EX-1 2 u93321exv1.htm EX-1 REPORT FOR THE SIX MONTHS ENDED JUNE 29, 2008 EX-1 Report for the Six Months Ended June 29, 2008
Exhibit 1
     In this quarterly report on Form 6-K, unless otherwise specified or the context requires, the terms “STATS ChipPAC,” “Company,” “we,” “our,” and “us” refer to STATS ChipPAC Ltd. and its consolidated subsidiaries. This quarterly report on Form 6-K contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and speak only as of the date of this report. These forward-looking statements are based on our current views and assumptions and involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in the report. Factors that could cause actual results to differ include, but are not limited to, general business and economic conditions and the state of the semiconductor industry; level of competition; demand for end-use applications products such as communications equipment and personal computers; decisions by customers to discontinue outsourcing of test and packaging services; our reliance on a small group of principal customers; our continued success in technological innovations; pricing pressures, including declines in average selling prices; our proposed capital reduction and cash distribution; availability of financing; prevailing market conditions; our ability to meet the applicable requirements for the termination of registration under the U.S. Securities Exchange Act of 1934, as amended; our ability to meet specific conditions imposed for the continued listing or delisting of our ordinary shares on the Singapore Exchange Securities Trading Limited; our substantial level of indebtedness; potential impairment charges; delays in acquiring or installing new equipment; adverse tax and other financial consequences if the South Korean taxing authorities do not agree with our interpretation of the applicable tax laws; our ability to develop and protect our intellectual property; rescheduling or canceling of customer orders; changes in our product mix; intellectual property rights disputes and litigation; our capacity utilization; limitations imposed by our financing arrangements which may limit our ability to maintain and grow our business; changes in customer order patterns; shortages in supply of key components; disruption of our operations; loss of key management or other personnel; defects or malfunctions in our testing equipment or packages; changes in environmental laws and regulations; exchange rate fluctuations; regulatory approvals for further investments in our subsidiaries; majority ownership by Temasek Holdings (Private) Limited (“Temasek”) that may result in conflicting interests with Temasek and our affiliates; unsuccessful acquisitions and investments in other companies and businesses; labor union problems in South Korea; uncertainties of conducting business in China and other countries in Asia; natural calamities and disasters, including outbreaks of epidemics and communicable diseases; and other risks described from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”), including its annual report on Form 20-F dated March 7, 2008. We do not intend, and do not assume any obligation, to update any forward-looking statements to reflect subsequent events or circumstances.
     Since the beginning of fiscal 2005, we have employed quarterly and fiscal year reporting periods. Our 52-53 week fiscal year ends on the Sunday nearest and prior to December 31. Our fiscal quarters end on a Sunday and are generally thirteen weeks in length. Our second quarter of 2008 ended on June 29, 2008, while our second quarter of 2007 and fiscal year 2007 ended on July 1, 2007 and December 30, 2007, respectively. References to “$” are to the lawful currency of the United States of America.

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands of U.S. Dollars (except per share data)
                 
    December 30,     June 29,  
    2007     2008  
            (Unaudited)  
ASSETS
                
Current assets:
                
Cash and cash equivalents
   $ 213,461     $ 222,692  
Short-term marketable securities
     29,230       50,189  
Accounts receivable, net
     271,360       285,777  
Short-term amounts due from affiliates
     9,292       8,242  
Other receivables
     6,877       9,095  
Inventories
     83,312       85,547  
Prepaid expenses and other current assets
     22,320       23,654  
 
            
Total current assets
     635,852       685,196  
Long-term marketable securities
     15,296       15,437  
Long-term amounts due from affiliates
     6,852       13,232  
Property, plant and equipment, net
     1,276,490       1,263,302  
Investment in equity investee
     10,350       10,338  
Intangible assets
     40,754       40,580  
Goodwill
     547,958       551,622  
Long-term restricted cash
     1,612       1,346  
Prepaid expenses and other non-current assets
     61,790       48,241  
 
            
Total assets
   $ 2,596,954     $ 2,629,294  
 
            
 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts and other payables
   $ 164,300     $ 187,054  
Payables related to property, plant and equipment purchases
     70,744       50,546  
Accrued operating expenses
     109,516       151,270  
Income taxes payable
     17,250       3,796  
Short-term borrowings
     50,300       50,000  
Amounts due to affiliates
     1,651       1,596  
Current installments of long-term debts
     190,481       42,693  
 
            
Total current liabilities
     604,242       486,955  
Long-term debts, excluding current installments
     423,853       413,409  
Other non-current liabilities
     125,093       95,079  
 
            
Total liabilities
     1,153,188       995,443  
Minority interest
     59,797       62,103  
Share capital:
                
Ordinary shares — Unlimited ordinary shares with no par value;
                
Issued ordinary shares — 2,047,333,663 in 2007 and 2,202,160,272 in 2008
     1,891,546       2,037,127  
Accumulated other comprehensive loss
     (7,605 )     (5,375 )
Accumulated deficit
     (499,972 )     (460,004 )
 
            
Total shareholders’ equity
     1,383,969       1,571,748  
 
            
Total liabilities and shareholders’ equity
   $ 2,596,954     $ 2,629,294  
 
            

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of U.S. Dollars (except per share data)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    July 1,     June 29,     July 1,     June 29,  
    2007     2008     2007     2008  
 
                                
Net revenues
   $ 370,183     $ 434,142     $ 760,653     $ 861,384  
Cost of revenues
     (303,236 )     (359,452 )     (616,147 )     (712,156 )
 
                        
Gross profit
     66,947       74,690       144,506       149,228  
 
                        
Operating expenses:
                                
Selling, general and administrative
     28,036       28,616       56,035       60,082  
Research and development
     8,985       9,279       17,170       19,284  
Accelerated share-based compensation
     —       1,562       —       1,562  
Tender offer expenses
     4,114       —       10,922       —  
Impairment of assets held for sale
     1,725       —       1,725       —  
Restructuring expenses
     990       —       990       900  
 
                        
Total operating expenses
     43,850       39,457       86,842       81,828  
 
                        
Operating income
     23,097       35,233       57,664       67,400  
 
                        
Other income (expense), net:
                                
Interest income
     1,633       1,376       3,470       2,811  
Interest expense
     (9,757 )     (8,950 )     (20,221 )     (19,492 )
Foreign currency exchange gain (loss)
     (405 )     2,053       (285 )     5,261  
Equity gain (loss) from investment in equity investee
     177       125       (76 )     (11 )
Other non-operating income, net
     (151 )     578       (110 )     1,306  
 
                        
Total other expense, net
     (8,503 )     (4,818 )     (17,222 )     (10,125 )
 
                        
Income before income taxes
     14,594       30,415       40,442       57,275  
Income tax expense
     (5,782 )     (7,009 )     (13,433 )     (14,629 )
 
                        
Income before minority interest
     8,812       23,406       27,009       42,646  
Minority interest
     (1,383 )     (1,290 )     (2,533 )     (2,677 )
 
                        
Net income
   $ 7,429     $ 22,116     $ 24,476     $ 39,969  
 
                        
 
                                
Net income per ordinary share:
                                
— basic
   $ 0.00     $ 0.01     $ 0.01     $ 0.02  
— diluted
   $ 0.00     $ 0.01     $ 0.01     $ 0.02  
 
                                
Ordinary shares (in thousands) used in per ordinary share calculation:
                                
— basic
     2,031,435       2,118,538       2,020,633       2,085,687  
— diluted
     2,186,078       2,120,798       2,180,555       2,089,239  

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of U.S. Dollars
(Unaudited)
                 
    Six Months Ended  
    July 1,     June 29,  
    2007     2008  
Cash Flows From Operating Activities
                
Net income
   $ 24,476     $ 39,969  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     122,813       142,903  
Amortization of leasing prepayments
     11       —  
Debt issuance cost amortization
     1,271       1,922  
Loss (gain) on sale of property, plant and equipment
     465       (367 )
Impairment of assets held for sale
     1,725       —  
Accretion of discount on convertible notes
     2,790       66  
Foreign currency exchange (gain) loss
     (232 )     1,015  
Share-based compensation expense
     4,869       3,139  
Deferred income taxes
     8,889       1,452  
Minority interest in income of subsidiary
     2,533       2,677  
Equity loss from investment in equity investee
     76       11  
Others
     118       265  
Changes in operating working capital:
                
Accounts receivable
     19,425       (14,417 )
Amounts due from affiliates
     701       (5,330 )
Inventories
     21,917       (2,235 )
Other receivables, prepaid expenses and other assets
     4,867       (6,439 )
Accounts payable, accrued operating expenses and other payables
     (48,589 )     13,490  
Amounts due to affiliates
     16       (55 )
 
            
Net cash provided by operating activities
     168,141       178,066  
 
            
Cash Flows From Investing Activities
                
Proceeds from sales of marketable securities
   $ 16,113     $ 11,930  
Proceeds from maturity of marketable securities
     4,604       10,764  
Purchases of marketable securities
     (8,753 )     (41,116 )
Acquisition of intangible assets
     (2,089 )     (3,941 )
Purchases of property, plant and equipment
     (108,290 )     (139,513 )
Proceeds on sale of assets held for sale
     —       11,399  
Others, net
     6,567       1,470  
 
            
Net cash used in investing activities
     (91,848 )     (149,007 )
 
            
Cash Flows From Financing Activities
                
Repayment of short-term debts
   $ (592 )   $ (300 )
Repayment of long-term debts
     (42,161 )     (4,083 )
Proceeds from issuance of shares
     12,639       6,152  
Redemption of convertible notes
     (36,800 )     (22,057 )
Proceeds from bank borrowings
     19,389       —  
Decrease in restricted cash
     1       266  
Grant received
     —       98  
Capital lease payments
     (3,440 )     —  
 
            
Net cash used in financing activities
     (50,964 )     (19,924 )
 
            
Net increase in cash and cash equivalents
     25,329       9,135  
Effect of exchange rate changes on cash and cash equivalents
     34       96  
Cash and cash equivalents at beginning of the period
     171,457       213,461  
 
            
Cash and cash equivalents at end of the period
   $ 196,820     $ 222,692  
 
            

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 29, 2008
(Unaudited)
Note 1: Interim Statements
     The consolidated balance sheet of STATS ChipPAC Ltd. (“STATS ChipPAC” or the “Company”) as of December 30, 2007, which has been derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America, but condense or omit certain information and note disclosures normally included in annual financial statements. In the opinion of management of STATS 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. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 30, 2007 included in STATS ChipPAC’s 2007 Annual Report on Form 20-F. The accompanying condensed consolidated financial statements include the accounts of STATS ChipPAC and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
     The Company predominantly utilizes the U.S. Dollar as its functional currency. The Company’s Taiwan subsidiary, STATS ChipPAC Taiwan Semiconductor Corporation, designates the New Taiwan Dollar as its functional currency. Where the functional currency is other than the Company’s U.S. Dollar reporting currency, it is translated into U.S. Dollars using exchange rates prevailing at the balance sheet date for assets and liabilities and average exchange rates for the reporting period for the results of operations. Adjustments resulting from translation of such foreign subsidiary financial statements are reported within accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity.
     As of June 29, 2008, Temasek Holdings (Private) Limited (“Temasek”), through its wholly-owned subsidiary, Singapore Technologies Semiconductors Pte Ltd (“STSPL”), beneficially owned approximately 83.8% of the Company’s ordinary shares, following STSPL’s conversion of its entire $134.5 million of the Company’s 2.5% Convertible Subordinated Notes due 2008 into 145.1 million ordinary shares on May 22, 2008.
     The Company owned approximately 52% of STATS ChipPAC Taiwan Semiconductor Corporation as of June 29, 2008. The shares of STATS ChipPAC Taiwan Semiconductor Corporation are listed on the Taiwan over-the-counter securities market.
     The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for any other period. Our 52-53 week fiscal year ends on the Sunday nearest and prior to December 31. Our fiscal quarters end on a Sunday and are generally thirteen weeks in length. The second quarter of 2008 ended on June 29, 2008, while the second quarter of 2007 and fiscal 2007 ended on July 1, 2007, and December 30, 2007, respectively.
Proposed Capital Reduction Exercise
     In January 2008, the Company announced its intention to effect a proposed capital reduction to return surplus share capital in an amount of up to $813.0 million to its shareholders. At an extraordinary general meeting held on March 17, 2008, the shareholders approved the proposed capital reduction. The Company obtained approval of the proposed capital reduction from the Singapore High Court on June 26, 2008. The proposed capital reduction is subject to (1) all relevant approvals and consents being obtained and (2) the board of directors determining, following the satisfaction of the preceding condition and the financing condition described below, that it is in the best interest of the Company, to effect the proposed cash distribution.
     The proposed capital reduction is also subject to and conditional upon the Company being able to obtain adequate debt financing to fund the cash distribution pursuant to the capital reduction and the repayment of certain of its outstanding debt (including the redemption or repurchase of the Company’s 7.5% Senior Notes due 2010 and 6.75% Senior Notes due 2011 that would otherwise restrict its ability to make the cash distribution and to finance the cash distribution) on terms and conditions acceptable to the Company. The amount of the cash distribution would accordingly be determined based on the proceeds of such debt financing made available to the Company.

