EX-1 3 u91834ex1.txt REPORT FOR THE THREE MONTHS ENDED SEPT 30,2001 EXHIBIT 1 CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS Unless the context otherwise requires, references herein to "we", "us", "the company" or "STATS" are to ST Assembly Test Services Ltd, a company organized under the laws of the Republic of Singapore. In this Quarterly Report on Form 6-K ("Quarterly Report"), all references to "$" are to U.S. dollar. References to a particular "fiscal year" are to the Company's fiscal year ended December 31 of that year. The Company's financial statements are presented in accordance with United States generally accepted accounting principles ("US GAAP"). In this Quarterly Report, any discrepancies in any table between totals and the sums of the amounts listed are due to rounding. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE. Certain of the statements in this Form 6-K are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that could cause actual results to differ include general business and economic conditions and the state of the semiconductor industry; demand for end-use applications products such as communications equipment and personal computers; reliance on a small group of principal customers; decisions by customers to discontinue outsourcing of test and assembly services; changes in customer order patterns; rescheduling or canceling of customer orders; changes in product mix; capacity utilization; level of competition; pricing pressures including declines in average selling prices; continued success in technological innovations; delays in acquiring or installing new equipment; shortages in supply of key components; availability of financing; exchange rate fluctuations; litigation and other risks described from time to time in the Company's SEC filings, including its annual report on Form 20-F dated March 30, 2001. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 4 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ST ASSEMBLY TEST SERVICES LTD AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 IN THOUSANDS OF US DOLLARS (EXCEPT SHARE AND PER SHARE DATA)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------------ 2000 2001 -------- -------- Net revenues $ 90,538 $ 28,049 Cost of revenues (63,202) (50,021) -------- -------- Gross profit (loss) 27,336 (21,972) -------- -------- Operating expenses: Selling, general and administrative 10,168 7,939 Research and development 4,078 3,816 Others, net 41 28 -------- -------- Total operating expenses 14,287 11,783 -------- -------- Operating income (loss) 13,049 (33,755) Other income: Interest income, net 2,684 1,161 Foreign currency exchange gain (loss) 606 (562) Other non-operating income, net 967 840 -------- -------- Total other income 4,257 1,439 -------- -------- Income (loss) before income taxes 17,306 (32,316) Income tax expense (851) (122) -------- -------- Net income (loss) before minority interest 16,455 (32,438) Minority interest -- 139 -------- -------- Net income (loss) $ 16,455 $(32,299) -------- -------- Other comprehensive income: Unrealized gain on available-for-sale marketable securities. -- 40 -------- -------- Comprehensive income (loss) $ 16,455 $(32,259) ======== ======== Basic net income (loss) per ordinary share $ 0.02 $ (0.03) Diluted net income (loss) per ordinary share $ 0.02 $ (0.03) Basic net income (loss) per ADS $ 0.17 $ (0.33) Diluted net income (loss) per ADS $ 0.17 $ (0.33) Ordinary shares (in thousands) used in per ordinary share calculation: - basic 984,774 989,608 - effect of dilutive options 7,200 -- -------- -------- - diluted 991,974 989,608 ======== ======== ADS (in thousands) used in per ADS calculation: - basic 98,477 98,961 - effect of dilutive options . 720 -- -------- -------- - diluted 99,197 98,961 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 5 ST ASSEMBLY TEST SERVICES LTD AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 IN THOUSANDS OF US DOLLARS (EXCEPT SHARE AND PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2000 2001 --------- --------- Net revenues $ 238,473 $ 111,943 Cost of revenues (158,668) (165,764) --------- --------- Gross profit (loss) 79,805 (53,821) --------- --------- Operating expenses: Selling, general and administrative 29,847 28,633 Research and development 10,972 10,839 Others, net (192) 110 --------- --------- Total operating expenses 40,627 39,582 --------- --------- Operating income (loss) 39,178 (93,403) Other income: Interest income, net 5,756 4,670 Foreign currency exchange gain (loss) 1,068 (229) Other non-operating income, net. 2,741 2,777 --------- --------- Total other income 9,565 7,218 --------- --------- Income (loss) before income taxes 48,743 (86,185) Income tax expense (2,390) (943) --------- --------- Net income (loss) before minority interest 46,353 (87,128) Minority interest. -- 139 --------- --------- Net income (loss) $ 46,353 $ (86,989) --------- --------- Other comprehensive