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 September 30, 2002
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.
(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
--------------------------------------------------------------------------------
(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 November 15, 2002: 7,790,688
IMP, Inc.
FORM 10-Q
Three Months and Six Months Ended September 30, 2002
INDEX
PAGE
Part I: Financial Information (unaudited)
Condensed Balance Sheets as of September 30, 2002 and March 31, 2002 3
Condensed Statements of Income for the three months and six months ended
September 30, 2002 and September 30, 2001 4
Condensed Statements of Cash Flows for the six months ended
September 30, 2002 and September 30, 2001 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 19
Item 2. Defaults by the Company on its Senior Securities 19
Item 3. Reports on Form 8-K 19
Item 4. Controls and Procedures 19
Signatures 20
Certification 22
Certification 23
Certification 24
Certification 25
2
IMP, Inc.
CONDENSED
BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
SEPTEMBER 30, MARCH 31,
2002 2002
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ........................................................................ $ 16 $ 31
Accounts receivable, net of allowances for doubtful accounts and returns of $400 and $150 ........ 2,780 3,565
Inventories ...................................................................................... 6,388 7,483
Other current assets ............................................................................. 1,155 602
-------- --------
Total current assets ............................................................................. 10,339 11,681
Property and equipment:
Leasehold improvements ........................................................................... 9,072 9,072
Machinery and equipment .......................................................................... 85,522 84,835
-------- --------
94,594 93,907
Less: Accumulated depreciation and amortization .................................................. 88,867 88,071
-------- --------
Net property and equipment ....................................................................... 5,727 5,836
Deposits and other long term assets .............................................................. 124 143
-------- --------
$ 16,190 $ 17,660
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt .................................................................................. $ 103 $ 505
Convertible debentures due to related party, net ................................................. 2,771 2,891
Current portion of capital lease obligations ..................................................... 1,489 1,828
Trade accounts payable ........................................................................... 3,877 4,381
Accrued payroll and related expenses ............................................................. 1,879 1,410
Other current liabilities ........................................................................ 721 1,746
-------- --------
Total current liabilities ........................................................................ 10,840 12,761
Long term portion of capital lease obligations ................................................... -- --
-------- --------
Total liabilities ................................................................................ $ 10,840 $ 12,761
-------- --------
Commitments and contingencies
Stockholders' equity :
Convertible preferred stock, $0.001 par value; 1,000 shares authorized; no shares
issued and outstanding ......................................................................... -- --
Common stock, $0.01 par value; 20,000 shares authorized; 7,790 and 7,291 shares
issued and outstanding ......................................................................... 78 73
Additional paid in capital ....................................................................... 86,826 86,464
Obligations to issue common stock ................................................................ -- 40
Treasury stock; at cost, 40 shares ............................................................... (3,897) (3,897)
Accumulated deficit .............................................................................. (77,657) (77,781)
-------- --------
Total stockholders' equity ....................................................................... 5,350 4,899
-------- --------
$ 16,190 $ 17,660
-------- --------
See accompanying notes to unaudited condensed financial statements
3
IMP, Inc.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues:
Component ......................................... $ 3,768 $ 6,678 $ 7,541 $ 14,060
Design and engineering services ................... -- 86 -- 86
-------- -------- -------- --------
3,768 6,764 7,541 14,146
Cost of revenues
Component ......................................... 2,455 4,029 5,290 8,954
Design and engineering services ................... -- 56 -- 56
-------- -------- -------- --------
2,455 4,085 5,290 9,010
Gross profit ........................................... 1,313 2,679 2,251 5,136
Operating expenses:
Research and development .......................... 437 556 931 1,144
Selling, general and administrative ............... 855 1,631 1,368 2,651
Gain on disposal of fixed assets .................. -- (80) (29) (80)
-------- -------- -------- --------
Total operating expenses ............................... 1,292 2,107 2,270 3,715
-------- -------- -------- --------
Income (loss) from operations .......................... 21 572 (19) 1,421
Interest expense ....................................... (24) (211) (92) (406)
Amortization of debt discount .......................... -- (412) (170) (640)
Other income, net ...................................... 90 57 405 57
-------- -------- -------- --------
Net income ............................................. $ 87 $ 6 $ 124 $ 432
======== ======== ======== ========
Basic Earnings Per Share ............................... $ 0.01 $ 0.00 $ 0.02 $ 0.11
-------- -------- -------- --------
Diluted Earnings Per Share ............................. $ 0.01 $ 0.00 $ 0.01 $ 0.10
======== ======== ======== ========
Weighted-average shares outstanding .................... 7,790 6,230 7,597 4,039
======== ======== ======== ========
Diluted weighted-average shares outstanding ............ 8,593 6,406 8,400 4,216
======== ======== ======== ========
See accompanying notes to unaudited condensed financial statements.