 

 

Related Financing Transactions
     In connection with the proposed capital reduction, the Company intends to pursue a debt financing plan, which is expected to consist of a private placement of senior notes and senior secured credit facilities comprising a term loan and a revolving credit facility. As part of the debt financing plan, the Company commenced a cash tender offer and consent solicitation in respect of its $150.0 million of 7.5% Senior Notes due 2010 and its $215.0 million of 6.75% Senior Notes due 2011. The tender offer and consent solicitation was conditional upon, among other things, the Company being able to obtain adequate debt financing to fund the proposed cash distribution described above and the tender offer and consent solicitation on terms and conditions acceptable to the Company. The tender offer and consent solicitation was terminated on August 9, 2008 because the financing condition was not satisfied.
Temasek’s Subsidiary, Singapore Technologies Semiconductors Pte Ltd’s, Tender Offer
     In March 2007, STSPL, a wholly-owned subsidiary of Temasek, launched a voluntary conditional cash tender offer for the ordinary shares and American Depositary Shares (“ADSs”) of the Company that STSPL did not already own. The tender offer also included an offer by STSPL for the Company’s then outstanding $115.0 million aggregate principal amount of zero coupon Convertible Notes due 2008 and $150.0 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2008. Concurrently with the tender offer, STSPL made an options proposal to all holders of options granted under STATS ChipPAC’s share option plans.
     In May 2007, the tender offer closed with STSPL and its concert parties holding 83.1% of the outstanding ordinary shares (including ordinary shares represented by ADSs, but excluding the ordinary shares issuable upon the conversion of the $134.5 million aggregate principal amount of the 2.5% Convertible Subordinated Notes due 2008 acquired by STSPL) and $134.5 million aggregate principal amount of the 2.5% Convertible Subordinated Notes due 2008. The balance $15.5 million outstanding principal amount of the 2.5% Convertible Subordinated Notes due 2008 was converted into ADSs in May 2007.
     As of June 29, 2008, Temasek, through its wholly-owned subsidiary, STSPL, beneficially owned 1,845.7 million ordinary shares, representing 83.8% of the Company’s ordinary shares, following STSPL’s conversion of its entire $134.5 million of the Company’s 2.5% Convertible Subordinated Notes due 2008 into 145.1 million ordinary shares on May 22, 2008.
     In the six months ended July 1, 2007, the Company recorded tender offer expenses of $10.9 million, consisting of investment banking, legal, accounting, insurance, printing and other costs associated with the tender offer. No tender offer expenses were incurred during the six months ended June 29, 2008.
Recent Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 for financial assets and financial liabilities at the beginning of the first quarter of 2008 and its adoption did not have a material impact on the Company’s consolidated financial position and results of operations. In February 2008, the FASB issued staff position No. 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (annually). FSP 157-2 is effective for fiscal years beginning after November 15, 2008.
     The Company is currently assessing the impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position and results of operations. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
     The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

 

 

     The following table sets forth the Company’s financial assets and liabilities that were accounted for, at fair value on a recurring basis as of June 29, 2008 (in thousands):
                         
    Fair value measurement
    June 29, 2008
    Level 1   Level 2   Level 3
Assets:
                        
Marketable securities
   $ 65,626     $ —     $ —  
Foreign currency forward contracts
     —       3,147       —  
     
 
   $ 65,626     $ 3,147     $ —  
     
 
                        
Liabilities:
                        
Foreign currency forward contracts
   $ —     $ 5,510     $ —  
     
 
   $ —     $ 5,510     $ —  
     
     Unrealized gains or losses on marketable securities and foreign currency forward contracts are recorded in accumulated other comprehensive gain (loss) at each measurement date.
     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This standard requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity. The new reporting requirements and related new footnote disclosure rules of SFAS 158 are effective for fiscal years ending after December 15, 2006. The adoption of SFAS 158 does not have a material impact on the Company’s consolidated financial statements. Additionally, SFAS 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position effective for fiscal year ending after December 15, 2008. The Company is currently evaluating the effect of the requirement of SFAS 158 related to measurement of the funded status of deferred benefit plans on its consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of SFAS No. 115” (“SFAS 159”), which permits companies to measure certain financial assets and financial liabilities at fair value. SFAS 159 requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The adoption of SFAS 159 at the beginning of the first quarter of 2008 did not have a material effect on the Company’s financial statements.
     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). If such liabilities are settled for lesser amounts prior to the adoption of SFAS 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS 141(R), such reversals will affect the income tax provision in the period of reversal. Early adoption is not permitted. The Company is currently evaluating the effects, if any, that SFAS 141(R) may have on its financial statements; however, since the Company acquired significant deferred tax assets for which valuation allowances were recorded at the acquisition date, SFAS 141(R) could significantly affect the results of operations if changes in the valuation allowances occur subsequent to adoption. As of June 29, 2008, the Company has established deferred tax valuation allowances of $34.9 million in purchase accounting.

 

 

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires the recognition of a noncontrolling (minority) interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling (minority) interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for annual periods beginning after December 15, 2008 and should be applied prospectively. However, the presentation and disclosure requirements of the statement shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect of SFAS 160 on its consolidated financial statements and anticipates that SFAS 160 will not have a significant impact on the reporting of its results of operations.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS 161”), which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effect of SFAS 161 on its consolidated financial statements.
Share-Based Compensation
     As of December 30, 2007, the Company had outstanding grants under four share-based plans. The Company adopted the fair value recognition provisions of SFAS 123(R) effective December 26, 2005. For share-based awards, the Company recognizes compensation expense on a graded vesting basis over the requisite service period of the award. The share-based compensation expense under SFAS 123(R) was as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    July 1,     June 29,     July 1,     June 29,  
    2007     2008     2007     2008  
Cost of revenues
   $ 1,069     $ 124     $ 2,557     $ 710  
Selling, general and administrative
     722       179       1,740       694  
Research and development
     196       34       572       173  
Accelerated share-based compensation
     —       1,562       —       1,562  
 
                        
 
   $ 1,987     $ 1,899     $ 4,869     $ 3,139  
 
                        
     In January 2008, the Company decided to terminate the STATS ChipPAC Ltd. Restricted Share Plan (the “RSP”), the STATS ChipPAC Ltd. Performance Share Plan (the “PSP”) and the STATS ChipPAC Ltd. Employee Share Purchase Plan 2004 (the “ESPP”), which became effective in end March 2008. The STATS ChipPAC Share Option Plan, as amended, was phased out as of December 2006 and replaced by the RSP. No Restricted Share Units (“RSUs”), contingent Performance Share Plan awards, employee share purchase rights or share options were granted in the three and six months ended June 29, 2008.
     SFAS 123(R) requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as financing cash flows. For the three months and six months ended June 29, 2008, the windfall tax benefit realized from exercised employee share options were insignificant.
     Concurrently with its tender offer (refer to “Temasek’s Subsidiary, Singapore Technologies Semiconductors Pte Ltd’s, Tender Offer” in Note 1), STSPL made an options proposal to all holders of options granted under STATS ChipPAC’s share option plans whereby the participating holders would agree not to exercise their options for new shares or to exercise their rights as option holders. During the tender offer period, 85,348,090 options were surrendered pursuant to the options proposal.
     The following table summarizes share option activity during the six months ended June 29, 2008:
                         
            Weighted Average   Aggregate Intrinsic
    Options   Exercise Price   Value
    (In thousands)           (In thousands)
Options outstanding at December 30, 2007
     15,986     $ 1.70          
Lapsed and forfeited
     (643 )     1.65          
Exercised
     (37 )     0.54          
 
                        
Options outstanding at June 29, 2008
     15,306     $ 1.81     $ 78  
 
                        
Exercisable at June 29, 2008
     15,166     $ 1.52     $ 49  
 
                        

 

 

     The aggregate intrinsic value in the table above is based on the difference between the market price and the price payable by option holders to exercise their options. During the three and six months ended June 29, 2008, the total amount of cash received from the exercise of share options were $0.002 million and $0.021 million, respectively.
     The following table summarizes information about share options outstanding at June 29, 2008:
                                                 
    Options Outstanding   Options Exercisable
            Weighted                   Weighted    
            Average   Weighted           Average   Weighted
Range of   Number   Remaining   Average   Number   Remaining   Average
Exercise   Outstanding at   Contractual   Exercise   Exercisable at   Contractual   Exercise
Prices   6/29/2008   Life   Price   6/29/2008   Life   Price
    (In thousands)                   (In thousands)                
$0.14 to $0.15
     13     1.3 years   $ 0.14       13     1.3 years   $ 0.14  
$0.22 to $0.29
     28     4.5 years   $ 0.29       28     4.5 years   $ 0.29  
$0.43 to $0.47
     1     2.8 years   $ 0.46       1     2.8 years   $ 0.46  
$0.55 to $0.87
     557     4.3 years   $ 0.76       417     3.9 years   $ 0.80  
$0.91 to $1.07
     3     2.8 years   $ 1.02       3     2.8 years   $ 1.02  
$1.16 to $1.64
     13,677     3.8 years   $ 1.39       13,677     3.8 years   $ 1.39  
$2.04 to $2.61
     208     1.5 years   $ 2.09       208     1.5 years   $ 2.09  
$3.99
     819     1.8 years   $ 3.99       819     1.8 years   $ 3.99  
                         
 
     15,306     3.7 years             15,166     3.7 years        
                         
     The following table summarizes information on RSUs and contingent PSP awards outstanding as of June 29, 2008:
                                                 
    RSP   Contingent PSP
            Weighted                   Weighted        
            Average                   Average   Aggregate  
    Number of   Grant-Date   Aggregate   Number of   Grant-Date   Intrinsic
    shares   Fair Value   Intrinsic Value   shares   Fair Value   Value
    (In thousands)           (In thousands)   (In thousands)           (In thousands)
Outstanding as at December 30, 2007
     6,302     $ 0.86               2,980     $ 0.85          
Lapsed and forfeited
     (230 )     0.84               (45 )     0.85          
Cancelled
     —       —               (2,935 )     0.85          
Vested
     (2,025 )     0.85     $ 1,903       —       —     $ —  
 
                                                
Outstanding as at June 29, 2008
     4,047     $ 0.86               —     $ —          
 
                                                
     The aggregate intrinsic value in the table above represents the value of the ordinary shares on the date that the RSUs and contingent PSP awards vest.
     During the three and six months ended June 29, 2008, 0.03 million and 2.0 million ordinary shares were issued pursuant to the RSUs.
     No issue of contingent PSP awards was made during the three and six months ended June 29, 2008. Upon the termination of the PSP in March 2008, the Company cancelled the 2,935,000 unvested Performance Share Units in the three months ended June 29, 2008. As a result, the Company recorded $1.6 million of accelerated share-based compensation expense in the three months ended June 29, 2008.
     The fair value of the contingent PSP awarded in the three months ended April 1, 2007 was calculated with the following assumptions:
         
    Three Months Ended
    April 1,
    2007
Expected term
   3 years
Dividend yield
     0.0 %
Risk free interest rate
     3.0 %
Weighted average volatility
     40.0 %
     For the employee share purchase rights under the terms of the ESPP granted prior to its termination in March 2008, the total number of shares purchased under the plan and the Company’s matching contribution of 20% of the contribution of the ESPP participants by issuing shares, can vary as the purchase price per share was determined based on the fair market value at the end of the purchase period. Therefore the final measure of compensation cost for these rights was determined at the end of the purchase period, on which the number of shares an employee was entitled and the purchase price were determinable. The Company calculated estimated

 

 

compensation cost as of the balance sheet date prior to the end of the purchase period based on the current estimation of the number of shares to be purchased under the plan and the level of contribution, as determined in accordance with the terms of the ESPP.
     The Company estimated the grant-date fair value of share options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model incorporated various and highly subjective assumptions including expected volatility, expected term and interest rates. The expected volatility was based on the implied volatility and trading history of the Company’s shares over the most recent period that commensurate with the estimated expected term of the Company’s share options. The estimated term of the Company’s share options was derived from historical experience. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
     The Company estimated the fair value of RSUs based on the market price of ordinary shares on the date of grant. The fair value of contingent PSP awards was calculated using the market price of ordinary shares on the date of award, adjusted to the market-based performance conditions represented by total shareholders’ return on a certain set of absolute and relative to benchmark company criteria.
     As of June 29, 2008, there were $0.01 million and $1.5 million of unrecognized share-based compensation expenses related to approximately 0.1 million of unvested share option awards and 4.0 million of unvested RSUs, net of $0.002 million of estimated share option award forfeitures and $0.1 million of estimated RSU forfeitures, respectively. These costs are expected to be recognized over a weighted-average period of 1.3 years for both the share options and the RSUs.
     During the three and six months ended June 29, 2008, the total grant-date fair value of share options that vested were $1.4 million and $4.5 million, respectively. The total intrinsic value of share options exercised during the three and six months ended June 29, 2008 were insignificant. For the three months ended March 30, 2008, the value of the 7,625,760 shares issued for ESPP purchases were $6.1 million and employees contributed $4.7 million to the ESPP.
Share Repurchase Program
     At the annual general meeting in April 2008, the Company obtained shareholders’ approval for the repurchase of up to approximately 51 million ordinary shares (2.5% of the issued ordinary shares in the capital of the Company as of the date of the annual general meeting). The approved amount for share repurchases under this shareholders’ mandate will terminate on the earlier of the date on which the next annual general meeting is held or required to be held, or the date which the approval is revoked or varied. As of June 29, 2008, the Company had not repurchased any shares.
Other Comprehensive Income (Loss)
     The components of accumulated other comprehensive loss on December 30, 2007 and June 29, 2008 comprised the following (in thousands):
                 
    December 30,     June 29,  
    2007     2008  
Currency translation loss
   $ (7,086 )   $ (2,231 )
Unrealized gain (loss) on hedging instruments
     378       (2,389 )
Unrealized loss on available-for-sale marketable securities
     (897 )     (755 )
 
            
 
   $ (7,605 )   $ (5,375 )
 
            
     Comprehensive income (loss) for the three and six months ended July 1, 2007 and June 29, 2008 were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    July 1,     June 29,     July 1,     June 29,  
    2007     2008     2007     2008  
Net income
   $ 7,429     $ 22,116     $ 24,476     $ 39,969  
Other comprehensive income (loss):
                                
Unrealized gain (loss) on available-for-sale marketable securities
     (376 )     (371 )     (144 )     142  
Realized gain on available-for-sale marketable securities included in net income
     (52 )     —       (124 )     —  
Unrealized loss on hedging instruments
     (65 )     (4,879 )     (570 )     (5,010 )

