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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 20-F
(Mark One)
[ ] Registration statement pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
OR
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1999
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-27811
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
(Exact name of Registrant as specified in its charter)
Republic of Singapore
(Jurisdiction of incorporation or organization)
60 Woodlands Industrial Park D
Street 2, Singapore 738406
+65-362-2838
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
American Depositary Shares,
each represented by ten Ordinary Shares, par value S$0.26 per share.
(Title of class)
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
Not Applicable
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report. 1,278,977,923 Ordinary Shares
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 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 [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
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Page
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Certain Definitions and Conventions
Presentation of Certain Financial Information
PART I ....................................................................................................... 3
Item 1. Description of Business........................................................................... 3
Item 2. Description of Property........................................................................... 27
Item 3. Legal Proceedings................................................................................. 27
Item 4. Control of Registrant............................................................................. 27
Item 5. Nature of Trading Market.......................................................................... 28
Item 6. Exchange Controls and Other Limitations Affecting Security Holders................................ 29
Item 7. Taxation.......................................................................................... 29
Item 8. Selected Financial Data........................................................................... 33
Item 9. Management's Discussion And Analysis Of Financial Condition And Results Of Operations............. 34
Item 9A. Quantitative and Qualitative Disclosures about Market Risk....................................... 44
Item 10. Directors and Officers of Registrant............................................................. 46
Item 11. Compensation of Directors and Officers........................................................... 51
Item 12. Options to Purchase Securities from Registrant or Subsidiaries................................... 52
Item 13. Interest of Management in Certain Transactions................................................... 53
PART III ..................................................................................................... 55
Item 15. Defaults Upon Senior Securities.................................................................. 55
Item 16. Changes in Securities and Changes in Security for Registered Securities and Use of Proceeds...... 55
PART IV ...................................................................................................... 55
Item 17. Financial Statements............................................................................. 55
Item 18. Financial Statements............................................................................. 55
Item 19. Financial Statements and Exhibits................................................................ 56
SIGNATURES
Financial Statements...................................................................................... F-1
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CERTAIN DEFINITIONS AND CONVENTIONS
Unless otherwise specified, when we refer to "Singapore dollars" and
"S$," we are referring to Singapore dollars, the legal currency of Singapore.
When we refer to "U.S. dollars," "dollars," "$" and "US$," we are referring to
United States dollars, the legal currency of the United States.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
Our financial statements are reported in U.S. dollars and presented in
accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for
the fiscal years ended December 31, 1997, 1998 and 1999.
The financial data contained herein reflects a subsequent change to our
strategic alliance agreement relating to Chartered Silicon Partners, or CSP,
that results in CSP being consolidated since October 1, 1999. The financial data
also gives effect to the issuance by us of 287,500,000 ordinary shares in our
initial public offering in 1999. Our shares are listed on both the Nasdaq
National Market under the symbol "CHRT" and the Singapore Exchange Securities
Trading Limited under the symbol "Chartered" (effective December 1, 1999, the
Stock Exchange of Singapore Limited was renamed the Singapore Exchange
Securities Trading Limited).
For the convenience of the reader, this document contains translations
of certain Singapore dollar amounts into U.S. dollars as at December 31, 1999,
which was S$1.67 = US$1.00. No representation is made that the Singapore dollar
or U.S. dollar amounts shown in this document could have been or could be
converted at such rate or at any other rate.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Chartered is one of the world's leading independent semiconductor
foundries. We provide comprehensive wafer fabrication services and technologies
to semiconductor suppliers and manufacturers of electronic systems. We focus on
providing foundry services to customers that serve high growth, technologically
advanced applications, including communications applications such as cable
modems, data networking and telecommunications equipment. Our top five customers
are Agilent Technologies, Ericsson, Lucent Technologies, Broadcom and Silicon
Integration Systems.
We currently own, or have an interest in, five fabrication facilities,
all of which are located in Singapore. We are currently in the process of
constructing a sixth fabrication facility in Singapore. We have service
operations in 10 cities in seven countries in North America, Europe and Asia. We
were incorporated in Singapore in 1987. As of March 15, 2000 we were 70.1%
owned by Singapore Technologies, or, ST, and its affiliates. ST is one of
Singapore's largest industrial conglomerates and is indirectly wholly-owned by
the Government of Singapore. Please see "Item 13. Interest of Management in
Certain Transactions" for additional information regarding ST.
INDUSTRY BACKGROUND
Semiconductors are critical components used in an increasingly wide
variety of applications, such as computer systems, communications equipment and
systems, automobiles, consumer products and industrial automation and control
systems. As performance has increased and size and cost have decreased, the use
of semiconductors in these applications has grown significantly. According to
the Semiconductor Industry Association, or SIA, increased sales of communication
semiconductors used in applications such as computer modems, networks, cellular
phones and Internet and electronic commerce hardware and appliances will drive
growth in the semiconductor industry during the next several years. The SIA
estimates that worldwide semiconductor device market revenue will grow from
$149.4 billion in 1999 to $233.7 billion in 2002.
Historically, the semiconductor industry was composed primarily of
companies which designed and manufactured semiconductors in their own
fabrication facilities. These companies are known as integrated device
manufacturers, or IDMs. In the mid-1980s, fabless semiconductor companies, which
focused on design and marketing and utilized external manufacturing capacity,
began to emerge. Fabless companies initially relied on the excess capacity
provided by IDMs. As the semiconductor industry continued to grow, fabless
companies and IDMs began to seek reliable and dedicated sources of wafer
fabrication services. This need is being met by the development of independent
companies, known as foundries, that focus primarily on providing wafer
fabrication services to semiconductor suppliers.
THE GROWTH OF THE SEMICONDUCTOR FOUNDRY INDUSTRY
Semiconductor suppliers presently face increasing demands to offer new
products that provide higher performance and greater functionality at lower
prices. To compete successfully, they must also minimize the time it takes to
bring a product to market. High performance semiconductors, which contain
millions of transistors, are extraordinarily challenging to design and even more
challenging to manufacture. Additionally, these high performance semiconductors
can only be produced in fabs that employ the most advanced semiconductor process
technologies.
According to a May 1999 report by GartnerGroup/Dataquest, or Dataquest,
the cost of a state-of-the-art fab had grown from approximately $200 million in
1983 to $1.8 billion in 1999. Today, only large and well-capitalized companies
can support the substantial technology and investment requirements of building
state-of-the-art fabs. In addition, for companies to justify the enormous cost
of a new fab, a high level of capacity utilization is essential to ensure that
fixed costs are fully absorbed. These trends have led to the rapid growth in
demand for advanced semiconductor manufacturing services provided by
semiconductor foundries.
Foundry services are now utilized by nearly every major semiconductor
company in the world. Dataquest estimates that in 1999, IDMs comprised 92% of
the worldwide semiconductor market. Historically, IDMs have used
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foundry services for their incremental manufacturing needs. Given the mounting
pressure on them to improve profit margins and accelerate time-to-market, we
expect IDMs to utilize foundries more extensively in the future for their core
manufacturing needs. For example, IDMs such as Motorola and Toshiba have
recently announced their intentions to outsource an increasing proportion of
their manufacturing needs. In addition, in March 2000 Dataquest estimated that
demand from fabless semiconductor companies for foundry services will grow from
$4.7 billion in 1999 to $10.5 billion in 2004. Manufacturers of electronic
systems, or systems companies, who design semiconductors for use in their own
products are also beginning to utilize foundry services. According to a March
2000 Dataquest estimate, the growth of the foundry market is expected to outpace
growth of the semiconductor industry overall, with foundry services expected to
grow from $7.0 billion in 1999 to $19.1 billion in 2004, representing a compound
annual growth rate of over 22%.
In addition to Dataquest, another research group, International Data
Corporation, or IDC, has recently begun publishing reports on the foundry
market. In IDC's February 2000 report, or the IDC Report, IDC estimated that in
1999, sales of semiconductors produced in foundries comprised 12.3% of the
worldwide semiconductor market. The IDC Report also estimated that continuing
demand from the fabless segment and rapidly growing demand from IDMs and system
companies will drive the foundry market from $6.8 billion in 1999 to $36.3
billion in 2004, a 40% compound annual growth rate.
THE REQUIREMENTS OF A FULL SERVICE FOUNDRY
As demand for foundry services has grown, many semiconductor suppliers
are seeking highly committed partners that meet their manufacturing technology
requirements. These partners must be able to provide the following:
Systems Integration Expertise. In recent years, business and consumer
demand for high performance data transmission, processing and storage has
increased dramatically. Fueling this demand has been growth in the data
communications, telecommunications, wireless and consumer markets. This has
resulted in greater demand for faster, smaller semiconductors that integrate an
increasing number of functions onto a single device at a lower cost. This need
for increased system-level integration requires semiconductor foundries to offer
specialized expertise in a number of areas. These include the integration of
logic, which processes data, and memory, which stores data, into a single device
and mixed-signal technologies which translate data between analog and digital
form.
Leading Edge Process Technologies. Semiconductor foundries must also
provide a range of manufacturing process technologies from standard CMOS to
technologies that enable extremely fast transmission and processing speeds, such
as specialized CMOS for wireless applications and the use of copper interconnect
for very high speed devices. Foundries must also continue to offer smaller
process geometries which allows for the integration of more functions in the
same size device or more devices per wafer.
Long-Term Relationships. As foundries become more integral to the
overall manufacturing strategies of their customers, it has become increasingly
important for foundries to form long-term relationships with them. Semiconductor
suppliers and systems companies need assurance that their foundry suppliers will
continue to provide sufficient advanced manufacturing capacity to keep pace with
their customers' growth, and develop and make available advanced process
technologies capable of producing next generation products.
Security. When using foundry services, semiconductor suppliers, systems
companies and their partners entrust highly valuable and proprietary
intellectual property to the foundries manufacturing their devices. These
customers demand foundry partners who understand the importance of protecting
intellectual property.
THE CHARTERED SOLUTION
Chartered is one of the world's leading independent semiconductor
foundries. We provide comprehensive wafer fabrication services and technologies
to semiconductor suppliers and systems companies and enable seamless
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integration of the semiconductor design and manufacturing processes. By doing
so, we enable our customers to bring high performance, highly-integrated
products to market rapidly and cost effectively.
We enable system-level integration for our customers, many of which
serve high growth markets. For example, to meet the needs of customers serving
the communications markets, we offer a broad array of leading digital and analog
technologies, including standard CMOS, mixed-signal and embedded memory
processes. We are also developing additional leading high performance
technologies such as advanced embedded memory technologies and specialized CMOS
for wireless applications. In order to augment our internal development efforts,
we have entered into strategic alliances and technology alliances with leading
semiconductor companies such as Lucent, Motorola and Ericsson Microelectronics
AB, or Ericsson. Silicon Manufacturing Partners, or SMP, our strategic alliance
with a subsidiary of Lucent, operates Fab 5. Our technology alliance with Lucent
includes an agreement to jointly develop 0.18u process geometries for high
density, low power and cost-effective applications. Our technology alliance with
Motorola includes the licensing and process transfer of Motorola's leading edge
copper interconnect HiPerMOS technology for 0.15u, 0.13u and 0.10u process
geometries. Our technology alliance with Ericsson involves the joint development
of RFCMOS and BiCMOS process technologies. The resulting manufacturing processes
will support wireless communications applications, including the Bluetooth
specification for pervasive wireless networks.
We partner with leading providers of EDA, software tools, design
intellectual property, or IP, and design services to enable our customers to
integrate system-level functionality in their products with accelerated
time-to-market and reduced design and manufacturing risk. Our partners' EDA
tools, design IP and processes are proven and have been validated for
Chartered's manufacturing processes. Our EDA development and IP partners include
Artisan Components, Avant!, Cadence, MIPS and Synopsys. We also partner with
assembly and test providers, principally ST Assembly Test Services Ltd, or
STATS, to offer our customers turnkey services, which incorporate wafer
fabrication, assembly and test. Our turnkey service enables our customers to
interface solely with Chartered for the entire manufacturing process, from wafer
manufacturing to drop shipment of completed devices directly to their customers.
We believe that Chartered is a trusted, customer-oriented service
provider. We have service operations in 10 cities in seven countries in North
America, Europe and Asia. In addition, our proprietary Customer On-Line Access
System provides our customers with easy, secure access through the Internet to
information pertaining to the services we render for them, including the status
of their wafers in our manufacturing process. All of our manufacturing
operations are located in Singapore, a politically and economically stable
nation with laws that protect our customers' proprietary technology.
BUSINESS STRATEGY
Our objective is to be the leading worldwide, full service provider of
wafer foundry services to semiconductor suppliers and systems companies focused
on high growth applications that require a high degree of system-level
integration. Key elements of our strategy include:
FOCUS ON SEMICONDUCTOR DEVICES FOR HIGH GROWTH APPLICATIONS SUCH AS
COMMUNICATIONS
We are focused on providing foundry services to customers that serve
high growth applications and require a high degree of functional integration.
These customers compete based on differentiated products, rapid time-to-market
and device performance, as opposed to suppliers of less complex commodity
semiconductor products, which compete primarily on price and manufacturing
capacity. Many of our customers, including Broadcom, Conexant, Agilent
Technologies, Level One, Motorola and PMC-Sierra, use our services to
manufacture their communications products for applications such as cable modems,
wireless, Gigabit Ethernet, ATM and ADSL.
PROVIDE A COMPLETE RANGE OF SERVICES
We are continuing to expand our range of services so that we can
effectively meet our customers' evolving needs. Our goal is to seamlessly
integrate the design and manufacturing process with a wide array of services,
tools and technologies. The services we currently make available to our
customers, in conjunction with our partners,
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include an increasing number of EDA design tools, design IP and process
technologies that have been validated for our manufacturing process. We also
offer our customers full turnkey services which include wafer fabrication,
assembly and test.
INCREASE FOUNDRY CAPACITY
We intend to expand our production capacity to meet the anticipated
needs of our customers. We plan to increase our total production capacity from
approximately 68,000 eight-inch equivalent wafers per month in December 1999 to
an estimated 171,000 eight-inch equivalent wafers per month (which figures
include 49% of the production capacity of Fab 5 and 100% of the production
capacity of Fab 6) by December 2002. On an aggregate annual basis, we expect our
production capacity to increase from approximately 712,000 eight-inch equivalent
wafers in 1999, to approximately 970,000, 1,400,000 and 1,780,000 eight-inch
equivalent wafers in years 2000, 2001 and 2002, respectively (which figures
include 49% of the production capacity of Fab 5 and 100% of the production
capacity of Fab 6) We believe that increasing our foundry capacity is critical
to ensuring that we can satisfy our customers' volume requirements as they
continue to grow.
OFFER LEADING PROCESS TECHNOLOGY
We intend to continually expand our portfolio of process technologies
through internal development, technology alliances, strategic alliances and
licensing agreements. We believe that offering leading process technologies is
critical to attracting and retaining customers that design highly sophisticated
semiconductors. We are currently developing new digital and mixed-signal
technologies, such as specialized CMOS for wireless communications applications
and additional embedded memory technologies. As of December 31, 1999, our
research and development team was comprised of 208 professionals, 57 of whom
have Ph.D.s. We are jointly developing 0.18u copper and aluminum processes with
Lucent for high density, low power and cost-effective applications. Our alliance
with Motorola includes the technology transfer and licensing of Motorola's
leading edge copper interconnect HiPerMOS technology for 0.15u 0.13u and 0.10u
processes. Our technology alliance with Ericsson involves the joint development
of RFCMOS and BiCMOS process technologies.
ENHANCE AND EXPAND ALLIANCES
We intend to leverage and expand our existing alliances and to
establish new alliances with leading companies that offer complementary
technologies, products and services. We believe that our alliances with
semiconductor technology leaders and providers of design tools, intellectual
property and assembly and test services have given us access to select leading
edge system technologies. These alliances have also enhanced our development
efforts and increased our fab utilization rates. We also believe that by
establishing these alliances and working closely with IDMs such as Lucent,
Motorola and Ericsson, who are also customers, we are better positioned to win
future business with them.
MANUFACTURING FACILITIES
We currently own or have an interest in five fabs, all of which are
located in Singapore. We are currently in the process of constructing a sixth
fabrication facility in Singapore. Fabs 1, 2 and 3 are wholly-owned and operated
by our company. Fab 5 is operated by SMP which we jointly own with a subsidiary
of Lucent. Fab 6, which we jointly own with EDB Investments and a subsidiary of
Agilent Technologies, is currently being equipped and will be operated by CSP.
In February 2000, we commenced construction of a new fab, Fab 7. First wafer
output from Fab 7 is expected to occur in mid 2001. We do not have a Fab 4.
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<TABLE>
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FAB 1 FAB 2 FAB 3 FAB 5 FAB 6 FAB 7
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PRODUCTION COMMENCED.. 1989 1995 1997 1999 Expected Fall Expected 2001
2000
CURRENT OUTPUT(1)..... 23,000 40,000 wafers 12,000 wafers 6,000 wafers -- --
wafers(2) per per month per month per month
month
ESTIMATED FULL
CAPACITY(3)......... 26,000 47,000 wafers 26,000 wafers 32,000 wafers 35,000 wafers 60,000 wafers
wafers(2) per per month; per month; per month; per month; per month;
month; expected 2000 expected 2000 expected 2001 expected 2001 expected 2003
expected 2000
WAFER SIZE............ Six-inch Eight-inch Eight-inch Eight-inch Eight-inch Eight-inch
(150mm) (200mm) (200mm) (200mm) (200mm) (200mm)
PROCESS TECHNOLOGIES.. 1.2 to 0.5u 0.6 to 0.3u(4) 0.35 to 0.25 to 0.25 to 0.15u and
0.22u(4) 0.15u(4) 0.13u(4) smaller(4)
MANUFACTURING......... Digital; Digital; Digital; SRAM; 0.25u High High
TECHNOLOGIES Analog; ROM; Analog; SRAM; ROM(5) Digital; performance, performance,
EEPROM(5) Flash Memory(5) BiCMOS; high-density high-density
Analog; CMOS; high CMOS; high
eSRAM(5) density SRAM(5) density SRAM(5)
CLEAN ROOM............ 35,000 sq. 70,000 sq. ft. 46,000 sq. ft. 46,000 sq. ft. 85,000 sq. ft. 170,000 sq. ft
ft. Class Class-1 SMIF(6) Class-1 SMIF(6) Class-1 SMIF(6) Class-1 SMIF(6) Class-1
10(6) SMIF(6)
</TABLE>
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(1) Current output is as of December 31, 1999.
(2) Equivalent to 13,000 eight-inch wafers per month for current output and
15,000 eight-inch wafers per month for estimated full capacity.
(3) Estimated capacity is based on our current and anticipated process
technology mix, which may vary and includes, with respect to Fab 5 and Fab
6, capacity to which our strategic partners are entitled.
(4) These numbers are preliminary and their successful implementation depend
on various factors, including our ability to achieve advances in process
technology or to obtain access to advanced process technology developed by
others. These fabs can be retrofitted to achieve smaller geometries than
those shown above.
(5) ROMs are read-only memory devices. EEPROMs are electronically erasable
programmable read-only devices. SRAMs are static random access memory
devices. eSRAMs are embedded static random access memory devices. CMOS
means complementary metal oxide silicon. BiCMOS means bipolar
complementary metal oxide silicon.
(6) Class 10 means a standard of air purity under which the amount of dust is
limited to fewer than ten particles of dust per cubic foot of air. Class 1
means a standard of air purity under which the amount of dust is limited
to fewer than one particle of dust per cubic foot of air. SMIF means
standard mechanical interface.
All of our fabs in production currently operate 24 hours per day, seven
days per week. Maintenance at each of the fabs is performed concurrently with
production.
The following table sets forth information regarding the total wafer
output by each of our fabs during the past five years:
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TOTAL OUTPUT(1)
(IN THOUSANDS)
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FAB 1995 1996 1997 1998 1999
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Fab 1........................... 159 140 103 142 181
Fab 2(2)........................ 27 114 220 265 419
Fab 3(2)........................ -- -- 21 33 96
Fab 5(2)........................ -- -- -- -- 16
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(1) Total output of revenue generating eight-inch equivalents for the fiscal
year end.
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(2) Fab 2 commenced production in 1995, Fab 3 commenced production in 1997 and
Fab 5 commenced production in 1999.
QUALITY ASSURANCE PROGRAMS
We have implemented systems to ensure high quality service to customers
and manufacturing reliability at our facilities in Singapore. Our in-house
laboratory is equipped with advanced analytical tools and provides the necessary
equipment and resources for our research and development and engineering staff
to continuously enhance product quality and our manufacturing processes. Our
quality assurance staff is comprised of engineers, technicians and other
employees who monitor and control our manufacturing processes.
Our production facilities in Singapore have been certified by the
International Standards Organization, or ISO, to meet ISO 9002 standards. ISO
9002 standards set forth what is required to ensure the production of quality
products and services. There are a total of 20 requirements, including
management responsibility, quality systems, and process control. The ISO
certification process involves periodically subjecting production processes and
quality management systems to stringent third-party review and verification. Our
customers often look to an ISO certification as a threshold indication of our
quality control standards.
STRATEGIC ALLIANCES
CHARTERED SILICON PARTNERS
In March 1997, we entered into the CSP strategic alliance with
Hewlett-Packard Europe B.V., or HP Europe, a subsidiary of Hewlett-Packard, and
EDB Investments Pte Ltd relating to the joint ownership of Fab 6. In 1999,
Hewlett-Packard spun-off certain of its businesses, including its semiconductor
business, to a new subsidiary, called Agilent Technologies, Inc. In connection
with the spin-off, Hewlett-Packard assigned its rights and obligations under the
agreements it had entered into with us, including the agreements of its
subsidiaries (including HP Europe), to Agilent Technologies or its subsidiary,
Agilent Technologies Europe B.V., or Agilent Technologies Europe. In particular,
HP Europe assigned the strategic alliance agreement to Agilent Technologies
Europe. We, Agilent Technologies Europe and EDB Investments have a 51%, 30% and
19% equity interest in CSP, respectively. We are obligated to make a total of
S$367.2 million ($215.4 million) in equity contributions to CSP through the end
of 2000. We and Agilent Technologies Europe also each have an option to purchase
additional shares in CSP from EDB Investments at a formula-driven price.
Pursuant to an agreement with CSP, Agilent Technologies is required to purchase
a minimum number of wafers per year and is entitled to purchase a maximum number
of wafers per year from CSP. If Agilent Technologies Europe's ownership interest
in CSP changes, the number of wafers Agilent Technologies is required to
purchase, as well as the number of wafers it is entitled to purchase, changes
accordingly.
CSP's Board of Directors is comprised of seven directors. As long as we
own more than 50% of CSP, we can elect four of the directors. Agilent
Technologies Europe can elect two directors as long as it owns at least 15% of
CSP and EDB Investments can elect one director as long as it holds any ownership
interest in CSP.
Pursuant to our agreement, the CSP strategic alliance continues
indefinitely so long as there are two or more parties to the alliance. Neither
we nor Agilent Technologies Europe may transfer our interests in CSP until 2001.
Before any transfer can occur, the non-transferring party may exercise a right
of first refusal with respect to the transferred interests. Upon a serious,
uncured default, the non-defaulting party has the right to purchase all of the
defaulting party's interest for fair value, as defined in the agreement. Upon a
change of control of a party, the other parties have the right to purchase, at
fair value, all of such party's interest.
CSP owns and will operate Fab 6. Pursuant to a service support
agreement, we provide CSP with management and corporate support services
including accounting, financial, sales and marketing. Under this agreement, CSP
is allocated a portion of our costs in providing such services. Although such
agreement may be terminated by either party in certain instances, we expect the
services support agreement to remain in place during the term of this strategic
alliance.
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Pursuant to a technology transfer and license agreement, both we and
Agilent Technologies contribute the process technologies needed by CSP. Such
process technologies are licensed to CSP for its own use and CSP cannot
sublicense them to others. In addition, we and Agilent Technologies
cross-license the rights to use such technologies to one another. These
cross-licenses allow our respective companies and subsidiaries to use the
process technologies and related intellectual property licensed to CSP in our
respective manufacturing facilities for our general businesses even if such uses
are not related to CSP.
U.S. GAAP generally requires consolidation of all majority owned
(greater than 50%) subsidiaries. However, as a result of certain provisions that
were contained in the strategic alliance agreement, the minority shareholders of
CSP were deemed to have substantive participative rights which overcame the
presumption that we should consolidate CSP. Therefore, CSP had been historically
accounted for under the equity method in our financial statements. As a result
of the amendment described below, we have treated CSP as a consolidated
subsidiary from October 1, 1999 forward.
Effective October 1, 1999, we, Agilent Technologies Europe and EDB
Investments amended our strategic alliance agreement. The amendment eliminated
some of CSP's minority shareholders' approval rights over CSP's annual business
plan. It also increased the thresholds for asset dispositions, borrowings and
capital expenditures that would require the approval of CSP's minority
shareholders. We believe that these changes eliminate CSP's minority
shareholders' substantive participating rights in CSP.