4
IMP, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
SIX MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------- -------
Cash flows from operating activities:
Net income .................................................................................. $ 124 $ 432
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization ............................................................... 865 1,301
Gain on disposal of fixed assets ............................................................ (29) (80)
Amortization of debt discount ............................................................... 170 640
Gain on settlement of lease obligations ..................................................... (182) --
Provision for doubtful accounts ............................................................. 250 1,074
Changes in operating assets and liabilities: ................................................ -- --
Accounts receivable ..................................................................... 535 (3,289)
Accounts receivable from related party ................................................. -- 298
Inventories ............................................................................ 1,095 299
Other current assets ................................................................... (553) 30
Deposits and other long term assets .................................................... 19 34
Trade accounts payable ................................................................. (130) (1,875)
Other current liabilities .............................................................. (1,025) (671)
Accrued payroll and related expenses ................................................... 469 (616)
Net cash provided by (used in) operating activities ............................................ 1,608 (2,423)
Cash flows from investing activities:
Purchase of property and equipment ........................................................ (133) (295)
Proceeds from sale of property and equipment .............................................. 21 --
Net cash used in investing activities .......................................................... (112) (295)
Cash flows from financing activities:
Repayments of convertible debentures ....................................................... (290) --
Net repayments of short-term advance from related parties ................................... (103) (1,363)
Repayments of revolving credit facility ..................................................... -- (2,672)
(Repayments of) Proceeds from equipment notes payable ....................................... (246) 1,074
Payments under capital lease obligations .................................................... (779) (266)
Bank overdraft .............................................................................. (93) --
Proceeds from issuance of common stock ...................................................... -- 5,940
------- -------
Net cash (used in) provided by financing activities ........................................ (1,511) 2,713
------- -------
Net decrease in cash and cash equivalents ................................................... (15) (5)
Cash and cash equivalents at beginning of period ............................................ 31 41
------- -------
Cash and cash equivalents at end of period .................................................. $ 16 $ 36
------- -------
Supplemental information:
Cash paid during the period for interest .................................................... $ 26 $ --
------- -------
Acquisition of equipment under capital lease obligations .................................... $ 622 $ --
------- -------
Issuance of common stock for settlement of liabilities ...................................... $ 367
Return of equipment and reduction of accounts payable ....................................... $ 8 $ 253
------- -------
Discount on convertible debentures .......................................................... $ -- $ 1,633
======= =======
Receivable from investors ................................................................... $ -- $ 60
======= =======
See accompanying notes to unaudited condensed financial statements.
5
IMP, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Business. IMP, Inc. (the "Company"), a Delaware corporation founded in 1981,
develops and manufactures analog CMOS integrated circuit solutions for
communications, computer and control applications.
In September 2001, Subba Mok LLC ("Subba Mok"), a limited liability company
headquartered in the United States of America, acquired approximately 72% of the
common stock of the Company. As a result of the shares issued in connection with
this transaction, the ownership of Teamasia Semiconductors (India) Ltd.,
("Teamasia"), a private corporation headquartered in India, was reduced from
approximately 51% to 14% of the Company.
In 2001, the Company changed its year end to March 31 of each year. Prior to the
year ended March 31, 2001, the Company's fiscal year ended on the Sunday nearest
to March 31.
NOTE 2--BASIS OF PRESENTATION
The balance sheet as of September 30, 2002, the statements of income for the
three months and six months ended September 30, 2002 and 2001, and the
statements of cash flows for the six months ended September 30, 2002 and 2001
have been prepared by the Company, with out audit and with the instructions to
Form 10-Q and Regulation S-K. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month period ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2003. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The Company believes that the disclosures provided are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended March 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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 differ materially from those
estimates. On an on-going basis, the Company evaluates its estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventory values, financing operations, warranty obligations, order cancellation
costs, restructuring, and contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company is organized as a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions and allocate resources
based on financial data consistent with the presentation in the accompanying
financial statements.
Reverse stock split. Effective September 2001, the Company effected a
one-for-five reverse split of its common stock. All shares and per share amounts
in these financial statements have been retrospectively restated to reflect such
reverse split.
Earnings per share. Basic earnings per share is calculated based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
dilutive potential common shares outstanding during the period, using the
as-if-converted method for convertible debentures and the treasury stock method
for options and warrants. The effect of including options and warrants would
have been antidilutive during the three and six months ended September 30, 2002.
As a result, such effect has been excluded from the computation of diluted
earnings per share during those antidilutive periods.