 

 

                                 
    Three Months Ended     Six Months Ended  
    July 1,     June 29,     July 1,     June 29,  
    2007     2008     2007     2008  
Realized (gain) loss on hedging instruments included in net income
     (285 )     1,261       (264 )     2,243  
Foreign currency translation adjustment
     532       (588 )     (277 )     4,855  
 
                        
Comprehensive income
   $ 7,183     $ 17,539     $ 23,097     $ 42,199  
 
                        
Hedging Instruments
     The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Changes in the fair value of those instruments will be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of derivatives and the effect on the consolidated financial statements will depend on the derivatives’ hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair values of cash flows of the asset or liability hedged.
     The Company operates in various countries, and accordingly, is subject to the inherent risks associated with foreign exchange rate movements. The Company has established risk management policies for committed or forecasted exposures to protect against volatility of future cash flows. These programs reduce, but do not always entirely eliminate, the impact of the currency exchange or commodity price movements. At June 29, 2008, the Company had a series of foreign currency forward contracts with total contract value of approximately $206.7 million, of which, forward contracts with total contract value of $195.7 million qualify for cash flow hedge accounting as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The duration of these instruments are generally less than 12 months. During the six months ended June 29, 2008, the Company had realized loss of $2.2 million and unrealized loss of $5.0 million, respectively, on its foreign currency forward contracts qualifying as cash flow hedges. Certain foreign currency forward contracts to economically hedge certain committed exposures are not designated as hedges. Accordingly, the changes in fair value of these foreign currency forward contracts are reported in earnings.
Note 2: Selected Balance Sheet Accounts
     The components of inventories were as follows (in thousands):
                 
    December 30,     June 29,  
    2007     2008  
Raw materials
   $ 65,877     $ 67,058  
Work-in-progress
     14,872       16,442  
Finished goods
     2,563       2,047  
 
            
 
   $ 83,312     $ 85,547  
 
            
     Prepaid expenses and other current assets consist of the following (in thousands):
                 
    December 30,     June 29,  
    2007     2008  
Other prepayments and assets
   $ 8,241     $ 15,425  
Deferred income tax assets
     1,207       1,222  
Loans to a vendor
     3,529       2,647  
Assets held for sale
     9,343       4,360  
 
            
 
   $ 22,320     $ 23,654  
 
            
     Prepaid expenses and other non-current assets consist of the following (in thousands):
                 
    December 30,     June 29,  
    2007     2008  
Leasing prepayments
   $ 248     $ 240  
Deferred income tax assets
     39,609       34,472  
Other deposits
     303       316  
Loans to a vendor
     882       —  
Debt issuance cost, net of accumulated amortization of $7,958 and $4,732
     6,949       5,028  
Assets held for sale
     10,544       3,887  
Others
     3,255       4,298  
 
            
 
   $ 61,790     $ 48,241  
 
            

 

 

     The Company extended $5.0 million and $15.0 million loans to a vendor in June 2003 and January 2004, respectively, to secure a specified minimum quantity of substrates up to December 2008. The loans are interest-free and are collateralized by equipment purchased by the loan monies, mortgage on the factory of the vendor and 2,400 shares of the vendor’s equity. The 2,400 shares of the vendor’s equity were released in April 2008 and no longer form part of the collateral. The loan of $5.0 million was fully repaid in June 2007. The loan of $15.0 million is repayable by quarterly installments of $0.9 million up to December 2008. During the six months ended June 29, 2008, $1.8 million of the $15.0 million loan was repaid.
     In May 2007, the Company entered into an agreement to sell packaging and test equipment related to discrete power packages to Ningbo Mingxin Microelectronics Co. Ltd. (“Mingxin”) for an aggregate consideration of $10.0 million payable over approximately two years. The Company has separately classified the related assets of $10.0 million as assets held for sale, a component of other current assets. During the three and six months ended June 29, 2008, $3.9 million and $5.0 million of the assets, respectively, have been transferred to Mingxin. These held for sale assets were recorded at the lower of carrying amount or fair value less cost to sell.
     In 2006, the Company entered into an agreement to sell packaging and test equipment related to specific low lead count packages to Wuxi CR Micro-Assembly Technology Ltd. (“ANST”) for $35.0 million payable over 4 years and a performance-based contingent earn-out of $5.0 million. ANST is a wholly owned subsidiary of Micro Assembly Technologies Limited (“MAT”), of which the Company has a 25% equity interest. As a result of the planned transfer of these assets to ANST, the Company has separately classified the related assets of $29.6 million to assets held for sale, a component of other non-current assets. During the three and six months ended June 29, 2008, $3.3 million and $6.5 million of the related assets, respectively, have been transferred to ANST and $0.06 million and $0.1 million of gain, respectively, were recognized in the three and six months ended June 29, 2008. In addition to the transfer of assets, the Company entered into an agreement to provide sales and technical support to ANST on a quarterly commission basis from 2007 to 2009, of which $0.2 million and $0.6 million was earned in the three and six months ended June 29, 2008, respectively.
     Restricted cash consists of time deposits and government bonds held in connection with foreign regulatory requirements and as collateral for bank loans. At December 30, 2007 and June 29, 2008, $1.6 million and $1.3 million, respectively, were held as long-term restricted cash.
     Property, plant and equipment consist of the following (in thousands):
                 
    December 30,     June 29,  
    2007     2008  
Cost:
                
Freehold land
   $ 11,010     $ 11,218  
Leasehold land and land use rights
     19,864       19,864  
Buildings, mechanical and electrical installation
     262,186       266,695  
Equipment
     2,145,503       2,238,577  
 
            
Total cost
     2,438,563       2,536,354  
Total accumulated depreciation
     (1,162,073 )     (1,273,052 )
 
            
Property, plant and equipment, net
   $ 1,276,490     $ 1,263,302  
 
            
     Intangible assets consist of the following (in thousands):
                                                 
    December 30, 2007     June 29, 2008  
    Gross     Accumulated     Net     Gross     Accumulated     Net  
    Assets     Amortization     Assets     Assets     Amortization     Assets  
Tradenames
   $ 7,700     $ (3,758 )   $ 3,942     $ 7,700     $ (4,308 )   $ 3,392  
Technology and intellectual property
     32,000       (10,933 )     21,067       32,000       (12,533 )     19,467  
Customer relationships
     99,300       (99,300 )     —       99,300       (99,300 )     —  
Software, licenses and others
     31,469       (15,724 )     15,745       35,539       (17,818 )     17,721  
 
                                    
 
   $ 170,469     $ (129,715 )   $ 40,754     $ 174,539     $ (133,959 )   $ 40,580  
 
                                    

 

 

     Amortization expense related to finite-lived intangible assets is summarized as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    July 1,     June 29,     July 1,     June 29,  
    2007     2008     2007     2008  
Tradenames
   $ 275     $ 275     $ 550     $ 550  
Technology and intellectual property
     800       800       1,600       1,600  
Customer relationships
     —       —       —       —  
Software, licenses and others
     988       1,051       1,725       1,999  
 
                        
 
   $ 2,063     $ 2,126     $ 3,875     $ 4,149  
 
                        
     Finite-lived intangible assets are generally amortized over estimated useful lives of two to ten years. Estimated future amortization expense is summarized as follows (in thousands):
         
June 30, 2008 to December 28, 2008
   $ 4,428  
2009
     8,363  
2010
     6,840  
2011
     4,831  
2012
     3,857  
Thereafter
     12,261  
 
      
Total
   $ 40,580  
 
      
     The change in the carrying amount of goodwill for the three months ended June 29, 2008 is as follows (in thousands):
         
Balance as of December 30, 2007
   $ 547,958  
Purchase adjustments
     3,664  
 
      
Balance as of June 29, 2008
   $ 551,622  
 
      
     The purchase adjustments of $3.7 million relate to other tax liabilities recorded.
Note 3: Lines of Credit and Other Borrowings
     As of June 29, 2008, the Company’s total debt outstanding consisted of $506.1 million of borrowings, which included $150.0 million of the Company’s 7.5% Senior Notes due 2010, $215.0 million of the Company’s 6.75% Senior Notes due 2011 and other long-term and short-term borrowings.
     In the six months ended June 29, 2008, the Company repurchased the outstanding $18.6 million aggregate principal of its zero coupon Convertible Notes due 2008 for $22.1 million (including accretion of discount on convertible notes and interest). The Company financed the repurchase of these convertible notes with its cash and cash equivalents.
     In May 2008, Temasek, through its wholly-owned subsidiary, STSPL, converted its holding of the Company’s outstanding $134.5 million principal amount of 2.5% Convertible Subordinated Notes due 2008 into 145.1 million ordinary shares of the Company.
     In October 2007, the Company issued a $50.0 million promissory note carrying interest, payable annually, of 6% per annum to LSI Corporation (“LSI”) in connection with the acquisition of an assembly and test operations in Thailand. The amount payable to LSI after contractual netting of certain receivables from LSI of $3.2 million amounted to $46.8 million as of June 29, 2008. The promissory note is payable over four annual installments of $20.0 million, $10.0 million, $10.0 million and $6.8 million over the next four years.
     STATS ChipPAC Korea Ltd. has lines of credit with Hana Bank and the National Agricultural Cooperation Federation Bank in South Korea with credit limits of $10.0 million and $5.0 million, respectively. These lines of credit bear interest at a rate of 3.7% per annum on these facilities. As of June 29, 2008, STATS ChipPAC Korea Ltd. had not used these lines of credit and there was no outstanding balance on these facilities. These lines of credit are subject to an annual review by the lenders for the continued use of the facilities.
     STATS ChipPAC Korea Ltd. has a U.S. Dollar term loan facility of $25.0 million from Hana Bank. During 2006, STATS ChipPAC Korea Ltd. borrowed $12.0 million under this facility to finance its purchase of a building and land in South Korea. In 2007, STATS ChipPAC Korea Ltd. borrowed an additional $3.6 million under this facility. As of June 29, 2008, the interest rate for the $12.0 million loan was 4.2% per annum and the interest rate for the $3.6 million loan was 4.0% per annum. Interest is payable on a monthly basis. The principal on the $12.0 million loan is repayable over eight equal quarterly installments from September 2007 to June

 

 

2009. The principal on the $3.6 million loan is repayable at maturity in June 2009. As of June 29, 2008, $0.6 million was held as a restricted deposit with the bank. These loans are secured by a pledge of land and a building with a combined net book value of $26.8 million as of June 29, 2008. As of June 29, 2008, $9.6 million of the loans was outstanding.
     STATS ChipPAC Taiwan Semiconductor Corporation has a NT$3.6 billion floating rate New Taiwan dollar term loan facility (approximately $118.5 million as of June 29, 2008) with a syndicate of lenders, with Taishin Bank as the sponsor bank. The loan drawdowns must be made within 24 months from the date of first drawdown which took place on February 18, 2007. As of June 29, 2008, STATS ChipPAC Taiwan Semiconductor Corporation has drawn down NT$0.7 billion (approximately $23.0 million as of June 29, 2008) under the term loan facility. As of June 29, 2007, the interest rate on the loan was 3.6% per annum. The principal and interest on the loan is payable in nine quarterly installments commencing 24 months from first draw down date with first eight quarterly installments each repaying 11% of the principal and the last quarterly installment repaying 12% of the principal. As of June 29, 2008, the outstanding balance on this facility was $23.0 million.
     Additionally, STATS ChipPAC Taiwan Semiconductor Corporation has NT$1.4 billion (approximately $44.4 million as of June 29, 2008) of bank and credit facilities from various other banks and financial institutions, of which $11.7 million borrowings was outstanding as of June 29, 2008. These credit facilities have varying interest rates ranging from 2.5% to 3.6% per annum and maturities ranging from 2008 through 2012.
     The Company has a $50.0 million line of credit with Bank of America. As of June 29, 2008, $50.0 million was borrowed under the facility over two loan tranches of $25.0 million each. The principal and interest of the two loan tranches of $25.0 million each are payable at maturity in July 2008 and August 2008, respectively. These two loan tranches bear interest rate of 3.31% per annum and 3.65% per annum, respectively. The Company has the option to roll-forward the principal at maturity for a period of 1, 2, 3, or 6 months.
     The Company established a syndicated three-year revolving line of credit of $125.0 million in 2006. This line of credit was arranged by Oversea-Chinese Banking Corporation Limited and includes a total of six lenders. The facility is irrevocable by the bank syndicate for the three-year period unless the Company is in breach of its covenants, including minimum tangible assets, interest coverage ratios and debt ratios, or an event of default occurs, such as a failure to pay any amount due under the line of credit. The Company cancelled the revolving line of credit on January 31, 2008.
     At June 29, 2008, the Company had other undrawn banking and credit facilities consisting of long-term loans and bank guarantees of $33.1 million with financial institutions.
Note 4: Income Taxes
     Changes in share ownership by shareholder may result in a limitation on the amount of the Singapore net operating losses and unutilized capital allowances that are available as carryforwards for use by the Company. The Company reviewed the tax effect of such a shareholder change in connection with the tender offer by STSPL in 2007. In January 2008, the Singapore tax authorities confirmed that the limitations relating to the Company’s ability to carryforward of certain Singapore tax losses and capital allowances for offset against future taxable profits of the Company in connection with the tender offer by STSPL were not affected subject to the fulfillment of certain continuing conditions.
     In the six months ended June 29, 2008, approximately $7.2 million have been further reserved as liability on unrecognized tax benefits for uncertain tax positions and is accounted for as a current income tax adjustment due to an increase of the current period activity related to uncertain tax positions. In addition, the Company reclassed certain tax liabilities from deferred tax liabilities to liability for unrecognized tax benefits. As of June 29, 2008, the Company has approximately $11.6 million of such accrued interest and penalties.
     The Company is under tax examination in certain of these jurisdictions and is engaged with the South Korean National Tax Service (the “NTS”) through a Mutual Agreement Procedure (“MAP”) relating to withholding tax not collected on the interest income on the loan from ChipPAC’s Hungarian subsidiary to its South Korean subsidiary for the period from 1999 to May 2002. Refer to Note 6 for details.
Note 5: Earnings Per Share
     Basic earnings per share (“EPS”) is computed using the weighted average number of ordinary shares outstanding. Diluted EPS is computed using the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares from the assumed exercise of share options outstanding during the period, if

