-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IOWizFRQyXo7alb3uBXAm26VrjWsnfRxcuZqNeFuZHXYpo+YH8EpyhIFmkX7Vq0L e4e/JnMWqgqUZgjDxTEjKg== /in/edgar/work/20000821/0001012870-00-004523/0001012870-00-004523.txt : 20000922 0001012870-00-004523.hdr.sgml : 20000922 ACCESSION NUMBER: 0001012870-00-004523 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000821 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHIPPAC INC CENTRAL INDEX KEY: 0001093779 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 770463048 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-31173 FILM NUMBER: 707225 BUSINESS ADDRESS: STREET 1: 3151 CORONADO DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4084865900 MAIL ADDRESS: STREET 1: 3151 CORONADO DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 0001.txt FORM 10-Q UNITED STATES 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 period ended June 30, 2000 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 333-91641 CHIPPAC, INC. (Exact name of Registrant as specified in its charter) Delaware 77-0463-48 State or other jurisdiction of I.R.S. Employer Identification Number incorporation or organization 3151 Coronado Drive Santa Clara, California 95054 Address of principal executive offices Zip Code (408) 486-5900 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 No X --------- ------------- Indicate the number of shares of the issuer's class of common stock, as of the latest practical date: Class Outstanding as of August 11, 2000 - ---------------------------------------------------------------------------- Class A Common stock, $.01 par value 67,131,718 Class B Common stock, $.01 par value 0 Page 1 ChipPAC, Inc. Part I -- FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets.................. 3 Unaudited Condensed Consolidated Statements of Operations........ 4 Unaudited Condensed Consolidated Statements of Cash Flows........ 5 Notes to Unaudited Condensed Consolidated Financial Statements....................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition.. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 24 Part II -- OTHER INFORMATION Item 1. Legal Proceedings........................................... 24 Item 2. Changes in Securities and Use of Proceeds................... 24 Item 3. Defaults Upon Senior Securities............................. 25 Item 4. Submission of Matters to a Vote of Security Holders......... 25 Item 5. Other Information........................................... 25 Item 6. Exhibits and Reports on Form 8-K............................ 25 Signatures.......................................................... 29 Page 2 ChipPAC Inc. Condensed Consolidated Balance Sheets (In thousands)
June 30, December 31, 2000 1999 ----------------- ----------------- Assets (Unaudited) (Unaudited) Current assets: Cash and cash equivalents $ 27,541 $ 32,117 Receivable from shareholder - 11,662 Accounts receivable, less allowance for doubtful accounts of $514 and $1,196 54,743 30,003 Inventories 20,351 17,497 Deferred taxes 836 775 Prepaid expenses and other current assets 5,789 2,386 ------- ------- Total currrent assets 109,260 94,440 Property, plant and equipment, net 308,216 226,931 Other assets 34,257 22,058 ------- ------- Total assets $ 451,733 $ 343,429 ======= ======= Liabilities and Equity Current liabilities: Short-term bank borrowing $ 15,900 ---- Accounts payable 50,971 $ 52,208 Accrued expenses and other liabilities 37,979 27,208 Deferred taxes ---- Current portion of long-term debt 9,350 4,800 ------- ------- Total current liabilities 114,200 84,216 ------- ------- Long-term debt, less current portion 344,250 295,200 Other long-term liabilities 9,252 3,929 ------- ------- Total liabilities 467,702 383,345 ------- ------- Commitments and contingencies Mandatorily redeemable preferred stock 104,291 82,970 Shareholders' and divisional equity: Common stock-class A 529 523 Common stock-class B --- --- Warrants-common stock A 1,250 1,250 Additional paid in capital-common stock 86,878 86,294 Divisional equity, net of capital distributions (167,714) (167,714) Receivable from shareholders (1,353) (1,128) Accumulated deficit (49,019) (51,280) Accumulated other comprehensive income 9,169 9,169 ------- ------- Total shareholders' equity (120,260) (122,886) ------- ------- Total liabilities and equity $ 451,733 $ 343,429 ======= =======
The accompanying notes form an integral part of these condensed consolidated financial statements Page 3 ChipPAC Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 -------------- ---------- ---------- ---------- Revenue $108,979 $80,853 $206,448 $166,401 Cost of revenue 82,838 71,168 159,882 143,300 -------------- ---------- ---------- ---------- Gross profit 26,141 9,685 46,566 23,101 Operating expenses: Selling, general & administrative 7,239 4,822 14,338 9,333 Research & development 2,510 2,985 5,141 5,988 -------------- ---------- ---------- ---------- Total operating expenses 9,749 7,808 19,479 15,321 -------------- ---------- ---------- ---------- Operating income 16,392 1,877 27,087 7,780 Non-operating income (expenses) Interest income 147 789 385 1,739 Interest expense (10,600) (2,787) (19,364) (5,794) Foreign currency gains (losses) 575 429 974 1,375 Other income (expenses), net 524 55 658 182 -------------- ---------- ---------- ---------- Non-operating income (expenses) (9,354) (1,514) (17,347) (2,498) Income before income taxes 7,038 363 9,740 5,282 Provision for (benefit from) income taxes 1,406 (167) 1,948 2,948 -------------- ---------- ---------- ---------- Net income $ 5,632 $ 530 $ 7,792 $ 2,334 -------------- ---------- ---------- ---------- Net income per share: Basic 0.11 0.01 0.16 0.06 Diluted 0.05 0.01 0.04 0.06 -------------- ---------- ---------- ---------- Shares used in per share calculation: Basic 49,753 38,861 49,516 38,861 Diluted 53,703 38,861 53,456 38,861 -------------- ---------- ---------- ----------
The accompanying notes form an integral part of these condensed consolidated financial statements Page 4
ChipPAC Inc. Condensed Consolidated Statements of Cash Flows (In thousands) Six Months Six months Ended Ended June 30, June 30, 2000 1999 ----------------- ----------------- (Unaudited) (Unaudited) Cash flows provided by operating activities: Net income (loss) $ 7,792 $ 2,334 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 18,345 41,850 Provision for inventory and accounts receivable (39) (427) Non-operating early debt extinguishments loss ---- ---- Foreign currency (gains) losses (636) (1,375) (Gain) loss on sale of equipment 44 (241) Changes in assets and liabilities: Accounts receivable (13,053) 9,843 Inventories 728 (1,889) Prepaid expenses and other assets (5,280) (20,780) Advances (to) from affiliates-trade ---- (6,190) Accounts payable (6,694) (22,193) Accrued expenses and other current 401 7,040 liabilities Other long-term liabilities 1,856 (2,087) _______ _______ Net cash provided by (used in) operating activities 3,464 5,885 _______ _______ Cash flows used in investing activities: Acquisition of property and equipment (36,378) (29,062) Proceeds from sale of equipment 15,018 1,263 Purchase of IP (12,655) ---- Purchase of CPM (42,194) ---- _______ _______ Net cash used in investing activities (76,209) (27,799) _______ _______ Cash flows provided by financing activities: Advances (to) from employees and affiliates (225) (4,430) Proceeds from short-term loans 25,700 1,169 Repayment of short-term loans (9,800) (19,469) Proceeds from term loans 53,311 300,000 Repayment of long-term debt and capital leases (1,400) (133,615) Payments made to extinguish debt early ---- ---- Dividend paid ---- (9,435) Net proceeds from stock issuance 583 123,415 Contributions to (withdrawals from) paid in capital ---- (270,917) _______ _______ Net cash provided by (used in) financing activities 68,169 (13,282) _______ _______ Effect on cash from changes in exchange rates ---- 15,340 _______ _______ Net increase (decrease) in cash (4,576) (19,856) Cash and cash equivalents at beginning of period 32,117 68,767 _______ _______ Cash and cash equivalents at end of period $ 27,541 $ 48,911 ======= =======
