<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 March 31, 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)
California 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 June 12, 2000
----------------------------------------------------------------------------
Class A Common stock, $.01 par value 97,256,500
Class B Common stock, $.01 par value 0
Class L Common stock, $.01 par value 10,523,500
Page 1
<PAGE>
ChipPAC INC
<TABLE>
<CAPTION>
Part I -- FINANCIAL INFORMATION
<S> <C>
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.. 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 16
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................ 17
Item 2. Changes in Securities and Use of Proceeds................ 17
Item 3. Defaults Upon Senior Securities.......................... 17
Item 4. Submission of Matters to a Vote of Security Holders...... 17
Item 5. Other Information........................................ 17
Item 6. Exhibits and Reports on Form 8-K......................... 18
Signatures....................................................... 22
</TABLE>
Page 2
<PAGE>
ChipPAC, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 32,117 $ 19,538
Accounts receivable, less allowance for doubtful
accounts of $1,203 and $1,196....................... 30,003 35,535
Receivable from shareholder.......................... 11,662 --
Inventories.......................................... 17,497 14,941
Deferred taxes....................................... 775 716
Prepaid expenses and other current assets............ 2,386 7,799
--------- ---------
Total current assets............................... 94,440 78,529
Property and equipment, net............................ 226,931 229,430
Other assets........................................... 22,058 20,995
--------- ---------
Total assets....................................... $ 343,429 $ 328,954
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
EQUITY
-------------------------------------------------------
Current liabilities:
Bank borrowings...................................... $ -- $ 7,500
Accounts payable..................................... 52,208 35,723
Accrued expenses and other liabilities............... 27,208 18,727
Current portions of long-term debt................... 4,800 7,300
--------- ---------
Total current liabilities.......................... 84,216 69,250
--------- ---------
Long-term debt, less current portion................... 295,200 292,700
Other long-term liabilities............................ 3,929 4,512
--------- ---------
Total liabilities.................................. 383,345 366,462
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock................. 82,970 85,685
Shareholders' and divisional equity:
Common stock--class A................................ 963 974
Common stock--class B................................ -- --
Common stock--class L................................ 104 104
Warrants--common stock A............................. 1,250 1,250
Additional paid in capital--common stock............. 85,750 86,336
Divisional equity, net of capital redemption......... (167,714) (167,714)
Receivable from shareholders......................... (1,128) (1,478)
Accumulated deficit.................................. (51,280) (51,834)
Accumulated other comprehensive income............... 9,169 9,169
--------- ---------
Total shareholders' and divisional equity.......... (122,886) (123,193)
--------- ---------
Total liabilities, mandatorily redeemable preferred
stock and equity.................................. $ 343,429 $ 328,954
========= =========
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements.
Page 3
<PAGE>
ChipPAC, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 2000
------- -------
<S> <C> <C>
Revenue..................................................... $85,548 $97,469
Cost of revenue............................................. 72,131 77,044
------- -------
Gross profit................................................ 13,417 20,425
Operating expenses:
Selling, general and administrative....................... 4,511 7,099
Research and development.................................. 3,003 2,631
------- -------
Total operating expenses................................ 7,514 9,730
------- -------
Operating income............................................ 5,903 10,695
Non-operating income (expenses):
Interest income........................................... 950 238
Interest expense.......................................... (3,007) (8,764)
Foreign currency gains (losses)........................... 946 399
Other income (expenses), net.............................. 127 134
------- -------
Non-operating income (expenses)......................... (984) (7,993)
------- -------
Income before income taxes.................................. 4,919 2,702
Provision for income taxes.................................. 3,115 542
------- -------
Net income.................................................. $ 1,804 $ 2,160
======= =======
Accretion of dividends on mandatorily redeemable preferred
stock...................................................... -- (2,559)
Accretion of recorded value of the Intel warrant............ -- (156)
------- -------
Net income (loss) available to common shareholders...... $ 1,804 $ (555)
======= =======
Comprehensive income:
Net income (loss)......................................... 1,804 2,160
Currency translation loss................................. (3,526) --
------- -------
Comprehensive income (loss)............................. $(1,722) $ 2,160
======= =======
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements.