SILICON MANUFACTURING PARTNERS
In December 1997, we entered into the SMP strategic alliance with
Lucent Technologies Microelectronics Pte Ltd, or Lucent Microelectronics,
relating to the joint ownership of Fab 5. Lucent Microelectronics has a 51%
equity interest in SMP and we have a 49% equity interest. We are obligated to
make S$208.3 million ($122.2 million) in equity contributions to SMP through the
end of 2000. SMP's Board of Directors is comprised of five directors, three of
which are elected by Lucent Microelectronics and two of which are elected by us.
We also nominate the chairman of the Board of Directors and the general manager,
while Lucent Microelectronics names the financial controller.
SMP operates Fab 5, which is adjacent to our Fab 3 building. SMP owns
the equipment used in Fab 5 and leases the space in Fab 3 from us. Please see
"Item 13. Interest of Management in Certain Transactions" for a description of
this lease. Pursuant to our agreement, we are each required to purchase a
specified percentage of Fab 5's output. However, if one party does not purchase
its share of wafers, the other party is entitled to utilize that unused
capacity. In the event such other party does not utilize the unused capacity,
the party who does not purchase its entitlement will be required to compensate
SMP for any costs it incurs in connection with such unused capacity.
Pursuant to our agreement, the SMP strategic alliance continues
indefinitely until it is terminated. Neither party may terminate the alliance
until 2006, at which time a party must give two years advance notice in order to
terminate. In addition, the parties may only transfer their interests to their
respective affiliates. Upon our dissolution, winding up or liquidation, Lucent
Microelectronics can purchase all of our interests in SMP for fair value, as
defined in the agreement. Upon our serious, uncured breach, Lucent
Microelectronics has the right to sell all of its interest in SMP to us for the
higher of fair value and the value of its interest based on SMP's net book
value, as defined in the agreement. Upon Lucent Microelectronics' dissolution,
winding up or liquidation, we have the right to purchase all of its interest in
SMP for fair value. Upon Lucent Microelectronics' serious, uncured breach, we
have the right to purchase all of its interest in SMP for 90% of fair value.
Upon a change of control of a party, the other party has the right to purchase,
at fair value, all of such party's interest in SMP.
Pursuant to a services support agreement, we provide SMP management and
corporate support services such as accounting, financial and human resources.
Under this agreement, SMP is allocated a portion of our costs in providing such
services. Although such agreement may be terminated by either party in certain
instances, we expect the services agreement to remain in place during the term
of this strategic alliance.
Pursuant to a technology transfer and license agreement, both we and
Lucent Microelectronics contribute the process technologies needed by SMP. Such
process technologies are licensed to SMP for its own use and SMP cannot
sublicense them to others. We and Lucent Microelectronics categorize our
licensed technologies as restricted and unrestricted technologies. We and Lucent
Microelectronics cross-license the unrestricted technologies to one
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another. These cross-licenses allow our respective companies and subsidiaries to
use certain process technologies and related intellectual property licensed to
SMP in our respective manufacturing facilities for our general businesses even
if such uses are not related to SMP. We do not cross-license the restricted
technologies with one another, which means that only SMP can use such restricted
process technologies and intellectual property.
WAFER FABRICATION SERVICES
OVERVIEW
Wafer fabrication is an intricate process that requires many distinct
steps. Each step in the manufacturing process must be completed with extreme
accuracy in order for finished semiconductor devices to work as intended. The
processes required to take raw wafers and turn them into finished semiconductor
devices are accomplished through a series of steps that can be summarized as
follows:
Circuit Design. Producing a semiconductor begins with designing the
layout of the semiconductor's components and designating the interconnections
between each component on the semiconductor. The result is a pattern of
components and connections that defines the function of the semiconductor. In
highly complex circuits, there may be more than 35 layers of electronic
patterns.
We do not design semiconductors for our customers. If requested, we
assist our customers in the design process by providing them with access to our
partners' EDA tools, design IP and design services which are proven and have
been qualified for our manufacturing processes. Our design engineers assist our
customers during the development process to ensure that their designs can be
successfully manufactured in volume.
Mask Making. The design for each layer of a semiconductor is imprinted
on a photographic negative, called a semiconductor mask. The mask is the
blueprint for each specific layer of the semiconductor. We do not manufacture
masks for our customers.
Wafer Fabrication. Transistors and other circuit elements comprising a
semiconductor are formed by repeating a series of processes in which a
photosensitive material is deposited on the wafer and exposed to light through
the mask. The unwanted material is then etched away, leaving only the desired
circuit pattern on the wafer. This process is repeated for each mask layer. The
final step in the wafer fabrication process is to visually and electronically
inspect each individual semiconductor, known as wafer probe, in order to
identify the operable semiconductors for assembly.
We provide all aspects of the wafer fabrication process except for
wafer probe, which we outsource principally to STATS. All steps in the wafer
manufacturing process are controlled by our computer-integrated manufacturing,
or CIM, system. The CIM system allows us to monitor equipment performance, wafer
processing steps, and the wafers themselves throughout the fabrication process.
Assembly and Test. After fabrication, the wafers are transferred to
assembly and test facilities. Assembly protects the semiconductor, facilitates
its integration into electronic systems and enables the dissipation of heat.
Following assembly, each semiconductor's functionality, voltage, current and
timing are tested. After testing, the completed semiconductor is either shipped
to the semiconductor supplier or directly to its final destination. We outsource
assembly and test services to independent assembly and test providers, primarily
STATS.
MANUFACTURING PROCESSES
We manufacture semiconductors using CMOS, bipolar and BiCMOS processes.
CMOS is the most widely used process technology because it requires lower power
than other technologies and allows dense placement of components onto a single
semiconductor. The low power consumption and high density characteristics of the
CMOS process allow the continued development of high performance semiconductors
that are smaller and faster. Bipolar technology enables very high speed but is
used only in analog semiconductors. BiCMOS process technology combines bipolar's
attribute of high speed with the high density and low power consumption of CMOS.
We use CMOS or a combination of CMOS and BiCMOS for the fabrication of logic,
mixed-signal and memory semiconductors.
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We manufacture a variety of semiconductors for a full range of end
market applications including communications, computing, and consumer
electronics. Examples of the types of semiconductors we manufacture are as
follows:
Logic. All digital electronic systems, such as computing devices,
are controlled by logic semiconductors, which process data.
Microcontrollers, microprocessors, digital signal processors, and
graphics chipsets are all logic devices. We manufacture logic
semiconductors primarily for the computing, consumer and communications
markets.
Mixed-Signal. Mixed-signal semiconductors combine analog and
digital devices on a single semiconductor to process both analog
signals and digital data. Mixed-signal semiconductors are used in
applications including wireless equipment, fiber optic communications
and data networking. We make mixed-signal semiconductors using both
CMOS and BiCMOS processes.
Memory. Memory devices store data and can be manufactured as
stand-alone devices or embedded in system semiconductors, which combine
a number of functions, such as logic and memory components. We
manufacture stand-alone memory devices including EPROM, EEPROM, ROM,
SRAM and Flash memory and embedded memory including eSRAM, eEEPROM, and
eFLASH memories. Memory is used in a range of products from computers
and mobile phones to "smart" chip cards.
TURNKEY SERVICES
Although we are an independent foundry specializing in wafer
fabrication, we offer our customers the option to purchase from us finished
semiconductor products that have been assembled and tested. We principally
subcontract assembly and testing of the fabricated semiconductors to STATS.
Testing includes wafer probe and final testing of assembled semiconductors.
After final testing, the semiconductors are returned to the customer or
drop-shipped according to our customers' specifications.
CUSTOMERS AND MARKETS
We manufactured semiconductors for over 125 different customers in each
of 1998 and in 1999. Our top five customers accounted for approximately 43.3%
and 38.2% of our revenue in 1998 and 1999, respectively. In 1998, no customer
individually accounted for more than 10% of our revenue. In 1999, only Agilent
Technologies accounted for more than 10% of our revenue.
The following table sets forth our top five customers for 1999 in order
of revenue:
<TABLE>
<CAPTION>
CUSTOMER REPRESENTATIVE PRODUCTS OR APPLICATIONS
- -------- ---------------------------------------
<S> <C>
Agilent Technologies............... Computer peripherals, networking and wireless communication
Ericsson........................... Mobile phone network equipment, mobile phones and mobile internet
Lucent............................. Wireless communication and networking
Broadcom........................... Cable modem/set-top box and ethernet transceivers
Silicon Integrated Systems......... Core logic, multimedia and data communications
</TABLE>
We categorize a sale geographically based on the country in which the
customer is headquartered. The following table sets forth the geographical
distribution, by percentage, of our net sales for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------
REGION 1997 1998 1999
- ------ ---- ---- ----
<S> <C> <C> <C>
United States .............................. 52% 63% 69%
Europe ..................................... 1 2 13
Asia/Pacific ............................... 47 34 15
Japan ...................................... 0 1 3
---- ---- ----
Total ................................. 100% 100% 100%
==== ==== ====
</TABLE>
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We expect that the majority of our sales will continue to be made to
companies headquartered in the United States or to overseas affiliates of United
States companies. All of our sales are direct sales to our customers with
delivery in Singapore. We provide customer support in the United States through
a wholly-owned subsidiary located in Milpitas, California which has additional
offices in Irvine, California; Boston, Massachusetts and Austin, Texas. We also
maintain customer support offices in Hsin-Chu, Taiwan; Tokyo, Japan; Paris,
France; London, England; and Munich, Germany.
Our customers generally do not place their purchase orders far in
advance. As a result, we do not typically operate with any significant backlog.
We currently allocate a portion of our wafer manufacturing capacity to
certain customers under several types of agreements. Some of these customers
have invested equity in us, placed deposits to secure wafer capacity, or prepaid
for our services. We are also obligated to make available capacity to customers
under certain other agreements.
CUSTOMER SERVICE
We focus on providing a high level of customer service in order to
attract customers and maintain their ongoing loyalty. Our culture emphasizes
responsiveness to customer needs, flexibility and delivery accuracy. Our
customer-oriented approach is especially evident in two prime functional areas
of customer interaction, customer design development and manufacturing services.
We emphasize very close interaction with customers throughout the
design development and prototyping process. We provide for an account manager to
be assigned early in the design development process who coordinates an account
team composed of local marketing, EDA, silicon engineering, third-party partner
and customer service/logistical support. The local account team is supported by
additional marketing and customer engineering staff in Singapore.
After the design moves into manufacturing production, ongoing customer
support is provided through all phases of the manufacturing process. The local
account manager teams with a dedicated customer service representative, along
with marketing and customer engineering support teams at the factory.
In 1996, we introduced our Customer On-Line Access System, through
which our customers are provided secure access via the Internet to critical
manufacturing data as their products move through the fab. We are currently
developing our eFab(TM) system which will provide our customers information
access, data exchange and e-commerce functionality over the Internet. eFab(TM)
will implement a solution based on industry standards that will enable effective
and timely communication of manufacturing data between our information systems
and those of our customers and suppliers.
RESEARCH AND DEVELOPMENT
The semiconductor industry is characterized by rapid technological
changes. We believe effective research and development is essential to our
success. Our research and development activities are focused on developing new
CMOS manufacturing process technologies. In 1997 and 1998, we invested
approximately $26.6 million and $43.4 million, respectively, in research and
development. Those investments represented approximately 7.0% and 10.3% of our
net revenue for the respective period. In 1999, we invested approximately $58.9
million in research and development which represented approximately 8.5% of our
net revenue for the year. Our investment in research and development allowed us
to continue developing new and advanced processes, with line width geometries
down to 0.15u, as well as to fund research activities below 0.15u. These
strategic research and development programs ensure that our baseline
manufacturing process accommodates new technology modules that are the heart of
highly differentiated system-level applications. As of December 31, 1999, we
employed 208 professionals in our research and development department, 57 of
whom have Ph.Ds.
We also enter into technology license and cross-license agreements. Our
technology alliances with leading semiconductor suppliers have contributed to
our development of new process technologies. For example, we have joint
development and technology sharing agreements with Lucent and Agilent
Technologies and a technology
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transfer and licensing agreement with Motorola. We intend to expand our existing
relationships and establish new relationships to further develop new
technologies.
We are currently involved in several process technology development
projects. We are working to develop mixed-signal, core logic and embedded memory
(SRAM and Flash). We are jointly developing 0.18u copper and aluminum processes
with Lucent for high density, low power and cost-effective applications. Our
alliance with Motorola includes the technology transfer and licensing of
Motorola's leading edge copper interconnect HiPerMOS technology for 0.15u, 0.13u
and 0.10u processes. We have launched a joint development program with Ericsson
for the development of RFCMOS and BiCMOS process technologies.
We have received research grants totaling $66.7 million from various
agencies of the Government of Singapore as of December 31, 1999. These grants
provide funding for a portion of our research and development related capital
expenditures and for the training and staffing costs associated with some of our
process technology development programs. Funds from these grants are disbursed
upon the achievement of program milestones. As of December 31, 1999, $16.3
million of the grants currently in effect had been disbursed to us. The grants
are disbursed based on the amount of expenditures incurred. There are no
conditions attached to the grants other than completion of the project to which
the grant relates and the certification of the costs incurred.
EQUIPMENT AND MATERIALS
We depend on a limited number of manufacturers that make and sell the
complex equipment that we use in our manufacturing processes. The principal
pieces of equipment we use to manufacture semiconductors are steppers, tracks,
etchers, furnaces, wet stations and implanters and sputtering, chemical vapor
deposition and chemical mechanical planarization equipment. In periods of high
market demand such as the industry is currently facing, the lead times from
order to delivery of such equipment can be as long as 12 to 18 months. We seek
to manage this process through early reservation of appropriate delivery slots
and constant communication with our suppliers.
Our manufacturing processes use highly specialized materials, including
silicon wafers, chemicals, gases, targets and masks. We depend on our suppliers
of these materials and seek to have more than one supplier for our material
requirements. To maintain competitive manufacturing operations, we must obtain
from our suppliers, in a timely manner, sufficient quantities of quality
materials at acceptable prices. We source most of our materials, including
critical items such as silicon wafers, from a limited group of suppliers. We
have a multi-year contract with MEMC Electronics Materials Inc. to purchase raw
wafers, pursuant to which we have made deposits to secure future supply. We
purchase all of our materials on a blanket purchase order basis and are
currently in negotiations with certain key suppliers to develop long-term
contracts. For those materials that are wholly procured from one source, we
identify and qualify alternative sources of supply. We have agreements with key
material suppliers under which they hold inventory on consignment for us. We are
not under any obligation to purchase inventory that is held on consignment until
we actually use it. We typically work with our suppliers to forecast our raw
material requirements one to three years in advance, although pricing
commitments are made on a semi-annual basis.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to obtain patents, licenses
and other intellectual property rights covering our production processes. To
that end, we have acquired certain patents and patent licenses and intend to
continue to seek patents on our production processes. We have not federally
registered any of our trademarks or copyrights, but are in the process of doing
so. As of December 31, 1999, we had filed an aggregate of 587 patent
applications worldwide, 353 of which had been filed in the United States. Of the
353 applications filed in the United States, 141 had been issued as of December
31, 1999 and 22 had been allowed but not issued. Those 22 patents will be issued
if and when we pay the applicable issuance fee. Our issued patents have
expiration dates ranging from 2011 to 2017. All of the allowed and pending
patents will expire after 2018. We have also entered into various patent
licenses and cross-licenses with major semiconductor companies. We may choose to
renew our present licenses or to obtain additional technology licenses in the
future. There can be no assurance that any such licenses could be obtained on
commercially reasonable terms.
Our ability to compete also depends on our ability to operate without infringing
the proprietary rights of others. The semiconductor industry is generally
characterized by frequent litigation regarding patent and other intellectual
property rights. We market services in several countries in Asia, such as Taiwan
and China, which may
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not protect our intellectual property rights to the same extent as the United
States. We have from time to time received communications from third parties
asserting patents that cover certain of our technologies and alleging
infringement of certain intellectual property rights of others. We expect that
we will receive similar communications in the future. Irrespective of the
validity or the successful assertion of such claims, we could incur significant
costs and devote significant management resources to the defense of these claims
which could seriously harm our company. There is no such material litigation
currently pending against us.
COMPETITION
The worldwide semiconductor foundry industry is highly competitive. Our
principal competitors are Taiwan Semiconductor Manufacturing Corporation, or
TSMC, United Microelectronics Corporation, or UMC, and International Business
Machines, or IBM. Our competitors may have greater access to capital and
substantially greater production, research and development, marketing and other
resources than we do. As a result, these companies may be able to compete more
aggressively over a longer period of time than we can. In addition, several new
dedicated foundries have commenced operations and compete directly with us. Any
significant increase in competition may erode our profit margins and weaken our
earnings.
A number of semiconductor manufacturers, including our primary
competitors, have recently announced plans to increase their manufacturing
capacity and, as a result, we expect that there will be a significant increase
in worldwide semiconductor capacity during the next five years. If growth in
demand for this capacity fails to match the growth in supply or occurs more
slowly than anticipated, there may be more intense competition and pressure on
the pricing of our services may result.
The principal elements of competition in the wafer foundry market
include technical competence, time-to-market, research and development, quality,
available capacity, device yields, customer service and price.
ENVIRONMENTAL MATTERS AND COMPLIANCE
We have implemented an extensive environmental management system. This
system is third party certified through internationally recognized ISO 14001.
This system enables our operations to identify applicable environmental
regulations and assist in evaluating compliance status. Programs are established
at manufacturing locations to ensure that all accidental spills and discharges
are properly addressed.
We are subject to a variety of laws and governmental regulations in
Singapore relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production process. While we believe that we are
currently in compliance in all material respects with such laws and regulations
and have management systems in place to continue to be in compliance, if we fail
to use, discharge or dispose of hazardous materials appropriately, we could
subject our company to substantial liability or could be required to suspend or
adversely modify our manufacturing operations. In addition, we could be liable
for remedial measures if our properties were found to be contaminated even if we
were not responsible for such contamination.
EMPLOYEES
As of December 31, 1999, we had 3,388 employees, with 1,135 in process
and equipment engineering, 1,176 in manufacturing operations, 521 in
manufacturing support, 208 in research and development and 348 in
administration, marketing and finance. We consider our relationship with our
employees to be good. In addition, certain corporate support services, such as
treasury, cash management, internal audit, training, executive resources and
corporate secretarial services, are carried out by employees of ST on our
behalf. Please see "Item 13. Interest of Management in Certain Transactions" for
a discussion of the services provided to us by ST.
We provide our employees with customary compensation and benefit plans,
including employee bonus plans and an employee share option plan. Please see
"Item 12. Options to Purchase Securities from Registrant or Subsidiaries" for a
discussion of our share option plan.
Our employees are not covered by any collective bargaining agreements.
We have not experienced any strikes or work stoppages by our employees.
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INSURANCE
We maintain industrial special risk insurance for our facilities,
equipment and inventories. The insurance for fabs (including our strategic
alliance fabs) and their equipment covers physical damage and consequential
losses from natural disaster, business interruption and certain other risks up
to their respective policy limits except for exclusions as defined in the
policy. We also maintain public liability insurance for losses to others arising
from our business operations and carry insurance for business interruption
resulting from such events. Our insurance policies covering public liability and
actions by employees are held by ST through its group insurance policy. We pay
our pro rata share of the costs of such policies based on the industrial all
risk amount insured and the number of its employees, respectively. Some of our
insurance coverage is provided through affiliates of ST. Some of our insurance
coverage for Fab 5 is under Lucent's global group insurance program.
While we believe that our insurance coverage is adequate, significant damage to
any of our production facilities, whether as a result of fire or other causes,
could seriously harm our company. We do not insure against the loss of key
personnel.
RISK FACTORS
Chartered wishes to caution readers that the following important factors,
and those important factors described in other reports and documents submitted
to, or filed with, the Securities and Exchange Commission, among other factors,
could affect the Company's results. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer and actual results could differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
RISKS RELATED TO OUR FINANCIAL CONDITION
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS AND THIS MAY CONTINUE.
Since our inception in 1987, we have incurred significant operating
losses and negative cash flows. This was true even in years in which our
revenues increased. For example, in 1998, revenue increased 11.3% over 1997 but
operating losses were 103.9% higher. The increase in revenue in 1998 was driven
by higher shipment volumes but was offset by a 12.0% decline from 1997 in our
average selling price of silicon wafers, higher production costs on increased
volume and under utilization of capacity at our fabrication facilities.
As of December 31, 1999, we had a retained deficit of approximately
$277.7 million. We cannot assure you that our operating losses or negative cash
flows will not continue or increase in the future or that we will become
profitable. Please see "Item 8. Selected Financial Data" and "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for information regarding our financial condition.
WE NEED TO CONTINUOUSLY IMPROVE OUR DEVICE YIELDS, MAINTAIN HIGH CAPACITY
UTILIZATION AND OPTIMIZE THE TECHNOLOGY MIX OF OUR SILICON WAFER PRODUCTION TO
ACHIEVE OUR PROFIT TARGETS.
The key factors that affect our profit margin are our ability to:
- continuously improve our device yields;
- maintain high capacity utilization; and
- optimize the technology mix of our silicon wafer production.
The term "device yields" means the actual number of usable
semiconductor devices on a wafer in relation to the total number of devices on
the wafer. Our device yields directly affect our ability to attract and retain
customers, as well as the price of our services.
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The term "capacity utilization" means the actual number of silicon
wafers we are processing at a fabrication facility, or fab, in relation to the
total number of wafers we have the capacity to process. Our capacity utilization
affects our operating results because a large percentage of our operating costs
are fixed. For example, in 1996, 1997 and 1998, a worldwide overcapacity of
semiconductor wafer supply resulted in lower utilization rates at our fabs. This
had a negative effect on our company during such period. Other factors
potentially affecting capacity utilization rates are the complexity and mix of
the wafers produced, overall industry conditions, operating efficiencies, the
level of customer orders, mechanical failure, disruption of operations due to
expansion of operations or relocation of equipment and fire or natural disaster.
Because the price of wafers varies significantly, the mix of wafers
produced affects revenue and profitability. The value of a wafer is determined
by the complexity of the device on the wafer. Production of devices with higher
level functionality and greater system-level integration requires more
manufacturing steps than the production of less complex devices and commands
higher wafer prices.
If we are unable to continuously improve our device yields, maintain
high capacity utilization or optimize the technology mix of our wafer
production, we may not be able to achieve our profit targets in which case the
market price of our ADSs or ordinary shares could fall.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER-TO-QUARTER WHICH MAKES IT DIFFICULT
TO PREDICT OUR FUTURE PERFORMANCE.
Our revenues, expenses and operating results have varied significantly
in the past and may fluctuate significantly from quarter-to-quarter in the
future due to a number of factors, many of which are outside our control. These
factors include, among others:
- the cyclical nature of both the semiconductor industry and the markets
served by our customers;
- shifts by integrated device manufacturers, or IDMs, between internal and
outsourced production;
- our customers' adjustments in their inventory;
- the loss of a key customer or the postponement of an order from a key
customer;
- the rescheduling and cancellation of large orders;
- the timing and volume of orders relative to our available production
capacity;
- our ability to obtain raw materials and equipment on a timely and
economic basis;
- environmental events or industrial accidents such as fires;
- currency and interest rate fluctuations that may not be adequately
hedged; and
- technological changes.
Due to the factors noted above and other risks discussed in this
section, many of which are beyond our control, you should not rely on
quarter-to-quarter comparisons to predict our future performance. Unfavorable
changes in any of the above factors may seriously harm our company. In addition,
it is possible that in some future periods our operating results may be below
the expectations of public market analysts and investors. In this event, the
price of our ADSs or ordinary shares may underperform or fall.
WE EXPECT TO INCUR SUBSTANTIAL CAPITAL EXPENDITURES IN CONNECTION WITH OUR
GROWTH PLANS AND MAY REQUIRE ADDITIONAL FINANCING THAT MAY NOT BE AVAILABLE.
Our business and the nature of our industry require us to make
substantial capital expenditures leading to a high level of fixed costs. We
expect to incur significant capital expenditures in connection with our growth
plans. For example, in February 2000, we commenced construction of Fab 7 and
expect to require additional financing to
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complete its construction and equipping. We are also currently expanding and
adding additional equipment to increase the capacity of our fabs, two of which
are jointly-owned with third parties, and expect to require additional financing
to complete such equipping. These capital expenditures will be made in advance
of sales. Given the fixed cost nature of our business, we may incur operating
losses if our revenue does not adequately offset the level of our capital
expenditures, as occurred in 1997, 1998 and the first three quarters of 1999.
Additionally, our actual expenditures may exceed our planned expenditures for a
variety of reasons, including changes in our growth plan, our process
technology, market conditions, interest rates and other factors.
CSP, our strategic alliance that owns and will operate Fab 6, intends
to enter into a credit facility providing for borrowings of approximately $820
million to finance its capital expenditure requirements, including approximately
$480 million for its planned capital expenditures for 2000. The actual amount of
debt to be incurred under the facility will be influenced by several factors,
including without limitation, the speed and timing of the ramp up of operations
at Fab 6 and the terms of such debt.
We will require additional financing to fund our current growth plan.