 

 

any, using the treasury stock method plus other potentially dilutive securities outstanding, such as convertible notes.
     The Company excluded certain potentially dilutive securities for each period presented from its diluted earnings per share computation because the exercise price of the securities exceeded the average fair value of the Company’s ordinary shares, and therefore these securities were anti-dilutive.
     A summary of the excluded potentially dilutive securities outstanding as of July 1, 2007 and June 29, 2008 follows (in thousands):
                                 
    Three Months Ended   Six Months Ended
    July 1,   June 29,   July 1,   June 29,
    2007   2008   2007   2008
Convertible notes
     65,618       —       65,618       —  
Share plans
     15,899       14,967       15,855       14,967  
     The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below (in thousands):
                                 
    Three Months Ended   Six Months Ended
    July 1,   June 29,   July 1,   June 29,
    2007   2008   2007   2008
Net income
   $ 7,429     $ 22,116     $ 24,476     $ 39,969  
 
                                
Adjusted net income
   $ 7,933     $ 22,116     $ 25,484     $ 39,969  
 
                                
Weighted average number of ordinary shares outstanding (basic)
     2,031,435       2,118,538       2,020,633       2,085,687  
Weighted average dilutive shares from share plans
     9,499       2,260       14,778       3,552  
Weighted average dilutive convertible notes
     145,144       —       145,144       —  
         
Weighted average number of ordinary and equivalent ordinary shares outstanding (diluted)
     2,186,078       2,120,798       2,180,555       2,089,239  
         
Note 6: Contingent Liabilities
     The Company is subject to claims and litigations, which arise in the normal course of business. These claims may include allegations of infringement of intellectual property rights of others as well as other claims of liability. The Company accrues liability associated with these claims and litigations when they are probable and reasonably estimable.
     In February 2006, the Company, ChipPAC Inc. (“ChipPAC”) and STATS ChipPAC (BVI) Limited were named as defendants in a patent infringement lawsuit filed in United States Federal Court for the Northern District of California (the “California Litigation”). The plaintiff, Tessera Technologies, Inc. (“Tessera”), has asserted that semiconductor chip packaging, specifically devices having Ball Grid Array (“BGA”) and multi-chip BGA configurations used by the defendants infringe certain patents of Tessera. Tessera has further asserted that the Company is in breach of an existing license agreement entered into by Tessera with ChipPAC, which agreement has been assigned by ChipPAC to the Company.
     In May 2007, at Tessera’s request, the United States International Trade Commission (the “ITC”) instituted an investigation (the “First ITC Investigation”) of certain of the Company’s co-defendants in the California Litigation and other companies, including certain of the Company’s customers. In addition, in April 2007, Tessera instituted an action in the United States District Court for the Eastern District of Texas (the “Texas Action”) against certain of the Company’s co-defendants in the California Litigation and other companies. In the First ITC Investigation, Tessera seeks an order preventing the named companies from importing certain packaged semiconductor chips and products containing them into the United States. The Texas Action seeks damages and injunctive relief against the named defendants. Both the First ITC Investigation and the Texas Action allege infringement of two of the same patents asserted by Tessera in the California Litigation, and may involve some of the same products packaged by the Company that are included in the California Litigation.

 

 

     In May 2008, the ITC instituted a second investigation (the “Second ITC Investigation”). In the Second ITC Investigation, Tessera seeks an order to prevent the Company and other named companies (collectively, the “Respondents”) from providing packaging or assembly services for certain packaged semiconductor chips incorporating small format non-tape BGA semiconductor packages and products containing them, for importation into the United States. In addition, Tessera seeks a general exclusion order excluding from importation all small format non-tape BGA semiconductor packages (and downstream products containing such packages), regardless of whether such packages are assembled by the Respondents. The Second ITC Investigation alleges infringement of three of the same patents asserted by Tessera in the California Litigation. The Company has responded to the complaint on June 23, 2008. The target date currently set by the ITC for the conclusion of the Second ITC Investigation is August 2009.
     The district court in the California Litigation has vacated the trial schedule and stayed all proceedings pending a final resolution of the First ITC Investigation. The U.S. Patent and Trademark Office (the “PTO”) has also instituted reexamination proceedings on all of the patents Tessera has asserted in the California Litigation and the Second ITC Investigation. It is not possible to predict the outcome of the California Litigation or the Second ITC Investigation, the total costs of resolving the California Litigation and the Second ITC Investigation, or when the stay in the California Litigation will be lifted; nor is it possible to predict the outcome of the First ITC Investigation or the Texas Action. Nor is it possible to predict the outcome of the PTO proceedings or their impact on the California Litigation, the First ITC Investigation and the Second ITC Investigation.
     The Company believes that it has a meritorious defense to these claims and intends to defend the lawsuit(s) vigorously. A court or ITC determination that the Company’s provision of certain semiconductor assembly services may infringe the intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its provision of such assembly services. Due to the inherent uncertainties of the lawsuit(s) and investigation(s), the Company cannot accurately predict the ultimate outcome and it could result in significant liability and/or injunction and could have a material adverse effect on the business, financial condition and the results of operations of the Company.
     In addition, the Company is subject to various taxes in the different jurisdictions in which it operates. These include taxes on income, property, goods and services, and other taxes. The Company submits tax returns and claims with the appropriate government taxing authorities, which are subject to examination and agreement by those taxing authorities. The Company will regularly assess the likelihood of adverse outcomes resulting from these examinations to determine adequacy of provision for taxes.
     In connection with the merger of STATS and ChipPAC, the Company assumed certain contingent liabilities. In 2002, an assessment of approximately 16.0 billion South Korean Won (approximately $15.4 million based on the exchange rate as of June 29, 2008) was made by the South Korean National Tax Service (the “NTS”), relating to withholding tax not collected on the interest income on the loan from ChipPAC’s Hungarian subsidiary to its South Korean subsidiary for the period from 1999 to September 2001. The Company does not believe that the prevailing tax treaty requires withholding tax on the transaction in question. ChipPAC has appealed this assessment through the NTS’s Mutual Agreement Procedure (“MAP”). In July 2002, the Icheon tax office of the NTS approved a suspension of the proposed assessment until resolution of the disputed assessment. The NTS required a corporate guarantee amounting to the tax assessment in exchange for the suspension. ChipPAC complied with the guarantee request in July 2002. A further assessment of 2.7 billion South Korean Won (approximately $2.6 million based on the exchange rate as of June 29, 2008) was made against ChipPAC in January 2004 for interest expense from October 2001 to May 2002. ChipPAC engaged in a MAP and obtained suspension of the additional proposed assessment by providing a corporate guarantee in the amount of the additional assessment. The MAP was due to terminate on July 3, 2007 if not extended by the NTS. Prior to the termination, NTS extended the MAP on June 4, 2007. Based on South Korean tax law, the extension period should not exceed three years. In the event that the Company is not successful with its appeal, the Company estimates that the maximum amount payable by the Company, including potential interest and local surtax, as of June 29, 2008 to be 34.1 billion South Korean Won (approximately $32.7 million based on the exchange rate as of June 29, 2008). The final outcome of the resolution of this matter could result in significant liability and could have a material adverse effect on the business, financial condition and results of operations of the Company.
Note 7: Condensed Consolidating Financial Information
     In November 2004, the Company issued $215.0 million of 6.75% Senior Notes due 2011. These senior notes issued by STATS ChipPAC are fully and unconditionally guaranteed, jointly and severally, on a senior basis, by the following wholly owned subsidiaries: (1) STATS ChipPAC, Inc., STATS ChipPAC (Barbados) Ltd., STATS ChipPAC (BVI) Limited, ChipPAC International Company Limited, STATS ChipPAC Malaysia Sdn. Bhd., STATS ChipPAC (Thailand) Limited, STATS ChipPAC Test Services, Inc., STATS Holdings Limited, ChipPAC Luxembourg S.a.R.L., ChipPAC Liquidity Management Hungary Limited Liability

 

 

Company, and STATS ChipPAC Taiwan Co., Ltd. (the “Guarantor Subsidiaries”) and (2) STATS ChipPAC Korea Ltd. STATS ChipPAC Shanghai Co., Ltd., STATS ChipPAC Test Services (Shanghai) Co., Ltd., STATS ChipPAC Semiconductor Shanghai Co., Ltd. and STATS ChipPAC Taiwan Semiconductor Corporation (the “Non-Guarantor Subsidiaries”) did not provide guarantees.
     In July 2005, the Company issued $150.0 million of 7.5% Senior Notes due 2010. These senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis, by the Guarantor Subsidiaries. The Non-Guarantor Subsidiaries and STATS ChipPAC Korea Ltd. did not provide guarantees.
     The following is the consolidated financial information segregated between STATS ChipPAC Ltd. as the issuer of the $215.0 million 6.75% Senior Notes due 2011 and the $150.0 million 7.5% Senior Notes due 2010; STATS ChipPAC Korea Ltd. as a guarantor of the $215.0 million 6.75% Senior Notes due 2011 and non-guarantor of the $150.0 million 7.5% Senior Notes due 2010; the other Guarantor Subsidiaries and other Non-Guarantor Subsidiaries of the $215.0 million 6.75% Senior Notes due 2011 and the $150.0 million 7.5% Senior Notes due 2010.

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 30, 2007
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                                
Current assets:
                                                
Cash and cash equivalents
   $ 91,813     $ 25,224     $ 65,945     $ 30,479     $ —     $ 213,461  
Short-term marketable securities
     —       —       —       29,230       —       29,230  
Accounts receivable, net
     72,827       —       183,486       15,047       —       271,360  
Amounts due from affiliates
     440,518       38,005       141,656       65,932       (676,819 )     9,292  
Other receivables
     2,527       2,716       904       730       —       6,877  
Inventories
     19,614       38,516       11,680       13,502       —       83,312  
Prepaid expenses and other current assets
     5,276       2,589       11,170       3,285       —       22,320  
 
                                    
Total current assets
     632,575       107,050       414,841       158,205       (676,819 )     635,852  
Long-term marketable securities
     15,296       —       —       —       —       15,296  
Long-term amounts due from affiliates
     —       —       —       6,852       —       6,852  
Property, plant and equipment, net
     280,371       382,420       289,828       323,871       —       1,276,490  
Investment in equity investee
     10,350       —       —       —       —       10,350  
Investment in subsidiaries
     995,948       —       111,167       —       (1,107,115 )     —  
Intangible assets
     5,646       1,586       30,495       3,027       —       40,754  
Goodwill
     —       316,067       125,800       103,882       2,209       547,958  
Long-term restricted cash
     —       629       614       369       —       1,612  
Prepaid expenses and other non-current assets
     15,055       27,061       1,406       18,268       —       61,790  
 
                                    
Total assets
   $ 1,955,241     $ 834,813     $ 974,151     $ 614,474     $ (1,781,725 )   $ 2,596,954  
 
                                    
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                
Current liabilities:
                                                
Accounts and other payables
   $ 14,024     $ 76,254     $ 28,780     $ 45,242     $ —     $ 164,300  
Payables related to property, plant and equipment purchases
     13,422       35,486       11,350       10,486       —       70,744  
Accrued operating expenses
     48,028       12,091       37,554       11,843       —       109,516  
Income taxes payable
     —       7,682       2,718       6,850       —       17,250  
Short-term borrowings
     50,000       —       —       300       —       50,300  
Amounts due to affiliates
     58,447       87,560       485,123       47,340       (676,819 )     1,651  
Current obligations under capital leases
     —       —       —       —       —       —  
Current installments of long-term debts
     21,991       6,000       154,500       7,990       —       190,481  
 
                                    
Total current liabilities
     205,912       225,073       720,025       130,051       (676,819 )     604,242  
Long-term debts, excluding current installments installments
     365,000       6,600       26,800       25,453       —       423,853  
Other non-current liabilities
     360       95,377       19,067       10,289       —       125,093  
 
                                    
Total liabilities
     571,272       327,050       765,892       165,793       (676,819 )     1,153,188  
 
                                    
Minority interest
     —       —       —       —       59,797       59,797  
Total shareholders’ equity
     1,383,969       507,763       208,259       448,681       (1,164,703 )     1,383,969  
 
                                    
Total liabilities and shareholders’ equity
   $ 1,955,241     $ 834,813     $ 974,151     $ 614,474     $ (1,781,725 )   $ 2,596,954  
 
                                    

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended July 1, 2007
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
                                                
Net revenues
   $ 204,499     $ 290,456     $ 550,217     $ 156,925     $ (441,444 )   $ 760,653  
Cost of revenues
     (159,075 )     (246,245 )     (497,076 )     (131,551 )     417,800       (616,147 )
 
                                    
Gross profit
     45,424       44,211       53,141       25,374       (23,644 )     144,506  
 
                                    
Operating expenses:
                                                
Selling, general and administrative
     29,073       7,151       34,229       4,110       (18,528 )     56,035  
Research and development
     6,600       5,179       9,697       817       (5,123 )     17,170  
Tender offer expenses
     10,119       —       803       —       —       10,922  
Impairment of assets held for sale
     —       —       1,725       —       —       1,725  
Restructuring charges
     990       —       —       —       —       990  
 
                                    
Total operating expenses
     46,782       12,330       46,454       4,927       (23,651 )     86,842  
 
                                    
Operating income (loss)
     (1,358 )     31,881       6,687       20,447       7       57,664  
 
                                    
Other income (expense), net:
                                                