Page 4
<PAGE>
ChipPAC, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 1,804 $ 2,160
Adjustments to reconcile net income (loss) to net cash
provided by (use in) operating activities:
Depreciation and amortization......................... 13,465 8,891
Provision for inventory and accounts receivable....... (517) (151)
Non-operating early debt extinguishments loss......... -- --
Foreign currency (gains) losses....................... (946) (399)
(Gain) loss on sale of equipment...................... (98) (132)
Change in assets and liabilities:
Accounts receivable................................. 12,451 6,461
Inventories......................................... (3,283) 2,347
Prepaid expenses and other assets................... 1,204 (4,338)
Advances (to) from affiliates....................... (4,224) --
Accounts payable.................................... (23,095) (16,989)
Accrued expenses and other current liabilities...... 2,617 (8,652)
Other long-term liabilities......................... 1,486 1,020
--------- ---------
Net cash provided by (used in) operating
activities....................................... 864 (9,782)
--------- ---------
Cash flows used in investing activities:
Acquisition of property and equipment................... (4,343) (11,042)
Proceeds from sale of equipment......................... 119 154
--------- ---------
Net cash used in investing activities............. (4,224) (10,888)
--------- ---------
Cash flows provided by financing activities:
Advances (to) from affiliates........................... 186 (350)
Proceeds from short-term loans.......................... 693 13,500
Repayment of short-term loans........................... (4,653) (6,000)
Repayments of long-term debt and capital leases ........ (5,043) --
Dividend paid........................................... (9,435) --
Proceeds from stock issuance............................ -- 599
Contributions to (withdrawals from) paid in capital..... 20,989 --
--------- ---------
Net cash provided by (used in) financing
activities....................................... 2,737 7,749
--------- ---------
Effect on cash from changes in exchange rates........... (1,379) 342
Net increases (decrease) in cash........................ (2,002) (12,579)
Cash and cash equivalents at beginning of period........ 68,767 32,117
--------- ---------
Cash and cash equivalents at end of period.............. $ 66,865 $ 19,538
========= =========
</TABLE>
The accompanying notes form an integral part of these condensed consolidated
financial statements.
Page 5
<PAGE>
ChipPAC, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended April 2, 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 1999 Registration on Form S-4
(Registration No. 333-91641) as declared effective by the Securities and
Exchange Commission on April 28, 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 March 31, 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
significant intercompany balances have been eliminated on consolidation.
For the comparative disclosures for the three months ended March 31, 1999,
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),
Page 6
<PAGE>
ChipPAC, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ChipPAC Assembly and Test Co. Ltd. (CATS) and Hyundai Electronics Co.
(Shanghai) Ltd., (HECS). Accordingly the financial statements for the
comparative period is prepared on a combined basis. These comparative financial
statements are prepared on a combined basis 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 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: 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
March 31, 2000 being $6.7 million lower than would have been recorded using
five year lives.
Note 3: Inventories
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(In thousands)
<S> <C> <C>
Raw materials......................................... $10,422 $12,274
Work-in-process....................................... 3,068 3,003
Finished goods........................................ 1,451 2,220
------- -------
Total............................................... $14,941 $17,497
======= =======
</TABLE>
Note 4: 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 March
31, 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.
Page 7
<PAGE>
ChipPAC, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5: Segment Reporting
The Company is engaged in one industry segment, the packaging and testing of
integrated circuits.
Note 6: Subsequent Event
On May 5, 2000, ChipPAC, Inc. (CPI) entered into a non-binding letter of
intent with Intersil with respect to the acquisition by CPI 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. CPI expects to enter into a five-year supply agreement with
Intersil to provide assembly and test services on an exclusive basis. For its
fiscal year ended July 2, 1999, the Malaysian business had revenues of $110.5
million. Although there can be no assurances that the acquisition of the
Malaysian business will be consummated, CPI does expect that the proposed
transaction will be completed by June 30, 2000.
Note 7: 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. ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC
Luxembourg S.a.R.L. and ChipPAC Liquidity Management Hungary Limited Liability
Company were formed by Hyundai in 1999 and have no historical operating results
or balances for the four years ended December 31, 1998. As a result, it is not
possible to include these entities in the supplemental financial statements for
these periods. Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented herein because management has
determined that they are not material to investors. Financial information for
ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L. and
ChipPAC Liquidity Management has not been presented as these entities have no
historical financial results and future transactions will primarily consist of
inter-company transactions. The following HECS financial statements in the
condensed combining financial statements include the accounts of CATS.
