debentures contained a
beneficial conversion feature after allocating value to the warrants as
described above. The beneficial conversion feature was calculated as the
difference between the effective conversion
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price per share and the fair value of the common stock on the effective date of
the MOU multiplied by the number of shares into which the convertible debentures
are convertible at the stated conversion ratio of $0.69 per share.
The Company recorded this transaction as follows:
Convertible debentures $1,867,000
Warrants 821,000
Beneficial conversion feature 812,000
----------
$3,500,000
==========
The combined warrants and beneficial conversion feature totaling $1.6 million
has been recorded as a discount to the convertible debentures and is being
amortized into interest expense over 12 months. During the three months ended
June 30, 2001, $228,000 was amortized into interest expense.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies conditions intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 specifies that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with determinable useful lives
be amortized over their useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No. 141 for any future
business combination entered into. SFAS No. 142 is effective for the Company on
April 1, 2002, and its adoption is not expected to have a significant impact on
the Company's financial condition or results of operations until such time when
significant goodwill or intangible assets are recorded by the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires recognition of all derivatives as assets or
liabilities and measurement of those instruments at fair value. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which deferred the required date of adoption of SFAS
No. 133 for one year, to fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 on April 1, 2001. The adoption of SFAS No. 133 did not have
an effect on the Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual future results could differ materially from those
discussed here. Factors that would cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Business" in our Form 10-K for the year ended March 31,
2001 filed with the Securities and Exchange Commission.
This information should also be read along with the unaudited condensed
financial statements and notes thereto included in Item I of this Quarterly
Report and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
fiscal year ended March 31, 2001 contained in the Company's Annual Report filed
on Form 10-K.
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, certain
consolidated statement of operations data for the periods indicated.
Three Months Ended
-------------------------------
June 30, 2001 June 25, 2000
-------------------------------------------------------------------------------
Total revenues 100.0% 100.0%
Cost of revenue 53.2 94.6
------ ------
Gross margin 46.8 5.4
Operating expenses:
Research and development 8.0 12.2
Selling, general and administrative 27.4 12.4
------ ------
Operating income (loss) 11.5 (19.2)
Interest expense (5.7) (1.9)
Other income, net -- 0.6
------ ------
Net (loss) income 5.8% (20.5)%
====== ======
During the quarter ended June 30, 2001, the Company generated net revenues of
$7.4 million compared to $7.5 million for the same period of the prior year. The
decrease in net revenues was due to decreased demand for the Company's foundry
and power management products. Foundry product sales accounted for 78.0% of net
revenues in the quarter ended June 30, 2001 and power management product sales
accounted for 22.0% of net revenues in the quarter ended June 30, 2001. This
ratio has remained consistent over the past year.
For the three months ended June 30, 2001, the Company's largest customers were
International Rectifier, Linfinity Microelectronics and Tektronix, which
accounted for approximately 26.3%, 14.3% and 7.8% of net revenues and 22.3%,
4.2%, and 0% of net receivables at June 30, 2001, respectively.
COST OF REVENUES. Cost of revenues in the three months ended June 30, 2001 was
$3.9 million, representing 53.2% of net revenues compared to $7.6 million,
representing 94.6% of net revenues for the same quarter in the prior fiscal
year. The decrease in cost of revenues as a percentage of sales is a result of
several actions taken by the Company, including:
- an aggressive program to reduce the costs and improve the efficiency of
the manufacturing process;
- a reduction in force, reducing headcount from 201 on March 31, 2001 to
161 on June 30, 2001; and
- negotiations with vendors to reduce costs of raw materials and
supplies.
In addition, during the quarter ended June 30, 2001, the Company re-evaluated
the practical production capacity of its fabrication facility in light of the
actions described above, and considering the steep decline in the semiconductor
market during the first six months of 2001. Prior to the quarter ended June 30,
2001, the practical capacity of the Company's fabrication facility was estimated
to be approximately 3,000 wafers per week. After re-evaluating the production
capacity of the fabrication facility in light of changes made to the production
process, reductions in headcount and other considerations, management estimates
the current production capacity to be approximately 1,200 wafers per week.
Accordingly, to the extent actual production is at or near 1,200 per week,
overhead absorption is higher than it would have been using the estimated
production capacity of 3,000 wafers per week.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$588,000 (8.0% of revenue) in the quarter ended June 30, 2001 compared to
$974,000 (12.2% of revenue) in the corresponding quarter of the prior fiscal
year. Costs of engineering resources associated with design revenue are included
in costs of sales. The reduction in research and development expenses is a
result of cost control measures put in place during the quarter ended June 30,
2001. The Company believes that research and
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development expenses in absolute dollars will increase from current levels as it
invests in the development, design and introduction of standard products as well
as an increase in staffing and related personnel compensation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2.0 million (27.4% of net revenues) in the quarter
ended June 30, 2001, up from $995,000 (12.4% of net revenues) in the same
quarter of the prior year. The increase in selling, general and administrative
expenses is due to increased sales and marketing, commissions and travel
expenses.