Interest income
     1,881       210       1,948       447       (1,016 )     3,470  
Interest expense
     (17,271 )     (1,566 )     (1,699 )     (701 )     1,016       (20,221 )
Foreign currency exchange gain (loss)
     (363 )     (127 )     —       205       —       (285 )
Equity loss from equity investee
     (76 )     —       —       —       —       (76 )
Equity income from investment in subsidiaries
     36,529       —       12,908       —       (49,437 )     —  
Dividend income from subsidiary
     6,782       —       —       —       (6,782 )     —  
Other non-operating income (expense), net
     (302 )     (24 )     37       179       —       (110 )
 
                                    
Total other income (expense), net
     27,180       (1,507 )     13,194       130       (56,219 )     (17,222 )
 
                                    
Income before income taxes
     25,822       30,374       19,881       20,577       (56,212 )     40,442  
Income tax expense
     (1,346 )     (7,273 )     (1,854 )     (2,960 )     —       (13,433 )
 
                                    
Income before minority interest
     24,476       23,101       18,027       17,617       (56,212 )     27,009  
Minority interest
     —       —       —       —       (2,533 )     (2,533 )
 
                                    
Net income
   $ 24,476     $ 23,101     $ 18,027     $ 17,617     $ (58,745 )   $ 24,476  
 
                                    

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended July 1, 2007
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
                                                
Cash Flows From Operating Activities
                                                
Net income
   $ 24,476     $ 23,101     $ 18,027     $ 17,617     $ (58,745 )   $ 24,476  
Adjustments to reconcile net income to net cash provided by operating activities:
                                                
Depreciation and amortization
     42,827       30,071       25,601       24,321       (7 )     122,813  
Amortization of leasing prepayments
     11       —       —       —       —       11  
Debt issuance cost amortization
     1,216       —       55       —       —       1,271  
Loss (gain) on sale of property, plant and equipment
     1,006       (1 )     (4 )     (536 )     —       465  
Impairment of assets held for sale
     —       —       1,725       —       —       1,725  
Accretion of discount on convertible notes
     2,790       —       —       —       —       2,790  
Foreign currency exchange (gain) loss
     3       —       —       (235 )     —       (232 )
Share-based compensation expense
     1,710       2,155       993       11       —       4,869  
Deferred income taxes
     1,346       7,259       103       181       —       8,889  
Minority interest in income of subsidiary
     —       —       —       —       2,533       2,533  
Equity income from investment in subsidiaries
     (36,529 )     —       (12,908 )     —       49,437       —  
Equity loss from investment in equity investee
     76       —       —       —       —       76  
Others
     24       69       56       (31 )     —       118  
Changes in operating working capital:
                                                
Accounts receivable
     15,763       —       2,013       1,649       —       19,425  
Amounts due from affiliates
     7,719       (8,969 )     (10,571 )     (3,662 )     16,184       701  
Inventories
     11,733       2,118       304       7,762       —       21,917  
Other receivables, prepaid expenses and other assets
     (4,822 )     1,817       951       139       6,782       4,867  
Accounts payable, accrued operating expenses and other payables
     (15,353 )     (12,835 )     1,806       (22,207 )     —       (48,589 )
Amounts due to affiliates
     8,176       7,858       (8,633 )     8,799       (16,184 )     16  
 
                                    
Net cash provided by operating activities
     62,172       52,643       19,518       33,808       —       168,141  
 
                                    
Cash Flows From Investing Activities
                                                
Proceeds from sales of marketable securities
   $ —     $ —     $ —     $ 16,113     $ —     $ 16,113  
Proceeds from maturity of marketable securities
     —       —       —       4,604       —       4,604  
Purchases of marketable securities
     —       —       —       (8,753 )     —       (8,753 )
Cash injection in subsidiary
     (1,119 )     —       —       —       1,119       —  
Acquisition of intangible assets
     (1,080 )     (278 )     (573 )     (158 )     —       (2,089 )
Purchases of property, plant and equipment
     (20,531 )     (65,631 )     (14,553 )     (26,518 )     18,943       (108,290 )
Others, net
     11,750       4,737       1,261       7,762       (18,943 )     6,567  
 
                                    
Net cash used in investing activities
     (10,980 )     (61,172 )     (13,865 )     (6,950 )     1,119       (91,848 )
 
                                    
Cash Flows From Financing Activities
                                                
Repayment of short-term debts
   $ —     $ (48 )   $ —     $ (544 )   $ —     $ (592 )
Repayment of long-term debts
     —       (1,380 )     —       (40,781 )     —       (42,161 )
Proceeds from issuance of shares
     12,639       —       —       1,119       (1,119 )     12,639  
Redemption of convertible notes
     (36,800 )     —       —       —       —       (36,800 )
Proceeds from bank borrowings
     —       3,600       —       15,789       —       19,389  
Decrease in restricted cash
     —       —       —       1       —       1  
Capital lease payments
     —       (3,440 )     —       —       —       (3,440 )
 
                                    
Net cash used in financing activities
     (24,161 )     (1,268 )     —       (24,416 )     (1,119 )     (50,964 )
 
                                    
Net increase (decrease) in cash and cash equivalents
     27,031       (9,797 )     5,653       2,442       —       25,329  
Effect of exchange rate changes on cash and cash equivalents
     —       —       —       34       —       34  
Cash and cash equivalents at beginning of the period
     69,057       22,503       55,785       24,112       —       171,457  
 
                                    
Cash and cash equivalents at end of the period
   $ 96,088     $ 12,706     $ 61,438     $ 26,588     $ —     $ 196,820  
 
                                    

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 29, 2008
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                                
Current assets:
                                                
Cash and cash equivalents
   $ 108,592     $ 13,376     $ 73,006     $ 27,718     $ —     $ 222,692  
Short-term marketable securities
     —       —       —       50,189       —       50,189  
Accounts receivable, net
     90,550       —       180,896       14,331       —       285,777  
Amounts due from affiliates
     598,173       25,347       172,234       56,246       (843,758 )     8,242  
Other receivables
     7,395       4,072       1,622       658       (4,652 )     9,095  
Inventories
     17,872       44,425       10,104       13,146       —       85,547  
Prepaid expenses and other current assets
     7,263       6,213       8,416       1,762       —       23,654  
 
                                    
Total current assets
     829,845       93,433       446,278       164,050       (848,410 )     685,196  
Long-term marketable securities
     15,437       —       —       —       —       15,437  
Long-term amounts due from affiliates
     —       —       —       13,232       —       13,232  
Property, plant and equipment, net
     247,333       410,293       278,854       326,822       —       1,263,302  
Investment in equity investee
     10,338       —       —       —       —       10,338  
Investment in subsidiaries
     1,014,791       —       107,837       —       (1,122,628 )     —  
Intangible assets
     6,695       1,288       29,914       2,683       —       40,580  
Goodwill
     —       319,731       125,800       103,882       2,209       551,622  
Long-term restricted cash
     —       636       315       395       —       1,346  
Prepaid expenses and other non-current assets
     13,520       22,696       1,171       10,854       —       48,241  
 
                                    
Total assets
   $ 2,137,959     $ 848,077     $ 990,169     $ 621,918     $ (1,968,829 )   $ 2,629,294  
 
                                    
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                
Current liabilities:
                                                
Accounts and other payables
   $ 14,829     $ 95,784     $ 28,440     $ 48,001     $ —     $ 187,054  
Payables related to property, plant and equipment purchases
     6,899       23,765       8,008       11,874       —       50,546  
Accrued operating expenses
     42,763       63,178       29,120       20,861       (4,652 )     151,270  
Income taxes payable
     —       872       1,823       1,101       —       3,796  
Short-term borrowings
     50,000       —       —       —       —       50,000  
Amounts due to affiliates
     86,537       75,919       633,807       49,091       (843,758 )     1,596  
Current installments of long-term debts
     —       9,600       20,000       13,093       —       42,693  
 
                                    
Total current liabilities
     201,028       269,118       721,198       144,021       (848,410 )     486,955  
Long-term debts, excluding current installments installments
     365,000       —       26,800       21,609       —       413,409  
Other non-current liabilities
     183       60,358       20,130       14,408       —       95,079  
 
                                    
Total liabilities
     566,211       329,476       768,128       180,038       (848,410 )     995,443  
 
                                    
Minority interest
     —       —       —       —       62,103       62,103  
Total shareholders’ equity
     1,571,748       518,601       222,041       441,880       (1,182,522 )     1,571,748  
 
                                    
Total liabilities and shareholders’ equity
   $ 2,137,959     $ 848,077     $ 990,169     $ 621,918     $ (1,968,829 )   $ 2,629,294  
 
                                    

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 29, 2008
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
                                                
Net revenues
   $ 217,928     $ 323,557     $ 641,607     $ 137,433     $ (459,141 )   $ 861,384  
Cost of revenues
     (159,093 )     (287,055 )     (568,435 )     (128,412 )     430,839       (712,156 )
 
                                    
Gross profit
     58,835       36,502       73,172       9,021       (28,302 )     149,228  
 
                                    
Operating expenses:
                                                
Selling, general and administrative
     28,303       7,594       40,166       5,318       (21,299 )     60,082  
Research and development
     7,973       5,499       11,820       995       (7,003 )     19,284  
Accelerated share-based compensation
     1,027       317       117       101       —       1,562  
Restructuring charges
     —       —       900       —       —       900  
 
                                    
Total operating expenses
     37,303       13,410       53,003       6,414       (28,302 )     81,828  
 
                                    
Operating income
     21,532       23,092       20,169       2,607       —       67,400  
 
                                    
Other income (expense), net:
                                                
Interest income
     1,302       94       1,655       776       (1,016 )     2,811  
Interest expense
     (15,844 )     (1,321 )     (2,794 )     (549 )     1,016       (19,492 )
Foreign currency exchange gain (loss)
     1,833       4,273       (572 )     (273 )     —       5,261  
Equity loss from equity investee
     (11 )     —       —       —       —       (11 )
Equity income (loss) from investment in subsidiaries
     26,329       —       (3,334 )     —       (22,995 )     —  
Dividend income from subsidiary
     4,652       —       —       —       (4,652 )     —  
Other non-operating income (expense), net
     (3 )     —       1,228       81       —       1,306  
 
                                    
Total other income (expense), net
     18,258       3,046       (3,817 )     35       (27,647 )     (10,125 )
 
                                    
Income before income taxes
     39,790       26,138       16,352       2,642       (27,647 )     57,275  
Income tax benefits (expense)
     179       (11,137 )     (2,705 )     (966 )     —       (14,629 )
 
                                    
Income before minority interest
     39,969       15,001       13,647       1,676       (27,647 )     42,646  
Minority interest
     —       —       —       —       (2,677 )     (2,677 )
 
                                    
Net income
   $ 39,969     $ 15,001     $ 13,647     $ 1,676     $ (30,324 )   $ 39,969  
 
                                    

 

 

STATS CHIPPAC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 29, 2008
In thousands of U.S. Dollars
(Unaudited)
                                                 
          STATS             Non -              
    STATS     ChipPAC     Guarantor     Guarantor              
    ChipPAC     Korea     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
                                                
Cash Flows From Operating Activities
                                                
Net income
   $ 39,969     $ 15,001     $ 13,647     $ 1,676     $ (30,324 )   $ 39,969  
Adjustments to reconcile net income to net cash provided by operating activities:
                                                
Depreciation and amortization
     40,666       40,258       35,399       26,580       —       142,903  
Debt issuance cost amortization
     1,875       —       47       —       —       1,922  
Gain on sale of property, plant and equipment
     (79 )     —       (5 )     (283 )     —       (367 )
Accretion of discount on convertible notes
     66       —       —       —       —       66  
Foreign currency exchange loss
     —       —       —       1,015       —       1,015  
Share-based compensation expense
     1,697       884       353       205       —       3,139  
Deferred income taxes
     —       484       503       465       —       1,452  
Minority interest in income of subsidiary
     —       —       —       —       2,677       2,677  
Equity (income) loss from investment in subsidiaries
     (26,329 )     —       3,334       —       22,995       —  
Equity loss from investment in equity investee
     11       —       —       —       —       11  
Others
     —       21       153       91       —       265  
Changes in operating working capital:
                                                
Accounts receivable
     (17,723 )     —       2,590       716       —       (14,417 )
Amounts due from affiliates
     (21,474 )     12,658       (26,741 )     3,306       26,921       (5,330 )
Inventories
     1,742       (5,909 )     1,576       356       —       (2,235 )
Other receivables, prepaid expenses and other assets
     (4,798 )     (4,759 )     (3,098 )     1,564       4,652       (6,439 )
Accounts payable, accrued operating expenses and other payables
     (4,633 )     23,739       (7,497 )     1,881       —       13,490  
Amounts due to affiliates
     28,090       (11,641 )     8,666       1,751       (26,921 )     (55 )
 
                                    
Net cash provided by operating activities
     39,080       70,736       28,927       39,323       —       178,066  
 
                                    
Cash Flows From Investing Activities
                                                
Proceeds from sales of marketable securities
   $ —     $ —     $ —     $ 11,930     $ —     $ 11,930  
Proceeds from maturity of marketable securities
     —       —       3,810       6,954       —       10,764  
Purchases of marketable securities
     —       —       (3,810 )     (37,306 )     —       (41,116 )
Cash injection in subsidiary
     (1,031 )     —       —       —       1,031       —  
Acquisition of intangible assets
     (1,200 )     (153 )     (2,331 )     (257 )     —       (3,941 )
Purchases of property, plant and equipment
     (21,375 )     (82,151 )     (33,003 )     (29,363 )     26,379       (139,513 )
Proceeds on assets held for sale
     —       —       5,019       6,380       —       11,399  
Proceeds from deregistration of subsidiary
     9,654       —       —       (9,654 )     —       —  
Others, net
     7,458       2,727       8,150       9,514       (26,379 )     1,470  
 