Page 8
<PAGE>
ChipPAC
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEETS
March 31, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Non-
Guarantors Guarantor
------------------ ---------
CPI CPK HECS Eliminations Combined
-------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents............. $ 11,824 $ 37,588 $ 17,353 $ -- $ 66,765
Receivable from
shareholder............. -- 4,114 -- -- 4,114
Intercompany accounts
receivable.............. 11,162 95,434 1,947 (108,543) --
Accounts receivable from
customers............... 24,563 1,566 1 -- 26,130
Inventories.............. 20 13,293 174 -- 13,487
Deferred taxes........... 420 527 -- -- 947
Prepaid expenses & other
current assets.......... 108 2,628 527 -- 3,263
-------- -------- -------- --------- --------
Total current assets... 48,097 155,150 20,002 (108,543) 114,706
Property, plant and
equipment, net............ 6,180 131,051 79,358 -- 216,589
Other assets............... 4,813 3,107 -- (4,800) 3,120
-------- -------- -------- --------- --------
Total assets........... $ 59,090 $289,308 $ 99,360 $(113,343) $334,415
======== ======== ======== ========= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Intercompany accounts
payable................. $ 80,010 $ 1,947 $ 26,586 $(108,543) $ --
Accounts payable......... 2,201 36,165 503 -- 38,869
Accrued expenses and
other liabilities....... 906 5,935 3,177 -- 10,018
Short-term debt.......... -- 2,117 12,700 -- 14,817
Long-term debt, current
portion................. -- 21,164 10,781 -- 31,945
HEI long-term debt....... -- 3,053 -- -- 3,053
Payables to affiliates... 443 -- 7,247 -- 7,690
-------- -------- -------- --------- --------
Total current
liabilities........... 83,560 70,381 60,994 (108,543) 106,392
Long-term debt, less
current portion........... -- 60,900 15,390 -- 76,290
HEI long-term debt, less
current portion........... -- 17,384 -- -- 17,384
Other long-term
liabilities............... -- 1,705 -- -- 1,705
-------- -------- -------- --------- --------
Total liabilities...... 83,560 150,370 76,384 (108,543) 201,771
-------- -------- -------- --------- --------
Shareholders' and
divisional equity
Preferred stock and paid
in capital.............. 16,674 111,110 78,096 (4,800) 201,080
Shareholder receivable-
HEA..................... (37,440) -- -- -- (37,440)
Accumulated earnings
(deficit)............... (3,704) 21,341 (55,585) -- (37,948)
Accumulated other
comprehensive income
(loss).................. -- 6,487 465 -- 6,952
-------- -------- -------- --------- --------
Shareholders' and
divisional equity
(deficit)............. (24,470) 138,938 22,976 (4,800) 132,644
-------- -------- -------- --------- --------
Total liabilities and
equity................ $ 59,090 $289,308 $ 99,360 $(113,343) $334,415
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 9
<PAGE>
ChipPAC
SUPPLEMENTAL COMBINING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Guarantors Non-Guarantor
---------------- -------------
CPI CPK HECS Eliminations Combined
------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenue:
Intercompany revenue... $ -- $77,416 $ 1,723 $(79,139) $ --
Customer revenue....... 81,828 3,720 -- -- 85,548
------- ------- ------- -------- -------
Revenue.............. 81,828 81,136 1,723 (79,139) 85,548
Cost of revenue.......... 77,613 68,203 5,454 (79,139) 72,131
------- ------- ------- -------- -------
Gross profit............. 4,215 12,933 (3,731) -- 13,417
Operating expenses:
Selling, general &
administrative........ 2,838 1,673 -- -- 4,511
Research &
development........... 1,475 1,528 -- -- 3,003
------- ------- ------- -------- -------
Total operating
expenses............ 4,313 3,201 -- -- 7,514
------- ------- ------- -------- -------
Operating income......... (98) 9,732 (3,731) -- 5,903
Non-operating income
(expense)
Interest income........ 127 693 130 -- 950
Interest expense....... -- (2,196) (811) -- (3,007)
Foreign currency gains
(losses).............. -- 965 (19) -- 946
Other income
(expenses), net....... 2 114 11 -- 127
------- ------- ------- -------- -------
Non-operating income
(expenses).......... 129 (424) (689) -- (984)
------- ------- ------- -------- -------
Income (loss) before
income taxes............ 31 9,308 (4,420) -- 4,919
Provision for income
taxes................... -- 3,115 -- -- 3,115
------- ------- ------- -------- -------
Net income (loss)...... $ 31 $ 6,193 $(4,420) $ -- $ 1,804
======= ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 10
<PAGE>
ChipPAC
SUPPLEMENTAL COMBINING CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Non-
Guarantors Guarantor
----------------- ---------
CPI CPK HECS Eliminations Combined
------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........ $ 31 $ 6,193 $ (4,420) $ -- $ 1,804
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and
amortization.......... 273 10,808 2,384 -- 13,465
Provision for inventory
and receivables....... (33) (484) -- -- (517)
Foreign currency
gains................. -- (946) -- -- (946)
(Gain) loss on
intercompany sales of
equipment............. -- -- -- -- --
Gain on external sales
of equipment.......... -- (98) -- -- (98)
Changes in assets and
liabilities:
Intercompany accounts
receivable............ (317) 11,399 -- (11,082) --
Accounts receivable.... 10,211 2,240 -- -- 12,451
Inventories............ (20) (3,304) 41 -- (3,283)