INTEREST EXPENSES. Interest expense for the three months ended June 30, 2001
increased to $423,000 a 184% increase from the same quarter in the prior year.
The increase is due to higher balances of debt, interest expense on convertible
debentures and amortization of discount on the convertible debentures.
OTHER INCOME, NET. Other income was $0 for the quarter ended June 30, 2001
compared to $48,000 for the comparative quarter in the prior year.
NET INCOME (LOSS). The Company had a net income $426,000 for the three months
ended June 30, 2001, or $0.05 per share ($0.02 on a diluted basis) compared to a
net loss of $1.6 million in the quarter ended June 25, 2000 or $0.34 per share
(both basic and diluted). We have taken a number of actions that we believe will
enable the Company to show profitable results at much lower revenue levels than
we have historically been able to achieve. Scaled down operations, cost control
and improvements in our manufacturing efficiency are the major drivers of the
Company's return to profitability.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $218,000 at June 30, 2001 compared to
$41,000 at March 31, 2001. In general, the increase results from increased
sales, cost cutting measures and proceeds from sale of stock, offset by growth
in accounts receivable and disbursements to vendors and creditors.
Cash used in operating activities for the three months ended June 30, 2001
totaled $2.2 million. The Company received $2.4 million net cash from financing
activities during the quarter ended June 30, 2001 and used cash to purchase
equipment totaling $16,000.
On May 10, 2001, the Company entered into an agreement with an investor group
whereby the investor group agreed to acquire 72% of the equity of the Company
for $6.0 million. Of this amount, $2.5 million was received in June 2001 and the
remainder was received in July 2001. The proceeds were used to pay down certain
borrowings and past due amounts.
In April 1999, the Company entered into an agreement with The CIT Group for a
$9.5 million facility. Included in the facility are secured term loans for up to
$2.0 million for equipment purchases and a revolving credit facility that allows
the Company to borrow up to $7.5 million based on qualifying accounts receivable
and inventory balances at 1.5% over prime. On July 10, 2001, the CIT Group gave
notice of termination and acceleration and demand for repayment for the
revolving credit facility, including the equipment term loans. As of June 30,
2001, $2.1 million remained outstanding under the revolving credit and equipment
term loan financing arrangement with the CIT Group. All amounts due to CIT were
repaid on August 13, 2001. Management is actively negotiating with several
lenders to replace the CIT Group revolving credit facility.
During the second quarter of fiscal year 2000, the Company was unable to meets
its obligations under its equipment notes payable and certain of its capital
leases. These instances of non-payment put the Company in default of these
agreements and in default of the revolving credit facility due to a cross
default clause in the revolving credit facility agreement.
During fiscal year 2001, management actively negotiated with the Company's
creditors. As a result of these negotiations, using proceeds from sales of stock
in June 2000 and convertible debentures in November and December 2000 to
Teamasia totaling $7,430,000, the Company was able to bring current, pay off, or
refinance certain of its debt and lease obligations. As of June 30, 2001, the
Company remained in default of its revolving credit facility and equipment notes
with an aggregate balance of $2.6 million.
As of June 30, 2001, the Company's current portion of debt and capital lease
obligations of $5.9 million is comprised of (i) $0.7 million of equipment notes,
(ii) $1.4 million of the revolving credit facility, (iii) $1.7 million of
capital lease obligations, (iv) $0.7 million short term advance from a related
party, and (v) a line of credit from customer of $1.5 million. The capital lease
obligations are comprised of nine individual leases, all of which are past due.
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As of June 30, 2001, the Company's long term portion of debt and capital lease
obligations of $2.6 million is comprised of $528,000 of capital lease
obligations and $3.5 million of convertible debentures due in May 2002, which is
recorded on the balance sheet net of a discount of $1.4 million. The capital
lease obligation is comprised of four lessors that account for the outstanding
long-term portion of the capital lease obligation.
In May 2001, the Company entered into a Memorandum of Understanding ("MOU") with
Teamasia whereby Teamasia agreed, among other provisions, to extend the due date
of $3.5 million of convertible debentures until May 2002. In addition, under the
MOU, an investor group led by the Chairman of the Board of Directors agreed to
purchase stock representing 72% of the Company's fully diluted equity for $6.0
million, to be received in installments, the last of which was due in July 2001.