The accompanying notes form an integral part of these condensed consolidated financial statements Page 5 ChipPAC, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Quarter Ended June 30, 2000 (Unaudited) Note 1: Interim Statements In the opinion of management of ChipPAC, Inc. ("ChipPAC"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial information included therein. ChipPAC believes that the disclosures are adequate to make the information not misleading. However, it is suggested that this financial data be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 1999 included in ChipPAC's 2000 Registration on Form S-1 (Registration No. 333-39428) as declared effective by the Securities and Exchange Commission on August 8, 2000. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for any other period or the fiscal year which ends on December 31, 2000. Basis of Presentation Prior to August 5, 1999 the Company represented the combination of three business units of Hyundai Electronics Industries Co., Ltd. ("HEI") which operated collectively as HEI's worldwide packaging and testing operations. These three business units historically consisted of the Assembly and Test Division of HEI, Hyundai Electronics Co. (Shanghai) Ltd. ("HECS"), and the Assembly and Test Division of Hyundai Electronics America ("HEA"), a majority owned subsidiary of HEI. Sales and marketing services were primarily performed by the Assembly and Test Division of HEA, and packaging and testing services were performed by HECS and the Assembly and Test Division of HEI. On August 5, 1999, affiliates of Bain Capital, Inc. and SXI Group LLC, a portfolio concern of Citicorp Venture Capital Ltd., which we refer to collectively as the "Equity Investors", and management acquired a controlling interest in the Company from Hyundai Electronics and Hyundai Electronics America, the prior stockholders, through a series of transactions, including a merger into ChipPAC, Inc. of a special purpose corporation organized by the Equity Investors. The merger was structured to be accounted for as a recapitalization. Specifically: . the Equity Investors and other parties, including members of our management, invested $92.0 million to acquire common stock of ChipPAC, Inc. which represented approximately 90.2% of its common stock outstanding immediately following the recapitalization; . the prior stockholders of ChipPAC, Inc. retained a portion of their common stock in ChipPAC, Inc. equal to $10.0 million, or approximately 9.8% of ChipPAC, Inc.'s common stock outstanding immediately following the recapitalization; and . the prior stockholders received as consideration for the remainder of their common stock (i) an aggregate of $384.0 million in cash and (ii) mandatorily redeemable convertible preferred stock payable for up to an aggregate of $70.0 million. Net payment to Hyundai of $384 million, included capital redemption of $311 million and debt retirement of $133 million, offset by Hyundai investment of $40 million in mandatorily redeemable preferred stock, and a capital contribution of $20 million. The financial statements for the period subsequent to the recapitalization and as at December 31, 1999 and June 30, 2000 have been prepared on a consolidated basis. The consolidated financial statements include the accounts of ChipPAC, Inc. and its majority controlled and owned subsidiaries. All Page 6 significant intercompany balances have been eliminated on consolidation. For the comparative disclosures for the three months and six months ended June 30, 2000, the Company represents the combination of four corporations then owned by Hyundai Electronics Industries Co., Ltd (HEI) and Hyundai Electronics America (HEA). These four corporations are ChipPAC, Inc. (CPI), ChipPAC Korea Co., Ltd (CPK) ChipPAC Assembly and Test Co. Ltd. (CATS) and Hyundai Electronics Co. (Shanghai) Ltd., (HECS). Accordingly the financial statements for the comparative periods are prepared on a combined basis. These comparative financial statements include the accounts of CPI, CPK, HECS and CATS, or the divisional accounts of the predecessor Assembly and Test Divisions for periods prior to the business transfers referred to above, and reflect the combined financial position, results of operations, and cash flows of these entities. All inter-company or inter-divisional transactions have been eliminated in the combination. Foreign Currency Translation Upon completion of the recapitalization on August 5, 1999, management decided to change the functional currency of its foreign operations to the US Dollar effective October 1,1999. Previously, the Company's functional currencies of its foreign operations were the respective local currencies and the net of the effect of the translation of the accounts of the foreign operation was included in equity as a cumulative translation adjustment. Note 2: Acquisition of Malaysian business from Intersil On June 30, 2000, the Company consummated its acquisition of Intersil's packaging and test operations located in Kuala Lumpur, Malaysia along with related intellectual property for approximately $70.0 million in cash and preferred stock. In connection with the acquisition, we entered into a five-year supply agreement with Intersil to provide assembly and test services on an exclusive basis. The Malaysian business increases our exposure to high growth advanced communications products, provides a presence in Malaysia and enhances our intellectual property in key areas. In addition, the Malaysian business expands our mixed-signal testing capabilities and provides us with critical expertise in RF testing. For its fiscal year ended July 2, 1999, all revenue of the Malaysian business was intercompany revenue with Intersil. The acquisition has been accounted for using purchase accounting. Under purchase accounting, the total purchase price of the Malaysian business is allocated to the acquired assets and liabilities based on their relative fair values as of the closing date of the acquisition. We are undertaking a study to determine the final allocation of the total purchase price to the various assets acquired and the liabilities assumed. Accordingly, the final allocations could be different from the amounts reflected below, and these differences may be significant. The purchase price of $70.0 million represents the total of the cash consideration and the estimated fair value of the Class C preferred stock exchanged for the whole of the outstanding issued shares of the Malaysian business and certain intellectual property. The amount and components of the purchase price and the preliminary allocation of the purchase price to assets purchased and liabilities assumed are as follows: (in millions) Purchase Price: Cash consideration............................................... $52.5 Estimated fair value of Class C preferred stock.................. 15.8 Estimated expenses............................................... 3.5 Less: payment due from Intersil................................... (1.8) ----- $70.0 ===== Page 7 Allocation of Purchase Price: Estimated fair value of Buildings..................................................... $16.9 Plant and equipment........................................... 56.9 Intellectual property......................................... 12.7 Restructuring accrual......................................... (5.0) Deferred taxes................................................ (4.1) Net other assets and liabilities.............................. (7.4) ----- $70.0 ===== There is no goodwill arising from the acquisition of the Malaysian business. The estimated fair value of total assets acquired and liabilities assumed exceeded the purchase price, resulting in negative goodwill of $56.1 million. The negative goodwill has been allocated in full to non-current assets as summarized below: Estimated Negative Fair Goodwill Adjusted Non-current asset Value Allocated Fair Value - ---------------------------------------------------------------------- (in millions) Land and Buildings........... $ 27.9 $(11.0) $16.9 Plant and equipment.......... 93.9 (37.0) 56.9 Intellectual property........ 20.9 (8.2) 12.7 ------ ------ ----- $142.7 $(56.2) $86.5 ====== ====== ===== Intellectual property primarily consists of trade secrets and patents. The Company expects that the estimated average useful life of these assets will be seven years. An accrual of $5.0 million has been established for expected costs of restructuring the Malaysian business. These one time non-recurring costs are expected to be incurred in connection with factory reorganization, product discontinuance and employee related costs. The terms of the acquisition of the Malaysian business require, for the period from the closing of the acquisition to June 30, 2003, the payment of additional contingent incentive payments to the seller based on the achievement of milestones with respect to the transfer of the seller's packaging business, currently subcontracted by the seller to a third party, to us. These contingent payments will be recorded as additional purchase price if and when earned and paid on a quarterly basis. In the event that Intersil were to achieve all the milestones, we would pay Intersil an additional sum of approximately $17.9 million in the aggregate. Page 8 The results of operations of the Malaysian business will be included with those of the Company for periods subsequent to the date of acquisition. Set forth below is the unaudited proforma combined summary of operations of the Company for the six months ended June 30, 2000 and 1999, as if the acquisition had been made on January 1, 1999 (in thousands). Six Months Ended June 30: 2000 1999 -------- -------- Net sales $277,658 $222,716 Net income $ 11,534 $ 6,237 Earnings per share Basic $ 0.23 $ 0.16 ======== ======== Diluted $ 0.22 $ 0.16 ======== ======== Shares used in per share calculation Basic 49,516 38,861 ======== ======== Diluted 53,456 38,861 ======== ======== Note 3: Property, Plant and Equipment Effective January 1, 2000 we re-evaluated the estimated useful lives of our property, plant and equipment. Based on an independent appraisal to evaluate the useful lives of such equipment and our internal assessment, we changed the estimated useful lives of assembly and test product equipment, and furniture and fixtures from five years to eight years. Previously, such equipment was depreciated on a straight line basis over and an estimated useful life of five years. The net book values of assembly and test product equipment and furniture and fixtures already in use are now being depreciated over the remaining useful life, based on eight years from the date such assets were originally placed in service. This change resulted in depreciation expense in the quarter ended June 30, 2000 and the six months ended June 30, 2000 being $6.9 million and $13.6 million, respectively, lower than would have been recorded using five year lives. Note 4: Inventories June 30, December 31, 2000 1999 ------- ------------ (In thousands) Raw materials................. $15,644 $12,274 Work-in-process............... 