                                    
Net cash used in investing activities
     (6,494 )     (79,577 )     (22,165 )     (41,802 )     1,031       (149,007 )
 
                                    
Cash Flows From Financing Activities
                                                
Repayment of short-term debts
   $ —     $ —     $ —     $ (300 )   $ —     $ (300 )
Repayment of long-term debts
     —       (3,000 )     —       (1,083 )     —       (4,083 )
Proceeds from issuance of shares
     6,152       —       —       1,031       (1,031 )     6,152  
Redemption of convertible notes
     (22,057 )     —       —       —       —       (22,057 )
(Increase) decrease in restricted cash
     —       (7 )     299       (26 )     —       266  
Grant received
     98       —       —       —       —       98  
 
                                    
Net cash provided by (used in) financing activities
     (15,807 )     (3,007 )     299       (378 )     (1,031 )     (19,924 )
 
                                    
Net increase (decrease) in cash and cash equivalents
     16,779       (11,848 )     7,061       (2,857 )     —       9,135  
Effect of exchange rate changes on cash and cash equivalents
     —       —       —       96       —       96  
Cash and cash equivalents at beginning of the period
     91,813       25,224       65,945       30,479       —       213,461  
 
                                    
Cash and cash equivalents at end of the period
   $ 108,592     $ 13,376     $ 73,006     $ 27,718     $ —     $ 222,692  
 
                                    

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion of our business, financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included in this report. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ from those anticipated in these forward looking statements as a result of certain factors, such as those set forth in our annual report on Form 20-F filed with the SEC on March 7, 2008. Since the beginning of fiscal 2005, we have employed quarterly and fiscal year reporting periods. Our 52-53 week fiscal year ends on the Sunday nearest and prior to December 31. Our fiscal quarters end on a Sunday and are generally thirteen weeks in length. Our second quarter of 2008 ended on June 29, 2008, while our second quarter of 2007 and fiscal year 2007 ended on July 1, 2007 and December 30, 2007, respectively. References to “$” are to the lawful currency of the United States of America. The noon buying rate in The City of New York on June 29, 2008 was 1,041.75 South Korean Won per $1.00 for cable transfers in South Korean Won and was 30.37 New Taiwan Dollar per $1.00 for cable transfers in New Taiwan Dollars, as certified for customs purposes by the Federal Reserve Bank of New York. For your convenience, unless otherwise indicated, certain South Korean Won and New Taiwan Dollar amounts have been translated into U.S. Dollar amounts based on these exchange rates.
Overview
     We are a leading service provider of semiconductor packaging design, bump, probe, assembly, test and distribution solutions. We have the scale to provide a comprehensive range of semiconductor packaging and test solutions to a diversified global customer base servicing the computing, communications, consumer, automotive and industrial markets. Our services include:
•   Packaging services: providing leaded, power, array, memory card and wafer level chip-scale packages (“CSPs”) to customers with a broad range of packaging solutions and full backend turnkey services for a wide variety of electronics applications. We also provide redistribution layers, integrated passive devices and wafer bumping services for flip-chip and wafer level CSPs. As part of customer support on packaging services, we also offer package design; electrical, mechanical and thermal simulation; measurement and design of lead-frames and laminate substrates;
 
•   Test services: including wafer probe and final testing on a diverse selection of test platforms covering the major test platforms in the industry. We have expertise in testing a broad variety of semiconductors, especially mixed-signal, radio frequency, analog and high-performance digital devices. We also offer test-related services such as burn-in process support, reliability testing, thermal and electrical characterization, dry pack, and tape and reel; and
 
•   Pre-production and post-production services: such as package development, test software and related hardware development, warehousing and drop shipment services.
     We have a leadership position in providing advanced packages, such as stacked die, System-in-Package and flip-chip, as well as Ball Grid Array (“BGA”) packages and wafer level CSPs. We are a leader in high volume assembly, test and distribution of discrete and analog power packages.
     We are also a leader in testing mixed-signal semiconductors or semiconductors combining the use of analog and digital circuits in a chip. Mixed-signal semiconductors are used extensively in fast-growing communications and consumer applications. We have strong expertise in testing a wide range of high-performance digital devices.
     We have been successful in attracting new customers with our packaging and test capabilities and then expanding our relationship with such customers to provide full turnkey solutions tailored to their individual needs.
     We are headquartered in Singapore and our manufacturing facilities are strategically located in South Korea, Singapore, China, Malaysia, Taiwan (which includes our 52%-owned subsidiary, STATS ChipPAC Taiwan Semiconductor Corporation) and Thailand. We also have test pre-production facilities in the United States. We market our services through our direct sales force in the United States, South Korea, Japan, China, Singapore, Malaysia, Taiwan, the United Kingdom and the Netherlands. With an established presence in the countries where strategic semiconductor markets are located, we are in close proximity to the major hubs of wafer fabrication which allows us to provide customers with fully-integrated, multi-site, end-to-end packaging and test services.

 

 

Proposed Capital Reduction Exercise
     In January 2008, we announced our intention to effect a proposed capital reduction to return surplus share capital in an amount of up to $813.0 million to our shareholders. At an extraordinary general meeting held on March 17, 2008, our shareholders approved the proposed capital reduction. We obtained approval of the proposed capital reduction from the Singapore High Court on June 26, 2008. The proposed capital reduction is subject to (1) all relevant approvals and consents being obtained and (2) the board of directors determining, following the satisfaction of the preceding condition and the financing condition described below, that it is in our best interest, to effect the proposed cash distribution.
     The proposed capital reduction is also subject to and conditional upon us being able to obtain adequate debt financing to fund the cash distribution pursuant to the capital reduction and the repayment of certain of our outstanding debt (including the redemption or repurchase of our 7.5% Senior Notes due 2010 and 6.75% Senior Notes due 2011 that would otherwise restrict our ability to make the cash distribution and to finance the cash distribution) on terms and conditions acceptable to us. The amount of the cash distribution would accordingly be determined based on the proceeds of such debt financing made available to us.
Related Financing Transactions
     In connection with the proposed capital reduction, we intend to pursue a debt financing plan, which is expected to consist of a private placement of senior notes and senior secured credit facilities comprising a term loan and a revolving credit facility. As part of the debt financing plan, we commenced a cash tender offer and consent solicitation in respect of our $150.0 million of 7.5% Senior Notes due 2010 and our $215.0 million of 6.75% Senior Notes due 2011. The tender offer and consent solicitation was conditional upon, among other things, we being able to obtain adequate debt financing to fund the proposed cash distribution described above and the tender offer and consent solicitation on the terms and conditions acceptable to us. The tender offer and consent solicitation was terminated on August 9, 2008 because the financing condition was not satisfied.
Temasek’s Subsidiary, Singapore Technologies Semiconductors Pte Ltd’s, Tender Offer
     In March 2007, Singapore Technologies Semiconductors Pte Ltd (“STSPL”), a wholly-owned subsidiary of Temasek Holdings (Private) Limited (“Temasek”), launched a voluntary conditional cash tender offer for our ordinary shares and American Depositary Shares (“ADSs”) that STSPL did not already own. The tender offer also included an offer by STSPL for our then outstanding $115.0 million aggregate principal amount of zero coupon Convertible Notes due 2008 and $150.0 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2008. Concurrently with the tender offer, STSPL made an options proposal to all holders of options granted under STATS ChipPAC share option plans.
     In May 2007, the tender offer closed with STSPL and its concert parties holding 83.1% of our outstanding ordinary shares (including ordinary shares represented by ADSs, but excluding the ordinary shares issuable upon the conversion of the $134.5 million aggregate principal amount of the 2.5% Convertible Subordinated Notes due 2008 acquired by STSPL) and $134.5 million aggregate principal amount of the 2.5% Convertible Subordinated Notes due 2008. The balance $15.5 million outstanding principal amount of our 2.5% Convertible Subordinated Notes due 2008 was converted into ADSs in May 2007.
     As of June 29, 2008, Temasek, through its wholly-owned subsidiary, STSPL, beneficially owned 1,845.7 million ordinary shares, representing 83.8% of the Company’s ordinary shares, following STSPL’s conversion of its entire $134.5 million of the Company’s 2.5% Convertible Subordinated Notes due 2008 into 145.1 million ordinary shares on May 22, 2008.
     In the six months ended July 1, 2007, we recorded tender offer expenses of $10.9 million, consisting of investment banking, legal, accounting, insurance, printing and other costs associated with the tender offer. No tender offer expenses were incurred during the six months ended June 29, 2008.
Results of Operations
Three and six months ended June 29, 2008 compared to three and six months ended July 1, 2007
Net Revenues
     We derive revenues primarily from packaging and test of laminate and leaded packages. Net revenues were $434.1 million and $861.4 million in the three and six months ended June 29, 2008, respectively, an increase of 17.3% and 13.2% compared to $370.2 million and $760.7 million in the three and six months ended July 1, 2007, respectively. The increase in net revenues in the three and six months ended June 29, 2008 was

 

 

primarily due to increased packaging revenue from higher unit volume and contribution from our factory in Pathumthani, Thailand, which we acquired in October 2007.
     Our packaging revenues in the three and six months ended June 29, 2008 increased 17.8% and 12.1% to $325.2 million and $640.0 million, respectively, compared to the same periods in 2007. Unit volumes of our total packaging in the three and six months ended June 29, 2008 were 23.6% and 21.6% higher compared to the same periods in 2007 and resulted in an increase of $62.0 million and $113.5 million in packaging revenues, respectively. Average selling prices per pin for packaging services in the three and six months ended June 29, 2008 decreased 4.8% and 7.9%, respectively, compared to the same periods in 2007, primarily due to unfavorable changes in product mix, which partially offset our increase in revenue from higher volume by $12.9 million and $44.6 million, respectively. Revenues from test and other services in the three and six months ended June 29, 2008 increased 15.8% and 16.8% to $109.0 million and $221.4 million, respectively, compared to the three and six months ended July 1, 2007.
     In the three and six months ended June 29, 2008, revenue contribution from the communications market increased 2.6% and 1.9% over the same periods in 2007, respectively, and represented 52.6% and 53.2% of our revenues in the three and six months ended June 29, 2008, compared to 50.0% and 51.3% of our revenues in the same periods in 2007, respectively. Revenue contribution from consumer, multi-applications and other markets in the three and six months ended June 29, 2008 decreased 2.1% and 1.5% compared to the same periods in 2007 and represented 33.1% and 31.7% of our revenues in the three and six months ended June 29, 2008, respectively. Revenue contribution from the personal computer market in the three and six months ended June 29, 2008 decreased 0.5% and 0.4% over the same period in 2007, respectively, and represented 14.3% and 15.1% of our revenues in the three and six months ended June 29, 2008. We expect to continue to depend on the communications, consumer and multi-applications, and personal computer markets for substantially all of our net revenues.
Gross Profit
     Gross profit in the three and six months ended June 29, 2008 was $74.7 million and $149.2 million, respectively, an increase of $7.8 million and $4.7 million compared to $66.9 million and $144.5 million in the same periods in 2007, respectively. Gross profit as a percentage of revenues was 17.2% and 17.3% in the three and six months ended June 29, 2008, respectively, compared to 18.1% and 19.0% in the same periods in 2007, respectively. Gross profit in the three and six months ended June 29, 2008 included $0.1 million and $0.7 million of share-based compensation expense under SFAS 123(R), respectively, a decrease of $0.9 million and $1.8 million compared to the three and six months ended July 1, 2007, respectively, which reduced gross margin by 0.03% and 0.1% in the three and six months ended June 29, 2008, respectively. In the three and six months ended June 29, 2008, gross margin decreased primarily due to lower equipment utilization, higher material cost, and Asian currencies appreciation against the U.S. Dollar. Overall equipment utilization was approximately 67% in the three months ended June 29, 2008 compared to approximately 74% in the same period in 2007. Our cost of revenues consist principally of fixed costs such as depreciation and leasing expenses and variable costs such as direct and indirect labor, materials and overhead expenses. We continue to experience higher cost as a result of external global economic factors, such as higher substrate, gold and oil prices which affected our cost of materials, and the adverse effect of the strengthening of the Singapore Dollar, Chinese Renminbi and Malaysian Ringgit against the U.S. Dollar when compared to the same periods in 2007.
Selling, General and Administrative
     Selling, general and administrative expenses were $28.6 million and $60.1 million in the three and six months ended June 29, 2008, an increase of 2.1% and 7.2% compared to $28.0 million and $56.0 million in the three and six months ended July 1, 2007, respectively. As a percentage of revenues, selling, general and administrative expenses were 6.6 % and 7.0% in the three and six months ended June 29, 2008 compared to 7.6% and 7.4% in the same periods in 2007, respectively. The increase in selling, general and administrative expenses in the three and six months ended June 29, 2008 was primarily due to higher payroll expense resulting from an increased number of employees, the Asian currencies appreciation against the U.S. Dollar and increased cost of general business support, partially offset by lower share-based compensation expense. In the three and six months ended June 29, 2008, share-based compensation expense under SFAS 123(R) was $0.2 million and $0.7 million, respectively, compared to $0.7 million and $1.7 million in the same periods in 2007, respectively.
Research and Development
     Research and development expenses were $9.3 million and $19.3 million in the three and six months ended June 29, 2008, respectively, an increase of $0.3 million and $2.1 million, compared to $9.0 million and $17.2 million in the same periods in 2007, respectively. Research and development expenses increased primarily due to an increase in headcount and the establishment of a facility for the research and development of advanced wafer integration technology. As a percentage of revenues, research and development expenses were 2.1% and 2.2% in the three and six months ended June 29, 2008, respectively, compared to 2.4% and 2.3% in the same periods in 2007, respectively.