In addition, a substantial portion of our borrowings is guaranteed by our
controlling shareholder, ST, and its affiliates. We may not be able to obtain
similar credit guarantees from ST in the future. We are actively evaluating
financing plans for our capital expenditure requirements. We expect to fund
these requirements through public or private debt or equity financing or from
other sources. There can be no assurance that additional financing will be
available at all or, if available, that such financing will be obtained on terms
favorable to us or that any additional financing will not be dilutive to our
shareholders
WE HAVE A HIGH LEVEL OF DEBT. IF WE ARE UNABLE TO MAKE INTEREST AND PRINCIPAL
PAYMENTS ON OUR DEBT, IT COULD SERIOUSLY HARM OUR COMPANY.
We have now and will continue to have a significant amount of debt. Our
high level of debt and the covenants contained in our financing documents could
have important consequences to you. For example, they could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to pursue our growth plan;
- require us to seek the lender's consent prior to paying dividends on our
ordinary shares;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the availability of
our cash flow to fund capital expenditures, working capital and other
general corporate purposes; and
- limit our flexibility in planning for, or reacting to, changes in our
business and the semiconductor industry.
We cannot assure you that we will be able to make interest and
principal payments on debt incurred in connection with our growth if the average
selling prices or demand for our semiconductor wafers are lower than expected.
RISKS RELATED TO OUR OPERATIONS
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE PERIODIC OVERCAPACITY
THAT RESULTS FROM THIS MAY SERIOUSLY HARM OUR COMPANY.
The semiconductor industry has historically been highly cyclical and,
at various times, has experienced significant economic downturns characterized
by production overcapacity, reduced product demand, and rapid erosion of average
selling prices. Historically, companies in the semiconductor industry have
expanded aggressively during periods of increased demand, as we and our
competitors are doing currently. As a result, periods of overcapacity in the
semiconductor industry have frequently followed periods of increased demand. We
expect this
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pattern to be repeated in the future. In addition, the markets for
semiconductors are characterized by rapid technological change, evolving
industry standards, intense competition and fluctuations in end-user demand. Our
operating results for 1997 and 1998 were seriously harmed by a downturn in the
semiconductor market. Future downturns in the semiconductor industry may be
severe and could seriously harm our company.
A DECREASE IN DEMAND FOR COMMUNICATIONS EQUIPMENT AND PERSONAL COMPUTERS MAY
SIGNIFICANTLY DECREASE THE DEMAND FOR OUR SERVICES.
A significant percentage of our sales revenue is derived from customers
who use our manufacturing services to make semiconductors for communications
equipment and personal computers. Any significant decrease in the demand for
communications equipment or personal computers may decrease the demand for our
services and could seriously harm our company. In addition, the declining
average selling price of communications equipment and personal computers places
significant pressure on the prices of the components that are used in this
equipment. If the average selling prices of communications equipment and
personal computers continue to decrease, the pricing pressure on components
produced by our company may reduce our revenue and therefore reduce our gross
profit margin significantly.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
REVENUES.
We have been largely dependent on a small number of customers for a
substantial portion of our business. Our top ten customers accounted for 62.8%
and 62.3% of our total net revenue in 1998 and 1999, respectively. In 1998, our
two largest customers accounted for approximately 9.6% and 9.3% of our total net
revenue, respectively, and, in 1999, our two largest customers accounted for
11.1% and 7.4% of our total net revenue, respectively. We expect that we will
continue to be dependent upon a relatively limited number of customers for a
significant portion of our revenue. We cannot assure you that revenue generated
from these customers, individually or in the aggregate, will reach or exceed
historical levels in any future period. Loss or cancellation of business from,
significant changes in scheduled deliveries to, or decreases in the prices of
services sold to, any of these customers could seriously harm our company.
Please see "Item 1. Description of Business -- Customers and Markets" for
additional information regarding our customers.
OUR CUSTOMERS DO NOT PLACE PURCHASE ORDERS FAR IN ADVANCE. THEREFORE, WE DO NOT
HAVE ANY SIGNIFICANT BACKLOG.
Our customers generally do not place purchase orders far in advance. In
addition, due to the cyclical nature of the semiconductor industry, our
customers' purchase orders have varied significantly from period-to-period. As a
result, we do not typically operate with any significant backlog. The lack of a
significant backlog makes it difficult for us to forecast our net revenue in
future periods. Moreover, our expense levels are based in part on our
expectations of future revenue and we may be unable to adjust costs in a timely
manner to compensate for revenue shortfalls. We expect that in the future our
revenue in any quarter will continue to be substantially dependent upon purchase
orders received in that quarter. We cannot assure you that any of our customers
will continue to place orders with us in the future at the same levels as in
prior periods.
WE MAY NOT BE ABLE TO IMPLEMENT NEW TECHNOLOGY AS IT BECOMES AVAILABLE WHICH MAY
AFFECT OUR ABILITY TO PRODUCE ADVANCED PRODUCTS AT COMPETITIVE PRICES.
The semiconductor industry is rapidly developing and the technology
used is constantly evolving. If we do not anticipate the technology evolution
and rapidly adopt new and innovative technology, we may not be able to produce
sufficiently advanced products at competitive prices. There is a risk that our
competitors may adopt new technology before we do, resulting in our loss of
market share. If we do not continue to produce the most advanced products at
competitive prices, our customers may use the services of our competitors
instead of our services, which could seriously harm our company.
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WE DEPEND ON OUR TECHNOLOGY PARTNERS TO ADVANCE OUR PORTFOLIO OF PROCESS
TECHNOLOGIES.
Enhancing our manufacturing process technologies is critical to our
ability to provide services for our customers. We intend to continue to advance
our process technologies through internal research and development efforts and
technology alliances with leading semiconductor suppliers. Although we have an
internal research and development team focused on developing new semiconductor
manufacturing process technologies, we are dependent on our technology partners
to advance our portfolio of process technologies. We currently have joint
development and technology sharing agreements with Lucent and Agilent
Technologies, a subsidiary of Hewlett-Packard, a technology transfer and
licensing agreement with Motorola and a joint development agreement with
Ericsson Microelectronics AB, or Ericsson. If we are unable to continue our
technology alliances with Lucent, Agilent Technologies and Motorola on mutually
beneficial economic terms, or are unable to enter into new technology alliances
with other leading semiconductor suppliers, we may not be able to continue
providing our customers with leading edge process technologies, which could
seriously harm our company. Please see "Item 1. Description of Business --
Research and Development" for additional information regarding our internal
research and development efforts.
WE DEPEND ON OUR STRATEGIC ALLIANCES RELATING TO FAB 5 AND FAB 6. TERMINATION OF
EITHER OF THESE ALLIANCES COULD SERIOUSLY HARM OUR COMPANY.
We currently have two strategic alliances relating to the development
and operation of Fab 5 and Fab 6. Silicon Manufacturing Partners, or SMP, which
operates Fab 5, is jointly-owned with a subsidiary of Lucent. CSP, which owns
and will operate Fab 6, is jointly-owned with EDB Investments Pte Ltd and a
subsidiary of Agilent Technologies. We believe our alliances with these
companies give us access to select leading edge process technologies, moderate
our development costs and capital expenditures and increase our fab utilization
rates. The termination of either of these alliances could seriously harm our
company. Please see "Item 1. Description of Business -- Chartered Silicon
Partners" and "Item 1. Description of Business -- Silicon Manufacturing
Partners" for a more detailed description of these alliances and for certain
recent developments regarding Hewlett-Packard.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR INDUSTRY.
The worldwide semiconductor foundry industry is highly competitive. We
compete with dedicated foundry service providers such as Taiwan Semiconductor
Manufacturing Corporation, or TSMC, and United Microelectronics, or UMC, as well
as the foundry operation services of some IDMs such as International Business
Machines, or IBM. IDMs principally manufacture and sell their own proprietary
semiconductor products, but may offer foundry services. Our competitors may have
greater access to capital and substantially greater production, research and
development, marketing and other resources than we do. As a result, these
companies may be able to compete more aggressively over a longer period of time
than we can.
A number of semiconductor manufacturers, including our primary
competitors and our company, have recently announced plans to increase their
manufacturing capacity and, as a result, we expect that there will be a
significant increase in worldwide semiconductor capacity over the next five
years. If growth in demand for this capacity fails to match the growth in
supply, or occurs more slowly than anticipated, there may be more intense
competition and pressure on the pricing of our services may result. Any
significant increase in competition may erode our profit margins and weaken our
earnings.
The principal elements of competition in the wafer foundry market
include technical competence, time-to-market, research and development quality,
available capacity, device yields, customer service and price. We cannot assure
you that we will be able to compete successfully in the future, which could
seriously harm our company.
OUR BUSINESS DEPENDS IN PART ON OUR ABILITY TO OBTAIN AND PRESERVE INTELLECTUAL
PROPERTY RIGHTS.
Our ability to compete successfully and achieve future growth will
depend, in part, on our ability to protect our proprietary technology. As of
December 31, 1999, we held 179 patents worldwide, 141 of which are U.S. patents,
related to our production processes. We intend to continue to file patent
applications when appropriate to protect our proprietary technologies. The
process of seeking patent protection may take a long time and be
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expensive. We cannot assure you that patents will be issued from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented or that the rights granted under the patents will
provide us with meaningful protection or any commercial advantage. In addition,
we cannot assure you that the Asian countries in which we market our services,
such as Taiwan and China, will protect our intellectual property rights to the
same extent as the United States. Please see "Item 1. Description of Business --
Intellectual Property" for a more detailed description of our proprietary
technology.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES.
Our ability to compete successfully depends on our ability to operate
without infringing the proprietary rights of others. We have no means of knowing
what patent applications have been filed in the United States until they are
granted. Although we are not currently a party to any material litigation
involving patent infringement, the semiconductor industry is characterized by
frequent litigation regarding patent and other intellectual property rights. As
is typical in the semiconductor industry, we have from time to time received
communications from third parties asserting patents that cover certain of our
technologies and alleging infringement of certain intellectual property rights
of others. We expect to receive similar communications in the future. In the
event any third party were to make a valid claim against us or our customers we
could be required to:
- discontinue using certain process technologies which could cause us to
stop manufacturing certain semiconductors;
- pay substantial monetary damages;
- seek to develop non-infringing technologies, which may not be feasible;
or
- seek to acquire licenses to the infringed technology which may not be
available on commercially reasonable terms, if at all.
Our company could be seriously harmed by such developments. Litigation,
which could result in substantial costs to us and diversion of our resources,
may also be necessary to enforce our patents or other intellectual property
rights or to defend us against claimed infringement of the rights of others. If
we fail to obtain necessary licenses or if litigation relating to patent
infringement or other intellectual property matters occurs, it could seriously
harm our company.
RISKS RELATING TO MANUFACTURING
WE MAY EXPERIENCE DIFFICULTY IN ACHIEVING ACCEPTABLE DEVICE YIELDS, PRODUCT
PERFORMANCE AND DELIVERY TIMES AS A RESULT OF MANUFACTURING PROBLEMS.
The process technology for the manufacture of semiconductor wafers is
highly complex, requires advanced and costly equipment and is continuously being
modified in an effort to improve device yields and product performance.
Microscopic impurities such as dust and other contaminants, difficulties in the
production process, disruptions in the supply of utilities or defects in the key
materials and tools used to manufacture a particular wafer can cause a
percentage of the wafers to be rejected or individual semiconductors on specific
wafers to be non-functional, which in each case negatively affects our device
yields. We have, from time to time, experienced production difficulties that
have caused delivery delays, lower than expected device yields and the
replacement of certain vendors of manufacturing equipment used in our production
processes. We may also experience difficulty achieving acceptable device yields,
product performance and product delivery times in the future as a result of
manufacturing problems. These problems may result from, among other things,
capacity constraints, construction delays, increasing production at new
facilities, upgrading or expanding existing facilities or changing our process
technologies. Any of these problems could seriously harm our company.
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WE DEPEND ON OUR SUPPLIERS OF RAW MATERIALS AND EQUIPMENT AND DO NOT TYPICALLY
HAVE LONG-TERM SUPPLY CONTRACTS WITH THEM.
We depend on our suppliers of raw materials. To maintain competitive
manufacturing operations, we must obtain from our suppliers, in a timely manner,
sufficient quantities of quality materials at acceptable prices. We obtain most
of our materials, including critical materials such as raw silicon wafers, from
a limited number of suppliers. We purchase all of our materials on a blanket
purchase order basis. With the exception of one multi-year contract for the
purchase of raw wafers, we do not have long-term contracts with any of our
suppliers. From time to time, vendors have extended lead times or limited the
supply of required materials to us because of capacity constraints.
Consequently, from time to time, we have experienced difficulty obtaining
quantities of raw materials we need on a timely basis.
In addition, from time to time, we may reject materials that do not
meet our specifications, resulting in declines in output or device yields. We
cannot assure you that we will be able to obtain sufficient quantities of raw
materials and other supplies of an acceptable quality. If our ability to obtain
sufficient quantities of raw materials and other supplies in a timely manner is
substantially diminished or if there are significant increases in the costs of
raw materials, it could seriously harm our company.
We also depend on a limited number of manufacturers and vendors that
make and sell the complex equipment we use in our manufacturing processes. In
periods of high market demand which the industry is currently facing, the lead
times from order to delivery of this equipment could be as long as 12 to 18
months. If there are delays in the delivery of this equipment or if there are
increases in the cost of this equipment, it could seriously harm our company.
Please see "Item 1. Description of Business -- Equipment and Materials" for
additional information regarding our relationships with our suppliers of
materials and equipment.
WE DEPEND ON ST ASSEMBLY TEST SERVICES LTD FOR MOST OF OUR SEMICONDUCTOR
ASSEMBLY AND TESTING REQUIREMENTS.
Semiconductor assembly and testing are complex processes which involve
significant technological expertise and specialized equipment. Although we are
in the process of evaluating additional sources of supply, we currently depend
on our affiliate ST Assembly Test Services Ltd, or STATS, for almost all of the
assembly and test services we offer our customers. STATS consummated its initial
public offering on February 8, 2000. We do not have a long-term contract with
STATS and retain its services on a purchase order basis. STATS may, from time to
time, experience production interruption due to, among other things, technical
problems occurring during the assembly and testing processes. Because STATS is
our major provider of these services, any prolonged interruption in STATS'
operations or the termination of our affiliation with STATS could seriously harm
our company.
WE ARE SUBJECT TO THE RISK OF LOSS DUE TO FIRE BECAUSE THE MATERIALS WE USE IN
OUR MANUFACTURING PROCESSES ARE HIGHLY FLAMMABLE.
We use highly flammable materials such as silane and hydrogen in our
manufacturing processes and are therefore subject to the risk of loss arising
from fires. Although we have implemented industry acceptable risk management
controls at our manufacturing locations, the risk of fire associated with these
materials cannot be completely eliminated and, in the past, we have had minor
interruptions in production as a result of fire. We maintain insurance policies
to guard against losses caused by fire. While we believe our insurance coverage
for damage to our property and disruption of our business due to fire is
adequate, we cannot assure you that it would be sufficient to cover all of our
potential losses. If any of our fabs were to be damaged or cease operations as a
result of a fire, it would temporarily reduce manufacturing capacity and
seriously harm our company.
OUR FAILURE TO COMPLY WITH CERTAIN ENVIRONMENTAL REGULATIONS COULD SERIOUSLY
HARM OUR COMPANY.
We are subject to a variety of laws and governmental regulations in
Singapore relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production process. While we believe that we are
currently in compliance in all material respects with such laws and regulations,
if we fail to use, discharge or dispose of hazardous materials appropriately,
our company could be subject to substantial liability or could be required to
suspend or adversely modify our manufacturing operations. In addition, we could
be required to pay for
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the cleanup of our properties if they are found to be contaminated even if we
are not responsible for the contamination. We maintain insurance policies to
guard against losses resulting from environmental harm caused by our company.
While we believe our insurance coverage is adequate, we cannot assure you that
it would be sufficient to cover all our potential losses.
RISKS RELATING TO OUR INFRASTRUCTURE
WE ARE IN THE PROCESS OF CONSTRUCTING A NEW FABRICATION PLANT.
Fab 7 is in its design and initial construction phase. While we have
taken the project management and planning steps we believe are necessary to
complete Fab 7 on schedule and within budget, there are certain uncontrollable
events that could delay the project or increase the cost of Fab 7. Such
potential events include:
- a major design and/or construction change caused by changes to the
initial building space utilization plan or equipment layout;
- shortages and late delivery of building materials and facility
equipment;
- a long and intensive wet season that limits construction;
- a shortage of foreign construction workers or a change in immigration
laws preventing such workers from entering Singapore;
- strikes and labor disputes;
- on-site construction problems such as industrial accidents, fires and
structural collapse; and
- delays in securing the necessary governmental approvals and land lease.
WE DEPEND ON KEY PERSONNEL AND, DUE TO THE STRONG DEMAND IN SINGAPORE FOR
SKILLED LABOR, MAY HAVE DIFFICULTY ATTRACTING SUFFICIENT NUMBERS OF SKILLED
EMPLOYEES.
Our success depends to a significant extent upon the continued service
of our key senior executives and our engineering, marketing, sales,
manufacturing, support and other personnel. In addition, in connection with our
growth plans, we are likely to need a greater number of experienced engineers
and other employees in the future. The competition for skilled employees is
intense. Due to the current shortage of experienced personnel in Singapore, we
must recruit our personnel internationally. This is more expensive than hiring
personnel locally, and therefore increases our operating costs. As of December
31, 1999, a majority of our employees were citizens of countries other than
Singapore. We expect demand for personnel in Singapore to increase significantly
in the future as new wafer fabrication facilities are established in Singapore.
If we were to lose the services of any of our existing key personnel without
adequate replacements, or were unable to attract and retain new experienced
personnel as we grow, it could seriously harm our company. We do not carry "key
person" life insurance on any of our personnel.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH, WHICH COULD SERIOUSLY HARM OUR COMPANY.
We have experienced and are currently experiencing a period of
significant growth. This growth has placed, and the future growth will continue
to place, a significant strain on our managerial, technical, financial,
production, operational and other resources. In particular, by expanding our
manufacturing facilities and equipping new facilities we may create additional
capacity at our fabs, which, if not utilized, would reduce our profitability and
could seriously harm our company.
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YEAR 2000 UPDATE.
We crossed over from December 31, 1999 into January 1, 2000 without
experiencing any Year 2000-related incidents or disruptions that were harmful to
our company.
RISKS RELATED TO INVESTMENTS IN A CONTROLLED CORPORATION
SINGAPORE TECHNOLOGIES CONTROLS OUR COMPANY AND ITS INTERESTS MAY CONFLICT WITH
THE INTERESTS OF OUR OTHER SHAREHOLDERS.
As of March 15, 2000, ST and its affiliates beneficially own
approximately 70.1% of our outstanding ordinary shares. As a result, ST is able
to exercise control over many matters requiring approval by our shareholders,
including the election of directors and approval of significant corporate
transactions.
ST also provides us with financing, guarantees some of our debt and
enters into forward foreign exchange contracts with us relating to some of our
equipment purchase commitments with foreign vendors. While we believe that ST
will continue to provide us credit and other support, ST has no obligation to do
so and the availability and amount of its support will depend on various
factors, including our ability to raise funds without such support and the
expenses relating to such fundraising.
We also have contractual and other business relationships with ST and
its affiliates and may engage in transactions from time to time that are
material to us. Although the Audit Committee of our Board of Directors will
review all material transactions between our company and ST, circumstances may
arise in which the interests of ST and its affiliates could conflict with the
interests of our other shareholders. Because ST and its affiliates own a
significant portion of our ordinary shares, they could delay or prevent a change
in control of our company, even if a transaction of that nature would be
beneficial to our other shareholders. Our Articles of Association do not contain
a provision requiring that ST and its affiliates own at least a majority of our
ordinary shares. Please see "Item 13. Interest of Management in Certain
Transactions" for additional information regarding our relationship with ST and
its affiliates.
RISKS RELATED TO INVESTMENT IN A FOREIGN CORPORATION
WE OPERATE INTERNATIONALLY AND ARE THEREFORE AFFECTED BY PROBLEMS IN OTHER
COUNTRIES.
Our principal customers are located in the United States and Taiwan and
our principal suppliers are located in the United States, Japan, Korea and
Germany. As a result, we are affected by economic and political conditions in
those countries, including:
- fluctuations in the value of currencies;
- changes in labor conditions;
- longer payment cycles;
- greater difficulty in collecting accounts receivable;
- burdens and costs of compliance with a variety of foreign laws;
- political and economic instability;
- increases in duties and taxation;
- imposition of restrictions on currency conversion or the transfer of
funds;
- limitations on imports or exports;
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- expropriation of private enterprises; and
- reversal of the current policies (including favorable tax and lending
policies) encouraging foreign investment or foreign trade by our host
countries.
The geographical distances between Asia, the Americas and Europe also
create a number of logistical and communications challenges. Although we have
not experienced any serious harm in connection with our international
operations, we cannot assure you that such problems will not arise in the
future.
EXCHANGE RATE FLUCTUATIONS MAY AFFECT THE VALUE OF OUR ADSS OR ORDINARY SHARES.
Our financial statements are prepared in U.S. dollars. Our net revenue
is generally denominated in U.S. dollars and our operating expenses are
generally incurred in U.S. dollars and Singapore dollars. Our capital
expenditures are generally denominated in U.S. dollars, Japanese yen, Singapore
dollars and other currencies. Although we hedge a portion of the resulting net
foreign exchange position through the use of forward exchange contracts, we are
still affected by fluctuations in exchange rates among the U.S. dollar, the
Japanese yen, the Singapore dollar and other currencies. We are particularly
affected by fluctuations in the exchange rate between the U.S. dollar and the
Singapore dollar. For example, in 1999 substantially all of our revenue and
approximately 72.5% of our cost of revenue were denominated in U.S. dollars. If
the Singapore dollar strengthens against the U.S. dollar by 2.0%, our cost of
revenue will increase by 0.6%. Likewise, if the Singapore dollar weakens against
the U.S. dollar by 2.0%, our cost of revenue will decrease by 0.6%. Any
significant fluctuation in exchange rates may harm our company. In addition,
fluctuations in the exchange rate between the U.S. dollar and the Singapore
dollar will affect the U.S. dollar value of our ordinary shares and ADSs, and
the value of any cash dividends if paid in U.S. or Singapore dollars.
ECONOMIC CONDITIONS IN THE ASIA PACIFIC REGION MAY HAVE A NEGATIVE IMPACT ON OUR
REVENUE.
A significant portion of our revenue is derived from sales to customers
whose semiconductors are used in products that are sold in Japan, Taiwan and
other countries in East and Southeast Asia. In 1998, many countries in Asia
experienced considerable currency volatility and depreciation, high interest
rates and declining asset values. As a result, there was a general decline in
business and consumer spending and a decrease in economic growth as compared
with prior years. Although Singapore was not materially affected by these
events, our results of operations in 1998 were affected by overall regional
economic conditions because demand for semiconductor products generally rises as
the overall level of economic activity increases and falls as activity
decreases. Our results of operations in the future could be negatively impacted
if the economic environment in these countries deteriorates.
OUR PUBLIC SHAREHOLDERS MAY HAVE MORE DIFFICULTY PROTECTING THEIR INTERESTS THAN
THEY WOULD AS SHAREHOLDERS OF A U.S. CORPORATION.
Our corporate affairs are governed by our Memorandum and Articles of
Association and by the laws governing corporations incorporated in Singapore.
The rights of our shareholders and the responsibilities of the members of our
Board of Directors under Singapore law may be different from those applicable to
a corporation incorporated in the United States. Therefore, our public
shareholders may have more difficulty in protecting their interests in
connection with actions taken by our management, members of our Board of
Directors or our controlling shareholders than they would as shareholders of a
corporation incorporated in the United States. For example, controlling
shareholders in United States corporations are subject to fiduciary duties while
controlling shareholders in Singapore corporations are not subject to such
duties. Please see "-- Singapore Technologies controls our company and its
interests may conflict with the interests of our other shareholders" for a
discussion relating to our controlling shareholders, ST and its affiliates.
IT MAY BE DIFFICULT FOR YOU TO ENFORCE ANY JUDGMENT OBTAINED IN THE UNITED
STATES AGAINST US OR OUR AFFILIATES.
Our company is incorporated under the laws of the Republic of
Singapore. Many of our directors and executive officers, and some of the experts
named in this document, reside outside the United States. In addition,
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virtually all of our assets and the assets of those persons are located outside
the United States. As a result, it may be difficult to enforce in or out of the
United States any judgment obtained in the United States against us or any of
these persons, including judgments based upon the civil liability provisions of
the United States securities laws. In addition, in original actions brought in
courts in jurisdictions located outside the United States, it may be difficult
for investors to enforce liabilities based upon United States securities laws.
We have been advised by Allen & Gledhill, our Singapore legal counsel,
that judgments of U.S. courts based on the civil liability provisions of the
federal securities laws of the United States are not enforceable in Singapore
courts. Allen & Gledhill has also advised us that there is doubt as to whether
Singapore courts will enter judgments in original actions brought in Singapore
courts based solely upon the civil liability provisions of the federal
securities laws of the United States.