income: Unrealized gain on available-for-sale marketable securities -- 109 --------- --------- Comprehensive income (loss) $ 46,353 $ (86,880) ========= ========= Basic net income (loss) per ordinary share $ 0.05 $ (0.09) Diluted net income (loss) per ordinary share $ 0.05 $ (0.09) Basic net income (loss) per ADS $ 0.49 $ (0.88) Diluted net income (loss) per ADS $ 0.48 $ (0.88) Ordinary shares (in thousands) used in per ordinary share calculation: - basic 955,160 988,889 - effect of dilutive options 7,894 -- --------- --------- - diluted 963,054 988,889 ========= ========= ADS (in thousands) used in per ADS calculation: - basic 95,516 98,889 - effect of dilutive options 789 -- --------- --------- - diluted 96,305 98,889 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 6 ST ASSEMBLY TEST SERVICES LTD AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND SEPTEMBER 30, 2001 IN THOUSANDS OF US DOLLARS
DECEMBER 31, SEPTEMBER 30, ------------ ------------- 2000 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $141,733 $140,774 Accounts receivable, net . 52,315 19,671 Amounts due from ST and ST affiliates 8,727 2,003 Short-term deposits with ST affiliates 10,000 -- Other receivables . 18,989 8,731 Inventories 14,793 7,097 Marketable securities 11,486 3,339 Prepaid expenses 24,809 24,804 -------- -------- Total current assets 282,852 206,419 Property, plant and equipment, net 380,934 368,760 Marketable securities 10,420 7,695 Prepaid expenses 37,552 19,251 Goodwill -- 1,321 Other assets -- 2,577 -------- -------- Total Assets $711,758 $606,023 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 14,799 $ 14,673 Short-term debt -- 6,380 Accounts payable 13,956 9,700 Amounts due to ST and ST affiliates 2,062 1,263 Accrued operating expenses 32,963 11,526 Other payables 27,705 17,255 Income taxes payable 2,846 1,351 -------- -------- Total current liabilities 94,331 62,148 Other non-current liabilities 2,631 3,860 Long-term debt, excluding current installments 29,599 14,673 -------- -------- Total Liabilities 126,561 80,681 Minority interests -- 25,437 Shareholders' Equity: Share capital 159,461 159,954 Additional paid-in capital 386,325 387,420 Accumulated other comprehensive loss (9,731) (9,622) Retained earnings (deficit) 49,142 (37,847) -------- -------- Total Shareholders' Equity 585,197 499,905 -------- -------- Total Liabilities and Shareholders' Equity $711,758 $606,023 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 7 ST ASSEMBLY TEST SERVICES LTD AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 IN THOUSANDS OF US DOLLARS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2000 2001 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 46,353 $(86,989) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 51,706 74,915 Loss (gain) on sale of property, plant and equipment (195) 111 Exchange loss 3,633 218 Minority interest in loss in subsidiary -- (139) Others 678 (575) Changes in operating working capital: Accounts receivable (28,780) 33,114 Amounts due from ST and ST affiliates 1,417 6,724 Inventories (4,362) 7,696 Other receivables and prepaid expenses 6,800 29,915 Accounts payable 5,726 (4,977) Amounts due to ST and ST affiliates (3,088) (799) Accrued operating expenses and other payables 1,904 (23,170) --------- -------- Net cash provided by operating activities 81,792 36,044 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale or maturity of marketable securities -- 20,181 Purchases of marketable securities (20,095) (8,743) Proceeds from maturity of short-term deposits -- 10,000 Acquisition of subsidiary, net of cash acquired -- 1,835 Purchases of property, plant and equipment (240,320) (45,789) Proceeds from sale of property, plant and equipment 5,978 2,186 --------- -------- Net cash used in investing activities (254,437) (20,330) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt (60,000) (2,443) Repayment of long-term debt (7,468) (14,711) Proceeds from issuance of shares 389,019 738 --------- -------- Net cash provided by (used in) financing activities 321,551 (16,416) --------- -------- Net increase (decrease) in cash and cash equivalents 148,906 (702) Effect of exchange rate changes on cash and cash equivalents (3,953) (257) Cash and cash equivalents at beginning of the period 16,568 141,733 --------- -------- Cash and cash equivalents at end of the period $ 161,521 $140,774 ========= ======== SUPPLEMENTARY CASH FLOW INFORMATION Cash paid for: Interest $ 3,045 $ 1,418 Income taxes $ 461 $ 2,971