Prepaid expenses and
other assets.......... (4,840) 1,426 (182) 4,800 1,204
Advances (to) from
affiliates............ -- (4,224) -- -- (4,224)
Intercompany accounts
payable............... (3,546) (1) (7,535) 11,082 --
Accounts payable....... (83) (21,768) (1,244) -- (23,095)
Accrued expenses &
other liabilities..... (220) 2,672 165 -- 2,617
Other long-term
liabilities........... -- 1,486 -- -- 1,486
------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities.......... 1,456 5,399 (10,791) 4,800 864
------- -------- -------- -------- --------
Cash flows used in
investing activities:
Acquisition of property
and equipment........... (646) (2,868) (829) -- (4,343)
Proceeds, intercompany
equipment sales......... -- (37) 37 -- --
Proceeds, external
equipment sales......... -- 119 -- -- 119
------- -------- -------- -------- --------
Net cash used in
investing
activities.......... (646) (2,786) (792) -- (4,224)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Advances to HEA.......... 187 4,429 (4,430) -- 186
Proceeds from short-term
loans................... -- 693 -- -- 693
Repayment of short-term
loans................... -- (1,653) (3,000) -- (4,653)
Proceeds from term
loans................... -- -- -- -- --
Repayment, term loans
and capital leases...... -- (2,987) (2,056) -- (5,043)
Dividend paid............ -- (9,435) -- -- (9,435)
Contributions
(withdrawals) of
capital................. -- 987 24,802 (4,800) 20,989
------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities.......... 187 (7,966) 15,316 (4,800) 2,737
------- -------- -------- -------- --------
Effect from changes in
exchange rates........... -- (1,351) (28) -- (1,379)
------- -------- -------- -------- --------
Net increase (decrease) in
cash..................... 997 (6,704) 3,705 -- (2,002)
Cash and equivalents at
beginning of period...... 10,827 44,292 13,648 -- 68,767
------- -------- -------- -------- --------
Cash and equivalents at
end of period............ $11,824 $ 37,588 $ 17,353 $ -- $ 66,765
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 11
<PAGE>
ChipPAC, Inc.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 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.......... $ 2,530 $ 1,423 $ 11,905 $ 3,680 $ -- $ 19,538
Intercompany accounts
receivable........... 8,058 7,109 33,782 8,136 (57,085) --
Accounts receivable
from customers....... 355 -- 35,157 23 -- 35,535
Inventories........... -- -- 12,615 2,326 -- 14,941
Deferred taxes........ -- -- 716 -- -- 716
Prepaid expenses &
other current
assets............... 122 -- 7,493 184 -- 7,799
-------- -------- -------- ------- --------- --------
Total current
assets.............. 11,065 8,532 101,668 14,349 (57,085) 78,529
Property, plant and
equipment, net........ 6,904 -- 143,868 78,658 -- 229,430
Intercompany loans
receivable............ -- 271,000 -- (34,000) (237,000) --
Investment in
subsidiaries.......... 79,216 31,424 185,790 -- (296,430) --
Other assets........... 135 13,663 107,197 -- (100,000) 20,995
-------- -------- -------- ------- --------- --------
Total assets......... $ 97,320 $324,619 $538,523 $59,007 $(690,515) $328,954
======== ======== ======== ======= ========= ========
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND EQUITY
------------------------
Current liabilities:
Short term bank
borrowings............ $ -- $ 7,500 $ -- $ -- $ -- $ 7,500
Intercompany accounts
payable.............. 4,201 -- 26,374 26,501 (57,076) --
Accounts payable...... 866 40 31,387 3,430 -- 35,723
Accrued expenses and
other liabilities.... 3,909 3,348 8,877 4,521 (1,928) 18,727
Deferred taxes........ -- -- -- -- -- --
Short-term debt....... -- -- -- -- -- --
Current portion of
long-term debt....... -- 7,300 -- -- -- 7,300
-------- -------- -------- ------- --------- --------
Total current
liabilities......... 8,976 18,188 66,638 34,452 (59,004) 69,250
Long-term debt, less
current portion...... -- 292,700 -- -- -- 292,700
Intercompany loans
payable.............. -- -- 237,000 -- (237,000) --
Other long-term
liabilities.......... 240 -- 4,272 -- -- 4,512
-------- -------- -------- ------- --------- --------
Total liabilities.... 9,216 311,888 307,910 34,452 (296,004) 366,462
Mandatorily redeemable
preferred stock........ 85,685 -- -- -- -- 85,685
Shareholders' and
divisional equity:
Common stock.......... 1,078 -- -- -- -- 1,078
Common stock of
subsidiaries......... 210,790 14,544 171,315 -- (396,649) --
Warrants-common stock
A.................... 1,250 -- -- -- -- 1,250
Additional paid in
capital.............. 86,336 -- -- -- -- 86,336
Receivable from
shareholder.......... (1,478) -- -- -- -- (1,478)
Divisional equity, net
of capital
distributions........ (277,818) -- 29,623 88,282 (7,801) (167,714)
Accumulated earnings
(deficit)............ (17,739) (813) 20,972 (64,193) 9,939 (51,834)
Accumulated other
comprehensive income
(loss)............... -- -- 8,703 466 -- 9,169
-------- -------- -------- ------- --------- --------
Shareholders' and
divisional equity
(deficit)............ 2,419 13,731 230,613 24,555 (394,511) (123,193)
-------- -------- -------- ------- --------- --------
Total liabilities and
equity.............. $ 97,320 $324,619 $538,523 $59,007 $(690,515) $328,954
======== ======== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 12
<PAGE>
ChipPAC, Inc.