SINGAPORE LAW CONTAINS PROVISIONS THAT COULD DISCOURAGE A TAKEOVER OF OUR
COMPANY.
The Companies Act (Chapter 50) of Singapore and the Singapore Code on
Takeovers and Mergers contain certain provisions that may delay, deter or
prevent a future takeover or change in control of our company. Any person
acquiring an interest, either on his or her own or together with parties acting
in concert with him or her, in 25% or more of our voting shares must extend a
takeover offer for the remaining voting shares in accordance with the Singapore
Code on Takeovers and Mergers. A takeover offer is also required to be made if a
person holding between 25% and 50% (both inclusive) of the voting rights (either
on his or her own or together with parties acting in concert with him or her)
acquires an additional 3% of our voting shares in any 12-month period. The
preceding provisions may discourage or prevent certain types of transactions
involving an actual or threatened change of control of our company. This may
harm you because a transaction of that kind may allow you to sell your shares at
a price above the prevailing market price.
RISKS RELATED TO OUR ADSS AND ORDINARY SHARES AND OUR TRADING MARKET
THE SINGAPORE SECURITIES MARKET IS RELATIVELY SMALL AND MORE VOLATILE THAN U.S.
MARKETS AND MAY CAUSE THE MARKET PRICE OF OUR ADSS AND ORDINARY SHARES TO
FLUCTUATE.
The Singapore Exchange Securities Trading Limited, or the Singapore
Exchange, is relatively small and more volatile than stock exchanges in the
United States and certain other European countries. As of June 30, 1999, there
were 308 Singapore companies listed on the Main Board of the Singapore Exchange
and the aggregate market capitalization of listed equity securities of these
companies was approximately US$226 billion. For the year ended December 31,
1998, the average daily equity trading value on the Singapore Exchange
(including shares traded on the CLOB International trading system) was
approximately US$229 million, with an annualized aggregate trading value of
approximately US$57 billion. The relatively small market capitalization of, and
trading volume on, the Singapore Exchange may cause the market price of
securities of Singapore companies, including our ADSs and our ordinary shares,
to fluctuate in both the domestic and the international markets.
YOUR VOTING RIGHTS WITH RESPECT TO THE ADSS ARE LIMITED BY THE TERMS OF THE
DEPOSIT AGREEMENT FOR THE ADSS.
Holders may exercise voting rights with respect to the ordinary shares
represented by ADSs only in accordance with the provisions of the deposit
agreement relating to the ADSs. There are no provisions under Singapore law or
under our Articles of Association that limit ADS holders' ability to exercise
their voting rights through the depositary with respect to the underlying
ordinary shares. However, there are practical limitations upon the ability of
ADS holders to exercise their voting rights due to the additional procedural
steps involved in communicating with such holders. For example, our Articles of
Association require us to notify our shareholders at least 14 days in advance of
any annual general meeting unless a special resolution is to be passed at that
meeting, in which case at least 21 days' notice must be given. Our ordinary
shareholders will receive notice directly from us and will be able to exercise
their voting rights by either attending the meeting in person or voting by
proxy.
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ADS holders, by comparison, will not receive notice directly from us.
Rather, in accordance with the deposit agreement, we will provide the notice to
the depositary, which will in turn, as soon as practicable thereafter, mail to
holders of ADSs:
- the notice of such meeting;
- voting instruction forms; and
- a statement as to the manner in which instructions may be given by
holders.
To exercise their voting rights, ADS holders must then instruct the
depositary how to vote their shares. Because of this extra procedural step
involving the depositary, the process for exercising voting rights will take
longer for ADS holders than for holders of ordinary shares. ADSs for which the
depositary does not receive timely voting instructions will not be voted at any
meeting.
Except as described in this document, holders will not be able to
exercise voting rights attaching to the ADSs.
YOUR ABILITY TO PARTICIPATE IN ANY RIGHTS OFFERING OF OUR COMPANY IS LIMITED.
We may, from time to time, distribute rights to our shareholders,
including rights to acquire securities under the deposit agreement relating to
the ADSs. The depositary will not offer rights to holders unless both the rights
and the securities to which such rights relate are either exempt from
registration under the Securities Act or are registered under provisions of the
Securities Act. However, we are under no obligation to file a registration
statement with respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared effective.
Accordingly, holders of our ADSs may be unable to participate in rights
offerings by us and may experience dilution of their holdings as a result.
THE MARKET PRICES OF OUR ADSS AND ORDINARY SHARES HAVE BEEN AND MAY CONTINUE TO
BE HIGHLY VOLATILE.
The market prices of our ADSs and ordinary shares have fluctuated
widely and may continue to do so. For example, from our initial public offering
in October 1999 through March 15, 2000, the trading price of our ADSs has ranged
from a high of $101.75 per ADS to a low of $31.25 per ADS. During the same
period, the trading price of our ordinary shares has ranged from a high of
S$17.30 per ordinary share to a low of S$5.15 per ordinary share. Many factors
could cause the market prices of our ADSs and ordinary shares to rise and fall.
Some of these factors include:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations;
- changes in estimates of our performance or recommendations by financial
analysts;
- market conditions in the semiconductor industry and economy as a whole;
- introduction of new services by us or our competitors;
- changes in market valuations of other foundries and semiconductor
companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- additions or departures of key personnel; and
- other events or factors, many of which are beyond our control.
The financial markets in the United States, Singapore and other
countries have experienced significant price and volume fluctuations, and market
prices of technology companies have been and continue to be extremely
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volatile. Volatility in the prices of our ADSs and ordinary shares may be caused
by factors outside of our control and may be unrelated or disproportionate to
our operating results. In the past, following periods of volatility in the
market price of a public company's securities, securities class action
litigation has often been instituted against that company. Such litigation could
result in substantial costs and a diversion of our management's attention and
resources.
THE FUTURE SALES OF SECURITIES BY OUR COMPANY OR EXISTING SHAREHOLDERS MAY HURT
THE PRICE OF OUR ADSS AND OUR ORDINARY SHARES.
The market price of our ADSs and ordinary shares could decline as a
result of sales of a large number of ADSs or ordinary shares or the perception
that such sales could occur. Such sales also might make it more difficult for us
to sell ADSs or ordinary shares in the future at a time and at a price that we
deem appropriate.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT MAY NOT BE REALIZED
This document contains forward-looking statements, as defined in the
safe harbor provisions of the United States Private Securities Litigation Reform
Act of 1995. These forward-looking statements, including without limitation,
statements relating to our capital expenditures, financings, production
capacity, expansion plans and the construction and equipping of our new
fabrication facility, reflect our current views with respect to future events
and financial performance, and are subject to certain risks and uncertainties,
which could cause actual results to differ materially from historical results or
those anticipated. For example, changes in the market outlook, customer demands,
availability of materials, equipment, manpower and timely regulatory approvals,
as well as the availability of financings and the terms thereof, could affect
our capital expenditures, financings, production capacity, expansion plans and
the construction and equipping of our new fabrication facility. Although we
believe the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, we can give no assurance that our expectations will
be attained. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 2. DESCRIPTION OF PROPERTY
All of the fabrication facilities and our corporate offices are located
in Singapore. Fab 1 is located on land leased from Technology Parks Pte Ltd, a
private company wholly-owned by Jurong Town Corporation, or JTC, a statutory
board established by the Government of Singapore to develop and manage
industrial estates in Singapore. The lease runs until 2017 with a conditional
option to extend for another 30 years. Fabs 2 and 3 and our corporate offices
are located on land leased to ST by JTC. These leases run until 2024 with
conditional options to extend for another 30 years. We have entered into
sub-leases with ST for the entire term of the leases for Fabs 2 and 3. The
sub-leases for Fab 2 and Fab 3 require us to make rental payments to ST at rates
equal to the rent paid by ST to JTC for the subject land through 2006 for Fab 2
and 2024 for Fab 3.
CSP leases the land on which Fab 6 is located from ST, which in turn
leases it from JTC. The agreement provides for the land to be leased to ST until
2027, with a conditional option to extend for an additional 30 years. CSP makes
rental payments to ST at rates equal to the rent paid by ST to JTC for the
subject land through 2027. We expect ST to lease the land on which Fab 7 is
being built from JTC and to sub-lease that land to us on terms similar to those
of our other leases with ST.
Please see "Item 1. Description of Business - Manufacturing Facilities"
and "Item 1. Description of Business - Strategic Alliances" for a more detailed
description of the Company's fabrication plants.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that we believe would be
harmful to the Company.
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of March 15, 2000, based on an
aggregate of 1,280,512,723 ordinary shares outstanding as of such date by:
27
<PAGE> 29
- each person or group of affiliated persons who is known by us to
beneficially own 10% or more of our ordinary shares;
- each of our directors and our chief executive officer; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
ORDINARY SHARES
BENEFICIALLY OWNED(1)
10% SHAREHOLDERS, DIRECTORS AND -----------------------
EXECUTIVE OFFICERS AS A GROUP(2) NUMBER PERCENT
- -------------------------------- ------------ -------
<S> <C> <C>
Singapore Technologies Pte Ltd(3)....................... 499,116,152 39.0%
Singapore Technologies Semiconductors Pte Ltd(3)....... 398,518,228 31.1%
Ho Ching................................................ 40,000 *
Lim Ming Seong.......................................... 0 *
Barry Waite............................................. 4,176,000 *
Sum Soon Lim............................................ 247,001 *
James H. Van Tassel..................................... 131,929 *
Aubrey C. Tobey......................................... 46,968 *
Robert E. La Blanc...................................... 45,168 *
Andre Borrel............................................ 40,168 *
Charles E. Thompson..................................... 60,168 *
Koh Beng Seng........................................... 41,600 *
Tsugio Makimoto......................................... 4,000 *
Premod Paul Thomas...................................... 18,000 *
Liow Voon Kheng......................................... 4,000 *
All directors and executive officers as a group
(22 persons).......................................... 7,118,709 *
</TABLE>
- ----------
* Less than 1% of total.
(1) Gives effect to the ordinary shares issuable within 60 days of March 15,
2000 upon the exercise of all options and other rights beneficially owned
by the indicated shareholders on that date. Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting and
investment power with respect to ordinary shares. Unless otherwise
indicated, the persons named in the table have sole voting and sole
investment control with respect to all ordinary shares beneficially owned.
(2) The number of ordinary shares listed in this table includes ordinary
shares held directly or in the form of ADSs.
(3) As of December 31, 1999, Temasek Holdings (Private) Limited, the principal
holding company of the Government of Singapore, owned 78.3% of Singapore
Technologies Pte Ltd, or ST, and 100% of Singapore Technologies Holdings
Pte Ltd, or ST Holdings. ST Holdings owned 21.7% of ST which, in turn,
owns 100% of Singapore Technologies Semiconductors Pte Ltd, or ST
Semiconductors. Temasek may be deemed to beneficially own the shares
directly owned by ST and ST Semiconductors because it is the parent of ST
and ST Holdings.
Please see "Item 1. Description of Business -- Risk Factors -- Singapore
Technologies controls our company and its interests may conflict with the
interests of our other shareholders" and "Item 13. Interest of management in
certain transactions" for a discussion relating to our controlling
shareholders, ST and its affiliates.
ITEM 5. NATURE OF TRADING MARKET
PRICE RANGE OF OUR ADSS AND ORDINARY SHARES
The following table sets forth, for the periods indicated, the high and
low last reported sales prices per ADS and ordinary share since trading on
October 29, 1999 as furnished by the Nasdaq National Market, or Nasdaq, and the
Singapore Exchange. The initial public offering price of our ADSs on October 29,
1999 was $20.00 per ADS and S$3.344 per ordinary share.
28
<PAGE> 30
PRICE RANGE FOR ADSS QUOTED ON NASDAQ NATIONAL MARKET
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
October 29 through December 31, 1999 $ 73.00 $31.25
January 1 through March 15, 2000 $101.75 $59.50
</TABLE>
PRICE RANGE FOR ORDINARY SHARES LISTED ON SINGAPORE EXCHANGE
<TABLE>
HIGH LOW
------- ------
<S> <C> <C>
November 1 through December 31, 1999 S$10.10 S$5.15
January 1 through March 15, 2000 S$17.30 S$9.95
</TABLE>
The last reported sale price of the ADSs as quoted on Nasdaq on March
15, 2000 was $101.75 per ADS. The last reported sale price of the ordinary
shares as quoted on the Singapore Exchange on March 15, 2000 was S$17.30 per
ordinary share.
Please see "Item 1. Description of Business -- Risk Factors -- Risks
related to our ADSs and ordinary shares and our trading market" regarding the
nature of the trading market for our ADSs and ordinary shares.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
Currently, no exchange control restrictions exist in Singapore. There
are no provisions under Singapore law or under our Articles of Association that
limit our ADS holders' ability to exercise their voting rights. However, under
the deposit agreement for the ADSs, there may be practical limitations upon the
ability of our ADS holders to exercise their voting rights. Please see "Item 1.
Description of Business -- Risk Factors -- Your voting rights with respect to
the ADSs are limited by the terms of the deposit agreement for the ADSs"
regarding the practical limitations applicable to holders of our ADSs with
respect to voting rights.
ITEM 7. TAXATION
SINGAPORE TAXATION
The following discussion describes the material Singapore income tax,
stamp duty and estate duty consequences of the purchase, ownership and disposal
of the ordinary shares or ADSs (collectively the "securities") to a holder of
the securities that is not resident in Singapore. This discussion does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to a decision to purchase, own or dispose of the securities and
does not purport to deal with the tax consequences applicable to all categories
of investors.
This discussion is based on tax laws in effect in Singapore and on
administrative and judicial interpretations of these tax laws, as of the date of
this document, all of which are subject to change, possibly on a retroactive
basis.
INCOME TAX
General. Non-resident corporate taxpayers are subject to income tax on
income that is accrued in or derived from Singapore, and on foreign income
received in Singapore, subject to certain exceptions. A non-resident individual
is subject to income tax on the income accrued in or derived from Singapore.
Subject to the provisions of any applicable double taxation treaty,
non-resident taxpayers who derive certain types of income from Singapore are
subject to a withholding tax on that income at a rate of 26% for income earned
through 1999 (and 25.5% for income earned thereafter), or generally 15% in the
case of interest, royalty and rental of movable equipment.
A corporation will be regarded as being resident in Singapore if the
control and management of its business is exercised there (for example, if the
corporation's board of directors meets and conducts the business of the
corporation in Singapore). An individual will be regarded as being resident in
Singapore in a year of assessment if,
29
<PAGE> 31
in the preceding year, he or she was physically present in Singapore or
exercised an employment in Singapore (other than as a director of a company) for
183 days or more, or if he or she resides in Singapore.
Dividend Distributions. If we pay dividends on the ordinary shares or
ADSs out of the tax exempt income received because of our pioneer status or out
of our income subject to a concessionary tax rate, if any, such dividends will
be free of Singapore tax in the hands of the holders of the ordinary shares and
ADSs. Please see "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Special Tax Status" for a discussion of
our pioneer status.
Where the dividend is declared out of the above tax exempt income or
income subject to tax at a concessionary rate, we would have to obtain agreement
from the Inland Revenue Authority of Singapore confirming the amount of income
available for distribution of tax exempt dividends. Before this agreement has
been obtained, the Comptroller of Income Tax in Singapore may issue a
provisional assessment of our tax exempt income, and we will be able to
distribute tax exempt dividends based on this provisional assessment. Exempt
dividends paid by us in excess of our finalized tax exempt income will be deemed
distributed out of our ordinary income and will be subject to the treatment
outlined below.
We pay tax on our non-tax exempt income at the applicable corporate tax
rate, which was 26% for income earned through 1999 and which is currently 25.5%
for income earned in 2000 onward. This tax paid by us is in effect imputed to,
and deemed paid on behalf of, our shareholders. Thus, if we pay dividends on our
ordinary shares out of our non-tax exempt income, our shareholders receive the
dividends net of the tax paid by us. Dividends received by either a resident or
non-resident of Singapore are not subject to withholding tax. Shareholders are
taxed in Singapore on the gross amount of dividends, which is the cash amount of
the dividend plus an amount normally equivalent to the corporate income tax rate
paid by us on the dividend. The tax paid by us effectively becomes available to
shareholders as a tax credit to offset the Singapore income tax liability on
their overall income, including the gross amount of dividends.
A non-resident shareholder is effectively taxed on non-tax exempt
dividends at the corporate income tax rate. Thus, because tax deducted from the
dividend and paid by us at the corporate income tax rate is in effect imputed
to, and deemed paid on behalf of, our shareholders (as discussed in the
preceding paragraph), no further Singapore income tax will be imposed on the net
dividend received by a non-resident holder of ordinary shares or ADSs. Further,
the non-resident shareholder will normally not receive any tax refund from the
Inland Revenue Authority of Singapore.
No comprehensive tax treaty currently exists between Singapore and the
United States.
Gains on Disposal of the Ordinary Shares or ADSs. Singapore does not
impose tax on capital gains. However, gains or profits may be construed to be of
an income nature and subject to tax, especially if they arise from activities
which the Inland Revenue Authority of Singapore regards as the carrying on of a
trade in Singapore, or if they are short-term gains from the sale of real
property or shares in unlisted companies with substantial real property or real
property-related assets in Singapore. Thus, any gains or profits from the
disposal of the ordinary shares or ADSs are not taxable in Singapore unless the
seller is regarded as carrying on a trade in securities in Singapore, in which
case the disposal profits would be taxable as trading profits rather than
capital gains.
STAMP DUTY
There is no stamp duty payable in respect of the issuance and holding
of new ordinary shares or ADSs. Where existing ordinary shares or ADSs evidenced
in certificated form are acquired in Singapore, stamp duty is payable on the
instrument of transfer of the ordinary shares or ADSs at the rate of S$2.00 for
every S$1,000 of the consideration for, or market value of, the ordinary shares
or ADSs, whichever is higher. The stamp duty is borne by the purchaser unless
there is an agreement to the contrary. Where an instrument of transfer is
executed outside Singapore or no instrument of transfer is executed, no stamp
duty is payable on the acquisition of existing ordinary shares or ADSs. Stamp
duty may be payable if the instrument of transfer is received in Singapore.
ESTATE DUTY
In the case of an individual who is not domiciled in Singapore,
Singapore estate duty is imposed on the value of most movable and immovable
properties situated in Singapore. Thus, an individual holder of the ordinary
30
<PAGE> 32
shares who is not domiciled in Singapore at the time of his or her death will be
subject to Singapore estate duty on the value of any ordinary shares held by the
individual upon the individual's death. Such a shareholder will be required to
pay Singapore estate duty to the extent that the value of the ordinary shares,
and any other assets subject to Singapore estate duty, exceeds S$600,000. Unless
other exemptions apply to the other assets (for example, the separate exemption
limit for residential properties), any excess will be taxed at a rate equal to
5% on the first S$12 million of the individual's Singapore chargeable assets and
thereafter at a rate equal to 10%. However, an individual who holds ADSs and is
not domiciled in Singapore at the time of his or her death should not be subject
to Singapore estate tax duty on such ADSs because such ADSs are registered
outside Singapore and hence should not be considered as movable properties in
Singapore.
Prospective purchasers or ordinary shares or ADSs who are individuals,
whether or not domiciled in Singapore, should consult their own tax advisors
regarding the Singapore estate duty consequences of their investment.
UNITED STATES FEDERAL TAXATION
The following is a summary of the material U.S. federal income and
estate tax consequences that may be relevant to a U.S. holder with respect to
the acquisition, ownership and disposition of ordinary shares or ADSs. For
purposes of this summary, a "U.S. holder" includes the following:
- citizens or residents of the United States for United States federal
income tax purposes,
- corporations or other entities created or organized under the laws of
the United States or of any political subdivision thereof,
- persons otherwise subject to United States federal income taxation on
their worldwide income regardless of its source,
- estates the income of which is subject to United States federal income
taxation regardless of source,
- any trust the administration of which is subject to the primary
supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial
decisions of the trust, or, if the trust was in existence on August 20,
1996, has elected to continue to be treated as a United States person,
or
- any other person that is subject to U.S. federal income tax on a net
income basis in respect of an investment in ordinary shares or ADSs.
This summary deals only with ordinary shares and ADSs held as capital
assets (within the meaning of section 1221 of the Internal Revenue Code of 1986,
as amended (the "Code")) and does not address the tax consequences applicable to
holders that may be subject to special tax rules, including without limitation
financial institutions, insurance companies, regulated investment companies,
dealers in securities or currencies, persons holding ordinary shares or ADSs as
a hedge against currency risks or as a position in a "straddle" or "conversion
transaction" or other integrated investment transaction for tax purposes,
persons whose "functional currency" is not the U.S. dollar, or holders of 10% or
more, by voting power or value, of the stock of our company. It also does not
deal with holders other than original purchasers (except where otherwise
specifically noted). This summary is based upon the Code, existing temporary and
proposed Treasury Regulations, Internal Revenue Service ("IRS") rulings and
judicial decisions as now in effect and as currently interpreted and does not
take into account possible changes in such tax laws or interpretations, any of
which may be applied retroactively and could affect the tax consequences
described below. This summary further is based in part on the assumption that
each obligation in the deposit agreement and any related agreement will be
performed in accordance with its terms.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT A TAX ADVISOR WITH RESPECT TO
THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF ACQUIRING, OWNING
OR DISPOSING OF ORDINARY SHARES OR ADSs.
31
<PAGE> 33
OWNERSHIP OF ADSs
For U.S. federal income tax purposes, U.S. holders of ADSs will be
treated as the owners of the ordinary shares represented by such ADSs.
DIVIDENDS
Distributions of cash or property (other than ordinary shares, if any,
distributed pro rata to all shareholders of our company, including holders of
ADSs) with respect to ordinary shares will be included in income by a U.S.
holder as foreign source dividend income at the time of receipt, which in the
case of a U.S. holder of ADSs generally will be the date of receipt by the
depositary, to the extent such distributions are made from the current and
accumulated earnings and profits of our company. Such dividends will not be
eligible for the dividends received deduction generally allowed to corporate
U.S. holders. To the extent, if any, that the amount of any distribution by our
company exceeds our company's current and accumulated earnings and profits as
determined under U.S. federal income tax principles, it will be treated first as
a tax-free return of the U.S. holder's tax basis in the ordinary shares or ADSs
and thereafter as capital gain.
A U.S. holder will not be eligible for a foreign tax credit against its
U.S. federal income tax liability for Singapore dividend distribution taxes paid
by our company. U.S. holders should be aware that dividends paid by our company
generally will constitute "passive income" or, in the case of certain U.S.
holders, "financial services income" for purposes of the foreign tax credit.
If dividends are paid in Singapore dollars, the amount of the dividend
distribution includible in the income of a U.S. holder will be the U.S. dollar
value of the payments made in Singapore dollars, determined at a spot exchange
rate between Singapore dollars and U.S. dollars on the date such dividend is
includible in the income of the U.S. holder, regardless of whether the payment
is in fact converted into U.S. dollars. Generally, gain or loss, if any,
resulting from currency exchange fluctuations during the period from the date
the dividend is paid to the date such payment is converted into U.S. dollars
will be treated as ordinary income or loss.
Sale or exchange of ordinary shares or ADSs. A U.S. holder generally
will recognize gain or loss on the sale or exchange of ordinary shares or ADSs
equal to the difference between the amount realized on such sale or exchange and
the U.S. holder's tax basis in the ordinary shares or ADSs, as the case may be.
Such gain or loss will be capital gain or loss, and will be long-term capital
gain or loss if the ordinary shares or ADSs, as the case may be, were held for
more than one year. Gain or loss, if any, recognized by a U.S. holder generally
will be treated as U.S. source passive income or loss for U.S. foreign tax
credit purposes.
ESTATE TAXES
An individual shareholder who is a citizen or resident of the United
States for U.S. federal estate tax purposes will have the value of the ordinary
shares or ADSs owned by such holder included in his or her gross estate for U.S.
federal estate tax purposes. An individual holder who actually pays Singapore
estate tax with respect to the ordinary shares or ADSs will, however, be
entitled to credit the amount of such tax against his or her U.S. federal estate
tax liability, subject to certain conditions and limitations.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
In general, information reporting requirements will apply to payments
of dividends in respect of the ordinary shares or ADSs or the proceeds received
on the sale, exchange or redemption of the ordinary shares or ADSs by a paying
agent within the United States to a non-corporate (or other exempt) U.S. holder,
and a 31 percent backup withholding tax may apply to such amounts if the U.S.
holder fails to provide an accurate taxpayer identification number to the paying
agent. Amounts withheld as backup withholding will be creditable against the
U.S. holder's United States federal income tax liability.
The above summary is not intended to constitute a complete analysis of
all tax consequences relating to ownership of ordinary shares or ADSs. You
should consult your tax advisor concerning the tax consequences of your
particular situation.
32
<PAGE> 34
ITEM 8. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction
with our consolidated financial statements and the related notes and "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document. The selected financial data as
of December 31, 1995, 1996 and 1997 and for the years ended December 31, 1995
and 1996 are derived from our audited financial statements, however, we have not
included our audited financial statements for those periods in this document.