6
Going concern. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company continues to
experience severe liquidity problems and absorb cash in its operating activities
and, as of September 30, 2002, the Company has a working capital deficiency, but
improved from as of March 31, 2002, is in default under the terms of certain
financing agreements, is delinquent in the payment of its federal unemployment
taxes, and has limited financial resources available to meet its immediate cash
requirements. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company has failed to make various scheduled payments due under its prior
credit facility, equipment notes payable and its capital lease obligations. As a
result the Company is in default with respect to these agreements. The Company
has been successful in renegotiating the payments with all lease vendors and is
on schedule in making payments per the new terms and continues to negotiate with
others to settle the payment plans.
The indebtedness related to agreements in which the Company is in default is
classified as current on the Company's balance sheets as of September 30, 2002
and March 31, 2002 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).
In November 2000, Teamasia loaned the Company $1.2 million under a convertible
debenture due on May 28, 2001. The debenture was non-interest bearing and
convertible into 137,143 shares of common stock at Teamasia's option,
representing a conversion ratio equal to $8.75 per share.
In December 2000, Teamasia loaned the Company an additional $2.3 million under a
convertible debenture due on June 18, 2001. The debenture was non-interest
bearing and convertible into 262,857 shares of common stock, at Teamasia's
option, representing a conversion ratio equal to $8.75 per share.
In the year 2001 the convertible debentures were renegotiated whereby the notes
became interest bearing at prime rate and the due dates were extended to June
2002 and subsequently extended further until August 15, 2002. In consideration
for the extension, the Company has issued warrants to Teamasia to purchase
319,800 shares of common stock at an exercise price of $1.10. The convertible
debentures are convertible into common stock, at Teamasia's option at a
conversion ratio of $3.45 per share. The Company is currently in default on
these payments.
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 it would be canceling future orders. IR continues to do business with the
Company at reduced revenues.
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 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.
At September 30, 2002, the Company owed to the Internal Revenue Service ("IRS")
approximately $1.4 million in federal unemployment taxes, including delinquent
taxes, penalties and interest. The Company has submitted a proposal for the
payment of the past due amount to the IRS and the IRS has accepted the payment
plan.
In October, 2002 Teamasia refused to further extend the repayment date for the
convertible debenture. As a result the Company is in default. The company is in
negotiation with Teamasia to agree on a mutually acceptable repayment plan for
the loan. Also the Company is in negotiations with several financial
institutions to arrange financing for the Company to finance operating expenses
including the repayment of convertible debentures.
During the year ended March 31, 2002, management has put in place plans designed
to reduce the costs of operating the business, improve the operating efficiency
of the Company's manufacturing facility and obtain new customers. As a result of
this effort, the Company generated operating income, reduced capital absorbed in
operating activities and improved its working capital position during the year
ended March 31, 2002. The Company continues to focus on its effort to reduce
costs further. 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
7
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 3--REVENUE RECOGNITION
Component revenues are recognized as products are shipped except for sales
through distributors, which are recognized on a sell-through basis. Sales to
foreign distributors are FOB IMP's shipment location and the title of the
products sold passes from the seller to the buyer at the FOB shipping point.
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.
Sales return allowance. The Company reduces sales for estimated returns of
products. The sales return allowance is based on the Company's historical
experience.
NOTE 4--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
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 September 30, 2002 and March 31, 2002.
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.
NOTE 5--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):
September 30, March 31,
2002 2002
------ -----
Raw materials .......................... $ 254 $ 363
Work-in-process ........................ $4,345 5,313
Finished goods ......................... $1,789 1,807
------ -----
$6,388 $7,483
During the year ended March 31, 2000, the Company re-evaluated the practical
production capacity of its fabrication facility in the 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 fiscal 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.
8
NOTE 6- BORROWINGS
The Company has entered into various borrowing arrangements to finance
operations and equipment purchases. Borrowings consist of the following (in
thousands):
September, 30, March 31,
2002 2002
------ ------
Bank overdraft ................................... $ -- $ 93
Equipment notes .................................. 103 349
Short term advance from related parties .......... -- 63
Convertible debentures from related party ........ 2,771 2,891
------ ------
Total borrowings ................................. 2,874 3,396
Less current portion ............................. 2,874 3,396
------ ------
Long term borrowings ............................. $ -- $ --
====== ======
Convertible debentures from related party. In November 2000, Teamasia loaned the
Company $1.2 million under a convertible debenture due on May 28, 2001. The
debenture was non-interest bearing and convertible into 137,143 shares of common
stock at Teamasia's option, representing a conversion ratio equal to $8.75 per
share.
In December 2000, Teamasia loaned the Company an additional $2.3 million under a
convertible debenture due on June 18, 2001. The debenture was non-interest
bearing and convertible into 262,857 shares of common stock, at Teamasia's
option, representing a conversion ratio equal to $8.75 per share.