3,972 3,003 Finished goods................ 735 2,220 ------- ------- Total........................ $20,351 $17,497 ======= ======= Page 9 Note 5: Earnings per share Statement of Accounting Standards No. 128 ("SFAS 128") requires a reconciliation of the numerators and denominators of the basic and diluted per share computations. Basic earnings per share ("EPS") is computed by dividing net income available to stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS is computed using the weighted average number of common and all potentially dilutive common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. Following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below. Three months ended June 30, 2000 and 1999:
June 30, 2000 June 30, 1999 ------------------------- ------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ------ ------ --------- ------ ------ --------- (In thousands, except per share amounts) Basic EPS: Net income................................ 5,632 49,753 0.11 530 38,861 0.01 Effects of dilutive securities: Stock options and warrants................ (2,812) 3,950 0.01 - - Diluted EPS: Net income................................ 2,820 53,703 0.05 530 38,861 0.01
Six months ended June 30, 2000 and 1999:
June 30, 2000 June 30, 1999 ------------------------- ------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ------ ------ --------- ------ ------ --------- (In thousands, except per share amounts) Basic EPS: Net income................................ 7,797 49,516 0.16 2,334 38,861 0.06 Effects of dilutive securities: Stock options and warrants................ (5,527) 3,940 0.02 - - Diluted EPS: Net income................................ 2,270 53,456 0.04 2,334 38,861 0.06
In anticipation of the initial public offering (Note 9), the Company declared a 0.38098771 for 1 reverse stock split of the common stock. All periods presented have been restated to give effect to this split. Note 6: Comprehensive Income In fiscal 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive income refers to the change in the equity of a company during a period from transactions except those resulting from investments by owners and distributions to owners. ChipPAC adopted this statement as of the first quarter of 1998. Accumulated other comprehensive income at December 31, 1999 and June 30, 2000 comprised cumulative gains and losses prior to the change of functional currency to the U.S. dollar for the overseas operations on October 1, 1999. Note 7: Segment Reporting The Company is engaged in one industry segment, the packaging and testing of integrated circuits. Note 8: Equity and debt transactions In connection with our acquisition of the Malaysian business, we added a $55.0 million term C loan to our senior credit facilities and we obtained the ability to Page 10 increase our revolving credit line by $25.0 million without further consent from our existing lenders. The proceeds of the term C loan were used to finance our acquisition of the Malaysian business and pay transaction fees and expenses. Subsequent to the Initial Public Offering (Note 9), the loan was repaid in full. Further, in connection with the acquisition of the Malaysian business we issued 17,500 shares of Class C Preferred Stock to Intersil as part of the purchase consideration. The Class C preferred stock has an aggregate liquidation preference of $17.5 million, plus all accreted and unpaid dividends. Dividends on the Class C preferred stock accrete at a rate of 5.0% per annum. The Class C preferred stock automatically converted into shares of Class A common stock upon the Initial Public Offering (Note 9). Fifty percent of these shares converted at the initial public offering price and the remaining 50% of these shares converted at 90% of the initial public offering price. Note 9: Subsequent Events Initial Public Offering, the Reclassification, the Reverse Stock Split and Adoption of new stock plans On August 8, 2000 the Securities and Exchange Commission declared effective the Company's Registration Statement on Form S-1 (Registration No. 333-39428) relating to the initial public offering of the Company's Class A common stock. In connection with the closing of the initial public offering the Company issued 10,000,000 shares of Class A Common Stock in for gross proceeds of $120.0 million. The Company concurrently completed the private placements described below. The total proceeds from the offering and the concurrent private placements, net of issuance costs, was $131.5 million. The net proceeds have been used to redeem in full the Class B Preferred Stock and to repay senior credit facilities of $55.6 million. On August 18, 2000, in connection with the underwriters exercise of their overallotment option to purchase additional shares of the Company's Class A common stock, the Company issued an additional 1,500,000 shares of Class A common stock for gross proceeds of $18.0 million. Total proceeds from the issuance of the additional shares, net of issuance costs, was $16.9 million. The net proceeds from the sale of the additional shares will be used for general corporate purposes. Upon the effectiveness of the initial public offering, the Company effected a reclassification of its capital stock. The reclassification was effected pursuant to a merger of the Company with and into a newly formed, wholly owned subsidiary of the Company that was incorporated under the laws of the State of Delaware. The merger had the effect of reincorporating the Company under the laws of the State of Delaware. In connection with the merger, each outstanding share of Class L common stock was reclassified into one share of Class A common stock, plus an additional number of shares of Class A common stock determined by dividing the preference amount accreted by the initial public offering price. In connection with the closing of the initial public offering, all outstanding shares of Class A convertible preferred stock and Class C preferred stock was automatically converted into an aggregate of 4,349,254 shares of Class A common stock. In contemplation of the initial public offering, the Company effected a 0.38098771 for 1 reverse stock split of its capital stock. In addition, the Board of Directors and stockholders adopted the 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan. Concurrent private placement On July 13, 2000, Qualcomm agreed to enter into a three-year supply agreement with us under which we will provide packaging and test services for integrated circuit devices for Qualcomm and to purchase from us $25.0 million of our Class A common stock at a purchase price per share equal to 95% of the Initial Public Offering price. Based on the initial public offering price of $12.00, Qualcomm purchased 2,192,983 shares of Class A Common Stock. Equity investors Page 11 At the time of our 1999 recapitalization, we entered into advisory agreements with certain Equity Investors under which the Equity Investors may provide financial, advisory and consulting services to us in exchange for fees billed at the their customary rates for actual time spent performing these services. Commencing with the three months ended March 31, 2000, the Equity Investors were entitled to an annual advisory fee for the remaining term of the advisory agreement. Each advisory agreement was to remain in effect for an initial term of ten years The Company and the Equity Investors agreed to terminate the advisory agreements upon the closing of the Initial Public Offering in exchange for a one-time aggregate payment of $8.0 million consisting of a $3.6 million cash payment and the issuance of $4.4 million of our Class A common stock at a price per share equal to the initial public offering price in a private placement concurrently with the closing of the offering. The Company will record a one time charge to income of $8.0 million in the third quarter of fiscal 2000 in respect of this agreement termination. Note 10: Supplemental Financial Statements of Guarantor/Non-Guarantor Entities In connection with the recapitalization, ChipPAC International Company Limited (CP Int'l) issued senior subordinated debt securities which are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by the parent company, ChipPAC, Inc. (CPI) and by ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Korea Company Limited (CPK), ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company (the "Guarantor Subsidiaries"). All guarantor subsidiaries are wholly-owned direct or indirect subsidiaries of ChipPAC, Inc. Hyundai Electronics Co. (Shanghai) Ltd. (HECS) and ChipPAC Assembly & Test Co. Ltd. (CATS) (collectively the Chinese entities), will not provide guarantees (the "Non- Guarantor Subsidiaries"). The following is consolidated and combining financial information for CP Int'l CPI, and CPK, HECS, CATS, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company, segregated between the Guarantor and Non- Guarantor Subsidiaries. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented herein because management has determined that they are not material to investors. Financial information for ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L. and ChipPAC Liquidity Management has not been presented as these entities have no historical financial results and future transactions will primarily consist of inter-company transactions. The following HECS financial statements in the condensed combining financial statements include the accounts of CATS. Page 12 ChipPAC, Inc. Supplemental Combining Condensed Balance Sheets June 30, 1999 (In thousands) (Unaudited)