The selected financial data as of December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999 are derived from our audited financial
statements included elsewhere in this document which have been audited by KPMG,
independent accountants. Our financial statements are prepared in accordance
with U.S. GAAP.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996(1) 1997 1998(2)(3) 1999(4)(5)
---------- ---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue .................................. $ 287,026 $ 406,936 $ 379,761 $ 422,622 $ 694,258
Cost of revenue .............................. 187,168 289,435 368,521 439,668 527,023
---------- ---------- ---------- ---------- ----------
Gross profit (loss) .......................... 99,858 117,501 11,240 (17,046) 167,235
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development .................. 9,069 13,018 26,553 43,419 58,894
Fab start-up costs ........................ 11,236 13,132 10,908 1,455 8,442
Sales and marketing ....................... 5,550 16,233 20,184 31,872 34,359
General and administrative ................ 20,097 32,615 30,144 37,389 44,619
Costs incurred on termination of
development program...................... -- -- -- 31,776 6,500
Stock-based compensation .................. 2,799 332 2,024 (2,780) 20,094
---------- ---------- ---------- ---------- ----------
Total operating expenses ................ 48,751 75,330 89,813 143,131 172,908
---------- ---------- ---------- ---------- ----------
Operating income (loss) ...................... 51,107 42,171 (78,573) (160,177) (5,673)
Other income (expense):
Equity in loss of CSP ..................... -- -- (1,272) (5,577) (9,528)
Equity in loss of SMP ..................... -- -- -- (14,857) (23,282)
Other income .............................. 2,982 3,850 4,860 4,680 5,739
Interest income ........................... 2,944 973 179 1,690 6,733
Interest expense .......................... (1,297) (1,144) (12,782) (20,137) (17,822)
Exchange gain (loss) ...................... (22) 1,963 (31,678) 5,237 5,862
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ............ 55,714 47,813 (119,266) (189,141) (37,971)
Income tax expense ........................... (832) (337) (355) (865) (2,131)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest ....... 54,882 47,476 (119,621) (190,006) (40,102)
Minority interest in loss of CSP ............. -- -- -- -- 7,483
---------- ---------- ---------- ---------- ----------
Net income (loss) ............................ $ 54,882 $ 47,476 $ (119,621) $ (190,006) $ (32,619)
========== ========== ========== ========== ==========
Net income (loss) per ordinary share:
Basic ..................................... $ 0.13 $ 0.10 $ (0.24) $ (0.24) $ (0.03)
========== ========== ========== ========== ==========
Diluted ................................... $ 0.13 $ 0.10 $ (0.24) $ (0.24) $ (0.03)
========== ========== ========== ========== ==========
Shares used in per ordinary share calculation:
Basic ..................................... 418,661 488,296 490,407 784,541 1,035,181
Diluted ................................... 418,661 488,824 490,407 784,541 1,035,181
Net income (loss) per ADS:
Basic ..................................... $ 1.31 $ 0.97 $ (2.44) $ (2.42) $ (0.32)
========== ========== ========== ========== ==========
Diluted ................................... $ 1.31 $ 0.97 $ (2.44) $ (2.42) $ (0.32)
========== ========== ========== ========== ==========
ADSs used in per ADS calculation:
Basic ..................................... 41,866 48,830 49,041 78,454 103,518
Diluted ................................... 41,866 48,882 49,041 78,454 103,518
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 41,925 $ 7,064 $ 23,785 $ 99,619 $ 544,996
Working capital (deficit) ...................... (29,917) (173,937) (328,927) 13,099 294,562
Total assets ................................... 618,043 1,035,561 1,278,968 1,321,510 2,132,908
Short-term borrowings and current portion
of long-term debt............................ 28,456 29,155 10,591 52,128 119,991
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ------------ ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current installments of obligations under
capital leases .............................. 3,620 3,842 4,078 4,329 5,767
Obligations under capital leases, excluding .... 25,665 21,823 17,745 13,414 7,822
current installments
Other long-term debt ........................... 16,961 65,934 273,008 419,545 423,668
Shareholders' equity ........................... 377,609 489,237 310,806 601,246 1,141,750
</TABLE>
- -----------
(1) In 1996, gross profit and operating income included $23.2 million relating
to a reduction in accrued liabilities for a change in estimate of cost to
obtain certain licenses.
(2) Effective July 1, 1998, we changed our functional currency from the
Singapore dollar to the U.S. dollar.
(3) In 1998, we recorded a charge of $31.8 million relating to the write-down
of equipment in connection with the termination of a development program.
(4) In 1999, we recorded a charge of $6.5 million in connection with the
termination of a development program.
(5) CSP was treated as a consolidated subsidiary from October 1, 1999 forward.
EXCHANGE RATES
Fluctuations in the exchange rate between the Singapore dollar and the
U.S. dollar will affect the U.S. dollar equivalent of the Singapore dollar
price of the ordinary shares on the Singapore Exchange and, as a result, are
expected to affect the market price of ADSs. These fluctuations will also
affect the U.S. dollar conversion by the depositary of any cash dividends paid
in Singapore dollars on the ordinary shares represented by ADSs or any other
distribution received by the depositary in connection with the payment of
dividends on the ordinary shares. Currently, there are no restrictions in
Singapore on the conversion of Singapore dollars into U.S. dollars and vice
versa.
The following table sets forth, for the fiscal years indicated,
information concerning the exchange rates between Singapore dollars and U.S.
dollars based on the average of the noon buying rate in the City of New York on
the last business day of each month during the period for cable transfers in
Singapore dollars as certified for customs purposes by the Federal Reserve Bank
of New York. The table illustrates how many Singapore dollars it would take to
buy one U.S. dollar.
<TABLE>
<CAPTION>
SINGAPORE DOLLARS PER UNITED STATES $1.00
NOON BUYING RATE
-----------------------------------------
FISCAL YEAR ENDED DECEMBER 31, AVERAGE(1) LOW HIGH PERIOD END
- ------------------------------ ---------- --- ---- ----------
<S> <C> <C> <C> <C>
1994 ......................... 1.53 1.46 1.61 1.46
1995 ......................... 1.42 1.39 1.47 1.42
1996 ......................... 1.41 1.40 1.43 1.40
1997 ......................... 1.49 1.40 1.71 1.61
1998 ......................... 1.67 1.58 1.80 1.65
1999 ......................... 1.70 1.66 1.74 1.67
2000 (through March 15) ...... 1.71 1.65 1.72 1.72
</TABLE>
- ----------
(1) The average of the daily Noon Buying Rates on the last business day of
each month during the year.
Unless we indicate otherwise, all translations from Singapore dollars
to U.S. dollars contained in this document have been based on the noon buying
rate in the City of New York on December 31, 1999 for cable transfers in
Singapore dollars as certified for customs purposes by the Federal Reserve Bank
of New York. The noon buying rate on December 31, 1999 was S$1.67 per $1.00
DIVIDEND POLICY
In December 1995 and January 1997, we paid a cash dividend on our
ordinary shares in an amount equivalent to US$87,000 and US$93,000,
respectively, for the purpose of qualifying our ordinary shares as "trustee
stock" eligible for investment by account holders of the Central Provident
Fund, a mandatory employee pension plan administered by the Government of
Singapore. Except for these dividends, we have not, since our inception,
declared or paid any cash dividends on our ordinary shares. We do not currently
anticipate paying any cash dividends in 2000. We may, by ordinary resolution,
declare dividends at a general meeting, but we may not pay dividends in excess
of the amount recommended by our Board of Directors. Our Board of Directors may
also declare interim dividends without seeking shareholder approval. We must
pay all dividends out of our profits or pursuant to Section 69 of the Companies
Act of Singapore. In making its recommendation, our Board of Directors will
consider, among other things, our future earnings, operations, capital
requirements and general financial condition, as well as general business
conditions and other factors which our Board of Directors may determine are
appropriate. Some of our loan agreements restrict the payment of dividends
without the consent of the lender. We currently intend to retain future
earnings, if any, to finance expansion of our business.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes included elsewhere in this document. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from those projected
in the forward-looking statements. Factors that might cause future results to
differ significantly from those projected in the forward-looking statements
include, but are not limited to, those discussed below and elsewhere in this
document particularly in the cautionary risk factors described in Item 1 above.
OVERVIEW
Chartered is one of the world's leading independent semiconductor
foundries. We provide comprehensive wafer fabrication services and technologies
to semiconductor suppliers and manufacturers of electronic systems. We currently
own, or have an interest in, five fabrication facilities, all of which are
located in Singapore. We are currently in the process of constructing a sixth
fabrication facility in Singapore. Fabs 1, 2 and 3 are wholly-owned by our
company. Fab 5 is operated by SMP, of which we hold a 49% equity interest and
account for as a minority equity interest. Fab 6 is owned and will be operated
by CSP, of which we own a 51% equity interest and account for as a consolidated
subsidiary. Fab 7, which is wholly-owned by our company, is in the design and
initial construction phase.
U.S. GAAP generally requires consolidation of all majority owned
(greater than 50%) subsidiaries. However, as a result of certain provisions that
were contained in our strategic alliance agreement with respect to CSP, the
minority shareholders of CSP were deemed to have substantive participative
rights which overcame the presumption that we should consolidate CSP. Therefore,
CSP had been historically accounted for under the equity method in our financial
statements. As a result of an amendment to the strategic alliance agreement, we
have treated CSP as a consolidated subsidiary from October 1, 1999 forward.
Please see "Item 1. Business -- Strategic Alliances -- Chartered Silicon
Partners" for a discussion of this amendment.
As of March 15, 2000 we were 70.1% owned by ST and its affiliates. We
have a service agreement with ST pursuant to which we currently pay ST an annual
management fee for certain management and corporate support services based on a
service based fee arrangement.
According to the World Semiconductor Trade Statistics, the traditional
long-term growth rate for the worldwide semiconductor industry has been more
than 15%. However, the semiconductor industry is highly cyclical. Fabs can take
several years to plan, construct and begin operations. Therefore, during periods
of favorable market conditions, semiconductor manufacturers often begin building
new fabs in response to anticipated demand growth for semiconductors. In
addition, upon operation, fabs increase production volumes rapidly. As a result,
large
34
<PAGE> 36
amounts of semiconductor manufacturing capacity typically become available
during the same time period. Absent growth in demand, this sudden increase in
supply results in semiconductor manufacturing overcapacity, which leads to sharp
drops in semiconductor prices.
From 1996 through the second quarter of 1998, a number of sectors of
the semiconductor industry were in a state of overcapacity resulting in sharp
declines in the average selling price of semiconductor wafers and completed
semiconductor devices. However, since the third quarter of 1998, global
semiconductor demand has been growing at an accelerated pace.
Semiconductor manufacturing is very capital intensive in nature. A high
percentage of the cost of a fab is fixed, therefore increases or decreases in
capacity utilization rates can have a significant effect on profitability. The
unit cost of wafer fabrication generally decreases as fixed charges, such as
depreciation expense on the facility and semiconductor manufacturing equipment,
are allocated over a larger number of units produced.
Because the price of wafers varies significantly, the mix of wafers
produced affects revenue and profitability. The value of a wafer is determined
by the complexity of the device on the wafer. Production of devices with higher
level functionality and greater system-level integration requires more
manufacturing steps and commands higher wafer prices.
Because prices for wafers of a given level of technology decline over
the product life cycle, a fab must continue to migrate to increasingly
sophisticated technologies to maintain the same level of profitability. This
requires continuous capital investment.
In our first two fabs, we initially focused on manufacturing
semiconductor wafers for the computer industry. Production commenced in Fab 1 in
1989 and in Fab 2 in 1995. We achieved profitability in 1993 and continued to
increase our profitability through the first half of 1996. Conditions in the
semiconductor industry began to deteriorate in the second half of 1996. At the
same time, our capacity utilization declined from 90.7% in the first half of
1996 to 57.2% in the second half of 1996 and average selling price per wafer
declined significantly. Consistent with our long-term view of the growth of the
semiconductor industry, we continued to invest in new process technologies and
the expansion of our manufacturing capacity. During 1997, Fab 3 commenced
production and we entered into strategic alliances to form CSP and SMP. Because
we begin amortizing the capitalized costs associated with a new fab as soon as
the fab commences operation, we incur large depreciation expenses related to the
fab prior to the time the fab reaches volume production. In addition, we expense
all non-capitalized costs as incurred related to the start-up of the fab such as
personnel training costs and payroll and employee related costs.
Our production generally begins upon receipt of purchase orders from
our customers. Some of our customers are entitled to a discount on a fixed
number of wafers per period. Sales subject to these discounts were approximately
17% of total revenue in 1999.
Our 1999 share option plan is accounted for as a fixed option plan.
Reported share compensation expense represents the difference between the
exercise price of employee share option grants and the deemed fair value of our
ordinary shares at the date of the grant, amortized over the vesting period of
the applicable options.
Effective July 1, 1998, we changed our functional currency from the
Singapore dollar to the U.S. dollar. Significant changes in economic facts
necessitated this change in functional currency. These changes included
increased financing in U.S. dollars along with increasing sales to companies
based outside of Singapore, principally in the United States. In addition, there
continues to be less financial dependence by us on our parent.
The change in functional currency was recognized through the
translation of Singapore dollar amounts of our non-monetary assets, principally
property, plant and equipment at June 30, 1998, to U.S. dollars on July 1, 1998
with those U.S. dollar amounts becoming the accounting basis for those assets at
July 1, 1998 and for subsequent periods. The $52.7 million cumulative
translation adjustment at July 1, 1998 in shareholders' equity prior to the
change remains as a separate component of accumulated comprehensive income.
Please see note 2(e) to our consolidated financial statements for additional
information regarding our change in functional currency.
We expect that a significant change to the rate of inflation and the
changing prices of our equipment and materials may affect our cost of
operations and impact our net income. For the years ended December 31, 1997,
1998 and 1999, we believe that changes in inflation did not have a material
impact on our cost of operations or net income.
35
<PAGE> 37
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net revenue ........................................... 100.0% 100.0% 100.0%
Cost of revenue ....................................... 97.0 104.0 75.9
------ ------ ------
Gross profit (loss) ................................... 3.0 (4.0) 24.1
------ ------ ------
Operating expenses:
Research and development ........................... 7.0 10.3 8.5
Fab start-up costs ................................. 2.9 0.3 1.2
Sales and marketing ................................ 5.3 7.5 4.9
General and administrative ......................... 7.9 8.8 6.4
Costs incurred on termination of development
program .......................................... -- 7.5 0.9
Stock-based compensation ........................... 0.5 (0.7) 2.9
------ ------ ------
Total operating expenses ........................ 23.6 33.7 24.8
------ ------ ------
Operating loss ........................................ (20.6) (37.7) (0.7)
Other income (expense):
Equity in loss of CSP .............................. (0.3) (1.3) (1.4)
Equity in loss of SMP .............................. -- (3.5) (3.4)
Other income ....................................... 1.3 1.1 0.8
Interest income .................................... -- 0.4 1.0
Interest expense ................................... (3.4) (4.8) (2.6)
Exchange gain (loss) ............................... (8.3) 1.2 0.8
------ ------ ------
Loss before income taxes .............................. (31.3) (44.6) (5.5)
Income tax expense .................................... (0.1) (0.2) (0.3)
------ ------ ------
Loss before minority interest ......................... (31.4) (44.8) (5.8)
Minority interest in loss of CSP ...................... -- -- 1.1
------ ------ ------
Net loss .............................................. (31.4)% (44.8)% (4.7)%
====== ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
Net Revenue. We generate revenue primarily from fabricating
semiconductor wafers. In addition, we derive revenue from associated
subcontracted assembly and test services. Revenue is recognized upon shipment of
goods to our customers. Substantially all revenue is in U.S. dollars. Net
revenue increased 64.3% from $422.6 million in 1998 to $694.3 million in 1999.
The higher revenue was due to improved customer demand led by the U.S. region
which increased $211.8 million to $477.2 million in 1999, and the addition of
new customers in Europe, our fastest growing region, which increased $82.2
million to $89.1 million in 1999.
The combined factors of new customers and increased wafer demand
spurred wafer shipments from 439,700 in 1998 to 695,300 in 1999, an increase of
255,600, or 58.1%. The improvement in average selling prices also contributed to
net revenue improvement. Average selling prices increased by 4% from $961 per
wafer in 1998 to $999 per wafer in 1999. Adjusted to exclude the print-head
business that was terminated in 1998, average selling prices increased 2% from
1998 to 1999. The average selling price improvement was mainly due to shipment
of wafers with higher mix of advanced technology.
Cost of revenue and gross profit (loss). Cost of revenue includes
depreciation expense, attributed overhead, cost of materials and subcontracted
expenses for assembly and test services. Cost of revenue increased 19.9% from
$439.7 million in 1998 to $527.0 million in 1999, principally due to the
increase in production volumes. The increase in the number of wafers produced
resulted in a 24.2% decrease in average cost per wafer from $1,000 in 1998 to
$758 in 1999. As a result of higher volume of shipments and improved capacity
utilization, gross profit for
36
<PAGE> 38
1999 improved to $167.2 million, or 24.1% of net revenue, from gross loss of
$17.0 million, or negative 4.0% of net revenue, in 1998.
Research and development expenses. Research and development expenses
consist primarily of salaries and benefits for research and development
personnel, depreciation of research and development equipment and material
expenses for development wafers. Research and development expenses increased by
35.6% from $43.4 million in 1998 to $58.9 million in 1999. The increase was due
principally to expenses for the development of 0.25u and 0.18u process
technologies, as well as other advanced processes.
Fab start-up costs. Fab start-up costs constitute all expenses (other
than capitalized interest related to acquisition or construction of property,
plant and equipment) in connection with the establishment of new fabs and
operations. As a result of the amendment to the strategic alliance agreement
with Agilent Technologies Europe B.V. and EDB Investments Pte Ltd, the Company
has treated CSP as a consolidated subsidiary from October 1, 1999 forward. The
fab start-up costs for 1998 were due primarily to start-up activities for print
head operations (since terminated) and for 1999 were related to start-up costs
at CSP.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries and benefits for sales and marketing personnel, contract
expenses paid to providers of EDA software, expenses associated with overseas
offices, wafer samples, promotions and receivables provisions. Sales and
marketing expenses increased by 7.8% from $31.9 million in 1998 to $34.4 million
in 1999 due principally to costs of expanding our EDA partnership program and
customer support structure in the region.
General and administrative expenses. General and administrative
expenses consist primarily of salaries and benefits for administrative
personnel, depreciation of non-production equipment and recruitment and training
expenses. General and administrative expenses increased by 19.3% from $37.4
million in 1998 to $44.6 million in 1999. The increase was due primarily to
higher administrative headcount which resulted in higher payroll and staff
related expenses.
Costs incurred on termination of development program. During 1998, we
decided to discontinue a technology transfer and licensing arrangement related
to a development program. The program involved the transfer of two generation
(geometry) process technologies from the licensor and further enhancing them for
application by us. The process technologies were intended for a specific market
requiring embedding applications on to memory chips. The program started in
mid-1997 and by the later half of 1998, extreme weakness and volatility of the
market and adverse customer perceptions on the cost of the application, together
with customer views of the long and complicated product development cycle, led
to difficulties in both Chartered and the licensor fulfilling the original
intent of the agreement. All program transfer, development and marketing
activities were terminated in 1998.
In connection with the discontinuation of this development program,
certain equipment previously purchased and yet to be placed into service was
identified by management in 1998 as redundant and to be disposed. We recorded a
$31.8 million loss in 1998 to reduce the carrying amount of certain identified
equipment and a technology license agreement to their estimated fair value less
costs to sell. This loss comprised $30.9 million for the write-down of plant and
equipment to fair value less costs to sell and $0.8 million to reduce the
carrying amount of the related technology license agreement to zero. The
equipment was unique to or specifically configured to the requirements of the
transferred process technologies and could not be re-deployed effectively. We
sold one item of equipment in 1999 and we are in the process of evaluating bids
to purchase the remaining equipment and expect to sell it in 2000. The
technology license agreement written off represented the unamortized amount paid
in 1997 for the acquisition of the technology.
In 1999, as a result of subsequent discussions with the licensor
regarding the termination of the development program, we recorded a $6.5 million
charge representing a final cash settlement amount that allowed an in-principle
agreement to be reached on the termination of the license agreement.
Equity in loss of CSP. Prior to October 1, 1999, CSP was accounted for
using the equity method. Effective October 1, 1999, as a result of an amendment
to the CSP strategic alliance agreement, we have treated CSP as a consolidated
subsidiary. Our share of the losses in CSP was $5.6 million in 1998 and $9.5
million for the first nine months of 1999 (the period of time in 1999 for which
CSP was accounted for using the equity method).
37
<PAGE> 39
Equity in loss of SMP. Our share of the losses in SMP was $14.9 million
in 1998 compared to $23.3 million in 1999. This increase in loss represents the
increase in start-up activities for SMP in 1999.
Other income. As a result of higher recognizable grants from the
Government of Singapore for both research and development and staff training,
other income increased from $4.7 million in 1998 to $5.7 million in 1999.
Interest income. Interest income increased from $1.7 million in 1998 to
$6.7 million in 1999. The increase was due to interest earned from cash proceeds
from our initial public offering which were placed in fixed deposits.
Interest expense. Interest expense decreased 11.5% from $20.1 million
in 1998 to $17.8 million in 1999 due primarily to lower average outstanding loan
balances in 1999 compared to 1998.
Exchange gain (loss). Exchange gain increased 11.9% from $5.2 million
in 1998 to $5.9 million in 1999 due primarily to the strengthening of the U.S.
dollar against the Singapore dollar and the resulting effect on our accrual for
operating expenses that were denominated in Singapore dollars.
Income tax expense. Each of our existing fabs has been exempted from
income tax on profits from the sale of manufactured goods for ten years
following the date specified production milestones are achieved. Currently, we
pay tax only on interest income. We had a provision for taxes of $0.9 million in
1998 compared to $2.1 million in 1999. The higher tax provision in 1999 was the
result of tax payable on interest earned from cash proceeds from our initial
public offering which were placed in fixed deposits.
Minority interest in loss of CSP. The line item for minority interest
in loss of CSP of $7.5 million in 1999 results from the consolidation of CSP as
a subsidiary from October 1, 1999.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Net revenue. Net revenue increased 11.3%, from $379.8 million in 1997
to $422.6 million in 1998. This increase in revenue was due primarily to an
increase in the number of wafers shipped. The number of eight-inch equivalent
wafers shipped increased from 344,100 in 1997 to 439,700 in 1998, an increase of
95,600 or 27.8%. This was primarily the result of increased shipment of 0.35u
products and, to a lesser extent, the sale of print head chips.
The increase in wafers shipped was offset by a 12.9% decrease in
average selling prices, from $1,104 per wafer in 1997 to $961 per wafer in 1998.
This decrease was due primarily to worldwide semiconductor overcapacity and a
resulting decrease in average prices.
Cost of revenue and gross profit (loss). Cost of revenue increased
19.3% from $368.5 million in 1997 to $439.7 million in 1998, principally due to
higher depreciation cost as a result of additional capacity installed in Fabs 1,
2 and 3. The increase in the number of wafers produced resulted in average cost
per wafer decreasing 6.6% from $1,071 in 1997 to $1,000 in 1998. We suffered a
gross loss of $17.0 million in 1998 compared with gross profit of $11.2 million
in 1997. This was the result of declining average selling price and higher cost
of revenue including higher depreciation cost.
Research and development expenses. The 63.5% increase in research and
development expenses from $26.6 million in 1997 to $43.4 million in 1998 was due
primarily to activities in improving process technology and the development of
new technology, in particular the development of 0.25u and 0.35u process
technologies. To support these activities, we increased the number of personnel
engaged in research and development by 28 during 1998. In addition, we moved our
research and development operations from Fab 2, which was in commercial
production, to Fab 3, which was then being equipped with our latest production
equipment and was only producing a limited number of wafers. This caused a
significant increase in absorption of fixed costs by our research and
development activity.
Fab start-up costs. Fab start-up costs decreased 86.7% from $10.9
million in 1997 to $1.5 million in 1998. Fab 3 commenced operations in August
1997, after which Fab 3 expenses were no longer classified as start-up costs.
38
<PAGE> 40
Sales and marketing expenses. Sales and marketing expenses increased by
57.9% from $20.2 million in 1997 to $31.9 million in 1998 as we expanded our EDA
partnership programs, increased our presence in Europe and the eastern United
States and increased our use of wafer samples for prospective business. As a
percentage of net revenue, sales and marketing expenses increased from 5.3% in
1997 to 7.5% in 1998.
General and administrative expenses. General and administrative
expenses increased 24.0% from $30.1 million in 1997 to $37.4 million in 1998. As
a percentage of net revenue, general and administrative expenses increased from
7.9% in 1997 to 8.8% in 1998. This increase was due to administrative, payroll
and other expenses in connection with the commencement of production in Fab 3 in
1997.