In May 2001, the convertible debentures were renegotiated whereby the notes
became interest bearing at prime rate and the due dates were extended to June
2002. In consideration for the extension, the Company issued warrants to
Teamasia to purchase 319,800 shares of common stock at an exercise price of
$1.10 and subsequently further extended to August 15, 2002. The convertible
debentures are convertible into common stock, at Teamasia's option at a
conversion ratio of $3.45 per share. The Company is currently in default on
these payments.
As the terms of the warrants became fixed in May 2001, when the parties entered
into a Memorandum of Understanding (MOU), the issuance of the warrants was
recorded at that time. The convertible debentures and warrants have been
recorded based on their relative fair values. The fair value of the warrants of
$821,000 was determined by using the Black Scholes pricing model using the
following assumptions: 221% volatility, zero dividend, 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 price per share and the fair value
of the common stock on the effective date of the MOU multiplied by the number of
shares in to which the convertible debentures are convertible at the stated
ratio of $3.45 per share.
The Company has 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 debenture and is being
amortized into interest expense over 12 months. During the fiscal year ended
March 31, 2002 and quarter ended June 30, 2002, approximately $1,463,000 and
$170,000 was amortized into interest expense. The combined warrants and
beneficial conversion feature totaling $1.6 million has been fully amortized
into interest expenses and no amortization was recognized during the quarter
ending September 30, 2002 .
During the fiscal year ended March 31, 2002, and in the quarter ended June 30,
2002, the Company offset $438,000 and $290,000, respectively, in receivables due
from Teamasia against the carrying value of the convertible debentures.
9
Following further negotiations with Teamasia, the due date for the convertible
debentures has not been extended, and the Company is currently in default,
however the Company is in negotiation with Teamasia to an agreeable payment plan
or to convert the loan into equity. There is no assurance that such negotiations
will produce the desired outcome on terms favorable to the Company. Also the
Company is currently negotiating with several institutions to arrange financing
to provide for operating expenses and the repayment of convertible debentures.
The Company is hopeful that it will succeed in getting such financing in near
future, but there is no assurance.
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.
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,
2002 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, 2002 contained in the Company's Annual Report filed
in Form 10-K.
CURRENT EVENTS
During the month of August, 2002, the Company signed a contract with Minghua
Microelectronic Investment Company LTD, a company based in Ningbo, Republic of
China (China) to form a joint venture company. All activities of the joint
venture shall be governed by the laws and pertinent rules of the Peoples
Republic of China. The amount of investment of the joint venture is anticipated
to be $31.0 million. The joint venture company is owned 50% by IMP and 50 % by
Minghua Microelectronics. Minghua Microelectronic is responsible for providing
the land, building and clean room facility and IMP is providing equipment for
wafer fabrication from its present facility in San Jose, technology and business
to the Joint Venture. The joint venture shall have 10 board of directors, five
will be appointed by Minghua Microelectronics and five by IMP. IMP will manage
the joint venture for the first three years. Upon achieving certain goals and in
addition to all of the above IMP will receive $4.0 million in cash from Minghua
Microelectronic.
The joint venture facility with clean room is expected to be completed by the
middle of December 2002 and 50 % of the fabrication equipment from the San Jose
facility shall be moved to the facility in Ningbo, China by the first week of
January, 2003. IMP will continue its manufacturing operations with the remaining
50% of the equipment in San Jose, until the facility is operational in Ningbo,
China.
The scope of the joint venture company is to design, develop, manufacture and
sell semiconductor integrated circuits. The joint venture company will focus in
the area of power management integrated circuits IMP with its increased presence
in China, a fast growing market for semiconductor chips, expects to improve
sales of its standard products.
10
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 Six Months Ended
------------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----- ----- ----- -----
Total revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................. 65.1 60.4 70.1 63.7
----- ----- ----- -----
Gross margin................................. 34.9 39.6 29.9 36.3
Operating expenses:
Research and development..................... 11.6 8.2 12.3 8.1
Selling, general and administrative.......... 22.7 24.1 18.2 18.7
Gain on disposal of fixed assets............. (0.0) (1.2) (0.4) (0.6)
----- ----- ----- -----
Operating income (loss)......................... 0.6 8.5 (0.3) 10.1
Interest expense................................ (0.6) (3.1) (1.2) (2.9)
Amortization of debt discount (0.0) (6.1) (2.3) (4.5)
Other income, net............................... 2.3 0.8 5.4 0.4
----- ----- ----- -----
Net income...................................... 2.3% 0.1% 1.6% 3.1%
===== ===== ===== =====
During the quarter ended September 30, 2002, the Company generated net revenues
of $3.8 million compared to $6.7 million for the same period of the prior year.