SUPPLEMENTAL COMBINING CONDENSED STATEMENTS OF OPERATIONS
Quarter Ended March 31, 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.. $ 7,263 -- $ 1 $8,306 $(15,570) --
Customer revenue...... 376 -- 97,090 3 -- $97,469
-------- ------- -------- ------ -------- -------
Revenue............... 7,639 -- 97,091 8,309 (15,570) 97,469
Cost of revenue......... 123 -- 77,663 7,565 (8,307) 77,044
-------- ------- -------- ------ -------- -------
Gross profit............ 7,516 -- 19,428 744 (7,263) 20,425
Operating expenses:
Selling, general &
administrative....... 5,390 $ 8 8,964 -- (7,263) 7,099
Research &
development.......... 1,242 -- 1,389 -- -- 2,631
-------- ------- -------- ------ -------- -------
Total operating
expenses............. 6,632 8 10,353 -- (7,263) 9,730
-------- ------- -------- ------ -------- -------
Operating income........ 884 (8) 9,075 744 -- 10,695
Non-operating Income
(Expense):
Interest income....... (10,373) 7,762 8,079 20 (5,250) 238
Interest expense...... 10,383 (8,757) (14,780) (860) 5,250 (8,764)
Foreign currency gains
(losses)............. -- -- 406 (7) -- 399
Income (loss) from
investment in
subsidiaries......... (461) 892 4,224 -- (4,655) --
Other income
(expenses), net...... (2) -- 114 22 -- 134
-------- ------- -------- ------ -------- -------
Non-operating income
(expenses)........... (453) (103) (1,957) (825) (4,655) (7,993)
-------- ------- -------- ------ -------- -------
Income (loss) before
income taxes........... 431 (111) 7,118 (81) (4,655) 2,702
Provision for (benefit
from) income taxes..... (194) 81 2,190 -- (1,923) 542
-------- ------- -------- ------ -------- -------
Income before
extraordinary item..... 237 (192) 4,928 (81) (2,732) 2,160
Extraordinary item:
Loss from early
extinguishment of
debt, net of related
income tax benefit... -- -- -- -- -- --
-------- ------- -------- ------ -------- -------
Net Income (loss)....... $ 237 $ (192) $ 4,928 $ (81) $ (2,732) $ 2,160
======== ======= ======== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 13
<PAGE>
ChipPAC, Inc.
SUPPLEMENTAL COMBINING CONDENSED STATEMENTS OF CASH FLOWS
Quarter Ended March 31, 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............. $ 237 $ (192) $ 4,928 $ (81) $(2,732) $ 2,160
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities
Depreciation and
amortization......... 450 376 6,374 1,691 -- 8,891
Provision for
inventory and
receivables.......... -- -- (151) -- -- (151)
Foreign currency
(gains) losses....... -- -- (399) -- -- (399)
(Gain) loss on
external sales of
equipment............ -- -- (132) -- -- (132)
Equity income from
investment in
subsidiaries......... 461 (892) (4,224) -- 4,655 --
Changes in assets and
liabilities:.......... -- -- -- -- -- --
Intercompany accounts
receivable........... 2,091 (3,056) 7,863 663 (7,561) --
Accounts receivable... (7) -- 6,470 (2) -- 6,461
Inventories........... -- -- 4,507 (2,160) -- 2,347
Prepaid expenses and
other assets......... (376) 58 (4,108) 88 -- (4,338)
Advances (to) from
affiliates........... -- -- -- -- -- --
Intercompany accounts
payable.............. 858 -- (3,331) (5,088) 7,561 --
Accounts payable...... (382) -- (18,388) 1,781 -- (16,989)
Accrued expenses &
other liabilities.... (559) (5,697) (1,289) 816 (1,923) (8,652)
Other long-term
liabilities.......... -- -- 1,020 -- -- 1,020
------- ------- ------- ------ ------- -------
Net cash provided by
operating
activities........... 2,773 (9,403) (860) (2,292) -- (9,782)
------- ------- ------- ------ ------- -------
Cash flows used in
investing activities:
Acquisition of
property and
equipment............ (1,061) -- (7,383) (2,598) -- (11,042)
Proceeds, external
equipment sales...... -- -- (48) 202 -- 154
Investment in
subsidiaries......... (438) -- (3,000) -- 3,438 --
------- ------- ------- ------ ------- -------
Net cash used in
investing
activities........... (1,499) -- (10,431) (2,396) 3,438 (10,888)
------- ------- ------- ------ ------- -------
Cash flows provided by
financing activities:
Loans & advances with
affiliates........... (350) -- -- -- -- (350)
Proceeds from short-
term loans........... -- 13,500 -- -- -- 13,500
Repayment of short-
term loans........... -- (6,000) -- -- -- (6,000)
Net proceeds from
long-term loans...... -- (502) 502 -- -- --
Repayment, term loans
and capital leases... -- -- -- -- -- --
Intercompany loan
(advances) payments.. -- -- -- -- -- --
Capital redemption at
recap................ -- -- -- -- -- --
Capital contributions
at recap............. -- -- -- -- -- --
Intercompany capital
contributions........ -- 354 84 -- (438) --
Payments made to
extinguish debt
early................ -- -- -- -- -- --
Dividend paid......... -- -- -- -- -- --