Guarantors Non-Guarantor ---------------------- ------------------- CPI CPK CPS Eliminations Combined --------- ----------- ------------------- ---------------- ------------- Assets Current assets: Cash and cash equivalents $ 31,102 $ 9,369 $ 8,440 - $ 48,911 Intercompany accounts receivable 11,512 116,868 2,611 ($130,991) - Accounts receivable from customers 22,800 10,171 81 - 33,052 Inventories 5 10,957 283 - 11,245 Deferred taxes 420 1,056 - - 1,476 Prepaid expenses & other current assets 459 3,037 665 - 4,161 ------ ------ ------ ------ ------ Total current assets 66,298 151,458 12,080 (130,991) 98,845 Property, plant and equipment, net 6,164 135,696 81,129 - 222,989 Intercompany loans receivable - - - - - Other assets 4,828 3,296 - (4,800) 3,324 ------ ------ ------ ------ ------ Total assets $ 77,290 $290,450 $ 93,209 ($135,791) $325,158 ====== ======= ====== ======= ======= Liabilities and Equity Current liabilities: Intercompany accounts payable $ 98,785 $ 2,703 $ 29,503 ($130,991) - Payable to affiliate 443 - 7,187 - $ 7,630 Accounts payable 2,023 31,383 997 - 34,403 Accrued expenses and other liabilities 1,355 6,620 3,730 - 11,705 Short-term debt - 918 9,700 - 10,618 Current portion of long-term debt - 24,266 10,781 - 35,047 ------ ------ ------ ------ ------ Total current liabilities 102,606 65,890 61,898 (130,991) 99,403 Long-term debt, less current portion - 81,130 - - 81,130 Intercompany loans payable - (12,057) 12,057 - - Other long-term liabilities - 2,417 - - 2,417 ------ ------ ------ ------ ------ Total liabilities 102,606 137,380 73,955 (130,991) 182,950 ------- ------- ------ ------- ------- Shareholders' and divisional equity Preferred stock and paid in capital 16,669 111,724 78,096 (4,800) 201,689 Shareholder receivable-HEA (37,211) - - - (37,211) Accumulated earnings (deficit) (4,774) 26,666 (59,310) - (37,418) Accumulated other comprehensive income (loss) - 14,679 469 - 15,148 ------ ------ ------ ------ ------ Shareholders' and divisional equity (25,316) 153,070 19,255 (4,800) 142,208 ------ ------- ------ ------ ------- Total liabilities and equity $ 77,290 $290,450 $ 93,209 ($135,791) $325,158 ====== ======= ====== ======= =======
The accompanying notes form an integral part of these condensed consolidated financial statements Page 13 ChipPAC, Inc. Supplemental Combining Condensed Statements of Operations Six Months Ended June 30, 1999 (In thousands) (Unaudited)
Guarantors Non-Guarantor ----------------------- --------------- CPI CPK CPS Eliminations Combined ------- -------- --------------- -------------- ------------ Revenue Intercompany revenue - $147,441 $ 5,524 ($152,965) - Customer revenue 155,646 10,648 107 - $166,401 ------- ------- -------- --------- -------- Revenue 155,646 158,088 5,632 (152,965) 166,401 Cost of revenue 147,784 136,814 12,426 (153,724) 143,300 ------- ------- -------- --------- -------- Gross profit 7,862 21,274 (6,794) 759 23,101 Operating expenses: Selling, general & administrative 6,246 3,088 - - 9,333 Research & development 3,016 2,972 - - 5,988 Change of control expenses - - - - - ------- ------- -------- --------- -------- Total operating expenses 9,262 6,059 - - 15,321 ------- ------- -------- --------- -------- Operating income (1,400) 15,214 (6,794) 759 7,780 Non-operating Income (Expense) Interest income 370 1,101 268 - 1,739 Interest expense - (4,157) (1,637) - (5,794) Foreign currency gains (losses) (1) 1,392 (16) - 1,375 Other income (expenses), net (6) 913 3 (759) 182 ------- ------- -------- --------- -------- Non-operating income (expenses) 363 (752) (1,350) (759) (2,498) ------- ------- -------- --------- -------- Income (loss) before income taxes (1,037) 14,463 (8,144) - 5,282 Provision for (benefit from) income taxes 3 2,945 - - 2,948 ------- ------- -------- --------- -------- Income before extraordinary item (1,040) 11,518 (8,144) - 2,334 Extraordinary item: Loss from early extinguishment of debt, net of related income tax benefit - - - - ------- ------- -------- --------- -------- Net Income (loss) ($1,040) $ 11,518 ($8,144) - $ 2,334 ======= ======= ======== ========= ========
The accompanying notes form an integral part of these condensed consolidated financial statements Page 14 ChipPAC, Inc. Supplemental Combining Condensed Statements of Cash Flows Six Months Ended June 30, 1999 (In thousands) (Unaudited)
Guarantors Non-Guarantor ------------------- --------------- CPI CPK CPS Eliminations Combined -------- --------- --------------- -------------- ------------- Cash flows from operating activities: Net Income ($1,040) $ 11,518 ($8,144) $ 0 $ 2,334 Adjustments to reconcile net income Depreciation and amortization 663 36,101 5,086 - 41,850 Provision for inventory and receivables (45) (382) - - (427) Non-operating early debt extinguishment loss Foreign currency (gains) losses - (1,375) - - (1,375) (Gain) loss on external sales of equipment - (241) - - (241) Changes in assets and liabilities: Intercompany accounts receivable (667) (9,944) (664) 11,275 - Accounts receivable 11,986 (2,062) (81) - 9,843 Inventories (5) (1,816) (68) - (1,889) Prepaid expenses and other assets (5,205) (20,055) (320) 4,800 (20,780) Advances (to) from affiliates-trade - (6,190) - - (6,190) Intercompany accounts payable 15,229 664 (4,618) (11,275) - Accounts payable (260) (21,122) (811) - (22,193) Accrued expenses & other liabilities 222 6,136 682 - 7,040 Other long-term liabilities - (2,087) - - (2,087) Net cash provided by operating activities 20,878 (10,855) (8,938) 4,800 5,885 ------ ------ ------ ------ ------ Cash flows used in investing activities: Acquisition of property and equipment (1,019) (26,983) (5,289) 4,229 (29,062) Proceeds, external equipment sales - 5,455 37 (4,229) 1,263 ------ ------ ------ ------ ------ Net cash used in investing activities (1,019) (21,528) (5,252) - (27,799) ------ ------ ------ ------ ------ Cash flows provided by financing activities: Loans & advances with affiliates - - (4,430) - (4,430) Proceeds from short-term loans 416 753 - - 1,169 Repayment of short-term loans - (13,469) (6,000) - (19,469) Proceeds from term loans - 300,000 - - 300,000 Repayment, term loans and capital leases - (128,225) (5,390) - (133,615) Payments made to extinguish debt early - - - - - Dividend paid - (9,435) - - (9,435) Issuance of stock - 123,415 - - 123,415 Contributions (withdrawals) of capital - (290,919) 24,802 (4,800) (270,917) ------ ------ ------ ------ ------ Net cash provided by financing activities 416 (17,880) 8,982 (4,800) (13,282) ------ ------ ------ ------ ------ Effect from changes in exchange rates - 15,340 - - 15,340 ------ ------ ------ ------ ------ Net increase (decrease) in cash 20,275 (34,923) (5,209) - (19,856) Cash and equivalents at beginning of period 10,827 44,293 13,647 - 68,767 ------ ------ ------ ------ ------ Cash and equivalents at end of period $ 31,102 $ 9,369 $ 8,440 - $ 48,911 ====== ====== ====== ====== ======
The accompanying notes form an integral part of these condensed consolidated financial statements Page 15 ChipPAC, Inc. Supplemental Condensed Consolidating Balance Sheets June 30, 2000 (In thousands)