Cost relating to termination of development program. In connection with
the discontinuation of the development program described above under "-- Years
ended December 31, 1998 and December 31, 1999 -- Costs incurred on termination
of development program," certain equipment previously purchased and yet to be
placed into service was identified by management in 1998 as redundant and to be
disposed of in the near term. We recorded a $31.8 million loss in 1998 to reduce
the carrying amount of certain identified equipment and a technology license
agreement to their estimated fair value less costs to sell. This loss comprised
$30.9 million for the write-down of plant and equipment to fair value less costs
to sell and $0.8 million to reduce the carrying amount of the related technology
license agreement to zero. The equipment was unique to or specifically
configured to the requirements of the transferred process technologies and could
not be re-deployed effectively. The technology license agreement written off
represented the unamortized amount paid in 1997 for the acquisition of the
technology. As of December 31, 1998, management did not expect to incur any
further costs with respect to the decision to discontinue the development
program.
In 1999, as a result of subsequent discussions with the licensor
regarding the termination of the development program, we recorded a $6.5 million
charge representing a final cash settlement amount that allowed an in-principle
agreement to be reached on the termination of the license agreement. The
termination agreement was signed in August 1999. No further payments will be
made with respect to this program.
Equity in loss of CSP. Our share of the losses in CSP was $5.6 million
in 1998 compared to $1.3 million in 1997. The increase in loss was primarily
attributable to the increase in pre-operating costs at CSP, which was formed in
1997.
Equity in loss of SMP. Our share of the losses in SMP was $14.9 million
in 1998 and was attributable to the pre-operating costs of SMP, which was formed
in January 1998.
Interest income. Interest income increased from $0.2 million in 1997 to
$1.7 million in 1998 due to the additional equity investments in March and
October 1998 by existing shareholders. This capital was temporarily deposited in
fixed rate interest bearing accounts, before being drawn down for the repayment
of indebtedness and purchase of new equipment.
Interest expense. Interest expense increased 57.5% from $12.8 million
in 1997 to $20.1 million in 1998 due primarily to the higher level of borrowings
to finance the expansion of Fab 3. Outstanding loan balances increased from
$282.2 million at December 31, 1997 to $468.6 million at December 31, 1998.
Exchange gain (loss). In 1997, we incurred a loss of $31.7 million due
to the significant strengthening of the U.S. dollar against the Singapore dollar
and its effect on our U.S. dollar denominated liabilities. In 1998, we
recognized an exchange gain of $5.2 million in 1998 in a period of relative
stability between the U.S. dollar and the Singapore dollar, primarily as a
result of the amortization of gains on certain hedging transactions.
Income tax expense. Income tax expense increased from $0.4 million in
1997 to $0.9 million in 1998 due primarily to an increase in non-tax exempt
interest income.
QUARTERLY RESULTS
The following table sets forth certain unaudited consolidated financial
information, including as a percentage of net revenue, for the eight fiscal
quarters ended December 31, 1999. We believe that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly
39
<PAGE> 41
the selected quarterly information when read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
the document. Our results of operations have varied and may continue to vary
significantly from quarter-to-quarter and are not necessarily indicative of the
results of any future period. In addition, in light of our recent growth, we
believe that period-to-period comparisons should not be relied upon as an
indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue .............................. $145.7 $ 87.1 $ 83.9 $106.0 $130.8 $163.9 $183.3 $216.2
Cost of revenue .......................... 115.5 108.6 103.2 112.4 118.1 129.1 134.9 144.8
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss) ...................... 30.2 (21.5) (19.3) (6.4) 12.7 34.8 48.4 71.4
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development .............. 9.4 11.3 13.3 9.5 12.1 10.9 13.5 22.4
Fab start-up costs .................... 0.9 0.6 -- -- -- -- -- 8.5
Sales and marketing ................... 4.3 9.3 8.8 9.5 10.1 10.5 9.2 4.6
General and administrative ............ 6.5 8.6 7.8 14.5 10.3 12.4 9.8 12.1
Costs incurred on termination of
development program .................. -- -- -- 31.8 6.5 -- -- --
Stock-based compensation .............. (0.7) (0.7) (0.7) (0.7) 1.6 1.6 8.8 8.0
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses ............ 20.4 29.1 29.2 64.6 40.6 35.4 41.3 55.6
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) .................. 9.8 (50.6) (48.5) (71.0) (27.9) (0.6) 7.1 15.8
Other income (expense):
Equity in loss of CSP ................. (0.5) (1.3) (2.0) (1.7) (2.7) (3.3) (3.6) --
Equity in loss of SMP ................. (0.4) (4.6) (5.4) (4.5) (5.8) (6.2) (6.7) (4.6)
Other income .......................... -- 0.3 1.9 2.4 0.3 0.3 0.1 4.9
Interest income ....................... 0.5 0.3 0.1 0.7 0.7 0.5 0.5 5.1
Interest expense ...................... (5.7) (4.4) (5.3) (4.7) (4.6) (4.5) (4.5) (4.2)
Exchange gain (loss) .................. (1.3) (1.8) 6.6 1.8 5.5 (0.5) 1.1 (0.3)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes ........ 2.4 (62.1) (52.6) (77.0) (34.5) (14.3) (6.0) 16.7
Income tax benefit (expense) ............. (0.3) (0.3) (0.1) (0.2) (0.4) 0.5 (0.2) (2.1)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before minority interest ... 2.1 (62.4) (52.7) (77.2) (34.9) (13.8) (6.2) 14.6
Minority interest in loss of CSP ......... -- -- -- -- -- -- -- 7.5
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ........................ $ 2.1 $(62.4) $(52.7) $(77.2) $(34.9) $(13.8) $ (6.2) $ 22.1
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(AS A PERCENTAGE OF NET REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue .............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue .......................... 79.3 124.7 123.0 106.0 90.3 78.8 73.6 67.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss) ...................... 20.7 (24.7) (23.0) (6.0) 9.7 21.2 26.4 33.0
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development .............. 6.4 12.9 15.8 9.0 9.2 6.6 7.4 10.4
Fab start-up costs .................... 0.6 0.6 -- -- -- -- -- 3.9
Sales and marketing ................... 3.0 10.6 10.5 8.9 7.7 6.4 5.0 2.1
General and administrative ............ 4.4 9.9 9.3 13.7 7.9 7.6 5.3 5.6
Costs incurred on termination
of development program ............... -- -- -- 30.0 5.0 -- -- --
Stock-based compensation .............. (0.5) (0.8) (0.9) (0.7) 1.3 1.0 4.8 3.7
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses ............ 13.9 33.2 34.7 60.9 31.1 21.6 22.5 25.7
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) .................. 6.8 (57.9) (57.7) (66.9) (21.4) (0.4) 3.9 7.3
Other income (expense):
Equity in loss of CSP ................. (0.3) (1.6) (2.4) (1.6) (2.0) (2.0) (2.0) --
Equity in loss of SMP ................. (0.3) (5.2) (6.4) (4.2) (4.5) (3.8) (3.6) (2.1)
Other income .......................... -- 0.4 2.3 2.3 0.2 0.2 0.1 2.3
Interest income ....................... 0.3 0.4 0.2 0.7 0.5 0.3 0.3 2.3
Interest expense ...................... (3.9) (5.0) (6.3) (4.5) (3.5) (2.7) (2.5) (1.9)
Exchange gain (loss) .................. (0.9) (2.1) 7.9 1.7 4.2 (0.3) 0.6 (0.2)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes ........ 1.7 (71.0) (62.4) (72.5) (26.5) (8.7) (3.2) 7.7
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(AS A PERCENTAGE OF NET REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax benefit (expense) ............. (0.2) (0.3) (0.1) (0.2) (0.3) 0.3 (0.1) (1.0)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before minority interest.... 1.5 (71.3) (62.5) (72.7) (26.8) (8.4) (3.3) 6.7
Minority interest in loss of CSP ......... -- -- -- -- -- -- -- 3.5
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ........................ 1.5 % (71.3)% (62.5)% (72.7)% (26.8)% (8.4)% (3.3)% 10.2 %
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The worldwide semiconductor industry suffered from reduced demand in
the second and third quarters of 1998, due in part to excess inventories. As a
result, we shipped fewer wafers during these periods, at lower average selling
prices. Industry demand began to increase in the fourth quarter of 1998 and has
continued to increase in each of the quarters of 1999. Our wafer shipments
increased significantly during each of these periods. Our average selling prices
have rebounded since the first quarter of 1999. The higher number of wafers
shipped together with improved average selling prices have resulted in higher
net revenues.
Gross margins improved in each of the quarters beginning in the third
quarter of 1998, due primarily to better capacity utilization and higher average
selling prices.
Research and development costs vary from quarter-to-quarter as the
level of our research and development activity varies based on, among other
things, the commencement and termination of specific programs.
General and administrative expenses increased in the second through
fourth quarters of 1998 as we increased infrastructure and management resources
to support future growth.
Fourth quarter 1999 net income of $22.1 million (which included a
non-cash stock-based compensation charge of $8.0 million) reflected an
improvement of $99.3 million from a negative $77.2 million in the fourth quarter
of 1998. For the fourth quarter of 1999, higher volume of shipments, improved
capacity utilization and higher average selling prices drove the gross profit to
$71.4 million, or 33.0% of net revenue, from a negative $6.4 million, or
negative 6.0% of net revenue in the same quarter in 1998. The fourth quarter of
1998 net loss included a $31.8 million charge associated with the termination of
a development program and a credit of $0.7 million for a non-cash stock-based
compensation charge.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our principal sources of liquidity included
$545.0 million in cash and cash equivalents and $277.8 million of unutilized
banking and credit facilities consisting of short-term advances and bank
guarantees.
Net cash provided by operating activities totaled $156.9 million in
1998 and $271.1 million in 1999. The $156.9 million of cash generated in 1998
was attributable to a decrease in accounts receivable and inventories and an
increase in accrued operating expenses, as well as cash generated by other
operating activities. The $271.1 million of cash generated in 1999 was
attributable to an increase in accrued operating expenses and other cash
generated by operating activities, offset by an increase in accounts receivable.
Net cash used in investing activities totaled $358.6 million in 1998
and $377.4 million in 1999. Through December 31, 1999, our investing activities
have consisted primarily of capital expenditures totaling $279.4 million in 1998
and $340.3 million in 1999. Capital expenditures have been principally comprised
of the purchase of semiconductor equipment for the equipping of fabs. We also
had significant cash outflows relating to our investment in SMP and CSP.
Net cash provided by financing activities totaled $284.9 million in
1998 and $551.8 million in 1999. Cash generated from financing activities in
1998 was principally generated from the issuance of ordinary shares totaling
$492.9 million, offset by the repayment of loans and reduction of customer
deposits. Cash generated from financing activities in 1999 was principally
generated from our initial public offering, which raised approximately $548.1
million in net proceeds, partly offset by a reduction of customer deposits. As
of March 15, 2000, of the net proceeds from our initial public offering,
approximately $24.4 million has been used for an equity injection in
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<PAGE> 43
CSP, $8.8 million has been used for an equity injection in SMP and $40.1 million
has been used for capital expenditures. The remaining net proceeds are invested
in various time deposits with institutions.
We have an oral agreement for a multi-currency $100 million short-term
credit facility with ST. Interest on the facility accrues at the monthly average
interest rate of three specific banks as indicated by ST. Borrowings are
unsecured. As of December 31, 1999, there were no borrowings outstanding under
this facility.
As of December 31, 1999, we had three loans for capital expenditures
and equipment with outstanding principal amounts of $36.7 million, $165.5
million and $153.7 million, respectively. Each of the loans is denominated in
Singapore dollars and we fully hedge both interest and principal payments
against fluctuations in foreign exchange rates. The loans bear interest at rates
between 4.0% and 4.25%. The three loan agreements are unsecured and guaranteed
by ST.
- The first loan matures on September 1, 2003. Interest is payable
semiannually and principal will be amortized in equal semi-annual
installments commencing on September 1, 1997.
- The second loan matures on September 1, 2005. Interest is payable
semiannually and principal will be amortized in equal semi-annual
installments commencing on September 1, 1999.
- The third loan matures on September 1, 2002. Interest is payable
semi-annually and principal will be amortized in equal semi-annual
installments commencing on September 1, 1999.
As of December 31, 1999, we had two bank loans with outstanding amounts
of S$50.0 million (US$29.9 million) each. The loans are due February 13, 2002
and June 17, 2002, respectively. The loans carry interest rates of 2.0% above
the bank's first tier savings rate and 1.0% above the arithmetic mean of SIBOR
for deposits quoted by specified banks to the lender, respectively. Interest is
payable semi-annually in Singapore dollars for both loans. The loans are
unsecured. During 1998, we entered into foreign currency forward contracts to
hedge the principal and interest cash flows related to all of our Singapore
dollar borrowings.
CSP has a term loan facility of $143.2 million with several banks and
financial institutions for capital expenditures and equipment. As of December
31, 1999, $128.0 million had been drawn on this facility. The loan matures June
30, 2002 and carries an interest rate of 0.5625% above the arithmetic mean of
SIBOR rates for U.S. dollars deposits quoted by specified banks to the lender.
Interest is payable semi-annually in U.S. dollars and principal will be
amortized in four equal semi-annual installments commencing December 31, 2000.
Borrowings under this facility are unsecured.
We have received research grants totaling $66.7 million from various
agencies of the Government of Singapore as of December 31, 1999. These grants
provide funding for a portion of our research and development related capital
expenditures and for the training and staffing costs associated with some of our
process technology development programs. Funds from these grants are disbursed
upon the achievement of program milestones. As of December 31, 1999, $16.3
million of the grants currently in effect had been disbursed to us. The grants
are disbursed based on the amount of expenditures incurred. There are no
conditions attached to the grants other than completion of the project to which
the grant relates and the certification of the costs incurred.
We expect our aggregate capital expenditures to be approximately $1.1
billion in 2000, including approximately $480 million relating to CSP, $40
million relating to our investment in SMP and $200 million for the design and
initial construction of Fab 7. CSP intends to enter into a credit facility
providing for borrowings of approximately $820 million to finance its capital
expenditure requirements, including approximately $480 million for its planned
capital expenditures for 2000. The actual amount of debt to be incurred under
the facility will be influenced by several factors, including without
limitation, the speed and timing of the ramp up of operations at Fab 6 and the
terms of such debt. We believe that our cash on hand, existing and pending
credit facilities and credit terms with our equipment vendors will be sufficient
to meet our capital expenditure and working capital needs for 2000.
We expect our aggregate capital expenditures to be approximately $1.5
billion in 2001, including approximately $500 million relating to CSP and $600
million for the construction and equipping of Fab 7. We are actively evaluating
financing plans for our capital expenditure requirements for 2001. We expect to
fund these requirements through public or private debt or equity financing or
from other sources. There can be no assurance
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<PAGE> 44
that additional financing will be available at all or, if available, that such
financing will be obtained on terms favorable to us or that any additional
financing will not be dilutive to our shareholders.
YEAR 2000 UPDATE
We crossed over from December 31, 1999 into January 1, 2000 without
experiencing any Year 2000-related incidents or disruptions that were harmful to
our company.
SPECIAL TAX STATUS
We have been granted pioneer status under the Economic Expansion
Incentives (Relief from Income Tax) Act (Chapter 86) of Singapore for:
- the manufacture of large scale integrated circuits at Fab 1 for a
ten-year period beginning January 1, 1991;
- the manufacture of integrated circuits using submicron (smaller than one
micron) technology at Fab 2 for a ten-year period beginning July 1,
1996;
- the manufacture of integrated circuits using submicron technology at Fab
3 for a ten-year period beginning January 1, 1998; and
- the wafer fabrication of Application Specific Integrated Circuits (ASIC)
and other advanced semiconductor devices at Fab 6 for a ten-year period
beginning from the initial production date on condition that such date
occurs on or before December 1, 2000.
We have also been granted post-pioneer status under the Economic
Expansion Incentives (Relief from Income Tax) Act for:
- the manufacture of integrated circuits using submicron technology at Fab
2 for a five-year period beginning July 1, 2006;
- development and expansion company status for the manufacture of
integrated circuits using submicron technology at Fab 3 for a five-year
period beginning January 1, 2008; and
- development and expansion company status for the wafer fabrication of
ASICs and other advanced semiconductor devices at Fab 6 for a five-year
period beginning from the expiry of the term of the pioneer status.
During the period for which our pioneer status is effective, subject to
our compliance with certain conditions, income from our pioneer trade (that is,
sale of integrated circuits) is exempt from Singapore income tax. During the
periods for which our post-pioneer status and development and expansion company
status are effective, subject to our compliance with certain conditions, income
from our post-pioneer trade and development and expansion is taxed at a
concessionary rate of 10%. The income tax exempt profits arising from the
pioneer trade may be distributed as tax-exempt dividends, and holders of
ordinary shares are not subject to Singapore income tax on such dividends.
Please see "Item 7. Taxation -- Singapore Taxation -- Dividend Distribution" for
information regarding the taxation of dividends. Losses accumulated before the
pioneer status period cannot be carried forward. Losses accumulated in the
pioneer status period may be carried forward and may be offset against profits
from the same pioneer trade arising after the expiration of the pioneer status
period, subject to our compliance with certain conditions. Profits arising
during pioneer status offset any accumulated pioneer loss carryforward balance.
Without this exemption from income tax or the concessionary tax rate of 10%, we
would be subject to income tax at the applicable corporate income tax rate which
was 26% for income earned through 1999 and which is currently 25.5% for income
earned in 2000 onward. Interest income is not exempt from taxation during the
pioneer status period or entitled to the concessionary tax rate during the
post-pioneer status period or the development and expansion company status
period.
43
<PAGE> 45
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as recently amended,
is effective for fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. We believe the adoption of SFAS 133 will not have a
material effect on our financial position or results of operations.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risks derives primarily from the
changes in interest rates and foreign exchange rates. To mitigate these risks,
the Company utilizes derivative financial instruments, the application of which
is primarily for hedging purposes and not for speculative purposes.
INTEREST RATE RISK
Our cash equivalents and short-term investments are exposed to
financial market risk due to fluctuation in interest rates, which may affect our
interest income and the fair market value of our investments. We manage the
exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and investing in short-term investment-grade corporate
securities. These securities are highly liquid and generally mature within 12
months from our purchase date. Due to the short maturities of our investments,
the carrying value approximates the fair value. In addition, we do not use our
investments for trading or other speculative purposes.
We are exposed to interest rate risk on our existing floating rate debt
and on additional debt financing that may be periodically needed for the capital
expenditures associated with our capacity expansion and new fabs. The interest
rate that we will be able to obtain on debt financing will depend on market
conditions at that time, and may differ from the rates we have secured on our
current debt.
As of December 31, 1999, our debt obligations are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------------------------------------------
EXPECTED MATURITY DATE AS OF
(IN THOUSANDS, EXCEPT INTEREST RATE) DECEMBER 31, 1998
------------------------------------------------------ WEIGHTED -----------------
THERE- FAIR INTEREST FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE RATE TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
U.S. dollar at
floating rate(1)... $ 32,000 $ 32,000 $ 32,000 $ 32,000 $128,000 $128,000 5.93%
Singapore dollar
at fixed rate(2)... 87,991 87,991 87,991 36,772 $ 27,579 $ 27,579 355,903 350,515 4.11 $408,277 $397,717
Singapore dollar
at floating
rate(2) ........... 59,756 59,756 59,756 4.49 60,314 60,314
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Debt
Maturing ...... $119,991 $119,991 $179,747 $ 68,772 $ 27,579 $ 27,579 $543,659 $538,270 $468,591 $458,031
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
ACCOUNTS PAYABLE
U.S. dollar ...................................... $ 16,895 $102,614
Singapore dollar(2) .............................. 4,337 12,382
Japanese yen(2) .................................. 10,127 29,742
Others ........................................... -- 7,663
-------- --------
Total Payable ................................ $ 31,359 $152,401
======== ========
</TABLE>
- ---------------
(1) As a result of consolidating CSP as a subsidiary from October 1, 1999
forward, our debt obligations as of December 31, 1999 included a U.S.
dollar floating rate debt obligation amounting to US$128 million.
(2) We have entered into forward foreign contracts related to portion of these
amounts to exchange the related cash flows to U.S. dollars. Please see
"Foreign Currency Risk" below.
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<PAGE> 46
As of December 31, 1999, 65.5% of our outstanding debt obligations bore
fixed interest rates. We have no cash flow or earnings exposure due to market
interest rate changes for our fixed debt obligations. 34.5% of our outstanding
debt obligations bear floating interest rates. We have cash flow and earnings
exposure due to market interest rate changes for our floating debt obligations.
A half percentage point change in interest rates would affect our interest
payments by 3.7% annually.
FOREIGN CURRENCY RISK
Our foreign currency exposures give rise to market risk associated with
exchange rate movements of the U.S. dollar, our functional currency, against the
Japanese yen and the Singapore dollar. Substantially all of our revenue was
denominated in U.S. dollars during the year ended December 31, 1999 and as a
result, we had relatively little foreign currency exchange risk with respect to
any of our revenue. In 1999, approximately 27% of our cost of revenue was
denominated in Singapore dollars. In addition, approximately 59% of our capital
expenditures were denominated in U.S. dollars, approximately 25% were
denominated in Japanese yen and approximately 16% were denominated in Singapore
dollars. In addition, a substantial part of our debt is denominated in foreign
currency, primarily Singapore dollars.
To protect against reductions in value and the volatility of future
cash flows caused by changes in foreign exchange rates, we utilize currency
forward contracts to minimize the impact of foreign currency fluctuations on our
results of operations. We utilize, from time to time, currency forward contracts
to hedge specific currency risks related to equipment purchase commitments,
primarily in Japanese yen. In addition, we minimize our currency risk by
purchasing certain raw materials and equipment in U.S. dollars and borrowing in
U.S. dollars. Prior to July 1, 1998, our exposure to foreign currency risk was
viewed as exposure to non-Singapore dollar assets and liabilities. Effective
July 1, 1998, we changed our functional currency to the U.S. dollar as described
in note 2(e) to our consolidated financial statements. In connection with the
change, we entered into foreign currency forward contracts to mitigate the
effects to us of exchange rate fluctuations between the U.S. dollar and the
Singapore dollar related to our non-U.S. dollar denominated borrowings. The
table below provides information about our derivative financial instruments and
presents the information in U.S. dollar equivalents.
45
<PAGE> 47
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------------------------------------------- -----------------
EXPECTED MATURITY DATE
(IN THOUSANDS)
----------------------------------------------------------- FAIR FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE TOTAL VALUE
-------- -------- -------- ------- ------- ---------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FORWARD EXCHANGE AGREEMENTS
(Receive Yen/Pay US$)
Contract Amount............. $ 21,813 $ 5,992 $27,805 $(2,256) $18,342 $(3,415)
Average Contractual
Exchange Rate............... 96.57 76.22
(Receive S$/Pay US$)
Contract Amount............. 105,629 101,931 $156,094 $40,079 $29,514 $28,404 461,651 41,415 503,745 46,035
Average Contractual
Exchange Rate............... 1.74 1.75 1.76 1.75 1.75 1.73
(Receive US$/Pay S$)
Contract Amount............. 23,304 23,304 (11)
Average Contractual
Exchange Rate............... 1.66
-------- -------- -------- ------- ------- ------- -------- ------- -------- -------
Total Contract Amount... $150,746 $107,923 $156,094 $40,079 $29,514 $28,404 $512,760 $39,148 $522,087 $42,620
======== ======== ======== ======= ======= ======= ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
CARRYING
CARRYING AMOUNT PERCENTAGE
AMOUNT HEDGED HEDGED
-------- -------- ----------
<S> <C> <C> <C>
Accounts Payable
Japanese yen ....................... $ 29,742 $ 13,971 47.0%
Singapore dollar ................... 12,382 -- --
Others ............................. 7,663 -- --
Capital Lease
Japanese yen ....................... 13,834 13,834 100.0
Foreign Currency Loan
Singapore dollar ................... 415,659 415,659 100.0
Future Interest Payable on Debt
Singapore dollar ................... 5,386 5,386 100.0
-------- -------- ------
Total ............................ $484,666 $448,850 92.6%
======== ======== ======
</TABLE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth, as of December 31, 1999, the name, age
and position of each director and executive officer of our company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
BOARD OF DIRECTORS
Ho Ching(1)..................................... 46 Chairman of the Board
Lim Ming Seong(1)(3)............................ 52 Deputy Chairman of the Board
Barry Waite..................................... 51 Director
Sum Soon Lim(1)(2)(3)........................... 56 Director
James H. Van Tassel(3).......................... 70 Director
Aubrey C. Tobey(1)(2)........................... 74 Director
Robert Edmund La Blanc(2)....................... 65 Director
Andre Borrel(1)(3).............................. 63 Director
Charles E. Thompson(1).......................... 70 Director
Koh Beng Seng(2)................................ 49 Director
Tsugio Makimoto................................. 62 Director
Premod Paul Thomas(4)........................... 42 Alternate Director to Sum Soon Lim
Liow Voon Kheong(4)(5).......................... 48 Alternate Director to Lim Ming Seong
EXECUTIVE OFFICERS
Barry Waite..................................... 51 President and Chief Executive Officer
Chia Song Hwee.................................. 37 Senior Vice President and Chief Financial Officer
Robert Baxter................................... 44 Senior Vice President, Business Operations
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John Docherty................................... 47 Senior Vice President, Manufacturing Operations
Brian Klene..................................... 42 Vice President, Strategic Development
John Martin..................................... 57 Vice President, Technology Development
Lau Chi Kwan.................................... 49 Vice President, Quality, Reliability and Assurance
Justin Lim...................................... 42 Vice President, Information Technology
Tan Seng Chai................................... 37 Vice President, Human Resources
Michael J. Rekuc................................ 50 President, North America
</TABLE>
- ----------
(1) Member of the Executive Resource and Compensation Committee, or the ERCC.
