<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- ACT OF 1934
For the period ended June 30, 2000 OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-91641
CHIPPAC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0463-48
State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization
3151 Coronado Drive
Santa Clara, California 95054
Address of principal executive offices Zip Code
(408) 486-5900
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--------- -------------
Indicate the number of shares of the issuer's class of common stock, as of the
latest practical date:
Class Outstanding as of August 11, 2000
----------------------------------------------------------------------------
Class A Common stock, $.01 par value 67,131,718
Class B Common stock, $.01 par value 0
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ChipPAC, Inc.
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets.................. 3
Unaudited Condensed Consolidated Statements of Operations........ 4
Unaudited Condensed Consolidated Statements of Cash Flows........ 5
Notes to Unaudited Condensed Consolidated Financial
Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition.. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 24
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 3. Defaults Upon Senior Securities............................. 25
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signatures.......................................................... 29
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ChipPAC Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Assets (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 27,541 $ 32,117
Receivable from shareholder - 11,662
Accounts receivable, less allowance for doubtful
accounts of $514 and $1,196 54,743 30,003
Inventories 20,351 17,497
Deferred taxes 836 775
Prepaid expenses and other current assets 5,789 2,386
------- -------
Total currrent assets 109,260 94,440
Property, plant and equipment, net 308,216 226,931
Other assets 34,257 22,058
------- -------
Total assets $ 451,733 $ 343,429
======= =======
Liabilities and Equity
Current liabilities:
Short-term bank borrowing $ 15,900 ----
Accounts payable 50,971 $ 52,208
Accrued expenses and other liabilities 37,979 27,208
Deferred taxes ----
Current portion of long-term debt 9,350 4,800
------- -------
Total current liabilities 114,200 84,216
------- -------
Long-term debt, less current portion 344,250 295,200
Other long-term liabilities 9,252 3,929
------- -------
Total liabilities 467,702 383,345
------- -------
Commitments and contingencies
Mandatorily redeemable preferred stock 104,291 82,970
Shareholders' and divisional equity:
Common stock-class A 529 523
Common stock-class B --- ---
Warrants-common stock A 1,250 1,250
Additional paid in capital-common stock 86,878 86,294
Divisional equity, net of capital distributions (167,714) (167,714)
Receivable from shareholders (1,353) (1,128)
Accumulated deficit (49,019) (51,280)
Accumulated other comprehensive income 9,169 9,169
------- -------
Total shareholders' equity (120,260) (122,886)
------- -------
Total liabilities and equity $ 451,733 $ 343,429
======= =======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
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ChipPAC Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $108,979 $80,853 $206,448 $166,401
Cost of revenue 82,838 71,168 159,882 143,300
-------------- ---------- ---------- ----------
Gross profit 26,141 9,685 46,566 23,101
Operating expenses:
Selling, general & administrative 7,239 4,822 14,338 9,333
Research & development 2,510 2,985 5,141 5,988
-------------- ---------- ---------- ----------
Total operating expenses 9,749 7,808 19,479 15,321
-------------- ---------- ---------- ----------
Operating income 16,392 1,877 27,087 7,780
Non-operating income (expenses)
Interest income 147 789 385 1,739
Interest expense (10,600) (2,787) (19,364) (5,794)
Foreign currency gains (losses) 575 429 974 1,375
Other income (expenses), net 524 55 658 182
-------------- ---------- ---------- ----------
Non-operating income (expenses) (9,354) (1,514) (17,347) (2,498)
Income before income taxes 7,038 363 9,740 5,282
Provision for (benefit from) income taxes 1,406 (167) 1,948 2,948
-------------- ---------- ---------- ----------
Net income $ 5,632 $ 530 $ 7,792 $ 2,334
-------------- ---------- ---------- ----------
Net income per share:
Basic 0.11 0.01 0.16 0.06
Diluted 0.05 0.01 0.04 0.06
-------------- ---------- ---------- ----------
Shares used in per share calculation:
Basic 49,753 38,861 49,516 38,861
Diluted 53,703 38,861 53,456 38,861
-------------- ---------- ---------- ----------
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
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<TABLE>
<CAPTION>
ChipPAC Inc.
Condensed Consolidated Statements of
Cash Flows
(In thousands)
Six Months Six months
Ended Ended
June 30, June 30,
<S> <C> <C> <C>
2000 1999
----------------- -----------------
(Unaudited) (Unaudited)
Cash flows provided by operating activities:
Net income (loss) $ 7,792 $ 2,334
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,345 41,850
Provision for inventory and accounts receivable (39) (427)
Non-operating early debt extinguishments loss ---- ----
Foreign currency (gains) losses (636) (1,375)
(Gain) loss on sale of equipment 44 (241)
Changes in assets and liabilities:
Accounts receivable (13,053) 9,843
Inventories 728 (1,889)
Prepaid expenses and other assets (5,280) (20,780)
Advances (to) from affiliates-trade ---- (6,190)
Accounts payable (6,694) (22,193)
Accrued expenses and other current 401 7,040
liabilities
Other long-term liabilities 1,856 (2,087)
_______ _______
Net cash provided by (used in) operating activities 3,464 5,885
_______ _______
Cash flows used in investing activities:
Acquisition of property and equipment (36,378) (29,062)
Proceeds from sale of equipment 15,018 1,263
Purchase of IP (12,655) ----
Purchase of CPM (42,194) ----
_______ _______
Net cash used in investing activities (76,209) (27,799)
_______ _______
Cash flows provided by financing activities:
Advances (to) from employees and affiliates (225) (4,430)
Proceeds from short-term loans 25,700 1,169
Repayment of short-term loans (9,800) (19,469)
Proceeds from term loans 53,311 300,000
Repayment of long-term debt and capital leases (1,400) (133,615)
Payments made to extinguish debt early ---- ----
Dividend paid ---- (9,435)
Net proceeds from stock issuance 583 123,415
Contributions to (withdrawals from) paid in capital ---- (270,917)
_______ _______
Net cash provided by (used in) financing activities 68,169 (13,282)
_______ _______
Effect on cash from changes in exchange rates ---- 15,340
_______ _______
Net increase (decrease) in cash (4,576) (19,856)
Cash and cash equivalents at beginning of period 32,117 68,767
_______ _______
Cash and cash equivalents at end of period $ 27,541 $ 48,911
======= =======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
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ChipPAC, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2000
(Unaudited)
Note 1: Interim Statements
In the opinion of management of ChipPAC, Inc. ("ChipPAC"), the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the financial information included therein. ChipPAC believes that the
disclosures are adequate to make the information not misleading. However, it is
suggested that this financial data be read in conjunction with the audited
consolidated financial statements and related notes thereto for the year ended
December 31, 1999 included in ChipPAC's 2000 Registration on Form S-1
(Registration No. 333-39428) as declared effective by the Securities and
Exchange Commission on August 8, 2000.
The results of operations for interim periods are not necessarily indicative
of the results of operations that may be expected for any other period or the
fiscal year which ends on December 31, 2000.
Basis of Presentation
Prior to August 5, 1999 the Company represented the combination of three
business units of Hyundai Electronics Industries Co., Ltd. ("HEI") which
operated collectively as HEI's worldwide packaging and testing operations.
These three business units historically consisted of the Assembly and Test
Division of HEI, Hyundai Electronics Co. (Shanghai) Ltd. ("HECS"), and the
Assembly and Test Division of Hyundai Electronics America ("HEA"), a majority
owned subsidiary of HEI. Sales and marketing services were primarily performed
by the Assembly and Test Division of HEA, and packaging and testing services
were performed by HECS and the Assembly and Test Division of HEI.
On August 5, 1999, affiliates of Bain Capital, Inc. and SXI Group LLC, a
portfolio concern of Citicorp Venture Capital Ltd., which we refer to
collectively as the "Equity Investors", and management acquired a controlling
interest in the Company from Hyundai Electronics and Hyundai Electronics
America, the prior stockholders, through a series of transactions, including a
merger into ChipPAC, Inc. of a special purpose corporation organized by the
Equity Investors. The merger was structured to be accounted for as a
recapitalization. Specifically:
. the Equity Investors and other parties, including members of our
management, invested $92.0 million to acquire common stock of ChipPAC,
Inc. which represented approximately 90.2% of its common stock
outstanding immediately following the recapitalization;
. the prior stockholders of ChipPAC, Inc. retained a portion of their
common stock in ChipPAC, Inc. equal to $10.0 million, or approximately
9.8% of ChipPAC, Inc.'s common stock outstanding immediately following
the recapitalization; and
. the prior stockholders received as consideration for the remainder of
their common stock (i) an aggregate of $384.0 million in cash and (ii)
mandatorily redeemable convertible preferred stock payable for up to an
aggregate of $70.0 million. Net payment to Hyundai of $384 million,
included capital redemption of $311 million and debt retirement of $133
million, offset by Hyundai investment of $40 million in mandatorily
redeemable preferred stock, and a capital contribution of $20 million.