The decrease in net revenues was due to decreased demand for the Company's
foundry products. Foundry product sales accounted for 20% of net revenues in the
quarter ended September 30, 2002 and standard product sales accounted for 80% of
net revenues in the quarter ended September 30, 2002. Among standard products,
supervisor series of products accounted for approximately 34%, UART 19% and
discrete power devices accounted for 15% of the net revenue for the quarter
ended September 30, 2002. For the Six month ended September 30, 2002, the
Company generated net revenue of $7.5 million compared to $14.1 million for the
same period of the prior year. The decrease in the net revenue was due the
decreased demand for the foundry products. For the period ended September 30,
2002 the foundry sales were 20% and standard products sales 80%.
For the three months ended September 30, 2002, the Company's largest foundry
customers were Dialog, Signal Processing Technology and International Rectifier,
which accounted for approximately 6.5%, 3.8% and 2% of net revenues and 0%,
1.6%, and 0% of net receivables at September 30, 2002, respectively. The largest
foundry customers for the same period in the prior year were Linfinity
Microelectronics, International Rectifier, and Tektronix, which accounted for
approximately 33%, 15% and 4% of the net revenue and 4%, 6%, and 0% of net
accounts receivable at September 30, 2001, respectively.
For the three months ended September 30, 2002, the company's largest standard
products customers were SEMR, EIL and MAXTEK, which accounted for 21.5 %, 10.5%
and 6.5 % of net revenue and 27 %, 14 % and 7% of receivables at September 30,
2002, respectively.
COST OF REVENUES. Cost of revenues in the three months ended September 30, 2002
was $2.5 million, representing 65.1% of net revenues compared to $4.1 million,
representing 60.4% of net revenues for the same quarter in the prior fiscal
year. Percentage increase in cost of sales is due to decrease in revenue. Cost
of revenue for the six months ended September 30, 2002 was $5.29 million,
representing 70.1% of the revenue compared to $ 9.01 million, representing 63.7%
of net revenues for the same quarter in the prior fiscal year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$437,000 (11.6% of revenue) in the quarter ended September 30, 2002 compared to
$556,000 (8.2% of revenue) in the corresponding quarter of the prior fiscal
year. For the six months ended September 30,2002 research and development
expenses were $931,000 (12.3 % of revenue) compared to $1,144,000 ( 8.1% of
revenue). The net decrease in the cost is due to the cost cutting measures taken
by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $855,000 (22.7% of net revenues) in the quarter
ended September 30, 2002, down from $1,631,000 (24.1% of net revenues) in the
same quarter of the prior year. The decrease in expenses is due to the cost
cutting measures taken by the Company. The expenses for the six months ended
September 30, 2002 were $1,368,000 (18.2% of the revenue) as compared to
$2,651,000 (18.7% of the revenue) for same period last year. The net decrease in
expenses is due to the cost cutting measures taken by the company.
11
INTEREST EXPENSES. Interest expense for the three months ended September 30,
2002 was $24,000 as compared to $211,000 for the same quarter ended September
30, 2001. Interest expense for the six months ended September 30, 2002 was
$92,000 as compared to $406,000 for the six months ended September 30, 2001. The
decrease in interest expense is due to a change in borrowing terms as a result
of renegotiations made by the Company in extending the convertible debentures.
As a result of the renegotiations the convertible debentures were non-interest
bearing during the extension period.
AMORTIZATION OF DEBT DISCOUNT. During the quarter ended June 30, 2001, the
Company granted warrants in connection with the issuance of convertible
debentures to Teamasia. The transaction also contained a beneficial conversion
feature. The value of the warrants and the beneficial conversion feature,
totaling $1.63 million, is reflected as a discount on the subordinated
debentures and is being amortized over the term of the subordinated debentures,
which is one year. During the fiscal year ended March 31, 2002 and quarter ended
June 30, 2002, approximately $1,463,000 and $170,000 was amortized into interest
expense. The combined warrants and beneficial conversion feature totaling $1.63
million has been fully amortized into interest expense and no amortization was
recognized during the quarter ended September 30, 2002.
OTHER INCOME NET. Other income was $90,000 for the quarter ended September 30,
2002 compared to $57,000 for the comparative quarter in the prior year. For six
months ended September 30, 2002 the other income was $405,000 compared to $
57,000 for the comparative quarter in the prior year.
NET INCOME. The Company had a net income $87,000 for the three months ended
September 30, 2002, or $0.01 per share, compared to a net income of $6,000 in
the quarter ended September 30, 2001 or $0.00 per share. The Company has taken a
number of actions designed to enable the Company to show profitable results at
much lower revenue levels compared to historical levels. Scaled down operations,
cost control and improvements in the Company's manufacturing efficiency are the
major drivers of the Company's return to profitability.