(2) Member of the Audit Committee.
(3) Member of the Budget Committee.
(4) Under our Articles of Association, a director is entitled to designate an
alternate director to take his place when he is absent from a meeting. An
alternate director, when serving in place of an absent director, may
exercise all of the powers and authority of the absent director, except
the power to appoint an alternate director. When not acting in place of an
absent director for whom he has been appointed alternate director, an
alternate director is not entitled to attend, participate or vote in any
board meetings.
(5) Liow Voon Kheong was nominated as an alternate director by EDB Investments
Pte Ltd. We have granted EDB Investments the right to nominate an
alternate director for so long as EDB Investments owns any of our ordinary
shares.
BIOGRAPHICAL INFORMATION
HO CHING
Ho Ching has served on our Board of Directors since November 1987 and
as our Chairman of the Board since August 1995. Ms. Ho is the President and
Chief Executive Officer of Singapore Technologies Pte Ltd, our controlling
shareholder, Chairman of Singapore Technologies Engineering Ltd and Vice
Chairman of SembCorp Industries Ltd. Ms. Ho also serves on the boards of
directors of various companies in the Singapore Technologies group. Before
joining Singapore Technologies in 1987, Ms. Ho was with the Ministry of Defence
of Singapore where she held various senior positions. Ms. Ho received a Master
of Science (Electrical Engineering) Degree from Stanford University. For her
public service, she was awarded the Public Service Star in 1996.
LIM MING SEONG
Lim Ming Seong has served on our Board of Directors since November 1987
and as our Deputy Chairman of the Board since August 1995. Mr. Lim is the Group
Director of Singapore Technologies Pte Ltd, Deputy Chairman of ST Assembly Test
Services Ltd and Chairman of CSE Systems & Engineering Ltd. After joining
Singapore Technologies in December 1986, Mr. Lim has held various senior
positions in the Singapore Technologies group. Prior to joining Singapore
Technologies, Mr. Lim was with the Ministry of Defence of Singapore. Mr. Lim
received his Bachelor of Science (Honors) in Mechanical Engineering from the
University of Toronto and his Diploma in Business Administration from the
University of Singapore. Mr. Lim also participated in the Advanced Management
Programs at INSEAD and Harvard University.
BARRY WAITE
Barry Waite has served on our Board of Directors and as our President
and Chief Executive Officer since May 1998. Mr. Waite has more than 29 years of
experience in the semiconductor industry. Prior to joining our company, Mr.
Waite held various positions at Motorola Inc. Semiconductor Products Sector,
including Senior Vice President and General Manager of its microprocessor and
memory technology group and Senior Vice President and General Manager of the
European, Middle East and Africa region. Mr. Waite was with Texas Instruments
from 1970 to 1982. Mr. Waite has been Chairman of Silicon Manufacturing Partners
Pte Ltd and Chartered Silicon Partners Pte Ltd since May 1998. Mr. Waite
received his BA (Economics) (Honours) Degree from the University of Sheffield,
England and is an Officer of the Order of the British Empire.
SUM SOON LIM
Sum Soon Lim has served on our Board of Directors since February 1994
and is currently a part time corporate advisor to Singapore Technologies Pte
Ltd. Prior to accepting his position with Singapore Technologies, Mr. Sum had
worked with the Singapore Economic Development Board, DBS Bank, J.P. Morgan
Inc., Overseas Union Bank and Nuri Holdings (S) Pte Ltd, a
47
<PAGE> 49
private investment holding company. Mr. Sum is also a member of the Securities
Industry Council. Mr. Sum received his B.Sc (Honors) in Production Engineering
from the University of Nottingham, England.
JAMES H. VAN TASSEL
James H. Van Tassel has served on our Board of Directors since June
1993. He is a consultant in the semiconductor industry and has been involved in
the electronics and microelectronics industry since 1960. From 1980 to 1991, Dr.
Van Tassel was Vice President (Microelectronics) with NCR Corporation. Dr. Van
Tassel received his Bachelor of Science degree from the University of Wisconsin
at La Crosse, and his Master of Science Degree (Inorganic Chemistry) and Doctor
of Philosophy from Texas Technological University.
AUBREY C. TOBEY
Aubrey C. Tobey has served on our Board of Directors since March 1998
and is currently the President of ACT International providing consultancy in the
management and marketing of high technology. From 1983 to 1987, Mr. Tobey was
Vice President of Micronix Corporation and from 1965 to 1983 was Corporate Vice
President at GCA Corporation. Mr. Tobey was with Arthur D. Little, Inc., a
management, science and technology consulting firm from 1959 to 1965. Mr. Tobey
received his Bachelor of Science degree in Mechanical Engineering from Tufts
University and his Master of Science degree in Mechanical Engineering from the
University of Connecticut.
ROBERT EDMUND LA BLANC
Robert Edmund La Blanc has served on our Board of Directors since May
1998 and is the President of Robert E. La Blanc Associates, Inc., an information
technologies consulting and investment banking firm. From 1979 to 1981, Mr. La
Blanc was Vice Chairman of Continental Telecom, Inc. and from 1969 to 1979, a
General Partner of Salomon Brothers Inc. Mr. La Blanc has also held various
senior positions within companies in the telecommunications industry including
AT&T, Bell Telephone Laboratories and New York Telephone Company. Mr. La Blanc
received his B.E.E. from Manhattan College and his MBA from New York University.
Mr. La Blanc also is a graduate of the Operating Engineers Program at Bell
Telephone Laboratories and the USAF Communications Officers School.
ANDRE BORREL
Andre Borrel has served on our Board of Directors since July 1998 and
is currently working as a consultant in the semiconductor industry. Prior to
joining Chartered, Mr. Borrel was Senior Vice Present and General Manager of
Communications, Power and Signal Technology Group at Motorola Inc. Mr. Borrel is
also an Officer of the French National Order of Merit and holds a Master Degree
in Electronics from "Ecole Nationale Superieure des Telecommunications" in
Paris, France.
CHARLES E. THOMPSON
Charles E. Thompson has served on our Board of Directors since
September 1998 and is currently working as a consultant in the information
technology/semiconductor technology industry. From 1973 to 1996, Mr. Thompson
was World Marketing Senior Vice President at Motorola Inc. Prior thereto, Mr.
Thompson was Computer Department Sales Director at General Electric. Mr.
Thompson received his Bachelor of Science in Mathematics from the University of
Washington.
KOH BENG SENG
Koh Beng Seng has served on our Board of Directors since February 1999.
He is currently Senior Advisor to Asia Pulp & Paper Co. Ltd and an advisor to
the International Monetary Fund. Mr. Koh is active in the financial services
sector and was with the Monetary Authority of Singapore from 1973 to 1998, where
he served as Deputy Managing Director from 1988 to 1998. Mr. Koh received his
Bachelor of Commerce (First Class Honors) from Nanyang University and his MBA
from Columbia University. Mr. Koh was awarded an Overseas Postgraduate
Scholarship by the Monetary Authority of Singapore in 1978. In 1987, the
President of the Republic of Singapore awarded him a Meritorious Service Medal.
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<PAGE> 50
TSUGIO MAKIMOTO
Tsugio Makimoto has served on our Board of Directors since September
1999 and has 40 years of working experience in the semiconductor industry. Dr.
Makimoto has worked for Hitachi Ltd since 1959 where he has held various senior
positions, including Executive Managing Director in 1993 and Senior Executive
Managing Director in 1997. Dr. Makimoto is currently Hitachi's Corporate Chief
Technologist. Dr. Makimoto is a member of the Advisory Committee of the NAIST
(Nara Institute of Science and Technology) and the International Advisory Panel
of the NSTB (National Science and Technology Board) of Singapore. Dr. Makimoto
is also a visiting professor at Toyo University.
PREMOD PAUL THOMAS
Premod Paul Thomas was appointed to our Board of Directors as the
Alternate Director to Sum Soon Lim in July 1999. Mr. Thomas has served as the
Director (Finance) of Singapore Technologies Pte Ltd since February 1998. Before
joining Singapore Technologies Pte Ltd he was with Tirtamas Group, Jakarta, as
Group Executive Advisor from 1995 to 1998 and with Bank of America from 1983 to
1995. Mr. Thomas received his B.Com. (First Class Honors) from Loyola College,
India in 1977. He is a Certified Associate of the Indian Institute of Bankers,
Bombay, and has an MBA from the Indian Institute of Management, Ahmedabad.
LIOW VOON KHEONG
Liow Voon Kheong was appointed to our Board of Directors as the
Alternate Director to Lim Ming Seong in July 1998. Mr. Liow was previously an
Alternate Director from May 1995 to July 1998. Mr. Liow is presently Assistant
Managing Director (Operations) of the Singapore Economic Development Board,
General Manager of EDB Investments Pte Ltd, Director/General Manager of EDB
Ventures Pte Ltd and EDB Ventures 2 Pte Ltd and General Manager of PLE
Investments Pte Ltd. Mr. Liow started his career with the Singapore Economic
Development Board in 1976. He received his B.E. (Electrical & Electronics) and
his Diploma in Business Administration from the University of Singapore.
CHIA SONG HWEE
Chia Song Hwee has served as our Senior Vice President since February
2000 and as our Chief Financial Officer since December 1997. Mr. Chia was our
Director of Finance from April 1996 to December 1997. Mr. Chia has more than 13
years of experience in financial accounting and has overall responsibility for
our company's finance and legal matters. From May 1992 through December 1994,
Mr. Chia was Regional Financial Controller (Asia and Middle East) for Anadrill
Technical Services, Inc. From January 1995 to April 1996, Mr. Chia was Regional
Controller (Asia, Australia and Middle East) for Sedco Forex Technical Services,
Inc. Mr. Chia has been an Alternate Director on the Board of Directors of
Chartered Silicon Partners Pte Ltd since July 1998 and was appointed to its
Board of Directors in April 1999. He has also been an Alternate Director on the
Board of Directors of Silicon Manufacturing Partners Pte Ltd since October 1998.
Mr. Chia received his Bachelor of Business (Accountancy), with distinction, from
Edith Cowan University, Australia and is a Certified Practicing Accountant by
the Australian Society of CPAs.
MICHAEL J. REKUC
Michael J. Rekuc has served as President of our North American
operations since March 1999. From 1976 until March 1999, Mr. Rekuc held sales,
management and director positions in the semiconductor product sector of
Motorola Inc. His most recent positions at Motorola Inc. included worldwide
responsibilities as global sales director for wireless subscriber systems and a
two year role as vice president and sales director for PC, computing and
peripherals. Mr. Rekuc holds a BSc in Electrical Engineering from Lawrence
University of Michigan.
ROBERT BAXTER
Robert Baxter has served as our Senior Vice President, Business
Operations since July 1998 with overall responsibility for regional sales,
worldwide marketing, customer engineering and EDA teams in planning and
executing business strategies. Mr. Baxter has more than 23 years of working
experience in the semiconductor industry. He started his career with Texas
Instruments in 1976 and later joined Motorola Corporation in 1982. Prior to
joining Chartered, Mr. Baxter was Vice President and General Manager of
Motorola's Advanced Digital Consumer Division based in Tokyo. He also ran
Microcontroller Business Divisions based in Europe
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and in Austin, Texas for Motorola Inc. He has served on the Board of Directors
of Chartered Silicon Partners Pte Ltd since October 1998. Mr. Baxter holds a BSc
(Hons) in Applied Physics and Electronics from Durham University, United
Kingdom.
JOHN DOCHERTY
John Docherty has served as our Senior Vice President, Manufacturing
Operations since September 1998 and has overall responsibility for wafer fab
manufacturing operations, and leading our fab operations, turnkey services and
supply management activities. Mr. Docherty has more than 24 years experience in
the semiconductor industry. Prior to joining Chartered, Mr. Docherty was the
Vice President and Director of European Manufacturing for Motorola Inc.'s wafer
fabrication facilities in Scotland and France. Mr. Docherty has served on the
Boards of Directors of Chartered Silicon Partners Pte Ltd and Silicon
Manufacturing Partners Pte Ltd since October 1998. Mr. Docherty graduated from
Napier University, Edinburgh, United Kingdom and holds a Business Diploma from
Strathclyde University, Glasgow.
BRIAN KLENE
Brian Klene has served as our Vice President, Strategic Development
since October 1998 and has overall responsibility for strategic business
development and planning activities and intellectual property management. Mr.
Klene has also served as Vice President, Worldwide Marketing. Mr. Klene has more
than 20 years of working experience in the semiconductor and communications
industry. Prior to joining Chartered, Mr. Klene was Executive Vice President of
Sales and Marketing at Micron Technology and was with IBM from 1979 to 1989. Mr.
Klene received an MBA from the University of Southern California and his BA from
The Citadel.
JOHN MARTIN
John Martin has served as our Vice President, Technology Development
since January 1998 and has overall responsibility for our internal and external
technology development activities. Dr. Martin has more than 25 years of
experience in the semiconductor industry. He began his semiconductor career with
Rockwell International Microelectronics in 1973. From 1981 to 1997, Dr. Martin
held various positions in Motorola Inc.'s Semiconductor Products Sector. Dr.
Martin holds a Ph.D. in Inorganic Chemistry from the University of Arkansas and
a BA (Chemistry) from DePauw University.
LAU CHI KWAN
Lau Chi Kwan has served as our Vice President, Quality, Reliability and
Assurance since January 1998 and has overall responsibility for our quality
operations, total quality management and quality engineering support, which
includes failure analysis and reliability engineering. From 1994 to 1997, Dr.
Lau was our Yield Engineering Manager and subsequently our Research and
Development Director. Dr. Lau has 23 years of experience in the semiconductor
industry, largely in research and development. Prior to joining Chartered, Dr.
Lau was a project manager for Hewlett-Packard's Circuit Technology Business
Division. He began his career in 1976 with Microwave Acoustics Lab of the
University of Southern California and subsequently continued his research and
engineering work at Texas Instruments for three years and Hewlett-Packard for 11
years. Dr. Lau received a BSc from the University of Hawaii and MSc from the
University of Wisconsin. Dr. Lau received his Ph.D. from the University of
Southern California.
JUSTIN LIM
Justin Lim has served as our Vice President, Information Technology
since February 1998 and has overall responsibility for the development and
application of information technology for our business, operational and
strategic needs. Dr. Lim has 16 years of experience in the semiconductor
industry, largely in information technology support and development work. He
began his career in 1983 with Fairchild Semiconductor which was later acquired
by National Semiconductor Pte Ltd in 1988. Dr. Lim was with National
Semiconductor from 1988 to 1995. From 1995 to 1998, Dr. Lim was the Director of
Services for FASTech Integration Asia for three years. Dr. Lim received his
Ph.D. in Electrical Engineering from the University of Swansea, UK in 1983 after
obtaining his BSC (Electro-Mechanical Eng) (1st Class Hons) there in 1980. He
also holds a MBA from the National University of Singapore.
TAN SENG CHAI
Tan Seng Chai has served as our Vice President, Human Resources since
July 1999 and has overall responsibility for the development and implementation
of policies and processes in our human resource management system. From October
1997 to June 1999, Mr. Tan was our Human Resource Director. Mr. Tan joined our
company as human resource manager in April 1996. He has
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more than 12 years of experience in the semiconductor industry. He began his
career at National Semiconductor in 1987 where he held various positions in
engineering, production and human resource management. Mr. Tan later joined
Creative Technology Ltd in 1994 and prior to joining Chartered, he was
Creative's Senior Manager, Human Resource. Mr. Tan holds a Bachelor of
Engineering (Hons) from the National University of Singapore in 1987 and a MSc
(Industrial and System Eng) from the National University of Singapore in 1991.
BOARD COMPOSITION AND COMMITTEES
Our Articles of Association set the minimum number of directors at two.
We currently have 11 directors and two alternate directors. A portion of our
directors are elected at each annual general meeting of shareholders. The number
of directors retiring and eligible to stand for reelection each year varies, but
generally it is equal to one-third of the board, with the directors who have
been in office longest since their reelection or appointment standing for
reelection. Our Chief Executive Officer and President will not be required to
stand for reelection as a director while he or she is in office. Because ST and
its affiliates own approximately 70.1% of our outstanding ordinary shares, they
are able to control actions over many matters requiring approval by our
shareholders, including the election of directors.
The Executive Resource and Compensation Committee, or the ERCC, of our
Board of Directors oversees executive compensation and development in our
company with the goal of building capable and committed management teams through
competitive compensation, focused management and progressive policies which can
attract, motivate and retain a pool of talented executives to meet our current
and future growth plans. Specifically, the ERCC:
- establishes compensation policies for key executives;
- approves salary reviews, bonuses and incentives for key executives;
- approves share incentives, including share options and share ownership
for executives;
- approves key appointments and reviews succession plans for key
positions; and
- oversees the development of key executives and younger executives.
The members of the ERCC are Ms. Ho (chairman) and Messrs. Borrel, Lim,
Thompson, Sum and Tobey.
The Audit Committee of our Board of Directors consists of four members,
of which a majority may not be officers or employees of our company. The Audit
Committee reviews, acts on and reports to the Board of Directors regarding
various auditing and accounting matters, including the scope and results of
annual audits and the recommendation of our independent auditors. The Audit
Committee also reviews all material transactions between us and the Singapore
Technologies group. Please see "Item 13. Interest of Management in Certain
Transactions" for a description of our relationship with ST. The members of the
Audit Committee are Messrs. Sum (chairman), Koh, La Blanc and Tobey. Nasdaq has
recently adopted new rules in connection with audit committees. We are in the
process of reviewing our Audit Committee charter, structure and membership
requirements and will amend them as necessary to comply with Nasdaq's new rules.
The Budget Committee of our Board of Directors is responsible for
reviewing our annual budget and our quarterly financial performance in relation
to our budget. The members of the Budget Committee are Messrs. Borrel
(chairman), Lim, Van Tassel and Sum.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation we paid to or accrued for all of our
directors and executive officers for services rendered to us and our
subsidiaries during the fiscal year ended December 31, 1999 was approximately
$5.0 million. We did not set aside any provision for pension, retirement or
similar benefits for any director or officer during the fiscal year ended
December 31, 1999. We also provide our directors and certain of our officers
with customary director or officer insurance, as appropriate.
All of our officers and employees are eligible to participate in our
employee bonus plans. The plans provide for bonus payments based upon our
achievement of certain operational, financial and customer satisfaction targets.
Upon achievement of these targets, the participants in our plans are awarded
bonuses based on a percentage of their annual salary. Our President and Chief
Executive Officer is entitled to a guaranteed minimum annual bonus pursuant to
his employment agreement.
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ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
ISSUANCE OF SHARE OPTIONS
As of March 15, 2000, options to purchase 32,242,131 ordinary shares
were issued and outstanding, of which 15,737,296 were held by our officers and
directors. The outstanding options were granted under our 1999 Share Option
Plan. The exercise prices of these options range from S$0.93 to S$3.344. The
expiration dates of the options range from April 2004 to October 2009. In April
2000, we expect to grant to our officers, directors and employees options under
our 1999 Share Option Plan to purchase approximately 18,000,000 ordinary shares.
The exercise price of such options will be the fair market value of our ordinary
shares at the time of the grant.
EMPLOYEE BENEFIT PLANS
1999 SHARE OPTION PLAN
Effective March 30, 1999, we adopted our 1999 Share Option Plan. The
purpose of the plan is to offer selected individuals an opportunity to acquire
or increase a proprietary interest in our company by purchasing our ordinary
shares. Options granted under the 1999 plan may be nonstatutory options or
incentive share options intended to qualify under Section 422 of the United
States Internal Revenue Code.
The 1999 plan is administered by the ERCC. Our employees, outside
directors and consultants are eligible to receive option grants except as
follows:
- employees of our affiliates and our outside directors and consultants
are not eligible for the grant of incentive share options;
- employees, outside directors and consultants of our affiliates who are
residents or citizens of the United States are not eligible for the
grant of options; and
- employees of SMP who are residents or citizens of the United States are
not eligible for the grant of options.
An individual who owns more than 10% of the total combined voting power
of all classes of our outstanding shares is not eligible for the grant of
options unless:
- the exercise price of the option is at least 110% of the fair market
value of a share on the date of grant; and
- in the case of an incentive stock option, such option by its terms is
not exercisable after the expiration of five years from the date of
grant.
The aggregate number of shares that may be issued under the 1999 plan
and under any other share incentive and option schemes or agreements may not
exceed 107,160,000 shares (subject to adjustment pursuant to the plan). If an
outstanding option expires for any reason or is cancelled or otherwise
terminated, the shares allocable to the unexercised portion of such option will
again be available for the purposes of the plan and all other share incentive
and option schemes approved by the ERCC.
The exercise price of an incentive stock option shall not be less than
100% of the fair market value of a share on the date of grant. In no event will
the exercise price for an option be below par value.
The exercisability of options outstanding under the 1999 plan may be
fully or partially accelerated under certain circumstances such as a change in
control of our company, as defined in the 1999 plan. In addition, the vesting
periods of 17,273,481 outstanding options were accelerated by 12 months upon the
closing of our initial public offering.
Each grant under the 1999 plan is evidenced by a share option agreement
and the term of options granted may not exceed 10 years from the date of grant.
If the optionee's service with us is terminated, the optionee's outstanding
options, to the extent then exercisable, remain exercisable for a specified
period (which is based on the reason for the termination) following the date of
termination. All options which are not exercisable at the date of termination
lapse when the optionee's service terminates.
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Options are generally not transferable under the plan. Shares issued
upon the exercise of an option are subject to such rights of first refusal as
the ERCC may determine.
In the event of certain changes in our capitalization, our Board of
Directors will make appropriate adjustments in one or more of the number of
shares available for future grants under the 1999 plan, the number of shares
covered by each outstanding option or the exercise price of each outstanding
option. If we are a party to a merger or consolidation, outstanding options will
be subject to the agreement of merger or consolidation.
The 1999 plan will terminate automatically on March 30, 2009. The ERCC
may amend, suspend or terminate the 1999 plan at any time and for any reason,
provided that any amendment which increases the number of shares available for
issuance under the 1999 plan, or which materially changes the class of persons
who are eligible for the grant of incentive share options, will be subject to
the approval of our shareholders.
We amended the plan in connection with our initial public offering to
enable the plan and, at the ERCC's discretion, awards granted thereunder, to
comply with Section 162(m) of the United States Internal Revenue Code.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
WHAT IS THE SINGAPORE TECHNOLOGIES GROUP
Singapore Technologies Pte Ltd, or ST, is a holding company for a group
of high-technology companies. As of December 31, 1999, ST was 21.7% owned by
Singapore Technologies Holdings Pte Ltd, or ST Holdings. ST and ST Holdings were
78.3% and 100% owned, respectively, by Temasek Holdings (Private) Limited
through which the corporate investments of the Government of Singapore are held.
Temasek is owned by the Minister for Finance (Incorporated) of Singapore. ST
owns 100% of Singapore Technologies Semiconductors Pte Ltd, or ST
Semiconductors. As of March 15, 2000, ST and ST Semiconductors hold
approximately a 39.0% and 31.1% interest in our company, respectively. ST
Semiconductors holds interests in our sister companies, STATS and Tritech
Microelectronics Ltd (for which provisional liquidators were appointed effective
September 1, 1999), or Tritech. In 1999, our revenues represented approximately
21% of ST's revenues and our assets represented approximately 19% of ST's assets
(in each case, based on unaudited numbers).
ST has five principal business groups: engineering, technology,
infrastructure, property and financial services. ST has three operating
subsidiaries that are engaged in the semiconductor business, namely:
- Chartered Semiconductor Manufacturing Ltd;
- STATS; and
- Tritech (in liquidation).
STATS specializes in assembly and testing of semiconductors. STATS
consummated its initial public offering on February 8, 2000. Tritech, which is
in liquidation, was in the business of designing, developing and marketing
application specific standard products as well as customer specific
semiconductors. ST may in the future establish other subsidiaries, or form
strategic alliances with companies, which are engaged in the semiconductor
business.
As of March 15, 2000, ST and its affiliates own approximately 70.1% of
our outstanding ordinary shares and, as a result, are able to control actions
over many matters requiring approval by our shareholders, including the election
of directors and approval of significant corporate transactions. In addition,
Ms. Ho and Messrs. Lim, Sum, Koh, Thomas and Liow, each a member of our Board of
Directors (other than Messrs. Thomas and Liow who serve as alternate members),
serve as directors of companies in the Singapore Technologies group. Ms. Ho and
Messrs. Lim and Thomas, each a member (or alternate member) of our Board of
Directors, are employed by companies in the Singapore Technologies group.