The financial statements for the period subsequent to the recapitalization
and as at December 31, 1999 and June 30, 2000 have been prepared on a
consolidated basis. The consolidated financial statements include the accounts
of ChipPAC, Inc. and its majority controlled and owned subsidiaries. All
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significant intercompany balances have been eliminated on consolidation.
For the comparative disclosures for the three months and six months ended June
30, 2000, the Company represents the combination of four corporations then owned
by Hyundai Electronics Industries Co., Ltd (HEI) and Hyundai Electronics America
(HEA). These four corporations are ChipPAC, Inc. (CPI), ChipPAC Korea Co., Ltd
(CPK) ChipPAC Assembly and Test Co. Ltd. (CATS) and Hyundai Electronics Co.
(Shanghai) Ltd., (HECS). Accordingly the financial statements for the
comparative periods are prepared on a combined basis. These comparative
financial statements include the accounts of CPI, CPK, HECS and CATS, or the
divisional accounts of the predecessor Assembly and Test Divisions for periods
prior to the business transfers referred to above, and reflect the combined
financial position, results of operations, and cash flows of these entities. All
inter-company or inter-divisional transactions have been eliminated in the
combination.
Foreign Currency Translation
Upon completion of the recapitalization on August 5, 1999, management
decided to change the functional currency of its foreign operations to the US
Dollar effective October 1,1999. Previously, the Company's functional currencies
of its foreign operations were the respective local currencies and the net of
the effect of the translation of the accounts of the foreign operation was
included in equity as a cumulative translation adjustment.
Note 2: Acquisition of Malaysian business from Intersil
On June 30, 2000, the Company consummated its acquisition of Intersil's
packaging and test operations located in Kuala Lumpur, Malaysia along with
related intellectual property for approximately $70.0 million in cash and
preferred stock. In connection with the acquisition, we entered into a five-year
supply agreement with Intersil to provide assembly and test services on an
exclusive basis. The Malaysian business increases our exposure to high growth
advanced communications products, provides a presence in Malaysia and enhances
our intellectual property in key areas. In addition, the Malaysian business
expands our mixed-signal testing capabilities and provides us with critical
expertise in RF testing. For its fiscal year ended July 2, 1999, all revenue
of the Malaysian business was intercompany revenue with Intersil.
The acquisition has been accounted for using purchase accounting. Under purchase
accounting, the total purchase price of the Malaysian business is allocated to
the acquired assets and liabilities based on their relative fair values as of
the closing date of the acquisition. We are undertaking a study to determine the
final allocation of the total purchase price to the various assets acquired and
the liabilities assumed. Accordingly, the final allocations could be different
from the amounts reflected below, and these differences may be significant. The
purchase price of $70.0 million represents the total of the cash consideration
and the estimated fair value of the Class C preferred stock exchanged for the
whole of the outstanding issued shares of the Malaysian business and certain
intellectual property. The amount and components of the purchase price and the
preliminary allocation of the purchase price to assets purchased and
liabilities assumed are as follows:
(in millions)
Purchase Price:
Cash consideration............................................... $52.5
Estimated fair value of Class C preferred stock.................. 15.8
Estimated expenses............................................... 3.5
Less: payment due from Intersil................................... (1.8)
-----
$70.0
=====
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Allocation of Purchase Price:
Estimated fair value of
Buildings..................................................... $16.9
Plant and equipment........................................... 56.9
Intellectual property......................................... 12.7
Restructuring accrual......................................... (5.0)
Deferred taxes................................................ (4.1)
Net other assets and liabilities.............................. (7.4)
-----
$70.0
=====
There is no goodwill arising from the acquisition of the Malaysian business.
The estimated fair value of total assets acquired and liabilities assumed
exceeded the purchase price, resulting in negative goodwill of $56.1 million.
The negative goodwill has been allocated in full to non-current assets as
summarized below:
Estimated Negative
Fair Goodwill Adjusted
Non-current asset Value Allocated Fair Value
----------------------------------------------------------------------
(in millions)
Land and Buildings........... $ 27.9 $(11.0) $16.9
Plant and equipment.......... 93.9 (37.0) 56.9
Intellectual property........ 20.9 (8.2) 12.7
------ ------ -----
$142.7 $(56.2) $86.5
====== ====== =====
Intellectual property primarily consists of trade secrets and patents. The
Company expects that the estimated average useful life of these assets will be
seven years. An accrual of $5.0 million has been established for expected costs
of restructuring the Malaysian business. These one time non-recurring costs are
expected to be incurred in connection with factory reorganization, product
discontinuance and employee related costs.
The terms of the acquisition of the Malaysian business require, for the
period from the closing of the acquisition to June 30, 2003, the payment of
additional contingent incentive payments to the seller based on the achievement
of milestones with respect to the transfer of the seller's packaging business,
currently subcontracted by the seller to a third party, to us. These contingent
payments will be recorded as additional purchase price if and when earned and
paid on a quarterly basis. In the event that Intersil were to achieve all the
milestones, we would pay Intersil an additional sum of approximately $17.9
million in the aggregate.
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The results of operations of the Malaysian business will be included with those
of the Company for periods subsequent to the date of acquisition. Set forth
below is the unaudited proforma combined summary of operations of the Company
for the six months ended June 30, 2000 and 1999, as if the acquisition had been
made on January 1, 1999 (in thousands).
Six Months Ended June 30:
2000 1999
-------- --------
Net sales $277,658 $222,716
Net income $ 11,534 $ 6,237
Earnings per share
Basic $ 0.23 $ 0.16
======== ========
Diluted $ 0.22 $ 0.16
======== ========
Shares used in per share
calculation
Basic 49,516 38,861
======== ========
Diluted 53,456 38,861
======== ========
Note 3: Property, Plant and Equipment
Effective January 1, 2000 we re-evaluated the estimated useful lives of our
property, plant and equipment. Based on an independent appraisal to evaluate
the useful lives of such equipment and our internal assessment, we changed the
estimated useful lives of assembly and test product equipment, and furniture
and fixtures from five years to eight years. Previously, such equipment was
depreciated on a straight line basis over and an estimated useful life of five
years.
The net book values of assembly and test product equipment and furniture and
fixtures already in use are now being depreciated over the remaining useful
life, based on eight years from the date such assets were originally placed in
service. This change resulted in depreciation expense in the quarter ended
June 30, 2000 and the six months ended June 30, 2000 being $6.9 million and
$13.6 million, respectively, lower than would have been recorded using five year
lives.
Note 4: Inventories
June 30, December 31,
2000 1999
------- ------------
(In thousands)
Raw materials................. $15,644 $12,274
Work-in-process............... 3,972 3,003
Finished goods................ 735 2,220
------- -------
Total........................ $20,351 $17,497
======= =======
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Note 5: Earnings per share
Statement of Accounting Standards No. 128 ("SFAS 128") requires a reconciliation
of the numerators and denominators of the basic and diluted per share
computations. Basic earnings per share ("EPS") is computed by dividing net
income available to stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS is
computed using the weighted average number of common and all potentially
dilutive common shares outstanding during the period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options. Following
is a reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the periods presented below.
Three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------------- -------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Basic EPS:
Net income................................ 5,632 49,753 0.11 530 38,861 0.01
Effects of dilutive securities:
Stock options and warrants................ (2,812) 3,950 0.01 - -
Diluted EPS:
Net income................................ 2,820 53,703 0.05 530 38,861 0.01
</TABLE>
Six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------------- -------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Basic EPS:
Net income................................ 7,797 49,516 0.16 2,334 38,861 0.06
Effects of dilutive securities:
Stock options and warrants................ (5,527) 3,940 0.02 - -
Diluted EPS:
Net income................................ 2,270 53,456 0.04 2,334 38,861 0.06
</TABLE>
In anticipation of the initial public offering (Note 9), the Company declared a
0.38098771 for 1 reverse stock split of the common stock. All periods presented
have been restated to give effect to this split.