The Company had a net income $124,000 for the six months ended September 30,
2002, or $0.02 per share, compared to a net income of $432,000 in the six months
ended September 30, 2001 or $0.11 per share. The decrease in net profits is due
to the net decrease in sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $16,000 at September 30, 2002 from
$31,000 at March 31, 2002.
Net cash provided by operating activities in the six months ended September 30,
2002 was $1.6 million as compared to net cash used in operating activities in
the six months ended September 30, 2001 of $2.4 million. The improvement is
primarily attributable to cash flow changes in accounts receivables, which used
$3.2 million cash flow for the six months ended September 30, 2001 and provided
$0.5 million of cash flow for the six months ended September 30, 2002. During
the six months ended September 30, 2002, the Company's cash flows were favorably
effected by approximately $1.0 million in receivables that were sold without
recourse by the Company to an affiliated entity.
Net cash used for investing activities were $112,000 in six months ended
September 30, 2002 as compared to net cash used for investing activities of
$295,000 in six months ended September 30, 2001.
Net cash used in financing activities was $1.5 million in the six months ended
September 30, 2002 as compared to net cash provided by financing activities of
approximately $2.7 million in six months ended September 30, 2001. During the
six months ended September 30, 2001 the Company received proceeds from the
issuance of common stock of approximately $5.9 million, approximately $2.7
million was used to repay the Company's revolving credit facility.
The Company continues to experience severe liquidity problems and absorb capital
infusion in its operating activities. As of September 30, 2002, the Company had
a working capital deficiency, but improved from the year ended March 31, 2002 by
approximately $580,000. The Company is in default under the terms of certain
financing agreements, is delinquent in the payment of its federal unemployment
taxes, and has limited financial resources available to meet its immediate cash
requirements. These matters raise substantial doubt about 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.
12
The Company made payments of $779,000 on capital lease obligations and $246,000
on equipment notes during the six months ending September 30, 2002.
As of September 30, 2002, the Company's current portion of debt and capital
lease obligations of $1.59 million is comprised of (i) $103,000 of equipment
notes, and (ii) $1.49 million of capital lease obligations. The capital lease
obligations are comprised of ten individual leases.
As of September 30, 2002, the Company's long term portion of capital lease
obligations are $0 comparatively $273,000 outstanding as of September 30, 2001
and this is comprised of four leases.
In the fiscal year ended March 31, 2002, the Company entered into an agreement
with Teamasia whereby Teamasia agreed, among other provisions, to extend the due
date of the convertible debentures, in the original amount of $3.5 million,
until August 15, 2002. In addition, under the agreement, Subba Mok LLC, an
investor group led by the Chairman of the Board of Directors purchased stock
representing 72% of the Company's equity for $6.0 million. All proceeds were
received by July 31, 2001. The Company is currently in default on repayment of
the convertible debentures.
At September 30, 2002, the Company owed to the Internal Revenue Service ("IRS")
approximately $1.4 million in federal unemployment taxes, including delinquent
taxes, penalties and interest. The Company has submitted a proposal form the
payment of the past due amount to the IRS and the IRS has accepted the payment
plan.
FACTORS AFFECTING FUTURE RESULTS
The Company has minimal financial resources and its operating needs in fiscal
2002 were funded principally from the collection of accounts receivable and from
the sale of common stock to Subba Mok LLC. In the event cash flow from accounts
receivable is reduced or interrupted by slow collections, or by a decrease in
revenue generation, the Company will be unable to meet its obligations. The
Company's independent auditors stated in their auditors' report that the
Company's severe liquidity problems raise substantial doubt about whether the
Company can continue as a going concern. The Company continues to focus on
restructuring its operations to conserve cash. The Company has reported
operating income for the fiscal year 2002 and losses for the previous years
starting from 1997. These losses continue to affect the cash flow.
Our cash balance has decreased over each of the last several quarters. As of
September 30, 2002, we had cash and cash equivalents of approximately $16,000.
The Company sells its products to distributors and manufacturers in Southeast
Asia, which is currently experiencing an economic downturn. Sales in this region
accounted for more than 60 % of the Company's net revenues in the quarter ended
September 30, 2002. The Company experienced a slight growth in revenues from
this region during the fiscal year. 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 continue to be adversely affected.
As a result of the severe downturn in the semiconductor market, the Company
experienced a significant drop off in sales in the fourth quarter of fiscal year
2001 and subsequent quarters of fiscal year 2002 and the quarter ended on
September 30, 2002. The reduced sales and corresponding reduction in cash flow
has compounded the Company's liquidity issues. The downturn in the semiconductor
market is expected to continue for the foreseeable future, though IMP's revenue
has stabilized due to a slight increase in revenue of its standard products.