Parent Non- Guarantor Issuer Guarantor ------------------------- Other ------------ CPI CP Int'l Guarantors CPS Eliminations Consolidated -------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 124 $ 234 $ 22,902 $ 4,281 $ 0 $ 27,541 Intercompany accounts receivable 6,025 20,816 36,541 14,859 (78,241) - Accounts receivable from customers 5 - 54,653 85 - 54,743 Inventories - - 17,513 2,838 - 20,351 Deferred taxes - - 836 - - 836 Prepaid expenses & other current assets 265 - 3,650 1,874 - 5,789 -------- -------- -------- -------- ---------- --------- Total current assets 6,419 21,050 136,095 23,937 (78,241) 109,260 Property, plant and equipment, net 6,677 - 219,993 81,546 - 308,216 Intercompany loans receivable - 323,500 - (34,000) (289,500) - Investment in subsidiaries 110,606 32,340 206,131 - (349,077) - Other assets 31 14,875 119,351 - (100,000) 34,257 -------- -------- -------- -------- ---------- --------- Total assets $123,733 $391,765 $681,570 $ 71,483 ($816,818) $ 451,733 ======== ======== ======== ======== ========== ========= Liabilities and Equity Current liabilities: Short term bank borrowings $ 0 $ 15,900 $ 0 $ 0 $ 0 $ 15,900 Intercompany accounts payable - 58 48,532 29,651 (78,241) - Accounts payable 371 40 44,483 6,077 - 50,971 Accrued expenses and other liabilities 7,422 10,614 19,353 5,081 (4,491) 37,979 Deferred taxes - - - - - - Short-term debt - - - - - - Current portion of long-term debt - 9,350 - - - 9,350 -------- -------- -------- -------- ---------- --------- Total current liabilities 7,793 35,962 112,368 40,809 (82,732) 114,200 Long-term debt, less current portion - 344,250 - - - 344,250 Intercompany loans payable - - 289,500 - (289,500) - Other long-term liabilities 240 - 9,012 - - 9,252 -------- -------- -------- -------- ---------- --------- Total liabilities 8,033 380,212 410,880 40,809 (372,232) 467,702 -------- -------- -------- -------- ---------- --------- Mandatorily redeemable preferred stock 104,291 - - - - 104,291 Shareholders' and divisional equity Common stock 529 - - - - 529 Common stock-Subsidiaries - 14,569 189,948 (204,517) - Warrants-common stock A 1,250 - - - - 1,250 Additional paid in capital 86,929 (25) (26) - - 86,878 Receivable from shareholder (1,353) - - - - (1,353) Divisional equity, net of capital distributions (58,656) - 29,623 85,096 (223,777) (167,714) Accumulated earnings (deficit) (17,290) (2,991) 42,440 (54,885) (16,292) (49,019) Accumulated other comprehensive income (loss) - - 8,705 464 - 9,169 -------- -------- -------- -------- ---------- --------- Shareholders' and divisional equity 11,409 11,553 270,690 30,674 (444,586) (120,260) -------- -------- -------- -------- ---------- --------- Total liabilities and equity $123,733 $391,765 $681,570 $ 71,483 ($816,818) $ 451,733 ======== ======== ======== ======== ========== =========
The accompanying notes form an integral part of these condensed consolidated financial statements Page 16 Supplemental Combining Condensed Statements of Operations Six Months Ended June 30, 2000 (In thousands)
Parent Non- Guarantor Issuer Guarantor ------------------------ Other ------------- CPI CP Int'l Guarantors CPS Eliminations Consolidated -------------------------------------------------------------------------------- Revenue Intercompany revenue $ 14,425 $ 0 ($5,758) $23,030 ($31,697) $ 0 Customer revenue - - 206,445 3 - 206,448 ______ ______ ______ ______ ______ ______ Revenue 14,425 - 200,687 23,033 (31,697) 206,448 Cost of revenue 322 - 157,109 19,723 (17,272) 159,882 ______ ______ ______ ______ ______ ______ Gross profit 14,103 - 43,578 3,310 (14,425) 46,566 Operating expenses: Selling, general & administrative 10,856 21 17,886 - (14,425) 14,338 Research & development 2,522 - 2,619 - - 5,141 ______ ______ ______ ______ ______ ______ Total operating expenses 13,378 21 20,505 - (14,425) 19,479 ______ ______ ______ ______ ______ ______ Operating income 725 (21) 23,073 3,310 - 27,087 Non-operating Income (Expense) Interest income (10,352) 15,363 15,903 37 (20,566) 385 Interest expense 10,383 (19,357) (29,234) (1,724) 20,568 (19,364 Foreign currency gains (losses) - - 1,032 (58) - 974 Income (loss) from investment in subsidiaries 5,697 1,808 18,763 - (26,268) - Other income (expenses), net 137 - 48 474 (1) 658 ______ ______ ______ ______ ______ ______ Non-operating income (expenses) 5,865 (2,186) 6,512 (1,271) (26,267) (17,347 ______ ______ ______ ______ ______ ______ Income (loss) before income taxes 6,590 (2,207) 29,585 2,039 (26,267) 9,740 Provision for (benefit from) income taxes 3,084 162 3,206 - (4,504) 1,948 ______ ______ ______ ______ ______ ______ Net Income (loss) $ 3,506 ($2,369) $ 26,379 $ 2,039 ($21,763) $ 7,792 ====== ====== ====== ====== ====== ______
The accompanying notes form an integral part of these condensed consolidated financial statements Page 17 ChipPAC, Inc. Supplemental Combining Condensed Statements of Cash Flows Six Months Ended June 30, 2000 (In thousands)
Parent Non- Guarantor Issuer Guarantor ----------------------- Other ------------ CPI CP Int'l Guarantors CPS Eliminations Consolidated ------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 3,506 ($2,369) $ 26,380 $ 2,039 ($21,764) $ 7,792 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 847 1,029 12,878 3,591 - 18,345 Provision for inventory and receivables 376 - (415) - - (39) Foreign currency (gains) losses - - (636) - - (636) (Gain) loss on external sales of equipment - - 186 (142) - 44 Equity income from investment in subsidiaries (5,697) (1,808) (18,763) - 26,268 - Changes in assets and liabilities: - - - - - Intercompany accounts receivable 753 (16,881) 5,693 (6,060) 16,495 - Accounts receivable (33) - (12,955) (65) - (13,053) Inventories - - 3,400 (2,672) - 728 Prepaid expenses and other assets (444) - (3,234) (1,602) - (5,280) Intercompany accounts payable 28 58 18,346 (1,937) (16,495) - Accounts payable (849) - (10,273) 4,428 - (6,694) Accrued expenses & other liabilities 2,955 1,569 (999) 1,380 (4,504) 401 Other long-term liabilities - - 1,856 - - 1,856 ------ ------ ------ ------ ------ ------ Net cash provided by operating activities 1,442 (18,402) 21,464 (1,040) - 3,464 ------ ------ ------ ------ ------ ------ Cash flows used in investing activities: Acquisition of property and equipment (1,230) - (28,825) (7,401) 1,078 (36,378) Proceeds, external equipment sales - - 15,737 359 (1,078) 15,018 Investment in subsidiaries (17,296) - (65,486) - 40,588 (42,194) Purchase of intangible assets - - (12,655) - - (12,655) ------ ------ ------ ------ ------ ------ Net cash used in investing activities (18,526) - (91,229) (7,042) 40,588 (76,209) ------ ------ ------ ------ ------ ------ Cash flows provided by financing activities: Loans and advances (to) from employees-net (225) - - - - (225) Proceeds from short-term loans - 25,700 - - - 25,700 Repayment of short-term loans - (9,800) - - - (9,800) Net proceeds from long-term loans - 52,809 502 - - 53,311 Repayment of term loans - (1,400) - - - (1,400) Intercompany loan (advances) payments - (52,500) 52,500 - - - Intercompany capital contributions - 379 17,423 7,000 (24,802) - Net proceeds from common stock issuance 640 (26) (31) - - 583 Net proceeds from mandatorily redeemable preferred stock issuance 15,786 - - - (15,786) - ------ ------ ------ ------ ------ ------ Net cash provided by financing activities 16,201 15,162 70,394 7,000 (40,588) 68,169 ------ ------ ------ ------ ------ ------ Net increase (decrease) in cash (883) (3,240) 629 (1,082) - (4,576) Cash and equivalents at beginning of period 1,007 3,474 22,273 5,363 - 32,117 ------ ------ ------ ------ ------ ------ Cash and equivalents at end of period $ 124 $ 234 $ 22,902 $ 4,281 $ 0 $ 27,541 ====== ====== ====== ====== ====== ======
The accompanying notes form an integral part of these condensed consolidated financial statements Page 18 Item 2 : Management's discussion and analysis of financial condition and results of operations All references are to ChipPAC's fiscal quarters ended June 30, 2000("Q2 2000"), and June 30, 1999("Q2 1999"), unless otherwise indicated. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements as to future operating results and business plans of ChipPAC. We use words such as "anticipates", "believes", "expects", "future", "intends" and similar expressions to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth in "Factors Affecting Future Results" and elsewhere in this report. Overview In 1984, our packaging business began operating as a separate division of Hyundai Electronics Industries Co., Ltd., one of the world's largest semiconductor manufacturers and a member of the Hyundai Group, the Korean conglomerate. In 1997, we were incorporated as a distinct entity and established as the parent of a stand-alone worldwide business. In 1999, as part of our recapitalization, affiliates of Bain Capital Inc. and SXI Group LLC, a portfolio concern of Citicorp Venture Capital Ltd., which we refer to collectively as the "Equity Investors," obtained control of our company and Hyundai Electronics America retained approximately 10.0% of our outstanding common stock. Our revenues consist of fees charged to our customers for the packaging and testing of their integrated circuits, which we refer to as ICs. From 1995 to 1999, net revenues increased from $179.2 million to $375.5 million, primarily from the growth of BGA packaging. We are one of the largest providers of outsourced BGA packaging services worldwide and the main supplier of BGA packaging services to Intel, whom we believe is the largest consumer of these products and represented over 40% of the BGA independent packaging market in 1999. The capital investments made by Hyundai Electronics from 1995 to 1997 totaled approximately $300.0 million and provided us with the capacity necessary to support this growth in advanced packaging services, along with providing capacity to support future growth. By 1998, we possessed the scale required to provide our services to other customers who required BGA packaging services. We also have a significant business in leaded packaging, which accounted for 29.1% and 32.7% of our revenue in 1999 and during the three months ended June 30, 2000, respectively. Page 19 Malaysian Business On June 30, 2000, we consummated our acquisition of Intersil's packaging and test operations located in Kuala Lumpur, Malaysia along with related intellectual