All proceeds were received by July 31, 2001.
FACTORS AFFECTING FUTURE RESULTS
Except for historical information contained herein, the matters set forth in
this Report on Form 10-Q, including the statements in the following paragraphs,
are forward-looking statements that are subject to certain risks and
uncertainties including such factors as, among others, operating cash
availability, delays in new product and process technology announcements and
product introductions by the Company or its competitors, competitive pricing
pressures, fluctuations in manufacturing yields, changes in the mix or markets
in which products are sold, availability and costs of raw materials, reliance on
subcontractors, the cyclical nature of the semiconductor industry, industry-wide
wafer processing capacity, political and economic conditions in various
geographic areas, and costs associated with other events, such as under
utilization or expansion of production capacity, intellectual property disputes,
litigation, or environmental regulation and other factors described below.
The Company has minimal financial resources and its operating needs are funded
principally from the collection of accounts receivable and from the sale of
common stock and convertible debentures to Teamasia in fiscal year 2001. Should
the cash flow from accounts receivable be lessened or interrupted by slow
collections, limited borrowing capabilities from our credit facility, or by a
decrease in revenue generation, the Company would be unable to meet its
obligations. The Company continues to focus on restructuring its operations to
conserve cash and, as noted previously, entered into an agreement on May 10,
2001 to sell stock representing a 72% ownership stake in the Company for $6.0
million in cash.
Excluding the current quarter, the Company has reported operating losses and
total negative cash flow from operating activities since the second quarter of
fiscal 1997. Unless a trend of increasing revenue is achieved or the Company
lowers its break-even point, the Company will continue to report losses and
negative cash flows in the future.
The Company sells its products to distributors and manufactures in Southeast
Asia which is currently experiencing an economic downturn. Sales in this region
accounted for 25% of the Company's net revenues in fiscal year 2001. The Company
experienced a slight growth in revenues from this region during fiscal year
2001. However, should the region not be able to overcome its economic problems,
there is no assurance that the Company's results of operations will not be
adversely affected.
As a result of the severe downturn in the semiconductor market, the Company
experienced a significant decrease in sales in the fourth quarter of fiscal year
2001, although this trend reversed itself in the quarter ended June 30, 2001.
However, the downturn in the semiconductor market is expected to continue for
the foreseeable future and could compound the Company's liquidity issues.
In June 2001, International Rectifier Corporation (IR) notified the Company that
they will be canceling future orders. The final shipments of product to IR is
expected to occur in August 2001. Revenues for the year ended March 31, 2001 and
three months ended June 30, 2001 totaled $9.3 million and $1.9 million
respectively. The impact of this cancellation could have a significant negative
impact on the results of operations of the Company.
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company may continue investing in advanced design tools,
manufacturing equipment and process technologies. The Company anticipates
significant continuing capital expenditure during the next several years. There
can be no assurance that the Company will not be required to seek additional
debt or equity financing to satisfy its cash and capital needs or that such
financing will be available on terms satisfactory to the Company. If such
financing is required and if such financing were not available on terms
satisfactory to the Company, its operations would be materially adversely
affected.
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New products and process technology require significant research and development
expenditures. However, there can be no assurance that the Company will be able
to develop and introduce new products in a timely manner, that new products will
gain market acceptance or that new process technologies can be successfully
implemented. If the Company is unable to develop new products in a timely
manner, and to sell them at gross margins comparable to the Company's current
products, the future results of operations could be adversely impacted.
Part of the Company's future product development strategy included the
acquisition of the product portfolio of Epic Semiconductor based in Phoenix,
Arizona. Such products are based on the UARTs and MOSFET technologies. The
Company currently believes that, if successful in manufacturing and marketing of
such products, these products could enhance the revenue of the Company. However
there can be no assurance that the manufacturing and marketing of these products
can be successfully implemented in a timely manner. From time to time, the
Company has experienced manufacturing difficulties due to equipment failures
that have caused delivery delays and product returns. There can be no assurance
that the Company will not experience manufacturing problems and product delays
in the future as a result of , among other reasons, changes to the process
technologies, equipment failure, or production scheduling issues. The Company
depends on outside contract assembly vendors to assemble and package our
products, and, any delays in product delivery, quality and assembly problems
from these outside contract assembly companies could adversely affect the
Company's operating results.