Note 6: Comprehensive Income
In fiscal 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Comprehensive income refers to the change in the equity of a company during a
period from transactions except those resulting from investments by owners and
distributions to owners. ChipPAC adopted this statement as of the first quarter
of 1998. Accumulated other comprehensive income at December 31, 1999 and June
30, 2000 comprised cumulative gains and losses prior to the change of
functional currency to the U.S. dollar for the overseas operations on October
1, 1999.
Note 7: Segment Reporting
The Company is engaged in one industry segment, the packaging and testing of
integrated circuits.
Note 8: Equity and debt transactions
In connection with our acquisition of the Malaysian business, we added a $55.0
million term C loan to our senior credit facilities and we obtained the ability
to
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increase our revolving credit line by $25.0 million without further consent from
our existing lenders. The proceeds of the term C loan were used to finance our
acquisition of the Malaysian business and pay transaction fees and expenses.
Subsequent to the Initial Public Offering (Note 9), the loan was repaid in
full.
Further, in connection with the acquisition of the Malaysian business we issued
17,500 shares of Class C Preferred Stock to Intersil as part of the purchase
consideration. The Class C preferred stock has an aggregate liquidation
preference of $17.5 million, plus all accreted and unpaid dividends. Dividends
on the Class C preferred stock accrete at a rate of 5.0% per annum. The Class C
preferred stock automatically converted into shares of Class A common stock upon
the Initial Public Offering (Note 9). Fifty percent of these shares converted at
the initial public offering price and the remaining 50% of these shares
converted at 90% of the initial public offering price.
Note 9: Subsequent Events
Initial Public Offering, the Reclassification, the Reverse Stock Split and
Adoption of new stock plans
On August 8, 2000 the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1 (Registration No. 333-39428)
relating to the initial public offering of the Company's Class A common stock.
In connection with the closing of the initial public offering the Company issued
10,000,000 shares of Class A Common Stock in for gross proceeds of $120.0
million. The Company concurrently completed the private placements described
below. The total proceeds from the offering and the concurrent private
placements, net of issuance costs, was $131.5 million. The net proceeds have
been used to redeem in full the Class B Preferred Stock and to repay senior
credit facilities of $55.6 million.
On August 18, 2000, in connection with the underwriters exercise of their
overallotment option to purchase additional shares of the Company's Class A
common stock, the Company issued an additional 1,500,000 shares of Class A
common stock for gross proceeds of $18.0 million. Total proceeds from the
issuance of the additional shares, net of issuance costs, was $16.9 million. The
net proceeds from the sale of the additional shares will be used for general
corporate purposes.
Upon the effectiveness of the initial public offering, the Company effected a
reclassification of its capital stock. The reclassification was effected
pursuant to a merger of the Company with and into a newly formed, wholly owned
subsidiary of the Company that was incorporated under the laws of the State of
Delaware. The merger had the effect of reincorporating the Company under the
laws of the State of Delaware. In connection with the merger, each outstanding
share of Class L common stock was reclassified into one share of Class A
common stock, plus an additional number of shares of Class A common stock
determined by dividing the preference amount accreted by the initial public
offering price.
In connection with the closing of the initial public offering, all outstanding
shares of Class A convertible preferred stock and Class C preferred stock was
automatically converted into an aggregate of 4,349,254 shares of Class A common
stock.
In contemplation of the initial public offering, the Company effected a
0.38098771 for 1 reverse stock split of its capital stock. In addition, the
Board of Directors and stockholders adopted the 2000 Equity Incentive Plan and
2000 Employee Stock Purchase Plan.
Concurrent private placement
On July 13, 2000, Qualcomm agreed to enter into a three-year supply
agreement with us under which we will provide packaging and test services for
integrated circuit devices for Qualcomm and to purchase from us $25.0 million
of our Class A common stock at a purchase price per share equal to 95% of the
Initial Public Offering price. Based on the initial public offering price of
$12.00, Qualcomm purchased 2,192,983 shares of Class A Common Stock.
Equity investors
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At the time of our 1999 recapitalization, we entered into advisory agreements
with certain Equity Investors under which the Equity Investors may provide
financial, advisory and consulting services to us in exchange for fees billed at
the their customary rates for actual time spent performing these services.
Commencing with the three months ended March 31, 2000, the Equity Investors
were entitled to an annual advisory fee for the remaining term of the advisory
agreement. Each advisory agreement was to remain in effect for an initial term
of ten years
The Company and the Equity Investors agreed to terminate the advisory agreements
upon the closing of the Initial Public Offering in exchange for a one-time
aggregate payment of $8.0 million consisting of a $3.6 million cash payment and
the issuance of $4.4 million of our Class A common stock at a price per share
equal to the initial public offering price in a private placement concurrently
with the closing of the offering. The Company will record a one time charge to
income of $8.0 million in the third quarter of fiscal 2000 in respect of this
agreement termination.
Note 10: Supplemental Financial Statements of Guarantor/Non-Guarantor Entities
In connection with the recapitalization, ChipPAC International Company
Limited (CP Int'l) issued senior subordinated debt securities which are fully
and unconditionally guaranteed, jointly and severally, on a senior subordinated
basis, by the parent company, ChipPAC, Inc. (CPI) and by ChipPAC (Barbados)
Ltd., ChipPAC Limited, ChipPAC Korea Company Limited (CPK), ChipPAC Luxembourg
S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company
(the "Guarantor Subsidiaries"). All guarantor subsidiaries are wholly-owned
direct or indirect subsidiaries of ChipPAC, Inc. Hyundai Electronics Co.
(Shanghai) Ltd. (HECS) and ChipPAC Assembly & Test Co. Ltd. (CATS)
(collectively the Chinese entities), will not provide guarantees (the "Non-
Guarantor Subsidiaries"). The following is consolidated and combining financial
information for CP Int'l CPI, and CPK, HECS, CATS, ChipPAC (Barbados) Ltd.,
ChipPAC Limited, ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management
Hungary Limited Liability Company, segregated between the Guarantor and Non-
Guarantor Subsidiaries. Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented herein because
management has determined that they are not material to investors. Financial
information for ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg
S.a.R.L. and ChipPAC Liquidity Management has not been presented as these
entities have no historical financial results and future transactions will
primarily consist of inter-company transactions. The following HECS financial
statements in the condensed combining financial statements include the
accounts of CATS.
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ChipPAC, Inc.
Supplemental Combining Condensed
Balance Sheets
June 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Guarantors Non-Guarantor
---------------------- -------------------
CPI CPK CPS Eliminations Combined
--------- ----------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 31,102 $ 9,369 $ 8,440 - $ 48,911
Intercompany accounts receivable 11,512 116,868 2,611 ($130,991) -
Accounts receivable from customers 22,800 10,171 81 - 33,052
Inventories 5 10,957 283 - 11,245
Deferred taxes 420 1,056 - - 1,476
Prepaid expenses & other current assets 459 3,037 665 - 4,161
------ ------ ------ ------ ------
Total current assets 66,298 151,458 12,080 (130,991) 98,845
Property, plant and equipment, net 6,164 135,696 81,129 - 222,989
Intercompany loans receivable - - - - -
Other assets 4,828 3,296 - (4,800) 3,324
------ ------ ------ ------ ------
Total assets $ 77,290 $290,450 $ 93,209 ($135,791) $325,158
====== ======= ====== ======= =======
Liabilities and Equity
Current liabilities:
Intercompany accounts payable $ 98,785 $ 2,703 $ 29,503 ($130,991) -
Payable to affiliate 443 - 7,187 - $ 7,630
Accounts payable 2,023 31,383 997 - 34,403
Accrued expenses and other liabilities 1,355 6,620 3,730 - 11,705
Short-term debt - 918 9,700 - 10,618
Current portion of long-term debt - 24,266 10,781 - 35,047
------ ------ ------ ------ ------
Total current liabilities 102,606 65,890 61,898 (130,991) 99,403
Long-term debt, less current portion - 81,130 - - 81,130
Intercompany loans payable - (12,057) 12,057 - -
Other long-term liabilities - 2,417 - - 2,417
------ ------ ------ ------ ------
Total liabilities 102,606 137,380 73,955 (130,991) 182,950
------- ------- ------ ------- -------
Shareholders' and divisional equity
Preferred stock and paid in capital 16,669 111,724 78,096 (4,800) 201,689
Shareholder receivable-HEA (37,211) - - - (37,211)
Accumulated earnings (deficit) (4,774) 26,666 (59,310) - (37,418)
Accumulated other comprehensive income (loss) - 14,679 469 - 15,148
------ ------ ------ ------ ------
Shareholders' and divisional equity (25,316) 153,070 19,255 (4,800) 142,208
------ ------- ------ ------ -------
Total liabilities and equity $ 77,290 $290,450 $ 93,209 ($135,791) $325,158
====== ======= ====== ======= =======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 13
<PAGE>
ChipPAC, Inc.