See accompanying notes to unaudited condensed consolidated financial statements. 8 ST ASSEMBLY TEST SERVICES LTD AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION ST Assembly Test Services Ltd is a leading semiconductor test and assembly service provider to fabless companies, integrated device manufacturers and wafer foundries. The Company, with its principal operations in Singapore and global operations in the United States, United Kingdom, Japan, Taiwan and Germany, offers full back-end turnkey solutions to customers worldwide. The Company also offers advanced assembly services and has developed a wide array of traditional and advanced leadframe and laminate based products, including various ball grid array packages, to serve some of the world's technological leaders. The Company was incorporated in Singapore in October 1994. As of September 30, 2001, we were 71.97% owned by Singapore Technologies Pte Ltd ("ST") and its affiliates. 2. BASIS OF PRESENTATION The interim condensed consolidated financial statements are prepared in accordance with US GAAP and reflect normal recurring adjustments, which in the opinion of the management, are necessary for a fair presentation of the results for such interim periods. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of the results that may be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 20-F for the year ended December 31, 2000. 3. PRINCIPLES OF CONSOLIDATION The accompanying interim condensed consolidated financial statements include the financial statements of ST Assembly Test Services Ltd and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 4. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of the interim condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Actual results could differ from these estimates. 5. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISKS The Company has a number of major customers in North America, Europe and Asia. During the three-month periods ended September 30, 2000 and September 30, 2001, the five largest customers collectively accounted for approximately 71.8% and 74.3% of revenues, respectively. During the nine-month periods ended September 30, 2000 and September 30, 2001, the five largest customers collectively accounted for approximately 71.7% and 66.6% of revenues, respectively. The Company anticipates that significant customer concentration will continue for the foreseeable future, although the companies that constitute the Company's major customers may change. The Company believes that the concentration of its credit risk in trade receivables is mitigated substantially by its credit evaluation process, credit policies and credit control and collection procedures. 9 6. RISKS AND UNCERTAINTIES The Company's future results of operations include a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, dependence on the highly cyclical nature of both the semiconductor and the communications and personal computer industries, competitive pricing and declines in average selling prices, reliance on a small group of principal customers, timing and volume of orders relative to the Company's production capacity, availability of manufacturing capacity and fluctuations in manufacturing yields, availability of financing, competition, dependence on raw materials and equipment suppliers, exchange rate fluctuations, dependence on key personnel, enforcement of intellectual property rights, environmental regulations and fluctuations in quarterly operating results. 7. INVENTORIES Inventories at December 31, 2000 and September 30, 2001 consist of (in thousands):
DECEMBER 31, SEPTEMBER 30, 2000 2001 ------------ ------------- Raw materials $12,047 $ 9,051 Factory supplies 1,849 1,299 Work-in-progress 2,501 1,841 Finished goods 40 243 ------- ------- 16,437 12,434 Allowance for inventory obsolescence (1,644) (5,337) ------- ------- $14,793 $ 7,097 ------- -------
8. ACQUISITION OF SUBSIDIARY On August 21, 2001 the Company acquired a 51% equity interest in Winstek Semiconductor Corporation ("Winstek"), a company incorporated in Taiwan. The Company subscribed to new shares issued by Winstek for a total consideration of approximately $28 million in cash. Goodwill arising from this acquisition amounted to $1.3 million. Goodwill will be reviewed annually for impairment in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, as discussed in note 11. Winstek's principal activity is the provision of semiconductor test services including wafer probe, final testing and drop shipment services. 9. CONTINGENCY On February 20, 2001, Amkor Technology, Inc. ("Amkor") served a lawsuit against the Company and its subsidiary, ST Assembly Test Services, Inc. in the Eastern District of Texas, alleging patent infringement in respect of certain integrated circuit packages. The Company and Amkor had on September 7, 2001 announced that they had settled the lawsuit. Amkor granted the Company a non-exclusive licence to practise the Amkor MicroLead Frame(TM) (MLF(TM)) patents. The Company in turn agreed to provide Amkor a perpetual worldwide immunity from suits based on the Company's Quad Leadless Package (QLP(TM)) technology. 10 10. SUBSEQUENT EVENT In October 2001, the Company incorporated a wholly-owned subsidiary, FastRamp Test Services, Inc. ("FastRamp"), in the United States of America, to provide high-end engineering and pre-production test service in Silicon Valley. FastRamp will operate out of a new built-to-suit 34,000 sq. ft facility in Milpitas, California in January 2002. 