Although we are not currently a party to any material litigation relating to
patents and other intellectual property rights, because of technological
developments in the semiconductor industry, it may be possible that certain of
our designs or processes may involve infringement of existing patents. We also
cannot be sure that any of our patents will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to us or that any of our pending or future patent applications will
be issued. We have from time to time received, and may in the future receive,
communications from third parties asserting patents, maskwork rights, or
copyrights on certain of our products and technologies. Although we are not
currently a party to any material litigation, if a third party were to make a
valid intellectual property claim and a license were not available on
commercially reasonable terms, our operating results could be materially and
adversely affected. Litigation, which could result in substantial cost to us and
diversion of our resources, may also be necessary to enforce our patents or
other intellectual property rights or to defend us against claimed infringement
of the rights of others.
The Company is subject to a variety of federal, state, and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals and gases used in its manufacturing
process. Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in penalties being imposed on the Company,
suspension of production or a cessation of operations. There can be no assurance
that regulatory changes or changes in regulatory interpretation or enforcement
will not render compliance more difficult and costly. Any failure of the Company
to control the use of, or adequately restrict the discharge of, hazardous
substances, or otherwise comply with environmental regulations, could subject it
to significant future liabilities.
Effective April 1999, our common stock was moved from the Nasdaq National Market
to the Nasdaq SmallCap Market where it continues to trade under the symbol
"IMPX." Our common stock trading price remains below $5.00 per share and could
also be subject to the requirements of certain rules promulgated under the
Securities Exchange Act of 1934, as amended, which requires additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). The
additional burdens imposed upon broker-dealers by such requirements could
discourage broker-dealers from trading in our common stock. Additionally, future
announcements concerning the Company, its competitors or its principal
customers, including quarterly operating results, changes in earnings estimates
by analysts, technological innovations, new product introductions, governmental
regulations or litigation may cause the market price of the Company's Common
Stock to continue to fluctuate substantially. Further, in recent years the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. These fluctuations, as well as
general economic, political and market conditions such as recessions or
international currency fluctuations may materially adversely affect the market
price of the Common Stock.
On July 26, 2001, the Company attended a hearing with Nasdaq representatives to
discuss the delisting of the Company's common stock. The reasons for the
delisting include low stock price over a continued period of time, late filings
of Forms 10-K and 10-Q and the financial weakness of the Company. As a result of
this hearing, the Company agreed to meet certain filing deadlines in
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connection with its reporting obligations under the Securities Exchange Act of
1934, maintain certain financial requirements and effect a reverse stock split.
The Company has been unable to meet the agreed upon filing deadlines.
The Company took steps in fiscal 2001 to complete a major upgrade to its
manufacturing-execution software and hardware and currently is in the final
stages of implementing financial application software and hardware. The Company
expects that all upgrades to the financial system will be completed in the
quarter ending September 30, 2001.
The ability of the Company to transition from the fabrication of lower-margin
products to higher-margin products, including both those developed by the
Company and those for which it serves as a third-party foundry, is very
important for the Company's future results of operations. Rapidly changing
customer demands may result in the obsolescence of existing Company inventories.
There can be no assurances that the Company will be successful in its efforts to
keep pace with changing customer demands. In this regard, the ability of the
Company to develop higher-margin products will be materially and adversely
affected if it is unable to retain its engineering personnel due to the
Company's current business climate.
Many of our competitors have substantially greater technical, manufacturing,
financial and marketing resources than we do. Our international sales are
primarily denominated in U.S. currency. Consequently, changes in exchange rates
that strengthen the U.S. dollar could increase the price in local currencies of
our products in foreign markets and make our products relatively more expensive
than our competitor's products that are denominated in local currency. Due to
the current demand for semiconductors of all types, including both foundry
services and analog integrated circuits, we expect continued strong competition
from existing suppliers and the entry of new competitors. Such competitive
pressures could reduce the market acceptance of our products and result in
market price reductions and increases in expenses that could adversely affect
our business, financial condition or results of operations.
The fabrication of integrated circuits is a highly complex and precise process.
Minute impurities, contaminants in the manufacturing environment, difficulties
in the fabrication process, defects in the masks used to print circuits on a
wafer, manufacturing equipment failure, wafer breakage or other factors can
cause a substantial percentage of wafers to be rejected or numerous die on each
wafer to be nonfunctional. The majority of our costs of manufacturing are
relatively fixed, and, consequently, the number of shippable die per wafer for a
given product is critical to our results of operations. If we do not achieve
acceptable manufacturing yields, or if we experience product shipment delays, or
if we encounter capacity constraints, or issues related to volume production
ramp-ups, our financial condition or results of operations would be materially
and adversely affected. We have from time to time in the past experienced lower
than expected production yields, which have delayed product shipments and
adversely affected gross margins. Moreover, we cannot be sure that we will be
able to maintain acceptable manufacturing yields in the future.