 

 

Accelerated Share-Based Compensation
     The STATS ChipPAC Ltd. Performance Share Plan compensation expense was terminated in the three months ended June 29, 2008. As a result, we recorded $1.6 million of accelerated share-based compensation expense in the three months ended June 29, 2008.
Tender Offer Expenses
     In the three and six months ended July 1, 2007, we incurred $4.1 million and $10.9 million, respectively, consisting of investment banking, legal, accounting, insurance, printing and other costs associated with the tender offer from STSPL, a wholly-owned subsidiary of Temasek. No tender offer expenses were incurred in the three and six months ended June 29, 2008.
Impairment of Assets Held for Sale
     In the three months ended July 1, 2007, we recorded a $1.7 million held for sale asset impairment loss on the sale of our packaging and test assets related to our discrete power business. No impairment of assets held for sale was incurred in the three and six months ended July 1, 2007.
Restructuring Charges
     In the three months ended March 30, 2008 and July 1, 2007, we reduced our workforce by 75 and 143 employees, respectively, following the implementation of restructuring plans to realign our organization’s structure and efficiency. Severance and related charges of $0.9 million and $1.0 million were expensed in the three months ended March 30, 2008 and July 1, 2007, respectively.
Net Interest Income (Expense)
     Net interest expense was $7.6 million and $16.7 million in the three and six months ended June 29, 2008, respectively, compared to $8.1 million and $16.8 million in the same periods in 2007, respectively. Interest income was $1.4 million and $2.8 million in the three and six months ended June 29, 2008, respectively, compared to $1.6 million and $3.5 million in the same periods in 2007, respectively. The decrease in interest income in the three and six months ended June 29, 2008 was primarily due to lower interest rates, partially offset by higher cash balances in the three and six months ended June 29, 2008 compared to the same periods in 2007, respectively.
     Interest expense was $9.0 million and $19.5 million in the three and six months ended June 29, 2008, respectively, compared to $9.8 million and $20.2 million in the same periods in 2007, respectively. The decrease in interest expense was primarily due to our redemption of $115.0 million aggregate principal amount of our zero coupon Convertibles Notes due 2008 from November 2007 through June 2008 and the conversion of $134.5 million aggregate principal amount of our 2.5% Convertible Subordinated Notes due 2008 into ordinary shares by Temasek, through its wholly-owned subsidiary, STSPL. The decrease was partially offset by increases in our short-term debts in Singapore and long-term debts in Thailand in the three and six months ended June 29, 2008, compared to the same periods in 2007. Total outstanding interest-bearing debt was $506.1 million and $686.1 million as of June 29, 2008 and July 1, 2007, respectively.
Foreign Currency Exchange Gain (Loss)
     Net foreign currency exchange gains was $2.1 million and $5.3 million in the three months and six months ended June 29, 2008, compared to net foreign exchange losses of $0.4 million and $0.3 million in the same periods in 2007, respectively. These non-cash gains and losses were due primarily to the fluctuations between the exchange rate of the U.S. Dollar and the Singapore Dollar, the South Korean Won, the Chinese Renminbi and in the case of the three and six months ended June 29, 2008, the Thai Baht.
Other Non-Operating Income (Expense), Net
     Net other non-operating income was $0.6 million and $1.3 million in the three and six months ended June 29, 2008 compared to net other non-operating expense of $0.2 million and $0.1 million in the same periods in 2007, respectively.
Income Tax Expense
     Quarterly income tax expense was calculated using an estimate of the effective tax rate for the year. Our consolidated income tax expense was $7.0 million and $14.6 million in the three and six months ended June 29, 2008, respectively, compared to $5.8 million and $13.4 million in the same periods in 2007, respectively. The $7.0 million and $14.6 million tax expense included adjustments to the effective tax rate related to a $4.3 million and $7.2 million of liability for unrecognized tax benefits for the three and six months ended June 29, 2008, respectively.
Liquidity and Capital Resources
     Our principal source of liquidity consists of cash flows from operating activities, bank facilities, debt financing, and our existing cash, cash equivalents and marketable securities. As of June 29, 2008, we had cash,

 

 

cash equivalents and marketable securities of $288.3 million. We also have available lines of credit and banking facilities consisting of loans, letters of credit and bank guarantees, including those available to our consolidated subsidiaries, which amounted to an aggregate of $293.3 million, of which $106.1 million was utilized as of June 29, 2008. Our liquidity needs arise primarily from servicing our outstanding debts, working capital needs and the funding of capital expenditures and investments. Our capital expenditures are largely driven by the demand for our services, primarily to increase our packaging and testing capacity, to replace packaging and testing equipment from time to time, and to expand our facilities. Depending on business conditions, we expect our capital expenditures to be approximately $300 million in 2008 as our capital spending continues to be targeted at demand we see from our customers. We spent $64.1 million and $119.3 million on capital expenditures in the three and six months ended June 29, 2008 compared to $55.4 million and $112.2 million in the same periods in 2007, respectively.
     On October 2, 2007, we consummated the previously announced definitive agreement with LSI Corporation (“LSI”) to acquire LSI’s assembly and test operation in Thailand for an aggregate purchase price of approximately $100.0 million, payable over the next four years. We financed $50.0 million of the purchase price with our working capital, including our current cash and cash equivalents, and issued promissory note bearing interest of 6.0% per annum for the remainder $50.0 million purchase price.
     On November 7, 2007, we redeemed $96.4 million aggregate principal amount of our zero coupon Convertible Notes due 2008 pursuant to demands for redemption from note holders in accordance with the indenture governing the zero coupon Convertible Notes due 2008. We paid a total amount of $114.1 million (including interest accrued up to November 7, 2007) in respect of the convertible notes redemption. We financed the redemption with cash and short-term borrowings.
     In the six months ended June 29, 2008, we repurchased the outstanding $18.6 million aggregate principal of our zero coupon Convertible Notes due 2008 for $22.1 million (including accretion of discount on convertible notes). We financed the repurchase of the $18.6 million aggregate principal amount of these convertible notes with our cash and cash equivalents.
     In May 2008, Temasek, through its wholly-owned subsidiary, STSPL, converted its holding of all of the outstanding $134.5 million principal amount of our 2.5% Convertible Subordinated Notes due 2008 into 145.1 million of our ordinary shares.
     In January 2008, we announced our intention to effect a proposed capital reduction to return surplus share capital in an amount of up to $813.0 million to our shareholders. At an extraordinary general meeting held on March 17, 2008, our shareholders approved the proposed capital reduction. We obtained approval of the proposed capital reduction from the Singapore High Court on June 26, 2008. The proposed capital reduction is subject to (1) all relevant approvals and consents being obtained and (2) the board of directors determining, following the satisfaction of the preceding condition and the financing condition described below, that it is in our best interest, to effect the proposed cash distribution.
     The proposed capital reduction is also subject to and conditional upon us being able to obtain adequate debt financing to fund the cash distribution pursuant to the capital reduction and the repayment of certain of our outstanding debt (including the redemption or repurchase of our 7.5% Senior Notes due 2010 and 6.75% Senior Notes due 2011 that would otherwise restrict our ability to make the cash distribution and to finance the cash distribution) on terms and conditions acceptable to us. The amount of the cash distribution would accordingly be determined based on the proceeds of such debt financing made available to us.
     At the annual general meeting in April 2008, our shareholders approved the repurchase of up to approximately 51 million ordinary shares (2.5% of the issued ordinary shares in the capital of the Company as of the date of the annual general meeting). The approved amount for share repurchases under this shareholders’ mandate will terminate on the earlier of the date on which the next annual general meeting is held or required to be held or the date which the approval is revoked or varied. As of June 29, 2008, we have not repurchased any shares. We may use our available funds, draw down on our available lines of credit or seek additional financing or a combination of these to finance any repurchase of our ordinary shares.
     We believe that our cash on hand, existing credit facilities and anticipated cash flows from operations will be sufficient to meet our currently anticipated capital expenditure requirements, investment requirements, share repurchases, as well as debt service repayment obligations through to June 2009.
     If our capital requirements exceed our expectations as a result of higher than anticipated growth in the semiconductor industry, acquisition or investment opportunities, the expansion of our business or otherwise, or if our cash flows from operations are lower than anticipated, including as a result of an unexpected decrease in demand for our services due to a downturn in the semiconductor industry or otherwise, we may be required to obtain additional debt or equity financing from time to time depending on prevailing market conditions. In such events, there can be no assurance that additional financing will be available or, if available, that such financings

 

 

can be obtained on terms favorable to us or that any additional financing will not be dilutive to our shareholders or detrimental to our creditors.
Total Borrowings
     As of June 29, 2008, our total debt outstanding consisted of $506.1 million of borrowings, which included $150.0 million of our 7.5% Senior Notes due 2010, $215.0 million of our 6.75% Senior Notes due 2011, and other long-term and short-term borrowings.
     In March 2007, we redeemed the remaining outstanding $31.5 million aggregate principal amount of our 1.75% Convertible Notes due 2007 (including interest) for an aggregate consideration of $36.8 million. The repurchase was financed with our cash and cash equivalents.
     In May 2007, we issued 16.7 million ordinary shares upon conversion of $15.5 million aggregate principal amount of our 2.5% Convertible Subordinated Notes due 2008.
     In October 2007, we consummated the previously announced definitive agreement with LSI pursuant to which STATS ChipPAC (Thailand) Limited acquired LSI’s assembly and test operations in Thailand for an aggregate purchase price of approximately $100.0 million. We funded the initial payment of $50.0 million of the aggregate purchase consideration with our cash and cash equivalents. STATS ChipPAC (Thailand) Limited issued a promissory note bearing interest of 6.0% per annum, payable annually, for the remainder of the purchase price. The amount payable to LSI under the promissory note after contractual netting of certain receivables from LSI of $3.2 million amounted to $46.8 million as of June 29, 2008. The promissory note is payable in annual installments of $20.0 million, $10.0 million, $10.0 million and $6.8 million over the next four years.
     In November 2007, we redeemed $96.4 million aggregate principal amount of our zero coupon Convertible Notes due 2008 pursuant to demands for redemption from note holders in accordance with the indenture governing these convertible notes. We paid a total amount of $114.1 million (excluding interest) in respect of the convertible notes redemption. We financed the redemption with cash and short-term borrowings.
     In the six months ended June 29, 2008, we repurchased the outstanding $18.6 million aggregate principal of our zero coupon Convertible Notes due 2008 for $22.1 million (including accretion of discount on the convertible notes and interest). We financed the repurchase of the $18.6 million aggregate principal amount of these convertible notes with our cash and cash equivalents.
     In May 2008, Temasek, through its wholly-owned subsidiary, STSPL, converted its holding of all of our outstanding $134.5 million principal amount of 2.5% Convertible Subordinated Notes due 2008.
     STATS ChipPAC Korea Ltd. has lines of credit with Hana Bank and the National Agricultural Cooperation Federation Bank in South Korea with credit limits of $10.0 million and $5.0 million, respectively. These lines of credit bear interest at a rate of 3.7% per annum on these facilities. As of June 29, 2008, we had not used these lines of credit and there was no outstanding balance on these facilities. These lines of credit are subject to an annual review by the lenders for the continued use of the facilities.
     STATS ChipPAC Korea Ltd.’s term loan facility from Hana Bank in South Korea amounted to $25.0 million. During 2006, we borrowed $12.0 million under this facility to finance our purchase of a building and land in South Korea. This borrowing is repayable over eight equal quarterly installments from September 2007 to June 2009. In 2007, we borrowed an additional $3.6 million under this facility, which is repayable at maturity in June 2009. As of June 29, 2008, the interest rate for our $12.0 million loan was 4.6% per annum and the interest rate for our $3.6 million loan was 4.0% per annum. Interest is payable on a monthly basis. As of June 29, 2008, $0.6 million was held as a restricted deposit with the bank. These loans are secured by a pledge of land and a building with a combined net book value of $26.8 million as of June 29, 2008. As of June 29, 2008, $9.6 million of the loans was outstanding.
     In August 2006, STATS ChipPAC Taiwan Semiconductor Corporation obtained a floating interest rate loan facility of NT$3.6 billion (approximately $118.5 million based on the exchange rate as of June 29, 2008) with a syndicate of lenders, with Taishin Bank as the sponsor bank. The loan drawdowns must be made within 24 months from the date of first drawdown, which took place in February 2007. As of June 29, 2008, STATS ChipPAC Taiwan Semiconductor Corporation has drawn down NT$0.7 billion (approximately $23.0 million based on the exchange rate as of June 29, 2008) under this term loan facility. As of June 29, 2008, the interest rate on the loan was 3.6% per annum. The principal and interest on the loan is payable in nine quarterly installments commencing 24 months from first draw down date with the first eight quarterly installments each repaying 11% of the principal and the last quarterly installment repaying 12% of the principal. The proceeds

 

 

from this facility were primarily used to repay debt under certain of STATS ChipPAC Taiwan Semiconductor’s other credit facilities. As of June 29, 2008, the outstanding balance on this facility was $23.0 million.
     Additionally, STATS ChipPAC Taiwan Semiconductor Corporation has NT$1.4 billion (approximately $44.4 million as of June 29, 2008) of bank and credit facilities from various other banks and financial institutions, of which $11.7 million borrowings was outstanding as of June 29, 2008. These credit facilities have varying interest rates ranging from 2.5% to 3.6% per annum and maturities ranging from 2008 through 2012.
     We have a $50.0 million line of credit with Bank of America. As of June 29, 2008, $50.0 million was borrowed under the facility over two loan tranches of $25.0 million each. The principals and interest of the two loan tranches of $25.0 million are payable at maturity in July 2008 and August 2008, respectively. These two loan tranches of $25.0 million bear interest rate of 3.31% per annum and 3.65% per annum, respectively. We have the option to roll-forward the principal at maturity for a period of 1, 2, 3, or 6 months.
     We established a syndicated three-year revolving line of credit of $125.0 million in 2006. This line of credit was arranged by Oversea-Chinese Banking Corporation Limited and includes a total of six lenders. The facility is irrevocable by the bank syndicate for the three-year period unless we are in breach our covenants, including minimum tangible assets, interest coverage ratios and debt ratios, or an event of default occurs, such as a failure to pay any amount due under the line of credit. We cancelled the revolving line of credit on January 31, 2008.
Special Tax Status
     In February 2008, the Singapore Economic Development Board (“EDB”) offered us a new five-year tax incentive for our Singapore operations commencing July 1, 2007 whereby certain qualifying income will be subject to a concessionary tax rate of 5% instead of the Singapore statutory rate of 18%, subject to the fulfillment of certain continuing conditions.
Off-Balance Sheet Arrangements
     We provided a tax guarantee to the South Korean tax authorities as discussed below. We have no significant investment in any unconsolidated entities. Our off-balance sheet commitments are limited to operating leases, royalty/license agreements and purchase obligations. Our total off-balance sheet obligations were approximately $311.0 million as of June 29, 2008.
Contractual Obligations
     Our total commitments on our loans, operating leases, other obligations and agreements as of June 29, 2008, were as follows (in thousands):
                                         