Net proceeds from
common stock
issuance............. 599 -- -- -- (599) --
Net proceeds from
mandatorily
redeemable preferred
stock................ -- -- -- -- -- --
Net proceeds from sale
of stock to
management........... -- -- -- -- 599 599
Contributions
(withdrawals) of
capital.............. -- -- -- 3,000 (3,000) --
------- ------- ------- ------ ------- -------
Net cash provided by
financing
activities........... 249 7,352 586 3,000 (3,438) 7,749
------- ------- ------- ------ ------- -------
Effect from changes in
exchange rates......... -- -- 337 5 -- 342
------- ------- ------- ------ ------- -------
Net increase (decrease)
in cash................ 1,523 (2,051) (10,368) (1,683) -- (12,579)
Cash and equivalents at
beginning of period.... 1,007 3,474 22,273 5,363 -- 32,117
------- ------- ------- ------ ------- -------
Cash and equivalents at
end of period.......... $ 2,530 $ 1,423 $11,905 $3,680 $ -- $19,538
======= ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 14
<PAGE>
Item 2 : Management's discussion and analysis of financial condition and results
of operations
All references are to ChipPAC's fiscal quarters ended March 31, 2000("Q1 2000"),
and March 31, 1999("Q1 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 34.8% of our sales in 1999 and during the three months
ended March 31, 2000, respectively.
The following table describes the composition of revenue by product group
and test services, as a percentage of total revenues:
<TABLE>
<CAPTION>
Three
Months
Fiscal Year Ended Ended March
December 31, 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
BGA....................................... 37.7% 61.8% 68.1% 73.0% 59.5%
Leaded.................................... 59.5 35.5 29.1 25.5 34.8
Test...................................... 2.8 2.7 2.8 1.5 5.7
----- ----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Historically, our foreign currency gains and losses have arisen primarily
from the holding of monetary assets and liabilities denominated in U.S. Dollars
by our Korean subsidiary, which we refer to throughout this prospectus as
ChipPAC Korea. ChipPAC Korea's U.S. Dollar-denominated liabilities consist
primarily of long- and short-term debt, and accounts payable, while its U.S.
Dollar monetary assets consist primarily of intercompany receivables from other
ChipPAC entities. From 1995 until December 31, 1998, ChipPAC Korea's U.S.
Dollar-denominated liabilities exceeded its U.S. Dollar monetary assets. From
December 31, 1998 through July 31, 1999 ChipPAC Korea's U.S. Dollar monetary
assets exceeded its U.S. Dollar-denominated liabilities. From August 1, 1999
until December 31, 1999, ChipPAC Korea's U.S. Dollar-denominated liabilities
exceeded its U.S. Dollar monetary assets.
We changed the functional currency of ChipPAC Korea and our Chinese
subsidiaries, which we refer to throughout this prospectus as ChipPAC China,
from the respective local currencies to the U.S. Dollar, effective October 1,
1999. The consolidated effect of this change was to reduce net income for the
year ended December 31, 1999, by $4.8 million and to reduce both total assets
and stockholders' equity as at December 31, 1999, by $9.5 million. This change
had no effect on cash flows from operations or net cash flows for the year
ended December 31, 1999.
Quarterly Results (Unaudited)
The following table describes our unaudited historical quarterly sales and
gross profit in thousands of U.S. Dollars.
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------- ---------------------------------- ------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $53,130 $67,662 $82,052 $86,585 $77,130 $78,020 $82,818 $96,113 $85,548 $80,853 $101,270 $107,859
Gross profit.... 3,228 13,298 19,308 24,357 23,196 12,862 15,911 11,747 13,417 9,684 16,791 18,150
Gross margin.... 6.1% 19.7% 23.5% 28.1% 30.1% 16.5% 19.2% 12.2% 15.7% 12.0% 16.6% 16.8%
<CAPTION>
2000
--------
Q1
--------
<S> <C>
Revenues........ $97,469
Gross profit.... 20,425
Gross margin.... 21.0%
</TABLE>
The above table illustrates the cyclical and seasonal nature of our
financial performance, although we believe that as a provider of packaging and
test services, we are less susceptible to cyclical fluctuations than the
semiconductor industry as a whole. We have historically experienced steadily
rising revenue levels during the course of the year, peaking in the fourth
quarter, due to a peak in demand from the personal computer industry in the
fourth quarter of the year.
Malaysian Business
On May 5, 2000, we entered into a non-binding letter of intent with Intersil
Corporation with respect to the acquisition by us of Intersil Technology Sdn.