property for approximately $70.0 million in cash and preferred stock. In connection with the acquisition, we entered into a five-year supply agreement with Intersil to provide assembly and test services on an exclusive basis. The Malaysian business increases our exposure to high growth advanced communications products, provides a presence in Malaysia and enhances our intellectual property in key areas. In addition, the Malaysian business expands our mixed-signal testing capabilities and provides us with critical expertise in RF testing. The Malaysian business had revenues of $83.7 million, $80.4 million and $110.5 million for the fiscal years ended June 27, 1997, July 3, 1998 and July 2, 1999, respectively. All of these revenues represented intercompany sales to Intersil. Results of Operations Three and Six Months Ended June 30, 2000 Compared to the Three and Six Months Ended June 30, 1999 Revenues Revenues were $109.0 million and $206.4 million for the three months and six months ended June 30, 2000, respectively, an increase of 34.8% and 24.1% over the prior year periods, respectively. The communications end market was the fastest growing end market with 124% and 99.4% growth over the prior year three month and six month periods, respectively. Test revenues for the quarter ended and six months ended June 30, 2000 were $7.4 million and $12.9 million, respectively, an increase of 247.8% and 268.1% over the prior year periods, respectively. Laminate product assembly revenues for the quarter ended and six months ended June 30, 2000 were $64.3 million and $122.3 million, respectively, an increase of 23.4% and 6.9% over the prior year periods. Leaded product assembly revenues were $37.3 million and $71.2 million for the quarter ended and six months ended June 30, 2000, respectively, an increase of 39.9% and 47% over the prior year periods, respectively. Our total packaging unit volume was 412.4 million and 759.7 million for the three months and six months ended June 30, 2000, an increase of 61% and 81.8%, respectively, over the prior year periods. Leaded product assembly unit volume increased by 53.9% and 78.9%, respectively, over the prior year three and six month periods. Laminate product assembly unit volume increased by 137.7% and 107.1%, respectively, over the comparable prior year periods. Gross Profit Gross profit during the three months and six months ended June 30, 2000 was $26.1 million and $46.6 million, respectively and increased by 169.9% and 101.6%, respectively, over the comparable prior year periods. Gross margin percentage was 24.0% and 22.6% for the three months and six months ended June 30, 2000, an increase of 100% and 62.6%, respectively, over the comparable periods in the prior year. The margin improvement during the three months and six months periods ended June 30, 2000 were primarily attributable to reductions in material costs and increased efficiency in the utilization of our production capacity and labor resources and lower depreciation expense resulting from the change in the estimated useful lives in production equipment made effective from January 1, 2000. This change in accounting estimate resulted in lowered depreciation expense for the three months Page 20 and six months ended June 30, 2000 of approximately $6.9 million and $13.6 million, respectively. Selling, General and Administrative Selling, general and administrative expenses increased to $7.2 million and $14.3 million for the quarter and six months ended June 30, 2000, respectively, an increase of 50.1% and 53.7%, respectively, over the comparable prior year periods. As a percentage of revenue these expenses for the quarter and six months ended June 30, 2000 increased to 6.6% and 6.9%, respectively, from 6% and 5.6% in the prior year periods. This increase in spending was primarily due to additions of management personnel, MIS development, and management advisory fees. The remaining increase was due to additional sales, marketing and customer service headcount in support of the acquisition of new customers. Research and Development Research and development expense decreased to $2.5 million and $5.1 million during the three and six months ended June 30, 2000, respectively. This represents a 15.9% decrease and a 14.1% decrease, respectively, in research and development costs over the comparable prior year periods. During both the three and six months ended June 30, 2000 spending on consumable materials, supplies, and tooling was curtailed as we have focused our research efforts on highly collaborative development programs with major customers. Additionally, there were non-recurring start up costs in the first quarter of 1999 associated with the Santa Clara flip-chip and advanced packaging prototype design and development laboratory. Net Interest Expense Total outstanding interest bearing debt increased to $369.5 million at June 30, 2000 from $126.8 million at June 30, 1999 due primarily to the recapitalization which occurred on August 5, 1999 and also due to the additional term debt incurred in connection with the acquisition of the Malaysian facility on June 30, 2000. Interest income for the three months and six months ended June 30, 2000, decreased to $0.1 million and $0.4 million, respectively, from $0.8 and $1.7 million during the comparable three and six month periods in 1999. Foreign Currency Gains (Losses) Net foreign currency gains were $0.5 million and $0.7 million during the three and six months ended June 30, 2000, respectively, compared to net gains of $0.4 million and $1.4 million during the three and six months ended June 30, 1999, respectively. During 2000 our exposure to foreign currency gains and losses has been significantly mitigated by two related factors. First, on October 1, 1999 we changed our functional currency to the U.S. Dollar from the local currencies of our Korean and Chinese subsidiaries. Second, beginning in late 1999 we negotiated and denominated the large majority of our material and equipment purchases in U.S. Dollars. Income Taxes: Income tax expense for the quarter and six months ended June 30, 2000 was approximately $1.4 million and $1.9 million, respectively, for an effective tax rate of 20% for both periods. Concurrent with the recapitalization on August 5, 1999, the company was reorganized and as a result now has operations and earnings in jurisdictions with relatively low income tax rates, or where we enjoy tax holidays or other similar tax benefits. Prior to this reorganization of the company, during the three and six months ended June 30, 1999 the company had an income tax benefit of $0.2 million, and income tax expense of $2.9 million, respectively. Page 21 Liquidity and Capital Resources At June 30, 2000 we had and continue to have a borrowing capacity of $50.0 million for working capital and general corporate purposes under the revolving credit line portion of our senior credit facilities. In addition, borrowings of up to $20.0 million are available for acquiring equipment and making other specified capital expenditures under the capital expenditure line of our senior credit facilities. We may borrow and repay under the capital expenditure line until August 5, 2001. Amounts that we repay under the capital expenditure line after August 5, 2001 may not be reborrowed by us later. The final maturity for both these facilities is August 5, 2005. We did not draw upon these facilities in connection with our recapitalization. In connection with our June 30, 2000 acquisition of the Malaysian business, we added a $55.0 million term C loan to our senior credit facilities and we obtained the ability to increase our revolving credit line by $25.0 million without further consent from our existing lenders. The proceeds of the term C loan were partially used to finance the $70 million acquisition of the Malaysian business and pay related transaction fees and expenses. Our ongoing primary cash needs are for operations and equipment purchases. Prior to our recapitalization, we met a significant portion of our cash requirements from a combination of (1) short- and long-term bank loans and (2) capital contributions from Hyundai, our former owner. All short and long-term debt, loans, leases and other credit facilities existing prior to our recapitalization were repaid and terminated at the recapitalization date. In February 2000, we made an initial borrowing of $13.5 million on our revolving line of credit. We have spent approximately $36.6 million on capital expenditures during the six months ended June 30, 2000. We also entered into a sale and leaseback transaction during 2000 whereby we sold equipment to an equipment leasing company for cash proceeds of $15 million. We spent approximately $17.6 million in capital expenditures during the six months ended June 30, 1999. Under the recapitalization agreement, Hyundai Electronics may receive up to an additional $55.0 million of cash during the four-year period beginning January 1, 1999 if we exceed specified levels of EBITDA as described in the recapitalization agreement. Hyundai Electronics is entitled to receive 33.3% of the amount by which our EBITDA, which is defined in the recapitalization agreement. Under the terms of the agreement relating to our acquisition of the Malaysian