Supplemental Combining
Condensed Statements of Operations
Six Months Ended June 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Guarantors Non-Guarantor
----------------------- ---------------
CPI CPK CPS Eliminations Combined
------- -------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue
Intercompany revenue - $147,441 $ 5,524 ($152,965) -
Customer revenue 155,646 10,648 107 - $166,401
------- ------- -------- --------- --------
Revenue 155,646 158,088 5,632 (152,965) 166,401
Cost of revenue 147,784 136,814 12,426 (153,724) 143,300
------- ------- -------- --------- --------
Gross profit 7,862 21,274 (6,794) 759 23,101
Operating expenses:
Selling, general & administrative 6,246 3,088 - - 9,333
Research & development 3,016 2,972 - - 5,988
Change of control expenses - - - - -
------- ------- -------- --------- --------
Total operating expenses 9,262 6,059 - - 15,321
------- ------- -------- --------- --------
Operating income (1,400) 15,214 (6,794) 759 7,780
Non-operating Income (Expense)
Interest income 370 1,101 268 - 1,739
Interest expense - (4,157) (1,637) - (5,794)
Foreign currency gains (losses) (1) 1,392 (16) - 1,375
Other income (expenses), net (6) 913 3 (759) 182
------- ------- -------- --------- --------
Non-operating income (expenses) 363 (752) (1,350) (759) (2,498)
------- ------- -------- --------- --------
Income (loss) before income taxes (1,037) 14,463 (8,144) - 5,282
Provision for (benefit from) income taxes 3 2,945 - - 2,948
------- ------- -------- --------- --------
Income before extraordinary item (1,040) 11,518 (8,144) - 2,334
Extraordinary item:
Loss from early extinguishment of debt,
net of related income tax benefit - - - -
------- ------- -------- --------- --------
Net Income (loss) ($1,040) $ 11,518 ($8,144) - $ 2,334
======= ======= ======== ========= ========
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 14
<PAGE>
ChipPAC, Inc.
Supplemental Combining
Condensed Statements of Cash
Flows
Six Months Ended June 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Guarantors Non-Guarantor
------------------- ---------------
CPI CPK CPS Eliminations Combined
-------- --------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income ($1,040) $ 11,518 ($8,144) $ 0 $ 2,334
Adjustments to reconcile net income
Depreciation and amortization 663 36,101 5,086 - 41,850
Provision for inventory and receivables (45) (382) - - (427)
Non-operating early debt extinguishment loss
Foreign currency (gains) losses - (1,375) - - (1,375)
(Gain) loss on external
sales of equipment - (241) - - (241)
Changes in assets and liabilities:
Intercompany accounts receivable (667) (9,944) (664) 11,275 -
Accounts receivable 11,986 (2,062) (81) - 9,843
Inventories (5) (1,816) (68) - (1,889)
Prepaid expenses and other assets (5,205) (20,055) (320) 4,800 (20,780)
Advances (to) from affiliates-trade - (6,190) - - (6,190)
Intercompany accounts payable 15,229 664 (4,618) (11,275) -
Accounts payable (260) (21,122) (811) - (22,193)
Accrued expenses & other liabilities 222 6,136 682 - 7,040
Other long-term liabilities - (2,087) - - (2,087)
Net cash provided by operating activities 20,878 (10,855) (8,938) 4,800 5,885
------ ------ ------ ------ ------
Cash flows used in investing activities:
Acquisition of property and equipment (1,019) (26,983) (5,289) 4,229 (29,062)
Proceeds, external equipment sales - 5,455 37 (4,229) 1,263
------ ------ ------ ------ ------
Net cash used in investing activities (1,019) (21,528) (5,252) - (27,799)
------ ------ ------ ------ ------
Cash flows provided by financing activities:
Loans & advances with affiliates - - (4,430) - (4,430)
Proceeds from short-term loans 416 753 - - 1,169
Repayment of short-term loans - (13,469) (6,000) - (19,469)
Proceeds from term loans - 300,000 - - 300,000
Repayment, term loans and
capital leases - (128,225) (5,390) - (133,615)
Payments made to extinguish debt early - - - - -
Dividend paid - (9,435) - - (9,435)
Issuance of stock - 123,415 - - 123,415
Contributions (withdrawals) of capital - (290,919) 24,802 (4,800) (270,917)
------ ------ ------ ------ ------
Net cash provided by financing activities 416 (17,880) 8,982 (4,800) (13,282)
------ ------ ------ ------ ------
Effect from changes in exchange rates - 15,340 - - 15,340
------ ------ ------ ------ ------
Net increase (decrease) in cash 20,275 (34,923) (5,209) - (19,856)
Cash and equivalents at beginning of period 10,827 44,293 13,647 - 68,767
------ ------ ------ ------ ------
Cash and equivalents at end of period $ 31,102 $ 9,369 $ 8,440 - $ 48,911
====== ====== ====== ====== ======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 15
<PAGE>
ChipPAC, Inc.
Supplemental Condensed Consolidating Balance Sheets
June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Non-
Guarantor Issuer Guarantor
------------------------- Other ------------
CPI CP Int'l Guarantors CPS Eliminations Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 124 $ 234 $ 22,902 $ 4,281 $ 0 $ 27,541
Intercompany accounts receivable 6,025 20,816 36,541 14,859 (78,241) -
Accounts receivable from customers 5 - 54,653 85 - 54,743
Inventories - - 17,513 2,838 - 20,351
Deferred taxes - - 836 - - 836
Prepaid expenses & other current assets 265 - 3,650 1,874 - 5,789
-------- -------- -------- -------- ---------- ---------
Total current assets 6,419 21,050 136,095 23,937 (78,241) 109,260
Property, plant and equipment, net 6,677 - 219,993 81,546 - 308,216
Intercompany loans receivable - 323,500 - (34,000) (289,500) -
Investment in subsidiaries 110,606 32,340 206,131 - (349,077) -
Other assets 31 14,875 119,351 - (100,000) 34,257
-------- -------- -------- -------- ---------- ---------
Total assets $123,733 $391,765 $681,570 $ 71,483 ($816,818) $ 451,733
======== ======== ======== ======== ========== =========
Liabilities and Equity
Current liabilities:
Short term bank borrowings $ 0 $ 15,900 $ 0 $ 0 $ 0 $ 15,900
Intercompany accounts payable - 58 48,532 29,651 (78,241) -
Accounts payable 371 40 44,483 6,077 - 50,971
Accrued expenses and other liabilities 7,422 10,614 19,353 5,081 (4,491) 37,979
Deferred taxes - - - - - -
Short-term debt - - - - - -
Current portion of long-term debt - 9,350 - - - 9,350
-------- -------- -------- -------- ---------- ---------
Total current liabilities 7,793 35,962 112,368 40,809 (82,732) 114,200
Long-term debt, less current portion - 344,250 - - - 344,250
Intercompany loans payable - - 289,500 - (289,500) -
Other long-term liabilities 240 - 9,012 - - 9,252
-------- -------- -------- -------- ---------- ---------
Total liabilities 8,033 380,212 410,880 40,809 (372,232) 467,702
-------- -------- -------- -------- ---------- ---------
Mandatorily redeemable preferred stock 104,291 - - - - 104,291
Shareholders' and divisional equity
Common stock 529 - - - - 529
Common stock-Subsidiaries - 14,569 189,948 (204,517) -
Warrants-common stock A 1,250 - - - - 1,250
Additional paid in capital 86,929 (25) (26) - - 86,878
Receivable from shareholder (1,353) - - - - (1,353)
Divisional equity, net of capital distributions (58,656) - 29,623 85,096 (223,777) (167,714)
Accumulated earnings (deficit) (17,290) (2,991) 42,440 (54,885) (16,292) (49,019)
Accumulated other comprehensive income (loss) - - 8,705 464 - 9,169
-------- -------- -------- -------- ---------- ---------
Shareholders' and divisional equity 11,409 11,553 270,690 30,674 (444,586) (120,260)
-------- -------- -------- -------- ---------- ---------