In June 2001, International Rectifier Corporation ("IR") notified the Company
that it would be canceling future orders. IR continues to do business with the
Company at reduced revenues
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company will have to continue investing in advanced design
tools, manufacturing equipment and process technologies. The Company will be
required to seek additional debt or equity financing to satisfy its cash needs
and such financing may not be available on terms satisfactory to the Company. If
such financing is not available on terms satisfactory to the Company, its
operations would be materially adversely affected.
New products and process technologies 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
13
timely manner, and to sell them at gross margins comparable to the Company's
current products, the future results of operations will be adversely impacted.
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 there under 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, mask work 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 and a
drain on our limited 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
"IMPXC." 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 (the "Exchange Act"), which require
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 from the exchange. The
reasons for the delisting hearing 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 connection with its reporting obligations under the
Securities Exchange Act of 1934, maintain certain financial requirements and
complete a reverse stock split. We are required to maintain a minimum bid price
for our common stock by November 2002. The Company does not know whether it will
be able to maintain its Nasdaq listing.
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. 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
14
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.
We manufacture all of our wafers at our fabrication facility in San Jose. 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, and 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 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 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.
15
Recent Accounting Pronouncements.
In June 2000, SFAS No. 133 (SFAS 133) was amended by SFAS No. 138 (SFAS 138),
Accounting for Certain Derivative Instruments and Hedging Activities, which
amended or modified certain issues discussed in SFAS 133. SFAS 138 is effective
for all fiscal years beginning after June 15, 2000. SFAS 133 and SFAS 138
establish accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statements also require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. At this time, the Company does not engage in
derivative instruments or hedging activities. Accordingly, there was no impact
on the Company's financial statements from the adoption of SFAS 133 and SFAS
138.
In June 2001, the Financial Accounting Standards Board finalized SFAS No. 141
(SFAS 141), Business Combinations, and SFAS No. 142 (SFAS 142), Goodwill and
Other Intangible Assets. SFAS 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible asserts apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill base on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The implementation of SFAS 142
did not have a material impact on the Company's financial position, results of
operations or cash flows.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost asset and classify the accrued
amount as a liability in the balance sheet. The asset retirement liability is
then accreted to the ultimate payout as interest expense. The initial
measurement of the liability would be subsequently updated for revised estimates
of the discounted cash outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. The implementation of SFAS 143 did not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes the SFAS 121 by
requiring that one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operation to include more disposal
transactions. SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The implementation of SFAS 144 did not have a material impact
on the Company's financial position, results of operations, or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 (SFAS 145), rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS 145 updates, clarifies
and simplifies existing accounting pronouncements, by rescinding SFAS 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion No. 30
will now be used to classify those gains and losses. Additionally, SFAS 145
amends SFAS 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. Finally, SFAS 145 also makes technical
corrections to existing pronouncements. Management currently believes that the
adoption of SFAS 145 will not have a material impact on the Company's financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146 (SFAS 146), Accounting for Costs
Associated with Exit Activities, which addresses financial accounting and
reporting for costs associated with exit activities and supersedes Emerging
Issues Task Force ("EITF") 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs
16
Incurred in a Restructuring). SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. This differs from
EITF 94-3, which required that a liability for an exit cost be recognized at the
date of an entity's commitment to an exit plan. However, under SFAS 146, a
liability for one-time termination benefits is recognized when an entity has
committed to a plan of termination, provided certain other requirements have
been met. In addition, under SFAS 146, a liability for costs to terminate a
contract is not recognized until the contract has been terminated, and a
liability for costs that will continue to be incurred under a contract's
remaining term without economic benefit to the entity is recognized when the
entity ceases to use the right conveyed by the contract. SFAS 146 is effective
for exit or disposal activities initiated after December 31, 2002. The Company
does not expect the adoption of SFAS 146 will have a material impact on its
consolidated results of operations or financial position.
Critical Accounting Policies:
Use of Estimates. The Company's discussion and analysis of its financial
condition and results of operations are based upon our financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to customer programs and incentives, product returns,
bad debts, inventory values, financing operations, warranty obligations, order
cancellation costs, restructuring, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Basis of Presentation. The Company's financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
continues to experience severe liquidity problems and absorb cash in its
operating activities and, as of September 30, 2002, has a working capital
deficiency, is in default under the terms of certain financing agreements, is
delinquent in the payment of its federal unemployment taxes, and have limited
financial resources available to meet immediate cash requirements. These matters
raise substantial doubt about 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.
Revenue recognition. Component revenues are recognized as products are shipped
except for sales through distributors, which are recognized on a sell-through
basis. Sales to foreign distributors are FOB IMP's shipment location and the
title of the products sold passes from the seller to the buyer at the FOB
shipping point. 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 (the 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
beginning of fiscal year 2001. The adoption of SAB No. 101 did not have an
impact on Company's financial statements.