11. RECENT PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies the criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which was issued in August 2001. The Company is required to adopt the provisions of Statement No. 141 immediately and Statement No. 142 is effective January 1, 2002, except with respect to the accounting for goodwill and intangible assets acquired after June 30, 2001 which should be in accordance with this statement. Management believes that the adoption of Statements No. 141 and 142 will not have a material effect on the Company's financial position or results of operations. The FASB also issued Statement No. 143, Accounting for Asset Retirement Obligations, in June 2001 which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company will adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. Iit is not practicable for management to estimate the impact of adopting this Statement at the date of this report. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". Statement No. 144 retains the fundamental provisions of Statement No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. Statement No. 144 addresses certain implementation issues related to Statement No. 121. This Statement also supersedes the accounting and reporting provisions of APB opinion No. 30, "Reporting the Results Of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. Statement No. 144 retains the basic provisions of Opinion No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a 11 segment of a business). Management does not believe it is practicable to estimate the impact of adopting Statement No. 144 at the date of this report. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULT OF OPERATIONS The following table sets forth certain operating data as a percentage of net revenue for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2000 2001 2000 2001 ----- ------ ----- ------ (AS A PERCENTAGE OF NET REVENUE) Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues (69.8) (178.3) (66.5) (148.1) ----- ------ ----- ------ Gross profit (loss) 30.2 (78.3) 33.5 (48.1) ----- ------ ----- ------ Operating expenses: Selling, general and administrative 11.2 28.3 12.6 25.6 Research and development 4.5 13.6 4.6 9.7 Others, net 0.0 0.1 (0.1) 0.1 ----- ------ ----- ------ Total operating expenses 15.7 42.0 17.1 35.4 ----- ------ ----- ------ Operating income (loss) 14.5 (120.3) 16.4 (83.5) Other income: Interest income, net 3.0 4.1 2.4 4.2 Foreign currency exchange gain (loss) 0.7 (2.0) 0.4 (0.2) Other non-operating income, net 1.1 3.0 1.1 2.5 ----- ------ ----- ------ Total other income 4.8 5.1 3.9 6.5 ----- ------ ----- ------ Income (loss) before income taxes 19.3 (115.2) 20.3 (77.0) Income tax expense (0.9) (0.4) (1.0) (0.8) ----- ------ ----- ------ Net income (loss) before minority interest 18.4 (115.6) 19.3 (77.8) Minority interest 0.0 0.5 0.0 0.1 ----- ------ ----- ------ Net income (loss) 18.4 (115.1) 19.3 (77.7) ----- ------ ----- ------ Other comprehensive income: Unrealised gain on available-for-sale Marketable securities 0.0 0.1 0.0 0.1 ----- ------ ----- ------ Comprehensive income (loss) 18.4% (115.0)% 19.3% (77.6)% ----- ------ ----- ------
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001 NET REVENUES. Net revenues decreased by 69.0 % from $90.5 million in the three months ended September 30, 2000 to $28.0 million in the three months ended September 30, 2001. The decrease in net revenues was due primarily to the decrease in unit shipments in both assembly and test businesses and the decline in average selling prices. Net revenues from test services decreased by 66.6% from $41.0 million in the three months ended September 30, 2000 to $13.7 million in the three months ended September 30, 2001. Net revenues from assembly services decreased by 71.1% from $49.5 million in the three months ended September 30, 2000 to $14.3 million in the three months ended September 30, 2001. 13 COST OF REVENUES AND GROSS PROFIT (LOSS). Cost of revenues decreased by 20.9% from $63.2 million in the three months ended September 30, 2000 to $50.0 million in the three months ended September 30, 2001. Cost of revenues as a percentage of sales increased by 108.5% from 69.8% in the three months ended September 30, 2000 to 178.3% in the three months ended September 30, 2001. The increase was due to the high level of fixed costs, primarily depreciation expense and equipment leasing costs arising from equipment additions in the year 2000. Depreciation expense and cost of leasing testers increased from $22.7 million, or 25.1% of net revenues in the three months ended September 30, 2000 to $29.1 million, or 103.7% of net revenues in the three months ended September 30, 2001. Gross loss in the current quarter was $22.0 million, or a gross margin of negative 78.3%, as compared to gross profit of $27.3 million, or a gross margin of 30.2%, in the same quarter a year ago. The gross loss in the current quarter was mainly attributable to substantially lower revenues and the high level of fixed costs, primarily depreciation expense and equipment leasing costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses which include stock-based compensation decreased by 21.9% from $10.2 million in the three months ended September 30, 2000 to $7.9 million in the three months ended September 30, 2001. The decrease in selling, general and administrative expenses was a result of on-going cost reduction initiatives. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by 6.4% from $4.1 million in the three months ended September 30, 2000 to $3.8 million in the three months ended September 30, 2001. This represents 4.5% of net revenues in the three months ended September 30, 2000 compared to 13.6% of net revenues in the three months ended September 30, 2001. These expenses were incurred principally to enhance the Company's advanced packaging technologies in support of our strategy of offering complete back-end turnkey services to our customers. NET INTEREST INCOME. Net interest income decreased by 56.7% from $2.7 million in the three months ended September 30, 2000 to $1.2 million in the three months ended September 30, 2001. Net interest income consisted of interest income of $3.1 million and interest expense of $0.4 million in the three months ended September 30, 2000 and interest income of $1.4 million and interest expense of $0.3 million in the three months ended September 30, 2001. The interest income was earned on our marketable debt securities and fixed term time deposits with financial institutions. The lower interest income earned in the current quarter is due primarily to the lower amount of excess cash available for investment in marketable debt securities and fixed term time deposits in the current quarter and the general decline in the interest rate environment. The interest expense was incurred on the loan from the Economic Development Board ("EDB") of Singapore. FOREIGN CURRENCY EXCHANGE GAIN (LOSS). We recognized an exchange gain of $0.6 million in the three months ended September 30, 2000 and an exchange loss of $0.6 million in the three months ended September 30, 2001 due primarily to currency fluctuations of the U.S. dollar against the Singapore dollar and the Japanese yen. OTHER NON-OPERATING INCOME. Other non-operating income decreased from $1.0 million in the three months ended September 30, 2000 to $0.8 million in the three months ended September 30, 2001. INCOME TAX EXPENSE. Income tax expense was $0.9 million and $0.1 million in the three months ended September 30, 2000 and September 30, 2001, respectively. The income tax expense for both periods was due to Singapore tax on interest income generated principally from investment of excess cash in fixed term time deposits and marketable debt securities. In the three months ended September 30, 2001 income tax expense is net of a $0.2 million deferred income tax benefit. The Company has been granted pioneer trade enterprise status in Singapore from January 1, 1996 to December 31, 2003. As a result, income derived during this period, from subcontract assembly and testing of integrated circuits, including wafer probe services, is exempt from Singapore income tax, subject to compliance with certain conditions. Income from non-pioneer activities is subject to income tax at the prevailing enacted rate of tax. 14 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001 NET REVENUES. Net revenues decreased by 53.1% from $238.5 million in the nine months ended September 30, 2000 to $111.9 million in the nine months ended September 30, 2001. The decrease in net revenues was due primarily to the decrease in unit shipments in both assembly and test businesses and the decline in average selling prices. These were the result of severe weakness in the end markets served by our customers and the high level of excess inventories in the semiconductor industry. Net revenues from test services decreased by 53.1% from $110.3 million in the nine months ended September 30, 2000 to $51.7 million in the nine months ended September 30, 2001. Net revenues from assembly services decreased by 53.1% from $128.3 million in the nine months ended September 30, 2000 to $60.2 million in the nine months ended September 30, 2001. COST OF REVENUES AND GROSS PROFIT (LOSS). Cost of revenues increased by 4.5% from $158.7 million in the nine months ended September 30, 2000 to $165.8 million in the nine months ended September 30, 2001. Cost of revenues as a percentage of sales increased by 81.6% from 66.5% in the nine months ended September 30, 2000 to 148.1% in the nine months ended September 30, 2001. The increase was due to the high level of fixed costs, primarily depreciation