Total liabilities and equity $123,733 $391,765 $681,570 $ 71,483 ($816,818) $ 451,733
======== ======== ======== ======== ========== =========
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 16
<PAGE>
Supplemental Combining
Condensed Statements of
Operations
Six Months Ended June 30,
2000
(In thousands)
<TABLE>
<CAPTION>
Parent Non-
Guarantor Issuer Guarantor
------------------------ Other -------------
CPI CP Int'l Guarantors CPS Eliminations Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Intercompany revenue $ 14,425 $ 0 ($5,758) $23,030 ($31,697) $ 0
Customer revenue - - 206,445 3 - 206,448
______ ______ ______ ______ ______ ______
Revenue 14,425 - 200,687 23,033 (31,697) 206,448
Cost of revenue 322 - 157,109 19,723 (17,272) 159,882
______ ______ ______ ______ ______ ______
Gross profit 14,103 - 43,578 3,310 (14,425) 46,566
Operating expenses:
Selling, general & administrative 10,856 21 17,886 - (14,425) 14,338
Research & development 2,522 - 2,619 - - 5,141
______ ______ ______ ______ ______ ______
Total operating expenses 13,378 21 20,505 - (14,425) 19,479
______ ______ ______ ______ ______ ______
Operating income 725 (21) 23,073 3,310 - 27,087
Non-operating Income (Expense)
Interest income (10,352) 15,363 15,903 37 (20,566) 385
Interest expense 10,383 (19,357) (29,234) (1,724) 20,568 (19,364
Foreign currency gains (losses) - - 1,032 (58) - 974
Income (loss) from investment in subsidiaries 5,697 1,808 18,763 - (26,268) -
Other income (expenses), net 137 - 48 474 (1) 658
______ ______ ______ ______ ______ ______
Non-operating income (expenses) 5,865 (2,186) 6,512 (1,271) (26,267) (17,347
______ ______ ______ ______ ______ ______
Income (loss) before income taxes 6,590 (2,207) 29,585 2,039 (26,267) 9,740
Provision for (benefit from) income taxes 3,084 162 3,206 - (4,504) 1,948
______ ______ ______ ______ ______ ______
Net Income (loss) $ 3,506 ($2,369) $ 26,379 $ 2,039 ($21,763) $ 7,792
====== ====== ====== ====== ====== ______
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 17
<PAGE>
ChipPAC, Inc.
Supplemental Combining
Condensed Statements of
Cash Flows
Six Months Ended June 30,
2000
(In thousands)
<TABLE>
<CAPTION>
Parent Non-
Guarantor Issuer Guarantor
----------------------- Other ------------
CPI CP Int'l Guarantors CPS Eliminations Consolidated
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 3,506 ($2,369) $ 26,380 $ 2,039 ($21,764) $ 7,792
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization 847 1,029 12,878 3,591 - 18,345
Provision for inventory and receivables 376 - (415) - - (39)
Foreign currency (gains) losses - - (636) - - (636)
(Gain) loss on external sales of equipment - - 186 (142) - 44
Equity income from investment in subsidiaries (5,697) (1,808) (18,763) - 26,268 -
Changes in assets and liabilities: - - - - -
Intercompany accounts receivable 753 (16,881) 5,693 (6,060) 16,495 -
Accounts receivable (33) - (12,955) (65) - (13,053)
Inventories - - 3,400 (2,672) - 728
Prepaid expenses and other assets (444) - (3,234) (1,602) - (5,280)
Intercompany accounts payable 28 58 18,346 (1,937) (16,495) -
Accounts payable (849) - (10,273) 4,428 - (6,694)
Accrued expenses & other liabilities 2,955 1,569 (999) 1,380 (4,504) 401
Other long-term liabilities - - 1,856 - - 1,856
------ ------ ------ ------ ------ ------
Net cash provided by operating activities 1,442 (18,402) 21,464 (1,040) - 3,464
------ ------ ------ ------ ------ ------
Cash flows used in investing activities:
Acquisition of property and equipment (1,230) - (28,825) (7,401) 1,078 (36,378)
Proceeds, external equipment sales - - 15,737 359 (1,078) 15,018
Investment in subsidiaries (17,296) - (65,486) - 40,588 (42,194)
Purchase of intangible assets - - (12,655) - - (12,655)
------ ------ ------ ------ ------ ------
Net cash used in investing activities (18,526) - (91,229) (7,042) 40,588 (76,209)
------ ------ ------ ------ ------ ------
Cash flows provided by financing activities:
Loans and advances (to) from employees-net (225) - - - - (225)
Proceeds from short-term loans - 25,700 - - - 25,700
Repayment of short-term loans - (9,800) - - - (9,800)
Net proceeds from long-term loans - 52,809 502 - - 53,311
Repayment of term loans - (1,400) - - - (1,400)
Intercompany loan (advances) payments - (52,500) 52,500 - - -
Intercompany capital contributions - 379 17,423 7,000 (24,802) -
Net proceeds from common stock issuance 640 (26) (31) - - 583
Net proceeds from mandatorily redeemable
preferred stock issuance 15,786 - - - (15,786) -
------ ------ ------ ------ ------ ------
Net cash provided by financing activities 16,201 15,162 70,394 7,000 (40,588) 68,169
------ ------ ------ ------ ------ ------
Net increase (decrease) in cash (883) (3,240) 629 (1,082) - (4,576)
Cash and equivalents at beginning of period 1,007 3,474 22,273 5,363 - 32,117
------ ------ ------ ------ ------ ------
Cash and equivalents at end of period $ 124 $ 234 $ 22,902 $ 4,281 $ 0 $ 27,541
====== ====== ====== ====== ====== ======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements
Page 18
<PAGE>
Item 2 : Management's discussion and analysis of financial condition and results
of operations
All references are to ChipPAC's fiscal quarters ended June 30, 2000("Q2 2000"),
and June 30, 1999("Q2 1999"), unless otherwise indicated. This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to, statements as to future operating results and business plans
of ChipPAC. We use words such as "anticipates", "believes", "expects", "future",
"intends" and similar expressions to identify forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the factors set forth in "Factors Affecting Future
Results" and elsewhere in this report.
Overview
In 1984, our packaging business began operating as a separate division of
Hyundai Electronics Industries Co., Ltd., one of the world's largest
semiconductor manufacturers and a member of the Hyundai Group, the Korean
conglomerate. In 1997, we were incorporated as a distinct entity and established
as the parent of a stand-alone worldwide business. In 1999, as part of our
recapitalization, affiliates of Bain Capital Inc. and SXI Group LLC, a portfolio
concern of Citicorp Venture Capital Ltd., which we refer to collectively as the
"Equity Investors," obtained control of our company and Hyundai Electronics
America retained approximately 10.0% of our outstanding common stock.
Our revenues consist of fees charged to our customers for the packaging and
testing of their integrated circuits, which we refer to as ICs. From 1995 to
1999, net revenues increased from $179.2 million to $375.5 million, primarily
from the growth of BGA packaging. We are one of the largest providers of
outsourced BGA packaging services worldwide and the main supplier of BGA
packaging services to Intel, whom we believe is the largest consumer of these
products and represented over 40% of the BGA independent packaging market in
1999. The capital investments made by Hyundai Electronics from 1995 to 1997
totaled approximately $300.0 million and provided us with the capacity
necessary to support this growth in advanced packaging services, along with
providing capacity to support future growth. By 1998, we possessed the scale
required to provide our services to other customers who required BGA packaging
services. We also have a significant business in leaded packaging, which
accounted for 29.1% and 32.7% of our revenue in 1999 and during the three months
ended June 30, 2000, respectively.