Sales return allowance. The Company reduces sales for estimated returns of
products. The sales return allowance is based on our historical experience.
Allowance for bad debts. The Company maintains an allowance for bad debts based
on estimated unrealizable account receivables. Management estimates the
allowance based on an analysis of specific customers, taking into consideration
the age of the past due account and an assessment of the customer's ability to
pay.
Inventory. The Company values its inventory at the lower of the actual cost to
market and/or manufacture the inventory. The management regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on the Company's estimated forecast of product demand
and production requirements for the next twelve months. As demonstrated during
2002, demand for the Company's products can fluctuate significantly. A
significant increase in the demand for the products could result in a short-term
increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities
on hand. Additionally, the Company's estimates of future product demand may
prove to be inaccurate, in which case the Company may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if management believes that inventory is determined to be overvalued,
the Company would be required to
17
recognize such costs in the cost of goods sold at the time of such
determination. Likewise, if the inventory is determined to be undervalued, the
Company may have over-reported the costs of goods sold in previous periods and
would be required to recognize such additional operating income at the time of
sale. Therefore, although the Company makes every effort to ensure the accuracy
of the forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of closing inventory and reported operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Sensitivity: The Company has debt instruments which are interest
free and the Company is not subject to any interest rate risk.
Due to its international sales, the Company is exposed to risks associated with
foreign exchange rate fluctuations. Those exposures may change over time as
business practices evolve and could have a material adverse effect on the
Company's operating results and financial condition. All of the Company's sales
are denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive,
reducing the demand for the Company's products. A decline in the demand of the
Company's product could have a material adverse effect on the Company's
operating results, financial position, or liquidity. European currency issues
are not material due to the Company's minimal contact with European markets.
At September 30, 2002, the Company had approximately $1.49 million of
outstanding obligations under capital lease arrangements. As the lease payments
associated with these arrangements do not have variable interest rates, an
increase of 10 percent in short-term would not have material impact on the
Company's net income or cash flows. The Company does not hedge any interest rate
exposures.
Since the Company does not have any significant exposure to changing interest
rates, the Company did not undertake any specific actions to cover exposure to
interest rate risk and the Company is not a party to any interest rate risk
management transactions. The Company did not purchase or hold any derivative
financial instruments for trading purposes.
Foreign Currency Exchange Risk. All of the Company's financial transactions are
conducted in US dollars.
18
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, the Company
settled all outstanding claims for $150,000 due in three annual installments,
the last of which is due in December 2002. The Company is 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 2. 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 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.
In October, 2002 Teamasia refused to further extend repayment date for the
convertible debenture. As a result the Company is in default. The company is in
negotiation with Teamasia to agree on a mutually acceptable repayment plan for
the loan. Also company is in negotiations with several financial institutions to
arrange financing for the Company to provide operating expenses including the
repayment of convertible debentures.
Item 3. Reports on Form 8-K.
|_| The Company filed a report on Form 8-K on November 3, 2001 in
connection with a change in control of the Company
|_| The Company filed a report on Form 8-K on May 15, 2001 in connection
with a change in control of the Company
|_| The Company filed a report on Form 8-K on June 12, 2002 in
connection with a change in control of the Company
Item 4. Controls and Procedures
(a) Based on their evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form 10-Q, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934) are effective.
(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect
that our Disclosure Controls or our Internal Controls will prevent all errors
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
19
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: November 15, 2002. IMP Inc.
Registrant
By: /s/ Subbarao Pinamaneni
-----------------------
Name: Subbarao Pinamaneni
Title: Chairman of the Board
20
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of IMP Inc. for the period
ended September 30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Subbarao Pinamaneni, CEO and Chairman,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
IMP Inc.
By: /s/ Subba Rao Pinnamaneni
--------------------------------------------
Name: Subbarao Pinamaneni
Chairman of the Board and Chief Executive Officer
21
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of IMP Inc. for the period
ended September 30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Tarsaim Lal Batra, Chief Financial Officer,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
IMP Inc.
By: /s/ Tarsaim Lal Batra
--------------------------------------------
Name: Tarsaim Lal Batra
Chief Financial Officer
22
SARBANES-OXLEY SECTION 302 (a)
CERTIFICATIONS
I, Subba Rao Pinnamaneni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IMP, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/ Subba Rao Pinnamaneni
---------------------------
Name: Subba Rao Pinnamaneni
Chairman of the Board and Chief Executive Officer
23
CERTIFICATIONS (continued)
I, Tarsaim Lal Batra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IMP, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/ Tarsaim Lal Batra
-----------------------
Name: Tarsaim Lal Batra
Chief Financial Officer
24