In 2001, we experienced difficulties meeting product specifications for certain
customers and, as a result, accepted product returns from these customers. We
have since implemented changes to our processes to ensure our products meet
customer acceptance criteria, however, there can be no assurance that we will
not be required to accept product returns in the future.
We manufacture all of our wafers at our fabrication facility in San Jose,
California. Given the unique nature of our processes, it would be difficult to
arrange for independent manufacturing facilities to supply such wafers in a
short period of time. Any inability to utilize our manufacturing facility as a
result of fire, natural disaster or utility interruption, otherwise, would have
a material adverse effect on our financial condition or results of operations.
Although we believe that we have adequate capacity to support our near term
plans, we have in the past subcontracted the fabrication of a portion of our
wafer production to outside foundries, and may need to do so again. At the
present time, there are several wafer foundries that are capable of supplying
certain of our needs. However, we cannot be sure that we will always be able to
find the necessary foundry capacity.
Due to the relatively long manufacturing cycle for integrated circuits, we build
some of our inventory before we receive orders from our customers. Because of
inaccuracies inherent in forecasting the demand for such products, inventory
imbalances periodically occur that result in surplus amounts of some of our
products and shortages of others. Such shortages can adversely affect customer
relationships; surpluses can result in larger than desired inventory levels. Our
backlog consists of distributor and OEM customer orders required to be shipped
within six months following the order date. Customers may generally cancel or
reschedule orders to purchase products without penalty. As a result, to reflect
changes in their needs, customers frequently revise the quantities of our
products to be delivered and their delivery schedules. Because backlog can be
canceled or rescheduled without significant penalty, we do not believe our
backlog is a meaningful indicator of future revenue. In addition, our backlog
includes our orders from domestic distributors as to which revenues are not
recognized until the products are sold by the distributors. Such products when
sold may
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result in revenue lower than the stated backlog amounts as a result of discounts
that we authorize at the time of sale by the distributors.
The Company utilizes various external " silicon wafer service foundries" (for
epitaxial growth) and assembly sites to assemble and package its products. Any
product delivery delays, quality and manufacturing problems from these external
operations could adversely affect the Company's operating results.
We depend on a number of subcontractors for certain of our manufacturing
processes, such as epitaxial deposition services. If any of these subcontractors
fails to perform these processes on a timely basis, there could be manufacturing
delays, which would materially adversely affect our results of operations.
Currently, we purchase certain materials, including silicon wafers, on a
purchase order basis from a limited number of vendors. Any interruption or
termination of supply from any of these suppliers would have a material adverse
effect on our financial condition, results of operations, or liquidity. Our
products are packaged by a limited group of third party subcontractors in
Southeast Asia. Certain of the raw materials included in such products are
obtained from sole source suppliers. Although we are trying to reduce our
dependence on our sole and limited source suppliers, disruption or termination
of any of these sources could occur and such disruptions could have a material
adverse effect on our financial condition or results of operations. As is common
in the industry, independent third party subcontractors in Asia currently
assemble all of our products. In the event that any of our subcontractors were
to experience financial, operational, production or quality assurance
difficulties resulting in a reduction or interruption in our supply, our
operating results would be adversely affected until alternate subcontractors, if
any, became available.
The present and future success of the Company depends on its ability to continue
to attract, retain and motivate qualified senior management, sales and technical
personnel, particularly highly skilled semiconductor design and development
personnel, and process engineers, for whom competition is intense. The Company
is currently engaged in an executive search to hire a chief executive officer, a
chief financial officer and a controller. The loss of key executive officers,
key design and development personnel, or process engineers, or the inability to
hire and retain sufficient qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to retain these
employees.
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IMP, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was named as one of 88 defendants in a legal action brought by the
Lemelson Medical Foundation for patent violations. In December 2000, we settled
all outstanding claims for $150,000 due in three annual installments, the last
of which is due in December 2002. We are party to litigation in the ordinary
course of business. Any adverse outcome in any of these matters could have a
material adverse affect on our business and results of operations.
Item . Defaults by the Company on its Senior Securities
On July 10, 2001, CIT gave notice of termination and acceleration and demand for
repayment for both the revolving credit facility and the term loan. This
cancellation results from defaults under both the CIT agreement and related
forbearance letters. CIT has declared all obligations due and payable as of July
11, 2001. All amounts due to CIT were repaid on August 13, 2001. No new
financing has been secured.
Item 6. Reports on Form 8-K.
- The Company filed a report on Form 8-K on May 15, 2001 in connection
with a change in control of the Company.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2001. IMP Inc.
Registrant
By: /s/ Subbarao Pinamaneni
---------------------------
Name: Subbarao Pinamaneni
Title: Chairman of the Board
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