Page 19
<PAGE>
Malaysian Business
On June 30, 2000, we consummated our acquisition of Intersil's packaging and
test operations located in Kuala Lumpur, Malaysia along with related
intellectual property for approximately $70.0 million in cash and preferred
stock. In connection with the acquisition, we entered into a five-year supply
agreement with Intersil to provide assembly and test services on an exclusive
basis. The Malaysian business increases our exposure to high growth advanced
communications products, provides a presence in Malaysia and enhances our
intellectual property in key areas. In addition, the Malaysian business expands
our mixed-signal testing capabilities and provides us with critical expertise
in RF testing. The Malaysian business had revenues of $83.7 million, $80.4
million and $110.5 million for the fiscal years ended June 27, 1997, July 3,
1998 and July 2, 1999, respectively. All of these revenues represented
intercompany sales to Intersil.
Results of Operations
Three and Six Months Ended June 30, 2000 Compared to the Three and Six Months
Ended June 30, 1999
Revenues
Revenues were $109.0 million and $206.4 million for the three months and six
months ended June 30, 2000, respectively, an increase of 34.8% and 24.1% over
the prior year periods, respectively. The communications end market was the
fastest growing end market with 124% and 99.4% growth over the prior year three
month and six month periods, respectively.
Test revenues for the quarter ended and six months ended June 30, 2000 were $7.4
million and $12.9 million, respectively, an increase of 247.8% and 268.1% over
the prior year periods, respectively. Laminate product assembly revenues for
the quarter ended and six months ended June 30, 2000 were $64.3 million and
$122.3 million, respectively, an increase of 23.4% and 6.9% over the prior year
periods. Leaded product assembly revenues were $37.3 million and $71.2 million
for the quarter ended and six months ended June 30, 2000, respectively, an
increase of 39.9% and 47% over the prior year periods, respectively.
Our total packaging unit volume was 412.4 million and 759.7 million for the
three months and six months ended June 30, 2000, an increase of 61% and 81.8%,
respectively, over the prior year periods. Leaded product assembly unit volume
increased by 53.9% and 78.9%, respectively, over the prior year three and six
month periods. Laminate product assembly unit volume increased by 137.7% and
107.1%, respectively, over the comparable prior year periods.
Gross Profit
Gross profit during the three months and six months ended June 30, 2000 was
$26.1 million and $46.6 million, respectively and increased by 169.9% and
101.6%, respectively, over the comparable prior year periods. Gross margin
percentage was 24.0% and 22.6% for the three months and six months ended June
30, 2000, an increase of 100% and 62.6%, respectively, over the comparable
periods in the prior year.
The margin improvement during the three months and six months periods ended June
30, 2000 were primarily attributable to reductions in material costs and
increased efficiency in the utilization of our production capacity and labor
resources and lower depreciation expense resulting from the change in the
estimated useful lives in production equipment made effective from January 1,
2000. This change in accounting estimate resulted in lowered depreciation
expense for the three months
Page 20
<PAGE>
and six months ended June 30, 2000 of approximately $6.9 million and $13.6
million, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased to $7.2 million and $14.3
million for the quarter and six months ended June 30, 2000, respectively, an
increase of 50.1% and 53.7%, respectively, over the comparable prior year
periods. As a percentage of revenue these expenses for the quarter and six
months ended June 30, 2000 increased to 6.6% and 6.9%, respectively, from 6% and
5.6% in the prior year periods. This increase in spending was primarily due to
additions of management personnel, MIS development, and management advisory
fees. The remaining increase was due to additional sales, marketing and
customer service headcount in support of the acquisition of new customers.
Research and Development
Research and development expense decreased to $2.5 million and $5.1 million
during the three and six months ended June 30, 2000, respectively. This
represents a 15.9% decrease and a 14.1% decrease, respectively, in research and
development costs over the comparable prior year periods. During both the three
and six months ended June 30, 2000 spending on consumable materials, supplies,
and tooling was curtailed as we have focused our research efforts on highly
collaborative development programs with major customers. Additionally, there
were non-recurring start up costs in the first quarter of 1999 associated with
the Santa Clara flip-chip and advanced packaging prototype design and
development laboratory.
Net Interest Expense
Total outstanding interest bearing debt increased to $369.5 million at June 30,
2000 from $126.8 million at June 30, 1999 due primarily to the recapitalization
which occurred on August 5, 1999 and also due to the additional term debt
incurred in connection with the acquisition of the Malaysian facility on June
30, 2000. Interest income for the three months and six months ended June 30,
2000, decreased to $0.1 million and $0.4 million, respectively, from $0.8 and
$1.7 million during the comparable three and six month periods in 1999.
Foreign Currency Gains (Losses)
Net foreign currency gains were $0.5 million and $0.7 million during the three
and six months ended June 30, 2000, respectively, compared to net gains of $0.4
million and $1.4 million during the three and six months ended June 30, 1999,
respectively. During 2000 our exposure to foreign currency gains and losses has
been significantly mitigated by two related factors. First, on October 1, 1999
we changed our functional currency to the U.S. Dollar from the local currencies
of our Korean and Chinese subsidiaries. Second, beginning in late 1999 we
negotiated and denominated the large majority of our material and equipment
purchases in U.S. Dollars.
Income Taxes:
Income tax expense for the quarter and six months ended June 30, 2000 was
approximately $1.4 million and $1.9 million, respectively, for an effective tax
rate of 20% for both periods. Concurrent with the recapitalization on August 5,
1999, the company was reorganized and as a result now has operations and
earnings in jurisdictions with relatively low income tax rates, or where we
enjoy tax holidays or other similar tax benefits. Prior to this reorganization
of the company, during the three and six months ended June 30, 1999 the company
had an income tax benefit of $0.2 million, and income tax expense of $2.9
million, respectively.
Page 21
<PAGE>
Liquidity and Capital Resources
At June 30, 2000 we had and continue to have a borrowing capacity of $50.0
million for working capital and general corporate purposes under the revolving
credit line portion of our senior credit facilities. In addition, borrowings of
up to $20.0 million are available for acquiring equipment and making other
specified capital expenditures under the capital expenditure line of our senior
credit facilities. We may borrow and repay under the capital expenditure line
until August 5, 2001. Amounts that we repay under the capital expenditure line
after August 5, 2001 may not be reborrowed by us later. The final maturity for
both these facilities is August 5, 2005. We did not draw upon these facilities
in connection with our recapitalization. In connection with our June 30, 2000
acquisition of the Malaysian business, we added a $55.0 million term C loan to
our senior credit facilities and we obtained the ability to increase our
revolving credit line by $25.0 million without further consent from our existing
lenders. The proceeds of the term C loan were partially used to finance the $70
million acquisition of the Malaysian business and pay related transaction fees
and expenses.
Our ongoing primary cash needs are for operations and equipment purchases.
Prior to our recapitalization, we met a significant portion of our cash
requirements from a combination of (1) short- and long-term bank loans and (2)
capital contributions from Hyundai, our former owner. All short and long-term
debt, loans, leases and other credit facilities existing prior to our
recapitalization were repaid and terminated at the recapitalization date. In
February 2000, we made an initial borrowing of $13.5 million on our revolving
line of credit.
We have spent approximately $36.6 million on capital expenditures during the six
months ended June 30, 2000. We also entered into a sale and leaseback
transaction during 2000 whereby we sold equipment to an equipment leasing
company for cash proceeds of $15 million. We spent approximately $17.6 million
in capital expenditures during the six months ended June 30, 1999.
Under the recapitalization agreement, Hyundai Electronics may receive up to an
additional $55.0 million of cash during the four-year period beginning January
1, 1999 if we exceed specified levels of EBITDA as described in the
recapitalization agreement. Hyundai Electronics is entitled to receive 33.3% of
the amount by which our EBITDA, which is defined in the recapitalization
agreement.
Under the terms of the agreement relating to our acquisition of the Malaysian
business, during the period from June 1, 2000 to June 30, 2003, Intersil will be
entitled to receive additional contingent incentive payments based upon the
achievement of milestones relating to the transfer of business currently
subcontracted by Intersil to a third party. In the event that Intersil were to
achieve all the milestones, we would pay Intersil an additional sum of
approximately $17.9 million in the aggregate.
As of June 30, 2000, our debt consisted of $369.5 million of borrowings which
were comprised of $15.9 million of revolving loans, $203.6 million in term loans
and $150.0 million of senior subordinated notes. We also have $104.3 million of
preferred stock.