Bhd., a wholly-owned subsidiary of Intersil with semiconductor packaging and
test opeations in Kuala Lumpur, Malaysia which we refer to as the Malaysian
business, and intellectual property related to this Malaysian business, in
exchange for approximately $70.0 million in cash and preferred stock. We expect
to enter into a five-year supply agreement with Intersil to provide assembly and
test services on an exclusive basis. The proposed acquisition 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 radio frequency testing. For the Malaysian business'
fiscal year ended June 30, 1999, the Malaysian business had revenues of $110.5
million. Although there can be no assurances that the acquisition of the
Malaysian business will be consummated, we do expect that the proposed
transaction will be completed by June 30, 2000.
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. Pro forma for the proposed acquisition of the Malaysian business, all
of the revenues of the Malaysian business and 21.3% of our consolidated
revenues in 1999 would have been from sales to Intersil.
Results of Operations
The following table describes our results of operations based on the
percentage relationship of operating and other financial data to revenues
during the periods shown:
<TABLE>
<CAPTION>
Year Ended December Three Months Ended
31, March 31,
----------------------- --------------------
1997 1998 1999 1999 2000
----- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average exchange rate
of Won per U.S. Dollar........ 939.0 1,388.9 1,189.3 1,198.2 1,125.5
===== ======= ======= ========= =========
Historical Statement of
Operations Data:
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin................... 20.8 19.1 15.5 15.7 21.0
Selling, general &
administrative................ 5.5 4.5 5.7 5.3 7.3
Research & development......... 1.4 2.3 3.3 3.5 2.7
Write down of impaired assets.. 4.0 -- -- -- --
Management fees................ 1.1 0.2 -- -- 0.1
Change of control expenses..... -- -- 3.2 -- --
----- ------- ------- --------- ---------
Operating income............... 8.8% 12.1% 3.4% 6.9% 11.0%
===== ======= ======= ========= =========
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues: Net revenues in the three months ended March 31, 2000 increased
14.0% to $97.5 million from $85.5 million in the prior year period, primarily
due to the growth from new customers in the communications and multi-
application end markets. This increase was partially offset by a reduction in
revenues from the computing end market. Laminate product assembly revenue,
59.5% of our revenues for the three months ended March 31, 2000, declined 6.9%
over the comparable prior year period from $62.4 million to $58.1 million,
primarily due to a reduction in average selling price. BGA, a component of our
laminate product assembly revenue, continued to be fueled by demand for
wireless communications applications. Leaded product assembly revenue, 34.8% of
our revenues for the three months ended March 31, 2000, increased 55.5% over
the prior year period from $21.8 million to $33.9 million, primarily due to
increased demand for services to the flash memory market at our Chinese
facility. Test revenues comprised 5.7% of our revenues for the three months
ended March 31, 2000 and continued to grow dramatically increasing 323.9% over
the prior year period from $1.3 million to $5.5 million, primarily due to new
customer growth.
End-market demand in communications and multi-applications remained very
strong for the three months ended March 31, 2000, with revenue growth of
approximately 70% over the prior year period in each end-market. Demand in the
computing end market for the three months ended March 31, 2000 declined 23.3%
from the prior year period, primarily due to a reduction in chip-set packaging
requirements from one of our core customers.
Gross Profit: Gross profit increased to $20.4 million in the three months
ended March 31, 2000, resulting in a gross margin of 21.0% compared to gross
profit of $13.4 million and a gross margin of 15.7% in the prior year period.
Effective January 1, 2000 we re-evaluated the estimated useful lives of our
property, plant and equipment. Based on an independent appraisal of 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 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 being $6.7 million lower than
would have been recorded using five year lives. The remaining increase in gross
profit was attributable to improved materials procurement, partially offset by
an increase in average labor costs and strengthening of the Won against the
U.S. Dollar.
Selling, General and Administrative: Selling, general and administrative
expenses increased to $7.1 million for the three months ended March 31, 2000
compared to $4.5 million in the prior year period. As a percentage of revenues
these expenses increased to 7.3% from 5.3%. General and administrative costs
for the three months ended March 31, 2000 increased by $2.1 million compared to
the prior year period, primarily due to additions to 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 expenses decreased to
$2.6 million for the three months ended March 31, 2000 from $3.0 million in the
prior year period, despite a 38% increase in total research and development
headcount. Spending on consumable materials, supplies, and tooling was
significantly curtailed as we have focused our research efforts on highly
collaborative programs with major customers. In addition, research and
development expenses for the three months ended March 31, 1999 included
significant start-up costs incurred in connection with the Santa Clara flip-
chip prototype design and development laboratory.
Net Interest Expense: The total outstanding interest bearing debt, including
capital leases, increased to $307.5 million at March 31, 2000 from $143.5
million at March 31, 1999, principally as a result of the recapitalization.
Related interest expense was $8.8 million for the three months ended March 31,
2000, an increase of 191.5% over the prior year period. Interest income was
$0.2 million for the three months ended March 31, 2000 compared to $1.0 million
for the prior year period.