business, during the period from June 1, 2000 to June 30, 2003, Intersil will be entitled to receive additional contingent incentive payments based upon the achievement of milestones relating to the transfer of business currently subcontracted by Intersil to a third party. In the event that Intersil were to achieve all the milestones, we would pay Intersil an additional sum of approximately $17.9 million in the aggregate. As of June 30, 2000, our debt consisted of $369.5 million of borrowings which were comprised of $15.9 million of revolving loans, $203.6 million in term loans and $150.0 million of senior subordinated notes. We also have $104.3 million of preferred stock. Subsequent to June 30, 2000, we completed an initial public offering and concurrent private placement which generated net cash proceeds of approximately $148.45 million, including the net proceeds from the sale of shares to the underwriters for over subscription in the initial closing. Based upon certain requirements imposed by the senior bank facilities, at least approximately $41 million of the net initial public offering proceeds were required to be used to retire bank term debt. The company has met this minimum requirement and voluntarily used $55 million of the initial public offering net proceeds to retire the term debt acquired to partially finance the acquisition of the Malaysian business. We believe that our existing cash balances, cash flows from operations, available equipment lease financing, available borrowings under our senior credit facilities Page 22 and the net proceeds from the completed initial public offering and the concurrent private placement will be sufficient to meet our projected capital expenditures, working capital and other cash requirements for the next twelve months. Our debt instruments require that we meet specified financial tests, including, without limitation, a maximum leverage ratio, a minimum interest coverage ratio and minimum fixed charge coverage ratio. These debt instruments also contain covenants restricting our operations. There were no violations of these covenants through June 30, 2000 and we expect to comply with all these covenants during the next twelve months. Therefore, our liquidity and capital resources are not expected to be impacted by these covenants. Recent Accounting Pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments including standalone instruments, as forward currency exchange contracts and interest rate swaps or embedded derivatives and requires that these instruments be market-to-market on an ongoing basis. These market value adjustments are to be included either in the income statement or stockholders' equity, depending on the nature of the transaction. We are required to adopt SFAS 133 in the first quarter of our fiscal year 2001. We are in process of evaluating the effect of SFAS 133 on our financial statements. In December 1999, the Securities and Exchange Commission issued SAB No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. We believe that the impact of SAB No. 101 will have no material effect on our financial position or results of operations. In April 2000, the Financial Accounting Standards Board issued FASB interpretation of No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. Among other issues, this interpretation clarifies the definition of employees for purposes of applying Opinion No. 25, the criteria for determining whether a plan qualifies as a non- compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in the interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent that this interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effect of applying this Page 23 interpretation is recognized on a prospective basis from July 1, 2000. We are currently reviewing stock grants to determine the impact, if any, that may arise from implementation of this interpretation, although we do not expect the impact, if any, to be material to our financial statements. Item 3: Quantitative and Qualitative Disclosure about Market Risk We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We utilize derivative financial instruments but do not use derivative financial instruments for speculative or trading purposes. We have long-term debt that carries fixed and variable interest rates. A fluctuation in interest rates of 1% would increase our annual interest charge by approximately $1.5 million. A majority of our revenue and capital spending is transacted in U.S. Dollars. We do, however, enter into transactions in other currencies, primarily the Korean Won. With effect from October 1, 1999 we have changed the functional currency of ChipPAC Korea and ChipPAC China from their respective local currencies to the U.S. Dollar. The use of the U.S. Dollar as the functional currency is expected to result in a much lower level of foreign exchange gains and losses in our overseas subsidiaries. Factors Affecting Future Results For a statement of the factors which may affect our future results, we refer you to our registration statement on Form S-1 (No. 333-39428) relating to our proposed initial public offering of our Class A common stock. Please see in particular those factors mentioned under the heading "Risk Factors" beginning on page 10 and information mentioned under the heading "Cautionary Note Regarding Forward-Looking Statements" on page 18 of that registration statement. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds On August 14, 2000, the Company completed an initial public offering (the "Offering") of its Class A common stock. The managing underwriters in the Offering were Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, FleetBoston Robertson Stephens Inc. and Thomas Weisel Partners LLC (the "Underwriters"). The shares of Class A common stock sold in the Offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S- 1 (the "Registration Statement") (Reg. No. 333-39428) that was declared effective by the SEC on August 8, 2000. The Offering commenced on August 9, 2000. All 11,500,000 shares of Class A common stock registered under the Registration Statement (including 1,500,000 shares sold pursuant to the exercise of the Underwriters' overallotment option) were sold at a price of $12.00 per share. In connection with the Offering, the Company paid an aggregate of $8,280,000 in underwriting discounts and commissions to the Underwriters. In addition, the following table sets forth an estimate of all expenses incurred in connection with the Offering, other than underwriting discounts and commissions. All amounts shown are estimates except for the fees payable to the SEC,National Association of Securities Dealers, Inc. ("NASD") and Nasdaq National Market. - ----------------------------------------------------------------------- SEC registration fee $ 103,528 - ----------------------------------------------------------------------- NASD filing fee 30,500 - ----------------------------------------------------------------------- Nasdaq National Market Listing Fee 95,000 - ----------------------------------------------------------------------- Printing and engraving fees 300,000 - ----------------------------------------------------------------------- Legal fees and expenses 350,000 - ----------------------------------------------------------------------- Page 24 - ----------------------------------------------------------------------- Accounting fees and expenses 500,000 - ----------------------------------------------------------------------- Blue sky fees and expenses 1,000 - ----------------------------------------------------------------------- Transfer agent and register fees 7,000 - ----------------------------------------------------------------------- Directors and officers insurance 465,000 - ----------------------------------------------------------------------- Miscellaneous 4,447,972 - ----------------------------------------------------------------------- Total $6,300,000 - ----------------------------------------------------------------------- After deducting the underwriting discounts and commissions and the estimated Offering expenses described above, the Company received net proceeds from the Offering of approximately $123,420,000. The Company has used a portion of the net proceeds from the Offering to redeem in full its Class B preferred stock and to repay senior credit facilities of $55.6 million. The Company intends to use the remainder of the net proceeds for general corporate purposes. Other than to affiliates and stockholders who had an interest in the Company's Class B preferred stock and its senior credit facilities, none of the Company's net proceeds of the Offering were paid directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning more than 10% or more of any class of equity securities of the Company, or an affiliate of the Company. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders In June 2000, the stockholders voted on a consent in lieu of special meeting of stockholders. The following matters were voted on: (1) the reincorporation of the Company under the laws of the State of Delaware; (2) the merger agreement relating to such reincorporation; (3) Amended and Restated Certificate of Incorporation; (4) Amended and restated Bylaws; (5) appointment of independent public accountants; (6) form of Indemnification Agreement; (7) 2000 Equity Incentive Plan and (8) 2000 Employee Stock Purchase Plan. On all matters the vote tally was 47, 293,280 votes for, with the remainder of the outstanding share abstaining. In July 2000, the stockholders voted on a consent in lieu of special meeting of stockholders approving the 0.38098771 for 1 reverse stock split of the Company's capital stock. The vote tally was 47, 293,280 votes for, with the remainder of the outstanding share abstaining. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on from 8-K (a) Exhibits Exhibit Number Description 2.1 First Amendment to Agreement and Plan of Recapitalization and Merger, dated as of June 16, 1999 by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 2.2 Agreement and Plan of Recapitalization and Merger, dated as of March 13, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 2.3 Second Amendment to Agreement and Plan of Recapitalization and Merger, dated as of August 5, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 3.1 Amended and Restated Articles of Incorporation of ChipPAC, Inc.* 3.2 Amended and Restated By-Laws of ChipPAC, Inc.* Page 25 3.3 Memorandum of Association of ChipPAC International Company Limited (formerly known as ChipPAC Finance Limited).* 3.4 Articles of Association of ChipPAC International Company Limited (formerly known as ChipPAC Finance Limited).* 3.5 Articles of Incorporation of ChipPAC (Barbados) Ltd.* 3.6 By-Law No. 1 of ChipPAC (Barbados) Ltd.* 3.7 Memorandum of Association of ChipPAC Limited.* 3.8 Articles of Association of ChipPAC Limited.* 3.9 Articles of Incorporation of ChipPAC Luxembourg S.a.R.L.* 3.10 Deed of Foundation of ChipPAC Liquidity Management Hungary Limited Liability Company.* 3.11 Policy and Operating Guidelines of ChipPAC Liquidity Management Hungary Limited Liability Company (abbreviated as ChipPAC Ltd.)* 3.12 Articles of Incorporation of ChipPAC Korea Company Ltd.* 4.2 Indenture, dated as of July 29, 1999, by and among ChipPAC International Limited, ChipPAC Merger Corp. and Firstar Bank of Minnesota, N.A., as trustee.* 4.3 First Supplemental Indenture, dated as of August 5, 1999, by and among ChipPAC International Company Limited, ChipPAC, Inc. and Firstar Bank of Minnesota, N.A., as trustee.* 4.4 12 3/4% Senior Subordinated Notes Due 2009.* 4.5 Form of Series B 12 3/4% Senior Subordinated Notes Due 2009.* 10.1 Credit Agreement, dated as of August 5, 1999, by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent, Sole Lead Manager and Collateral Agent.* 10.2 Guaranty, dated as of August 5, 1999, by and among ChipPAC, Inc. and certain subsidiaries of ChipPAC, Inc., in favor of Credit Suisse First Boston.* 10.3 Subsidiary Guaranty Agreement, dated as of August 5, 1999, by and among ChipPAC Korea Company Ltd., ChipPAC Limited, ChipPAC (Barbados) Ltd., ChipPAC Luxembourg S.a.R.L., ChipPAC Liquidity Management Hungary Limited Liability Company and ChipPAC International Company Limited, in favor of Firstar Bank of Minnesota, N.A.* 10.4 Amended and Restated Stockholders Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc. the Hyundai Group (as defined therein), the Bain Group (as defined therein), the SXI Group (as defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset Partners, L.P.* 10.5 Amended and Restated Registration Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., the Hyundai Stockholders (as defined therein), the Bain Stockholders (as defined therein), the SXI Stockholders (as defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset Partners, L.P.* 10.5.1 Amendment No. 1 to Amended and Restated Registration Agreement, dated as of June 30, 2000, by and among ChipPAC, Inc., Sapphire Worldwide Investments, Inc., the Bain Stockholders (as defined therein) and SXI Group LLC.** Page 26 10.5.2 Form of Amendment No. 2 to Amended and Restated Registration Agreement, dated as of July 13, 2000, by and among ChipPAC, Inc., Qualcomm Incorporated, SXI Group LLC and the Bain Shareholders (as defined therein).** 10.5.3 Form of Amendment No. 3 to Amended and Restated Registration Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., Bain Capital, Inc., SXI Group LLC and the Bain Shareholders (as defined therein). ** 10.6 Transition Services Agreement, dated as of August 5, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc., ChipPAC Korea Company Ltd., Hyundai Electronics Company (Shanghai) Ltd., ChipPAC Assembly and Test (Shanghai) Company Ltd., ChipPAC Barbados Limited and ChipPAC Limited.* 10.7 Lease Agreement, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.7.1 Amendment Agreement, dated September 30, 1998, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.7.2 Amendment Agreement 2, dated September 30, 1999, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.8 Agreement Concerning Supply of Utilities, Use of Welfare Facilities and Management Services for Real Estate, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.9 Service Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries Co. Ltd. and ChipPAC Limited.* + 10.10 Sublease Agreement, dated as of May 1, 1998, by and between Hyundai Electronics America and ChipPAC, Inc.* 10.11 Patent Sublicense Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Limited.* 10.12 TCC License Agreement, dated December 22, 1998, between Tessera Inc., the Tessera Affiliates (as defined therein), ChipPAC, Inc. and the Licensee Affiliates (as defined therein).* + 10.12.1 Letter Agreement, dated July 15, 1999, by and among ChipPAC, Inc., Hyundai Electronics America, ChipPAC Limited and Tessera, Inc.* 10.13 Materials Agreement, dated as of July 1, 1999, by and between ChipPAC Limited and Intel Corporation.* + 10.14 Assembly Services Agreement, dated as of August 5, 1999, by and between Intel Corporation and ChipPAC Limited. * + 10.15 Stock Purchase Agreement, dated as of August 5, 1999, by and between ChipPAC, Inc. and Intel Corporation.* 10.16 Warrant to Purchase Class B Common Stock of ChipPAC, Inc., dated as of August 5, 1999, issued to Intel Corporation.* 10.17 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC Operating Limited and Bain Capital, Inc.* 10.18 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC Operating Limited and SXI Group LLC.* Page 27 10.19 Employment Agreement, dated as of October 1, 1999, between ChipPAC, Inc. and Dennis McKenna.* 10.20 ChipPAC, Inc. 1999 Stock Purchase and Option Plan.* 10.21 ChipPAC, Inc. 2000 Equity Incentive Plan.** 10.22 ChipPAC, Inc. 2000 Employee Stock Purchase Plan.** 10.23.1 Form of Key Employee Purchased Stock Agreement.* 10.23.2 Form of Key Employee Purchased Stock Agreement (with Loan).* 10.24 Form of Employee Restricted Stock Agreement.* 10.25 Form of Directors Tranche I Stock Option Agreement.* 10.26 Form of Employees Tranche I Stock Option Agreement.* 10.27 Form of Tranche II Stock Option Agreement.* 10.28 Intellectual Property Rights Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.** 10.29 Supply Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.** 10.30 Shareholders Agreement, dated as of June 30, 2000, by and among ChipPAC, Inc., the Bain Group (as defined therein), the SXI Group as defined therein) and Sapphire Worldwide Investments, Inc.** 10.31 Class A Common Stock Purchase Agreement, dated as of July 13, 2000, by and between ChipPAC, Inc. and Qualcomm Incorporated.** 10.32 Promissory Note, dated as of August 2, 2000, by and between Dennis McKenna and ChipPAC, Inc.** 10.33 Promissory Note, dated as of August 2, 2000, by and between Robert Krakauer and ChipPAC, Inc.** 10.34 Form of Amended and Restated Supplemental Agreement No. 1 to the Advisory Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC International Company Limited and Bain Capital, Inc. ** 10.35 Amended and Restated Supplemental Agreement No. 1 to the Advisory Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC International Company Limited and SXI Group LLC. ** 21.1 Subsidiaries of ChipPAC, Inc., ChipPAC International Company Limited, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Liquidity Management Limited Liability Company, ChipPAC Luxembourg S.a.R.L. and ChipPAC Korea Company Ltd.* 27.1 Financial Data Schedule.** - ------------------------------- * Incorporated by reference to the Registrant's Form S-4 (No. 333-91641). ** Incorporated by reference to the Registrant's Form S-1 (No. 333-39428). Page 28 + Confidential treatment has been granted as to certain portions of these exhibits, which are incorporated by reference. (b) Reports on Form 8-K On July 14, 2000 ChipPAC filed a report on Form 8-K under Item 2 that the Company had completed its acquisition of Intersil Technology Sdn. Bhd., a Malaysian corporation and wholly-owned subsidiary of Sapphire Worldwide Investments,Inc., a British Virgin Islands corporation and wholly-owned subsidiary of Intersil Corporation, a Delaware corporation. Pursuant to Item 7, we attached the financial statements required. 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. CHIPPAC, INC. (Registrant) /s/ Robert Krakauer --------------------------------------- ROBERT KRAKAUER Chief Financial Officer (as Registrant and as Principal Accounting Officer) August 21, 2000 Page 29 -----END PRIVACY-ENHANCED MESSAGE-----