Subsequent to June 30, 2000, we completed an initial public offering and
concurrent private placement which generated net cash proceeds of
approximately $148.45 million, including the net proceeds from the sale of
shares to the underwriters for over subscription in the initial closing. Based
upon certain requirements imposed by the senior bank facilities, at least
approximately $41 million of the net initial public offering proceeds were
required to be used to retire bank term debt. The company has met this minimum
requirement and voluntarily used $55 million of the initial public offering
net proceeds to retire the term debt acquired to partially finance the
acquisition of the Malaysian business.
We believe that our existing cash balances, cash flows from operations,
available equipment lease financing, available borrowings under our senior
credit facilities
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and the net proceeds from the completed initial public offering and the
concurrent private placement will be sufficient to meet our projected capital
expenditures, working capital and other cash requirements for the next twelve
months.
Our debt instruments require that we meet specified financial tests, including,
without limitation, a maximum leverage ratio, a minimum interest coverage ratio
and minimum fixed charge coverage ratio. These debt instruments also contain
covenants restricting our operations.
There were no violations of these covenants through June 30, 2000 and we expect
to comply with all these covenants during the next twelve months. Therefore,
our liquidity and capital resources are not expected to be impacted by these
covenants.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133." SFAS 137 amends Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to defer its
effective date to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments including standalone instruments, as forward currency
exchange contracts and interest rate swaps or embedded derivatives and requires
that these instruments be market-to-market on an ongoing basis. These market
value adjustments are to be included either in the income statement or
stockholders' equity, depending on the nature of the transaction. We are
required to adopt SFAS 133 in the first quarter of our fiscal year 2001. We are
in process of evaluating the effect of SFAS 133 on our financial statements.
In December 1999, the Securities and Exchange Commission issued SAB No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We believe that the impact of SAB No. 101 will have no
material effect on our financial position or results of operations.
In April 2000, the Financial Accounting Standards Board issued FASB
interpretation of No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. Among other issues, this
interpretation clarifies the definition of employees for purposes of applying
Opinion No. 25, the criteria for determining whether a plan qualifies as a non-
compensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effect of applying this
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interpretation is recognized on a prospective basis from July 1, 2000. We are
currently reviewing stock grants to determine the impact, if any, that may
arise from implementation of this interpretation, although we do not expect the
impact, if any, to be material to our financial statements.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. We utilize derivative financial instruments
but do not use derivative financial instruments for speculative or trading
purposes. We have long-term debt that carries fixed and variable interest rates.
A fluctuation in interest rates of 1% would increase our annual interest charge
by approximately $1.5 million. A majority of our revenue and capital spending is
transacted in U.S. Dollars. We do, however, enter into transactions in other
currencies, primarily the Korean Won. With effect from October 1, 1999 we have
changed the functional currency of ChipPAC Korea and ChipPAC China from their
respective local currencies to the U.S. Dollar. The use of the U.S. Dollar as
the functional currency is expected to result in a much lower level of foreign
exchange gains and losses in our overseas subsidiaries.
Factors Affecting Future Results
For a statement of the factors which may affect our future results, we refer you
to our registration statement on Form S-1 (No. 333-39428) relating to our
proposed initial public offering of our Class A common stock. Please see in
particular those factors mentioned under the heading "Risk Factors" beginning on
page 10 and information mentioned under the heading "Cautionary Note Regarding
Forward-Looking Statements" on page 18 of that registration statement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
On August 14, 2000, the Company completed an initial public offering (the
"Offering") of its Class A common stock. The managing underwriters in the
Offering were Credit Suisse First Boston Corporation, Deutsche Bank Securities
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, FleetBoston
Robertson Stephens Inc. and Thomas Weisel Partners LLC (the "Underwriters").
The shares of Class A common stock sold in the Offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-
1 (the "Registration Statement") (Reg. No. 333-39428) that was declared
effective by the SEC on August 8, 2000. The Offering commenced on August 9,
2000. All 11,500,000 shares of Class A common stock registered under the
Registration Statement (including 1,500,000 shares sold pursuant to the
exercise of the Underwriters' overallotment option) were sold at a price of
$12.00 per share. In connection with the Offering, the Company paid an aggregate
of $8,280,000 in underwriting discounts and commissions to the Underwriters.
In addition, the following table sets forth an estimate of all expenses
incurred in connection with the Offering, other than underwriting discounts
and commissions. All amounts shown are estimates except for the fees payable
to the SEC,National Association of Securities Dealers, Inc. ("NASD") and
Nasdaq National Market.
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SEC registration fee $ 103,528
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NASD filing fee 30,500
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Nasdaq National Market Listing Fee 95,000
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Printing and engraving fees 300,000
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Legal fees and expenses 350,000
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-----------------------------------------------------------------------
Accounting fees and expenses 500,000
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Blue sky fees and expenses 1,000
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Transfer agent and register fees 7,000
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Directors and officers insurance 465,000
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Miscellaneous 4,447,972
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Total $6,300,000
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After deducting the underwriting discounts and commissions and the estimated
Offering expenses described above, the Company received net proceeds from the
Offering of approximately $123,420,000. The Company has used a portion of the
net proceeds from the Offering to redeem in full its Class B preferred stock and
to repay senior credit facilities of $55.6 million. The Company intends to use
the remainder of the net proceeds for general corporate purposes. Other than to
affiliates and stockholders who had an interest in the Company's Class B
preferred stock and its senior credit facilities, none of the Company's net
proceeds of the Offering were paid directly or indirectly to any director,
officer, general partner of the Company or their associates, persons owning more
than 10% or more of any class of equity securities of the Company, or an
affiliate of the Company.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
In June 2000, the stockholders voted on a consent in lieu of special meeting
of stockholders. The following matters were voted on: (1) the reincorporation
of the Company under the laws of the State of Delaware; (2) the merger agreement
relating to such reincorporation; (3) Amended and Restated Certificate of
Incorporation; (4) Amended and restated Bylaws; (5) appointment of independent
public accountants; (6) form of Indemnification Agreement; (7) 2000 Equity
Incentive Plan and (8) 2000 Employee Stock Purchase Plan. On all matters the
vote tally was 47, 293,280 votes for, with the remainder of the outstanding
share abstaining.