Foreign Currency Gains (Losses): The foreign currency gain was $0.4 million
in the three months ended March 31, 2000 compared to $0.9 million in the prior
year period. 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, we negotiated with the large
majority of our material and equipment suppliers to denominate our purchase
transactions in U.S. Dollars.
Income Taxes: Income tax expense for the three months ended March 31, 2000
decreased to $0.5 million from $3.1 million in the prior year period, for an
effective tax rate of 20%. Concurrently with the recapitalization, we were
reorganized and now a significant portion of our total worldwide income is
earned in jurisdictions having relatively low tax rates, or where we enjoy tax
holidays or other similar tax benefits. During the three months ended March 31,
1999, we incurred a $4.4 million loss from operations in China, for which no
tax benefit was realized. Our remaining income before taxes of $9.3 million was
taxed at an effective rate of 33.3% during the three months ended March 31,
1999.
Net Income: As of a result of the items described above, net income
increased to $2.2 million for the three months ended March 31, 2000 from
$1.8 million during the prior year period before preferred dividends and
recorded value of the Intel Warrant.
Income Taxes: We recorded a provision for income taxes of $20.6 million
during 1998 compared with a tax benefit of $9.7 million on a pretax loss of
$55.8 million for 1997. Our effective tax rate was 38.9% in 1998. Our effective
tax rate in 1997 was significantly impacted by non-deductible operating losses
in 1997. The effective tax rates during both periods were adversely affected by
losses incurred by our operations in China, for which no tax benefit was
realized.
Net Income (Loss): As a result of the items described above, we had net
income of $32.3 million for 1998 compared to net loss of $46.1 million in 1997.
Liquidity and Capital Resources
We 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 portion 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 proposed
acquisition of Intersil Corporation's Malaysian business, we are seeking an
amendment to increase the existing revolving credit line by $25.0 million and
to add a $55.0 million term C loan to our existing $220.0 million of senior
credit facilities. The proceeds of the term C loan will be used to finance our
proposed acquisition of the Malaysian business and pay 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. 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. Subsequent to year end, there was
an initial borrowing of $13.5 million on line of credit.
Prior to the recapitalization, Hyundai Electronics invested significant
amounts of capital to increase our packaging and test services capacity. The
capital investments made by Hyundai Electronics from 1995 to 1997 totaled
approximately $300 million. We intend to spend approximately $108.2 million in
capital expenditures in 2000. We spent approximately $57.9 million in capital
expenditures in 1999, a decline of 8.8% from the $63.5 million spent in capital
expenditures in 1998, and a decline of 57.6% from the $136.6 million spent in
1997.
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, exceeds $116.5 million, $171.3 million, $198.5 million and $231.8
million, respectively, in each of the first four years following our
recapitalization. No payment was made to Hyundai Electronics in 1999 under
these terms.
As of March 31, 2000, our debt consisted of $307.5 million of borrowings
which were comprised of $7.5 million of revolving loans, $150.0 million in term
loans and $150.0 million of senior subordinated notes. We also have
$85.7 million of preferred stock.
Exclusive of the cash requirements for our proposed 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 and, although there can be no assurances that we will
complete our proposed initial public offering of our Class A common stock, the
net proceeds from such offering 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 March 31, 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.
Page 15
<PAGE>
Derivative Financial Instruments
Since October 1998, we have entered into foreign forward contracts to
mitigate the effect of foreign currency movements on the cost of materials and
equipment. The contracts entered into require the purchase of Korean Won or
Japanese Yen, and the delivery of U.S. Dollars, and generally have maturities
which do not exceed three months. Because the contracts entered into to date do
not qualify as hedges under generally accepted accounting principles, the gains
and losses from these contracts have been recorded as foreign currency gains
and losses. We had a net gain of $2.2 million and no gain or loss arising in
1998 and 1999, respectively, from forward foreign currency contracts.
As of March 31, 2000, we had no foreign currency contracts outstanding.
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
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 $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 will 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.
Page 16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Page 17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
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.*
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),
Page 18
<PAGE>
Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield
Asset Partners, L.P.*
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.. *
Page 19
<PAGE>
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.*
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 Form of Directors Tranche I Stock Option Agreement.*
10.22 Form of Employees Tranche I Stock Option Agreement.*
10.23 Form of Tranche II Stock Option Agreement.*
10.24 Form of Key Employee Purchased Stock Agreement.*
10.25 Form of Key Employee Purchased Stock Agreement (with loan).*
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.*
Page 20
<PAGE>
27.1 Financial Data Schedule.**
-------------------------------
* Incorporated by reference to the similarly numbered exhibit in the
Registrant's Form S-4 (No. 333-91641).
** Incorporated by reference to the similarly numbered exhibit in the
Registrant's Form S-1 (No. 333-39428).
. Confidential treatment has been granted as to certain portions of these
exhibits, which are incorporated by reference.
The Company did not file any reports on Form 8-K during the three months ended
March 31, 2000.
Page 21
<PAGE>
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)
June 16, 2000