    Payments Due  
    Within                     More Than        
    1 Year     1-3 Years     3-5 Years     5 Years     Total  
On balance sheet commitments:
                                        
6.75% Senior Notes due 2011 (1) (2)
   $ —     $ —     $ 215,000     $ —     $ 215,000  
7.5% Senior Notes due 2010 (1) (2)
     —       150,000       —       —       150,000  
Long-term loans (2)
     42,693       40,209       8,200       —       91,102  
Short-term loans (2)
     50,000       —       —       —       50,000  
Retirement benefits (3)
     86       676       890       7,011       8,663  
Other non-current liabilities (3)
     —       —       —       —       —  
 
                              
Total on balance sheet commitments
   $ 92,779     $ 190,885     $ 224,090     $ 7,011     $ 514,765  
 
                              
Off balance sheet commitments:
                                        
Operating leases
   $ 12,205     $ 18,963     $ 17,541     $ 32,934     $ 81,643  
Royalty/ licensing agreements
     8,445       16,914       16,734       —       42,093  
Purchase obligations:
                                        
— Capital commitments
     112,153       —       —       —       112,153  
— Inventory purchase commitments
     75,146       —       —       —       75,146  
 
                              
Total off balance sheet commitments
   $ 207,949     $ 35,877     $ 34,275     $ 32,934     $ 311,035  
 
                              
Total commitments
   $ 300,728     $ 226,762     $ 258,365     $ 39,945     $ 825,800  
 
                              
 
Notes:
 
(1)   On June 20, 2008, the Company announced a cash tender offer and consent solicitation in respect of any and all of its 6.75% Senior Notes due 2011 and 7.5% Senior Notes due 2010, which is conditional on, among other things, the Company obtaining adequate debt financing to fund the proposed cash

 

 

    distribution described above and the tender offer and consent solicitation on terms and conditions acceptable to it. As of June 29, 2008, these senior notes that were expected to be refinanced were classified as non-current liabilities. The Company terminated the tender offer and consent solicitation on August 9, 2008.
 
(2)   The 6.75% Senior Notes due 2011 and 7.5% Senior Notes due 2010, short-term and long-term loans agreements contain provisions for the payment of interest either on maturity or on a monthly, quarterly, semi-annual or annual basis at a stated rate of interest over the term of the debt. These payment obligations are not reflected in the table above. The interest payments due within one year, 1-3 years and 3-5 years amount to $29.8 million, $49.2 million and $7.7 million, respectively.
 
(3)   Our other non-current liabilities as of June 29, 2008 were $95.1 million, including $8.6 million related to non-current retirement benefits for our employees in Malaysia and Thailand. Also included in the other non-current liabilities is $27.4 million related to severance benefits for our employees in South Korea which were not included in the table due to lack of contractual certainty as to the timing of payments. Further included in the other non-current liabilities as of June 29, 2008 was $7.0 million of liability for uncertain tax positions under FIN 48. We are unable to reasonably estimate the timing of the amount, therefore, the liability is excluded from the table.
Contingencies
     We are subject to claims and litigations, which arise in the normal course of business. These claims may include allegations of infringement of intellectual property rights of others as well as other claims of liability. We accrue liability associated with these claims and litigations when they are probable and reasonably estimable.
     In February 2006, our Company, ChipPAC, Inc (“ChipPAC”) and STATS ChipPAC (BVI) Limited were named as defendants in a patent infringement lawsuit filed in United States Federal Court for the Northern District of California (“the California Litigation”). The plaintiff, Tessera Technologies, Inc (“Tessera”), has asserted that semiconductor chip packaging, specifically devices having Ball Grid Array (“BGA”) and multi-chip BGA configurations used by the defendants infringe certain patents of Tessera. Tessera has further asserted that our Company is in breach of an existing license agreement entered into by Tessera with ChipPAC, which agreement has been assigned by ChipPAC to our Company.
     In May 2007, at Tessera’s request, the United States International Trade Commission (the “ITC”) instituted an investigation (the “First ITC Investigation”) of certain of our Company’s co-defendants in the California Litigation and other companies, including certain of our Company’s customers. In addition, in April 2007, Tessera instituted an action in the United States District Court for the Eastern District of Texas (the “Texas Action”) against certain of our Company’s co-defendants in the California Litigation and other companies. In the First ITC Investigation, Tessera seeks an order preventing the named companies from importing certain packaged semiconductor chips and products containing them into the United States. The Texas Action seeks damages and injunctive relief against the named defendants. Both the First ITC Investigation and the Texas Action allege infringement of two of the same patents asserted by Tessera in the California Litigation, and may involve some of the same products packaged by our Company that are included in the California Litigation.
     In May 2008, the ITC instituted a second investigation (the “Second ITC Investigation”). In the Second ITC Investigation, Tessera seeks an order to prevent our Company and other named companies (collectively, the “Respondents”) from providing packaging or assembly services for certain packaged semiconductor chips incorporating small format non-tape BGA semiconductor packages and products containing them, for importation into the United States. In addition, Tessera seeks a general exclusion order excluding from importation all small format non-tape BGA semiconductor packages (and downstream products containing such packages), regardless of whether such packages are assembled by the Respondents. The Second ITC Investigation alleges infringement of three of the same patents asserted by Tessera in the California Litigation. We have responded to the complaint on June 23, 2008. The target date currently set by the ITC for the conclusion of the Second ITC Investigation is August 2009.
     The district court in the California Litigation has vacated the trial schedule and stayed all proceedings pending a final resolution of the First ITC Investigation. The U.S. Patent and Trademark Office (the “PTO”) has also instituted reexamination proceedings on all of the patents Tessera has asserted in the California Litigation and the Second ITC Investigation. It is not possible to predict the outcome of the California Litigation or the Second ITC Investigation, the total costs of resolving the California Litigation and the Second ITC Investigation, or when the stay in the California Litigation will be lifted; nor is it possible to predict the outcome of the First ITC Investigation or the Texas Action. Nor is it possible to predict the outcome of the PTO proceedings or their impact on the California Litigation, the First ITC Investigation and the Second ITC Investigation.

 

 

     We believe that we have a meritorious defense to these claims and intend to defend the lawsuit(s) vigorously. A court or ITC determination that our provision of certain semiconductor assembly services may infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our provision of such assembly services. Due to the inherent uncertainties of the lawsuit(s) and investigation(s), we cannot accurately predict the ultimate outcome and it could result in significant liability and/or injunction and could have a material adverse effect on the business, financial condition and the results of operations of our Company.
     In addition, we are subject to various taxes in the different jurisdictions in which we operate. These include taxes on income, property, goods and services, and other taxes. We submit tax returns and claims with the appropriate government taxing authorities, which are subject to examination and agreement by those taxing authorities. We will regularly assess the likelihood of adverse outcomes resulting from these examinations to determine adequacy of provision for taxes.
     In connection with the merger with ChipPAC, we assumed certain contingent liabilities. In 2002, an assessment of approximately 16.0 billion South Korean Won (approximately $15.4 million based on the exchange rate as of June 29, 2008) was made by the South Korean National Tax Service (“NTS”) relating to withholding tax not collected on the interest income on the loan between ChipPAC’s subsidiaries in South Korea and Hungary for the period from 1999 to September 2001. We do not believe that the prevailing tax treaty requires withholding on the transactions in question. ChipPAC has appealed the assessment through the NTS’s Mutual Agreement Procedure (“MAP”). On July 18, 2002, the Icheon tax office of the NTS approved a suspension of the proposed assessment until resolution of the disputed assessment. The NTS required a corporate guarantee amounting to the tax assessment in exchange for the suspension. ChipPAC complied with the guarantee request on July 10, 2002. A further assessment of 2.7 billion South Korean Won (approximately $2.6 million based on the exchange rate as of June 29, 2008) was made on January 9, 2004 for the interest from October 2001 to May 2002. ChipPAC engaged in a MAP and obtained suspension of the additional proposed assessment by providing a corporate guarantee in the amount of the additional assessment. In June 2007, the NTS extended the MAP. Based on South Korean tax law, the extension period should not exceed 3 years. In the event that we are not successful with the appeal, the maximum amount payable including potential interest and local surtax as of June 29, 2008 is estimated to be 34.1 billion South Korean Won (approximately $32.7 million based on the exchange rate as of June 29, 2008). The final outcome of the resolution of this matter could result in significant liability and could have a material adverse effect on our business, financial condition and results of operations.
Cash Flows From Operating Activities
     In the six months ended June 29, 2008, cash provided by operations was $178.1 million compared to $168.1 million in the six months ended July 1, 2007. Cash provided and used by operations is calculated by adjusting our net income or loss by non-cash related items such as depreciation and amortization, amortization of leasing prepayments, amortization of debt issuance cost, loss or gain from sale of assets, impairment of assets, accretion of discount on certain of our outstanding convertible notes, deferred income taxes, foreign currency exchange loss or gain, share-based compensation expense, minority interest, share of equity income and by changes in assets and liabilities. In the six months ended June 29, 2008, non-cash related items included $144.8 million related to depreciation and amortization (including amortization of capitalized debt issuance costs and leasing prepayments), $0.4 million gain from the sale of equipment, $0.1 million from the accretion of discount on certain of our convertible notes, $1.0 million from foreign currency exchange losses, $3.1 million related to share-based compensation expense, $1.5 million from deferred taxes, $2.7 million from the minority interest in income of one of our subsidiaries and $0.01 million equity loss from equity investments. In the six months ended July 1, 2007, non-cash related items included $124.1 million related to depreciation and amortization (including amortization of capitalized debt issuance costs and leasing prepayments), $0.5 million loss from the sale of equipment, $2.8 million from the accretion of discount on certain of our convertible notes, $0.2 million from foreign currency exchange gains, $4.9 million related to share-based compensation expense, $8.9 million from the deferred taxes, $2.5 million from the minority interest in income of one of our subsidiaries and $0.1 million equity loss from equity investments.
     Working capital uses of cash included decreases in amount due to affiliates and increases in accounts receivables, amount due from affiliates, inventories, and other receivables, prepaid expenses and other assets. Working capital source of cash included increases in accounts payables, accrued operating expense and other payables. Inventories as of June 29, 2008 were higher as compared to December 30, 2007 levels. Accounts receivables were higher compared to December 30, 2007 mainly due to slower collections. Additionally, accounts payables, accrued operating expenses and other payables increased as compared to December 30, 2007 primarily due to timing of quarterly purchases.

 

 

Cash Flows From Investing Activities
     In the six months ended June 29, 2008, cash used in investing activities was $149.0 million compared to $91.8 million in the six months ended July 1, 2007. The primary usage of cash in investing activities was related to the acquisition of property and equipment, net of changes in payables related to property, plant and equipment purchases, of $139.5 million in the six months ended June 29, 2008 compared to $108.3 million during the same period in 2007. We increased our capital expenditure in the six months ended June 29, 2008 compared to the same period in 2007 primarily to meet the demand from our customers. In the six months ended June 29, 2008, we received $11.4 million from the proceeds from sale of assets held for sale. In the six months ended June 29, 2008 and July 1, 2007, we invested $3.9 million and $2.1 million, respectively, in the acquisition of software, licenses and other intangible assets. In the six months ended June 29, 2008 and July 1, 2007, we purchased marketable securities of $41.1 million and $8.8 million, respectively. In the six months ended June 29, 2008 and July 1, 2007, we received proceeds from the sale and maturity of our marketable securities of $22.7 million and $20.7 million, respectively.
Cash Flows From Financing Activities
     In the six months ended June 29, 2008, cash used in financing activities was $19.9 million compared to $51.0 million in the six months ended July 1, 2007. In the six months ended June 29, 2008, no borrowings were made and $4.4 million of our borrowings and debts was repaid compared to $19.4 million and $42.8 million for the same period in 2007, respectively. In the six months ended June 29, 2008, we repurchased $18.6 million aggregate principal amount of our $115.0 million zero coupon Convertible Notes due 2008 (including accretion of discount on Convertible Notes and interest) at an aggregate consideration of $22.1 million. In the six months ended July 1, 2007, we redeemed the remaining $31.5 million aggregate principal amount of our 1.75% Convertible Notes due 2007 (including interest) at an aggregate consideration of $36.8 million. We made $3.4 million of capital lease payments in the six months ended July 1, 2007. In the six months ended June 29, 2008 and July 1, 2007, we reduced our restricted cash by $0.3 million and $0.001 million, respectively. In the six months ended June 29, 2008 and July 1, 2007, we received $6.2 million and $12.6 million, respectively, from the issuance of new ordinary shares through our share plans. The total numbers of ordinary shares issued in the six months ended June 29, 2008 and July 1, 2007 were 9.7 million and 19.4 million, respectively, which excluded the issuance of 145.1 million ordinary shares from the conversion of $134.5 million aggregate principal of our 2.5% Convertible Subordinated Notes due 2008 in May 2008.