In July 2000, the stockholders voted on a consent in lieu of special meeting of
stockholders approving the 0.38098771 for 1 reverse stock split of the Company's
capital stock. The vote tally was 47, 293,280 votes for, with the remainder of
the outstanding share abstaining.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on from 8-K
(a) Exhibits
Exhibit
Number Description
2.1 First Amendment to Agreement and Plan of Recapitalization and Merger,
dated as of June 16, 1999 by and among Hyundai Electronics Industries Co.,
Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.*
2.2 Agreement and Plan of Recapitalization and Merger, dated as of March 13,
1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai
Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.*
2.3 Second Amendment to Agreement and Plan of Recapitalization and Merger,
dated as of August 5, 1999, by and among Hyundai Electronics Industries
Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger
Corp.*
3.1 Amended and Restated Articles of Incorporation of ChipPAC, Inc.*
3.2 Amended and Restated By-Laws of ChipPAC, Inc.*
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3.3 Memorandum of Association of ChipPAC International Company Limited
(formerly known as ChipPAC Finance Limited).*
3.4 Articles of Association of ChipPAC International Company Limited (formerly
known as ChipPAC Finance Limited).*
3.5 Articles of Incorporation of ChipPAC (Barbados) Ltd.*
3.6 By-Law No. 1 of ChipPAC (Barbados) Ltd.*
3.7 Memorandum of Association of ChipPAC Limited.*
3.8 Articles of Association of ChipPAC Limited.*
3.9 Articles of Incorporation of ChipPAC Luxembourg S.a.R.L.*
3.10 Deed of Foundation of ChipPAC Liquidity Management Hungary Limited
Liability Company.*
3.11 Policy and Operating Guidelines of ChipPAC Liquidity Management Hungary
Limited Liability Company (abbreviated as ChipPAC Ltd.)*
3.12 Articles of Incorporation of ChipPAC Korea Company Ltd.*
4.2 Indenture, dated as of July 29, 1999, by and among ChipPAC International
Limited, ChipPAC Merger Corp. and Firstar Bank of Minnesota, N.A., as
trustee.*
4.3 First Supplemental Indenture, dated as of August 5, 1999, by and among
ChipPAC International Company Limited, ChipPAC, Inc. and Firstar Bank of
Minnesota, N.A., as trustee.*
4.4 12 3/4% Senior Subordinated Notes Due 2009.*
4.5 Form of Series B 12 3/4% Senior Subordinated Notes Due 2009.*
10.1 Credit Agreement, dated as of August 5, 1999, by and among ChipPAC
International Company Limited, ChipPAC, Inc., the Lenders listed therein
and Credit Suisse First Boston, as Administrative Agent, Sole Lead Manager
and Collateral Agent.*
10.2 Guaranty, dated as of August 5, 1999, by and among ChipPAC, Inc. and
certain subsidiaries of ChipPAC, Inc., in favor of Credit Suisse First
Boston.*
10.3 Subsidiary Guaranty Agreement, dated as of August 5, 1999, by and among
ChipPAC Korea Company Ltd., ChipPAC Limited, ChipPAC (Barbados) Ltd.,
ChipPAC Luxembourg S.a.R.L., ChipPAC Liquidity Management Hungary Limited
Liability Company and ChipPAC International Company Limited, in favor of
Firstar Bank of Minnesota, N.A.*
10.4 Amended and Restated Stockholders Agreement, dated as of August 5, 1999,
by and among ChipPAC, Inc. the Hyundai Group (as defined therein), the
Bain Group (as defined therein), the SXI Group (as defined therein), Intel
Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset
Partners, L.P.*
10.5 Amended and Restated Registration Agreement, dated as of August 5, 1999,
by and among ChipPAC, Inc., the Hyundai Stockholders (as defined therein),
the Bain Stockholders (as defined therein), the SXI Stockholders (as
defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and
Sankaty High Yield Asset Partners, L.P.*
10.5.1 Amendment No. 1 to Amended and Restated Registration Agreement, dated as
of June 30, 2000, by and among ChipPAC, Inc., Sapphire Worldwide
Investments, Inc., the Bain Stockholders (as defined therein) and SXI
Group LLC.**
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10.5.2 Form of Amendment No. 2 to Amended and Restated Registration Agreement,
dated as of July 13, 2000, by and among ChipPAC, Inc., Qualcomm
Incorporated, SXI Group LLC and the Bain Shareholders (as defined
therein).**
10.5.3 Form of Amendment No. 3 to Amended and Restated Registration Agreement,
dated as of August 2, 2000, by and among ChipPAC, Inc., Bain Capital,
Inc., SXI Group LLC and the Bain Shareholders (as defined therein). **
10.6 Transition Services Agreement, dated as of August 5, 1999, by and among
Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America,
ChipPAC, Inc., ChipPAC Korea Company Ltd., Hyundai Electronics Company
(Shanghai) Ltd., ChipPAC Assembly and Test (Shanghai) Company Ltd.,
ChipPAC Barbados Limited and ChipPAC Limited.*
10.7 Lease Agreement, dated as of June 30, 1998, by and between Hyundai
Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*
10.7.1 Amendment Agreement, dated September 30, 1998, to Lease Agreement, dated
June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd.
and ChipPAC Korea Ltd.*
10.7.2 Amendment Agreement 2, dated September 30, 1999, to Lease Agreement,
dated June 30, 1998, by and between Hyundai Electronics Industries Co.,
Ltd. and ChipPAC Korea Ltd.*
10.8 Agreement Concerning Supply of Utilities, Use of Welfare Facilities and
Management Services for Real Estate, dated as of June 30, 1998, by and
between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.*
10.9 Service Agreement, dated as of August 5, 1999, by and between Hyundai
Electronics Industries Co. Ltd. and ChipPAC Limited.* +
10.10 Sublease Agreement, dated as of May 1, 1998, by and between Hyundai
Electronics America and ChipPAC, Inc.*
10.11 Patent Sublicense Agreement, dated as of August 5, 1999, by and between
Hyundai Electronics Industries Co., Ltd. and ChipPAC Limited.*
10.12 TCC License Agreement, dated December 22, 1998, between Tessera Inc.,
the Tessera Affiliates (as defined therein), ChipPAC, Inc. and the
Licensee Affiliates (as defined therein).* +
10.12.1 Letter Agreement, dated July 15, 1999, by and among ChipPAC, Inc.,
Hyundai Electronics America, ChipPAC Limited and Tessera, Inc.*
10.13 Materials Agreement, dated as of July 1, 1999, by and between ChipPAC
Limited and Intel Corporation.* +
10.14 Assembly Services Agreement, dated as of August 5, 1999, by and between
Intel Corporation and ChipPAC Limited. * +
10.15 Stock Purchase Agreement, dated as of August 5, 1999, by and between
ChipPAC, Inc. and Intel Corporation.*
10.16 Warrant to Purchase Class B Common Stock of ChipPAC, Inc., dated as of
August 5, 1999, issued to Intel Corporation.*
10.17 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC,
Inc., ChipPAC Limited, ChipPAC Operating Limited and Bain Capital, Inc.*
10.18 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC,
Inc., ChipPAC Limited, ChipPAC Operating Limited and SXI Group LLC.*
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10.19 Employment Agreement, dated as of October 1, 1999, between ChipPAC, Inc.
and Dennis McKenna.*
10.20 ChipPAC, Inc. 1999 Stock Purchase and Option Plan.*
10.21 ChipPAC, Inc. 2000 Equity Incentive Plan.**
10.22 ChipPAC, Inc. 2000 Employee Stock Purchase Plan.**
10.23.1 Form of Key Employee Purchased Stock Agreement.*
10.23.2 Form of Key Employee Purchased Stock Agreement (with Loan).*
10.24 Form of Employee Restricted Stock Agreement.*
10.25 Form of Directors Tranche I Stock Option Agreement.*
10.26 Form of Employees Tranche I Stock Option Agreement.*
10.27 Form of Tranche II Stock Option Agreement.*
10.28 Intellectual Property Rights Agreement, entered into as of June
30, 2000, by and between Intersil Corporation and ChipPAC
Limited.**
10.29 Supply Agreement, entered into as of June 30, 2000, by and between
Intersil Corporation and ChipPAC Limited.**
10.30 Shareholders Agreement, dated as of June 30, 2000, by and among
ChipPAC, Inc., the Bain Group (as defined therein), the SXI Group
as defined therein) and Sapphire Worldwide Investments, Inc.**
10.31 Class A Common Stock Purchase Agreement, dated as of July 13,
2000, by and between ChipPAC, Inc. and Qualcomm Incorporated.**
10.32 Promissory Note, dated as of August 2, 2000, by and between Dennis
McKenna and ChipPAC, Inc.**
10.33 Promissory Note, dated as of August 2, 2000, by and between Robert
Krakauer and ChipPAC, Inc.**
10.34 Form of Amended and Restated Supplemental Agreement No. 1 to the
Advisory Agreement, dated as of August 2, 2000, by and among ChipPAC,
Inc., ChipPAC Limited, ChipPAC International Company Limited and Bain
Capital, Inc. **
10.35 Amended and Restated Supplemental Agreement No. 1 to the Advisory
Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc.,
ChipPAC Limited, ChipPAC International Company Limited and SXI Group
LLC. **
21.1 Subsidiaries of ChipPAC, Inc., ChipPAC International Company Limited,
ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Liquidity Management
Limited Liability Company, ChipPAC Luxembourg S.a.R.L. and ChipPAC Korea
Company Ltd.*
27.1 Financial Data Schedule.**
-------------------------------
* Incorporated by reference to the Registrant's Form S-4 (No. 333-91641).
** Incorporated by reference to the Registrant's Form S-1 (No. 333-39428).
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+ Confidential treatment has been granted as to certain portions of these
exhibits, which are incorporated by reference.
(b) Reports on Form 8-K
On July 14, 2000 ChipPAC filed a report on Form 8-K under Item 2 that the
Company had completed its acquisition of Intersil Technology Sdn. Bhd., a
Malaysian corporation and wholly-owned subsidiary of Sapphire Worldwide
Investments,Inc., a British Virgin Islands corporation and wholly-owned
subsidiary of Intersil Corporation, a Delaware corporation. Pursuant to Item 7,
we attached the financial statements required.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHIPPAC, INC.
(Registrant)
/s/ Robert Krakauer
---------------------------------------
ROBERT KRAKAUER
Chief Financial Officer
(as Registrant and as Principal Accounting Officer)
August 21, 2000
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