expense and equipment leasing costs, a charge of $1.8 million relating to the early termination of equipment leases and a provision for inventory obsolescence of approximately $2.8 million. Depreciation expense and cost of leasing testers increased from $60.8 million in the nine months ended September 30, 2000 to $88.7 million in the nine months ended September 30, 2001. Additional equipment was acquired and placed into service progressively to meet the increased demand for assembly and test services during the year 2000. In the first quarter of this year, there was a charge of $1.8 million relating to the early termination of equipment leases. The inventory provision was taken for substrates and leadframes accumulated for loadings that did not materialize as a result of the downturn. These "end-of-life" substrates and leadframes are not expected to be usable as our customers no longer require those packages. Gross loss in the current nine-month period was $53.8 million, or a gross margin of negative 48.1%, as compared to gross profit of $79.8 million, or gross margin of 33.5%, in the same nine-month period a year ago. The gross loss in the current nine-month period was mainly attributable to substantially lower revenues, high level of fixed costs, primarily depreciation expense and equipment leasing costs, the charge of $1.8 million relating to the early termination of equipment leases and the provision for inventory obsolescence of approximately $2.8 million. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses which include stock-based compensation decreased by 4.1% from $29.8 million in the nine months ended September 30, 2000 to $28.6 million in the nine months ended September 30, 2001. The decrease in selling, general and administrative expenses was a result of on-going cost reduction initiatives such as cutting management salaries, reducing headcount through attrition, enforcing mandatory vacation days and aggressively managing discretionary spending. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by 1.2% from $11.0 million in the nine months ended September 30, 2000 to $10.8 million in the nine months ended September 30, 2001. This represents 4.6% of net revenues in the nine months ended September 30, 2000 compared to 9.7% of net revenues in the nine months ended September 30, 2001. These expenses were incurred principally to enhance the Company's advanced packaging technologies in support of our strategy of offering complete back-end turnkey services to our customers. NET INTEREST INCOME. Net interest income decreased by 18.9% from $5.8 million in the nine months ended September 30, 2000 to $4.7 million in the nine months ended September 30, 2001. Net interest income consisted of interest income of $7.8 million and interest expense of $2.0 million in the nine months ended September 30, 2000 and interest income of $5.7 million and interest expense of $1.0 million in the nine months ended September 30, 2001. The interest income was earned on our marketable debt securities and fixed term time deposits with financial institutions. The lower interest income earned in the current nine-month period is due primarily to the lower amount of excess cash available for investment in marketable debt securities and fixed term time deposits in the current nine-month period and the general decline in the interest rate environment. The lower interest expense in the current nine-month period resulted from the full repayment of two loans amounting in total to $60 million in February 2000 and the progressive repayments of the EDB loan on its repayment due dates. 15 FOREIGN CURRENCY EXCHANGE GAIN. We recognized an exchange gain of $1.1 million and an exchange loss of $0.2 million in the nine months ended September 30, 2000 and September 30, 2001, respectively, due primarily to currency fluctuations of the U.S. dollar against the Singapore dollar and the Japanese yen. OTHER NON-OPERATING INCOME. Other non-operating income was $2.7 million in the nine months ended September 30, 2000 and $2.8 million in the nine months ended September 30, 2001. INCOME TAX EXPENSE. Income tax expense was $2.4 million and $0.9 million in the nine months ended September 30, 2000 and September 30, 2001, respectively. The income tax expense for both periods was due to Singapore tax on interest income generated principally from investment of excess cash in fixed term time deposits and marketable debt securities. In the current nine-month period, income tax expense is net of a $0.5 million deferred income tax benefit. The Company has been granted pioneer trade enterprise status in Singapore from January 1, 1996 to December 31, 2003. As a result, income derived during this period, from subcontract assembly and testing of integrated circuits, including wafer probe services, is exempt from Singapore income tax, subject to compliance with certain conditions. Income from non-pioneer activities is subject to income tax at the prevailing enacted rate of tax. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, our principal sources of liquidity included $140.8 million in cash and cash equivalents and $20.0 million of unutilized banking and credit facilities consisting of short-term advances and bank guarantees. Interest on any future borrowings under the unutilised facilities will be charged at the bank's prevailing rate. The borrowings as of September 30, 2001 of $35.7 million consist primarily of the balance outstanding on a Singapore dollar denominated loan from the EDB which we entered into on September 5, 1998 for a sum of S$90.0 million ($54.3 million). The loan is guaranteed by Singapore Technologies Pte Ltd. The loan bears interest, payable semi-annually, at 1% over the prevailing annual interest rate offered by the Central Provident Fund Board, a Singapore Government Statutory Board. The principal amount is repayable over seven equal semi-annual installments commencing from September 1, 2000 and ending on September 1, 2003. The prevailing annual loan interest rate at September 30, 2001 was 3.5%. The loan agreement restricts us from paying dividends, from incurring further indebtedness and from undertaking any form of reconstruction, including amalgamation with another company, which would result in a change in the control of the Company, in each case, without prior lender consent. Net cash provided by operating activities totaled $36.0 million for the nine months ended September 30, 2001 compared to $81.8 million for the nine months ended September 30, 2000. The net cash of $36.0 million generated from operating activities for the nine months ended September 30, 2001 was primarily due to positive working capital changes resulting mainly from timing of payments to suppliers and collection of accounts receivable during the current nine-month period. Net cash provided by operating activities in the three months ended September 30, 2001 is $0.1 million. Net cash used in investing activities totaled $20.3 million for the nine months ended September 30, 2001 and $254.4 million for the nine months ended September 30, 2000. The net cash used in investing activities of $20.3 million in the nine months ended September 30, 2001 consisted of capital expenditures of $45.8 million and purchases of marketable debt securities of $8.7 million. The net investment was reduced by receipts of $20.2 million from the maturity of marketable debt securities, $10.0 million from the maturity of short-term deposits, $1.8 million from the acquisition of Winstek Semiconductor Corporation and $2.2 million from the disposal of equipment. Capital expenditures were mainly for additions of peripherals, equipment upgrades and IT systems enhancements. The lower level of investment in capital equipment in the current nine-month period was due to the current downturn in the semiconductor industry. Our current budget for capital expenditures for the year 2001 is $66.9 million compared to $277 million a year ago. However, from time to time we may 16 acquire or make investments in additional businesses, products and technologies or establish joint ventures or strategic partnerships that we believe will complement our current and future businesses. Some of these acquisitions or investments could be material. Net cash used in financing activities totaled $16.4 million for the nine months ended September 30, 2001, compared to net cash provided by financing activities for the nine months ended September 30, 2000 of $321.6 million. The cash used in financing activities of $16.4 million for the nine months ended September 30, 2001 was mainly for the repayment of two installments due on the long-term EDB loan and the repayment of bank loans amounting to $2.4 million by a subsidiary. The substantial amount of cash generated by financing activities in the nine months ended September 30, 2000 consisted mainly of proceeds from our initial public offering in February 2000. FOREIGN CURRENCY EXCHANGE EXPOSURE We experience foreign currency exchange gains and losses arising from transactions in currencies, principally the Singapore dollar and the Japanese yen, other than our functional currency, the U.S. dollar. We have adopted a hedging policy that we believe adequately covers any material exposure to our non-U.S. dollar assets and liabilities. To minimize foreign currency exchange risk, we selectively hedge our material foreign currency exposures through forward foreign currency swap contracts and options. We did not enter into any foreign currency swaps or options to hedge our currency exposures during the first nine months of 2001 as we did not believe that our foreign currency exposures were material during this period. We cannot assure you that sudden or rapid movement in exchange or interest rates will not have a material adverse effect on our business, financial condition or results of operations. 17