In 1996, our Board of Directors established an Audit Committee that,
among other things, reviews all material transactions between us and the
Singapore Technologies group. Please see "Item 10. Directors and Officers of
Registrant -- Board Composition and Committees" for a summary of the function
and composition of the Audit Committee. Mr. Sum, the chairman of the Audit
Committee, also serves as a consultant to ST and serves as a director for other
ST affiliates.
We also have contractual and other business relationships with ST and
its affiliates and we engage in material transactions with ST from time to time.
Although our Audit Committee reviews all material transactions between our
company and the Singapore
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Technologies group, conflicts of interest may arise between us in certain
circumstances. We are not obligated to conduct any business with members of the
ST group if the costs of doing so are greater than for unaffiliated third
parties.
FINANCIAL SUPPORT PROVIDED TO US BY SINGAPORE TECHNOLOGIES GROUP
Through its subsidiary, ST Treasury Services Ltd, ST currently provides
us with short-term financing and guarantees some of our debt. Certain of our
loan agreements require ST to own at least a majority of our outstanding
ordinary shares. ST Treasury Services Ltd has also in the past provided loans to
us and has entered into forward foreign exchange contracts with us to provide a
hedge for certain of our equipment purchase commitments with foreign vendors. As
of December 31, 1999, approximately $202.2 million of our debt was guaranteed by
ST at no cost. In addition, $153.7 million of our debt was guaranteed by
commercial banks at the request of ST, at a weighted average cost to us of
0.29%.
In addition, from time to time we advance funds to, or borrow funds
from, ST Treasury Services Ltd. (and from ST prior to the second half of 1998).
In general, advances to and borrowings from ST and ST Treasury bear interest at
rates comparable to the rates offered by commercial banks in Singapore, are
unsecured and are repayable within three to six months on a renewable basis. The
amount of interest income received from ST in 1997 and 1998 was $0.2 million and
$0.8 million respectively. The amount of interest income received from ST
Treasury in 1998 and 1999 was $0.9 million and $2.8 million, respectively. The
amount of interest expense paid to ST was $12.7 million and $6.6 million in 1997
and 1998 respectively. The amount of interest expense paid to ST Treasury in
1998 and 1999 was $2.3 million and $0.1 million, respectively. The average rate
of interest payable in 1997, 1998 and 1999 to ST and ST Treasury for our
Singapore dollar denominated borrowings was 4.89%, 7.13% and 2.74% respectively,
and 6.06%, 6.33% and 6.13% respectively, for our U.S. dollar denominated
borrowings.
We have also entered into an oral multi-currency credit facility with
ST Treasury in connection with our borrowing arrangements with it. Under this
facility, ST Treasury has agreed to make available to us funds of up to $100
million. We may, upon notice to ST Treasury, draw down at any time any amount
available under the facility. We are not restricted in our utilization of drawn
funds. Funds drawn under the facility are required to be repaid within one year
of the date on which they are drawn. Payment schedules and directions will be as
agreed to by us and ST Treasury at the time of the draw down. Unless otherwise
agreed to, amounts drawn under the facility are unsecured and neither we nor ST
Treasury are subject to conditions or events of default. Interest on drawn funds
accrues at a rate based on the monthly average interest rate of three banks, as
chosen by ST Treasury. As of December 31, 1999, there were no unsecured
borrowings outstanding under this facility.
While ST has historically provided credit and other support to us, ST
has no obligation to continue doing so and the availability and amount of such
support will depend on various factors, including our ability to raise funds
without such support and the expenses relating to such fundraising.
CORPORATE SERVICES PROVIDED TO US BY SINGAPORE TECHNOLOGIES
We have a service agreement with ST pursuant to which it provides us
with services and support which are tangible as well as intangible in nature.
The services provided by ST include management and corporate support services,
such as treasury, cash management, internal audit, training, executive resources
and corporate secretarial services. In addition, ST is able to offer us the
benefits of a global network and the "Singapore Technologies" name and ST's wide
spectrum of industries provide us with operational and financial leverages in
our dealings with external third parties. In return for those services, support
and benefits, we currently pay ST an annual management fee based on a service
based fee arrangement. In addition, we reimburse ST for the third-party costs
and expenses it incurs on our behalf.
In 1997, 1998 and 1999, we paid management fees to ST of $5.7 million,
$4.9 million and $3.8 million, respectively. In addition, we reimbursed ST for
costs and expenses incurred on our behalf, principally certain of our payroll
expenses paid through ST. Those reimbursements totaled $5.6 million, $5.7
million and $6.5 million in 1997, 1998 and 1999, respectively.
The service agreement expires in the event we cease to be a subsidiary
of ST. It can be terminated by ST upon our prolonged failure to pay the
management fees due to ST. The management fees we pay ST under the service
agreement are itemized to allow us to compare them with similar services
provided by unrelated third parties. We also believe that we derive economic
benefits from the corporate services and support ST provides us. For example, ST
guarantees a portion of our debt without fees or covenants and provides standby
credit facilities without charge. In addition, we have used ST's leverage to
secure loans and terms (including interest rates and covenants) that we would
not otherwise have obtained.
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In the event that the service agreement is terminated, however, we will
be required to provide the corporate services previously provided by ST either
internally or obtain them from third parties and the cost to us could be greater
than that charged by ST.
OTHER TRANSACTIONS WITH THE SINGAPORE TECHNOLOGIES GROUP
We transact business with ST and its affiliates in the normal course of
our respective businesses. We recorded sales to Tritech of $20.8 million, $6.2
million and $1.3 million in 1997, 1998 and 1999, respectively. These sales
represented 5.5%, 1.5% and 0.2% of our net sales for the respective periods.
Tritech was placed under judicial management on July 2, 1999 and commenced
winding-up proceedings on October 15, 1999.
We paid STATS $13.3 million, $22.7 million and $33.9 million in 1997,
1998 and 1999, respectively, for services rendered in those years. We also paid
affiliates of ST $3.0 million, $1.4 million and $7.6 million in 1997, 1998 and
1999, respectively, for services rendered in those years. We purchased $1.0
million, $0.9 million and $0.6 million in assets from affiliates of ST in 1997,
1998 and 1999, respectively. We also paid ST Construction and ST Architects $2.6
million, $1.1 million and $0.1 million in 1997, 1998 and 1999, respectively, for
construction costs rendered in those years.
Fabs 2 and 3 and our corporate offices are located on land leased to ST
by Jurong Town Corporation, or JTC, a statutory board established by the
Government of Singapore to develop and manage industrial estates in Singapore.
These leases run until 2024 with conditional options to extend for another 30
years. We have entered into sub-leases with ST for the entire term of the leases
for Fabs 2 and 3. The sub-leases for Fab 2 and Fab 3 require us to make rental
payments to ST at rates equal to the rent paid by ST to JTC for the subject land
through 2006 for Fab 2 and 2024 for Fab 3. The rental rates may be re-
negotiated thereafter. In total, we paid ST $2.1 million, $1.6 million and $2.5
million, respectively, in lease payments for 1997, 1998 and 1999.
CSP leases the land on which Fab 6 is located from ST, which in turn
leases it from JTC. The agreement provides for the land to be leased to ST until
2027, with a conditional option to extend for an additional 30 years. CSP makes
rental payments to ST at rates equal to the rent paid by ST to JTC for the
subject land through 2027. CSP paid ST $0.5 million, $0.9 million and $1.1
million in lease payments for 1997, 1998 and 1999, respectively. We expect ST to
lease the land on which Fab 7 is being built from JTC and to sublease that land
to us on terms similar to those of our other leases with ST.
Some of our insurance coverage is held under various insurance policies
which are negotiated and maintained by ST but billed directly to us. This
enables us to benefit from the group rates negotiated by ST.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
As of March 15, 2000, of the net proceeds from our initial public
offering, approximately $24.4 million has been used for an equity injection in
CSP, $8.8 million has been used for an equity injection in SMP and $40.1 million
has been used for capital expenditures. The remaining proceeds are invested in
various time deposits with institutions. None of the net proceeds from our
initial public offering were paid, directly or indirectly to any of our
directors, officers or general partners or any of their associates, or to any
persons owing ten percent or more of any class of our equity securities, or any
affiliates.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of responding to this
item.
ITEM 18. FINANCIAL STATEMENTS
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See Item 19 (a) for a list of financial statements filed under Item 18.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements are filed as part of this
document, together with the report of the independent
auditors:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and
1999
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended December 31, 1997, 1998
and 1999
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
(b) Exhibits
<TABLE>
<S> <C>
*3 Memorandum and Articles of Association of the Registrant
*4.1 Specimen certificate for ordinary shares
**4.2 Deposit Agreement dated November 4, 1999 by and among the Registrant, Citibank, N.A. and the holders
and beneficial owners of American Depositary Shares evidenced by American Depositary Receipts
issued thereunder (including as an exhibit, the form of American Depositary Receipt)
*10.1 Joint Venture Agreement dated March 13, 1997 by and among the Registrant, Hewlett-Packard Europe
B.V. and EDB Investments Pte Ltd
*10.2 Amendment Agreement No. 1 to Joint Venture Agreement dated July 4, 1997 by and among the
Registrant, Hewlett-Packard Europe B.V. and EDB Investments Pte Ltd
*10.3 Amendment No. 2 to Joint Venture Agreement dated October 1, 1999 by and among the Registrant,
Hewlett-Packard Europe B.V. and EDB Investments Pte Ltd
**10.4 Deed of Accession and Ratification dated November 9, 1999 by and among the Registrant, EDB
Investments Pte Ltd, Hewlett-Packard Europe B.V. and Agilent Technologies Europe B.V. relating to
the Joint Venture Agreement dated March 13, 1997, as amended
*10.5 Option Agreement dated July 4, 1997 by and among the Registrant, Hewlett-Packard Europe B.V. and
EDB Investments Pte Ltd
**10.6 Deed of Accession and Ratification dated November 9, 1999 by and among the Registrant, EDB
Investments Pte Ltd, Hewlett-Packard Europe B.V. and Agilent Technologies Europe B.V. relating to
the Option Agreement dated July 4, 1997
*10.7 Assured Supply and Demand Agreement dated July 4, 1997 by and among the Registrant, Chartered
Silicon Partners Pte Ltd and Hewlett-Packard Company
*10.8 Amendment Agreement No. 2 to Assured Supply and Demand Agreement dated June 17, 1999 by and among
the Registrant, Chartered Silicon Partners Pte Ltd and Hewlett-Packard Company
**10.9 Novation and Amendment Agreement dated November 9, 1999 by and among Chartered Silicon Partners Pte
Ltd, the Registrant, Hewlett-Packard Company and Agilent Technologies, Inc. relating to the Assured
Supply and Demand Agreement 64-225 dated July 4, 1997, as amended
*10.10 Joint Venture Agreement dated December 19, 1997 by and between the Registrant and Lucent
</TABLE>
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<TABLE>
<S> <C>
Technologies Microelectronics Pte Ltd
*10.11 Assured Supply and Demand Agreement dated February 17, 1998 by and among the Registrant, Silicon
Manufacturing Partners Pte Ltd and Lucent Technologies Microelectronics Pte Ltd
*10.12 Supplemental Assured Supply and Demand Agreement dated September 3, 1999 by and among the
Registrant, Silicon Manufacturing Partners Pte Ltd and Lucent Technologies Microelectronics Pte
Ltd
*10.13 License and Technology Transfer Agreement dated July 4, 1997 by and among the Registrant,
Chartered Silicon Partners Pte Ltd and Hewlett-Packard Company
**10.14 Novation and Amendment Agreement dated November 9, 1999 by and among Chartered Silicon Partners
Pte Ltd, the Registrant, Hewlett-Packard Company and Agilent Technologies, Inc. relating to the
License and Technology Transfer Agreement 64-224 dated July 4, 1997
*10.15 License and Technology Transfer Agreement dated February 17, 1998 by and among the Registrant,
Lucent Technologies Microelectronics Pte Ltd and Silicon Manufacturing Partners Pte Ltd
*10.16 Technology Transfer Agreement dated February 17, 1998 by and between the Registrant and Lucent
Technologies Inc.
*10.17 Technology Transfer and License Agreement dated May 20, 1999 by and among the Registrant,
Chartered Silicon Partners Pte Ltd and Motorola, Inc.
+10.18 First Ancillary Agreement to the Technology Transfer and License Agreement dated January 24, 2000 by
and among the Registrant, Chartered Silicon Partners Pte Ltd and Motorola, Inc.
*10.19 Patent License Agreement dated January 1, 1998 by and between the Registrant and Lucent
Technologies Inc.
*10.20 Patent License Agreement dated January 1, 1995 by and between the Registrant and International
Business Machines Corporation
*10.21 Patent Cross License Agreement dated August 12, 1999 by and between the Registrant and Toshiba
Corporation
*10.22 Joint Development Agreement for Process Technologies dated February 18, 1999 by and between the
Registrant and Lucent Technologies Inc.
**10.23 ST Group Management and Support Services Agreement dated November 1, 1999 by and between the
Registrant and Singapore Technologies Pte Ltd
*10.24 Loan Agreement dated August 1, 1995 by and between the Registrant and the Economic Development
Board of Singapore
*10.25 Loan Agreement dated April 14, 1997 by and between the Registrant and the Economic Development Board
of Singapore, as supplemented on May 29, 1997
*10.26 Loan Agreement dated July 21, 1997 by and between the Registrant and the Economic Development
Board of Singapore
*10.27 Loan Agreement dated February 11, 1997 by and between the Registrant and Post Office Savings Bank
of Singapore
*10.28 Loan Agreement dated June 10, 1997 by and between the Registrant and Post Office Savings Bank of
Singapore
*10.29 Credit Agreement dated March 12, 1998 by and among Chartered Silicon Partners Pte Ltd, the banks
named on the signature pages thereto, as lenders, and ABN Amro Bank N.V. (Singapore Branch), as
Agent, as supplemented on December 14, 1998
**10.30 Second Supplemental Agreement dated November 9, 1999 by and among Chartered Silicon Partners Pte
Ltd, the banks on the signature pages thereto, as Lenders, and ABN Amro Bank N.V. (Singapore
Branch), as agent
*10.31 Shareholders Undertaking dated July 1, 1998 by and among the Registrant, Chartered Silicon
Partners Pte Ltd, EDB Investments Pte Ltd, Hewlett-Packard Europe B.V. and ABN Amro Bank N.V.
(Singapore Branch), as Agent, as supplemented on December 16, 1998
**10.32 Second Supplemental Shareholders Undertaking dated November 9, 1999 by and among Chartered
</TABLE>
57
<PAGE> 59
<TABLE>
<S> <C>
Silicon Partners Pte Ltd, as Borrower, the Registrant, EDB Investments Pte Ltd, Agilent Technologies
Europe B.V., as Shareholders, Hewlett-Packard Europe B.V., as Retiring Shareholder, and ABN Amro
Bank N.F. (Singapore Branch), as Agent
*10.33 Syndicated Credit Facilities Agreement dated September 3, 1999 by and among Silicon Manufacturing
Partners Pte Ltd, ABN Amro Bank N.V. (Singapore Branch), Citibank, N.A. (Singapore Branch) and
Overseas Union Bank Limited, as Lead Arrangers, the banks and financial institutions named on the
signature pages thereto, as lenders, Citicorp Investment Bank (Singapore) Limited, as Facility
Agent, and Citicorp Investment Bank (Singapore) Limited, as Security Agent
*10.34 Shareholders Undertaking dated September 3, 1999 by and among the Registrant, Lucent Technologies
Microelectronics Pte Ltd, Silicon Manufacturing Partners Pte Ltd and Citicorp Investment Bank
(Singapore) Limited
*10.35 Lease of Lot 2164 Mukim 3-2 Science Park Drive dated January 18, 1995 by and between Technology
Parks Private Limited and the Registrant
*10.36 Building Agreement relating to Private Lot A12787 Mukim No. 13 Sembawang dated April 11, 1995 by
and between Jurong Town Corporation and Singapore Technologies Pte Ltd
*10.37 Agreement for Sub-License and Sub-Lease dated September 30, 1997 by and between Singapore
Technologies Pte Ltd and the Registrant relating to Private Lot A12787 Mukim No. 13 Sembawang
*10.38 Building Agreement relating to Private Lot A12787(a) Woodlands Industrial Park D, Mukim No. 13
Sembawang dated February 17, 1998 by and between Jurong Town Corporation and Singapore
Technologies Pte Ltd
*10.39 First Supplementary Agreement to Building Agreement relating to Private Lot A 12787(a) Woodlands
Industrial Park D, Mukim No. 13 dated October 7, 1998 by and between Jurong Town Corporation and
Singapore Technologies Pte Ltd
*10.40 Building Agreement relating to Private Lot A12787(b) Woodlands Industrial Park D, Mukim No. 13
Sembawang dated February 17, 1998 by and between Jurong Town Corporation and Singapore
Technologies Pte Ltd
*10.41 First Supplementary Agreement to Building Agreement relating to Private Lot A12787(b) Woodlands
Industrial Park D, Mukim No. 13 dated October 7, 1998 by and between Jurong Town Corporation and
Singapore Technologies Pte Ltd
*10.42 Agreement for Sub-License and Sub-Lease (Private Lot A12787(a)) dated February 17, 1998 by and
between Singapore Technologies Pte Ltd and the Registrant
*10.43 Agreement for Sub-License and Sub-Lease (Private Lot A12787(b)) dated February 17, 1998 by and
between Singapore Technologies Pte Ltd and the Registrant
*10.44 Sub-Lease dated February 17, 1998 by and between the Registrant and Silicon Manufacturing
Partners Pte Ltd
*10.45 Building Agreement relating to Private Lot A12787(d) Woodlands Industrial Park D, Mokim No. 13
Sembawang dated September 24, 1999 by and between Jurong Town Corporation and Singapore
Technologies Pte Ltd
*10.46 Agreement for Sub-License and Sub-Lease (Private Lot A12787(d)) dated September 24, 1999 by and
between Singapore Technologies Pte Ltd and Chartered Silicon Partners Pte Ltd
23 Consent of Allen & Gledhil
</TABLE>
- ----------
+ Certain portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the Commission. The omitted portions
have been separately filed with the Commission.
* Filed as an exhibit to the Company's Registration Statement on Form F-1
(Registration No. 333-88397), which exhibit is incorporated herein by
reference
** Filed as an exhibit to the Company's Current Report on Form 6-K (File No.
000-27811), which exhibit is incorporated herein by reference.
58
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
By: /s/ Chia Song Hwee
--------------------------------------
Name: Chia Song Hwee
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ho Ching Chairman of the Board March 20, 2000
- --------------------------------------
HO CHING
/s/ Lim Ming Seong Deputy Chairman of the Board March 20, 2000
- --------------------------------------
LIM MING SEONG
/s/ Barry Waite President and Chief Executive Officer March 20, 2000
- -------------------------------------- (principal executive officer)
BARRY WAITE
/s/ Chia Song Hwee Senior Vice President and Chief Financial Officer March 20, 2000
- -------------------------------------- (principal financial and accounting officer)
CHIA SONG HWEE
/s/ Sum Soon Lim Director March 20, 2000
- --------------------------------------
SUM SOON LIM
/s/ James H. Van Tassel Director March 20, 2000
- --------------------------------------
JAMES H. VAN TASSEL
/s/ Aubrey C. Tobey Director March 20, 2000
- --------------------------------------
AUBREY C. TOBEY
/s/ Robert Edmund La Blanc Director March 20, 2000
- --------------------------------------
ROBERT EDMUND LA BLANC
/s/ Andre Borrel Director March 20, 2000
- --------------------------------------
ANDRE BORREL
/s/ Charles E. Thompson Director March 20, 2000
- --------------------------------------
CHARLES E. THOMPSON
/s/ Koh Beng Seng Director March 20, 2000
- --------------------------------------
KOH BENG SENG
/s/ Tsugio Makimoto Director March 20, 2000
- --------------------------------------
TSUGIO MAKIMOTO
</TABLE>
59
<PAGE> 61
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Financial Statements F-8
</TABLE>
F-1
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Chartered Semiconductor Manufacturing Ltd:
We have audited the accompanying consolidated balance sheets of Chartered
Semiconductor Manufacturing Ltd and subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of operations and comprehensive
income (loss), shareholders' equity and cash flows for the years ended December
31, 1997, 1998 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Singapore Standards on Auditing
issued by the Institute of Certified Public Accountants of Singapore ("ICPAS"),
which set forth standards which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Chartered Semiconductor Manufacturing Ltd and subsidiaries as of December 31,
1998 and 1999, and the consolidated results of their operations and their cash
flows for the years ended December 31, 1997, 1998 and 1999, in conformity with
generally accepted accounting principles in the United States of America.
/s/ KPMG
Singapore
February 8, 2000
F-2
<PAGE> 63
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1999
In thousands of US Dollars (except share data)
<TABLE>
<CAPTION>
NOTE 1998 1999
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................. 3 $ 99,619 $ 544,996
Accounts receivable
Trade ................................................... 4 71,285 117,165
Others .................................................. 4 12,703 24,061
Amounts due from ST and ST affiliates ...................... 22 2,591 1,622
Amounts due from CSP ....................................... 1,095 -
Amounts due from SMP ....................................... 5,568 6,324
Inventories ................................................ 5 29,476 33,619
Prepaid expenses ........................................... 895 2,000
----------- -----------
Total current assets ................................. 223,232 729,787
Investment in CSP .......................................... 6 34,158 -
Investment in SMP .......................................... 6 24,329 47,036
Other assets ............................................... 50,905 45,453
Technology license agreements .............................. 7 6,916 28,526
Property, plant and equipment, net ......................... 9 981,970 1,282,106
----------- -----------
Total assets ......................................... $ 1,321,510 $ 2,132,908
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable
Trade ................................................... $ 8,530 $ 10,560
Fixed asset purchases ................................... 22,829 141,841
Current installments of obligations under capital leases ... 10 4,329 5,767
Current installments of long-term debt ..................... 11 49,046 119,991
Bank overdrafts ............................................ 12 3,082 -
Accrued operating expenses ................................. 13 84,918 127,147
Amounts due to ST and ST affiliates ........................ 22 10,607 9,775
Income taxes payable ....................................... 662 2,921
Other current liabilities .................................. 14 26,130 17,223
----------- -----------
Total current liabilities ............................ 210,133 435,225
Obligations under capital leases, excluding
current installments .................................... 10 13,414 7,822
Long-term debt, excluding current installments ............. 11 419,545 423,668
Customer deposits .......................................... 15 47,087 39,804
Other liabilities .......................................... 16 30,085 27,475
----------- -----------
Total liabilities .................................... 720,264 933,994
Minority interest .......................................... - 57,164
SHAREHOLDERS' EQUITY
Share capital: ordinary shares of S$0.26 each
Authorized: 3,076,923,079 shares
Issued and outstanding: 1998 - 1,000,106,881 shares,
1999 - 1,278,977,923 shares .......................... 18 221,433 264,529
Subscription receivable .................................... (12,341) -
Additional paid-in capital ................................. 19 689,970 1,207,656
Retained deficit ........................................... 20 (245,120) (277,739)
Accumulated other comprehensive loss ....................... (52,696) (52,696)
----------- -----------
Total shareholders' equity ........................... 601,246 1,141,750
----------- -----------
Commitments and contingencies .............................. 23
Total liabilities and shareholders' equity ........... $ 1,321,510 $ 2,132,908
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 64
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share and per share data)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net revenue ................................................ $ 379,761 $ 422,622 $ 694,258
Cost of revenue ............................................ (368,521) (439,668) (527,023)
----------- ----------- -----------
Gross profit (loss) ........................................ 11,240 (17,046) 167,235
----------- ----------- -----------
OPERATING EXPENSES
Research and development ................................ 26,553 43,419 58,894
Fab start-up costs ...................................... 10,908 1,455 8,442
Sales and marketing ..................................... 20,184 31,872 34,359
General and administrative .............................. 30,144 37,389 44,619
Costs incurred on termination of development program .... - 31,776 6,500
Stock-based compensation (note 24) ...................... 2,024 (2,780) 20,094
----------- ----------- -----------
Total operating expenses ............................. 89,813 143,131 172,908
----------- ----------- -----------
Operating loss ............................................. (78,573) (160,177) (5,673)
Equity in loss of CSP ...................................... (1,272) (5,577) (9,528)
Equity in loss of SMP ...................................... - (14,857) (23,282)
Other income ............................................... 4,860 4,680 5,739
Interest income ............................................ 179 1,690 6,733
Interest expense ........................................... (12,782) (20,137) (17,822)
Exchange gain (loss) ....................................... (31,678) 5,237 5,862
----------- ----------- -----------
Loss before income taxes ................................... (119,266) (189,141) (37,971)
Income tax expense ......................................... (355) (865) (2,131)
----------- ----------- -----------
Loss before minority interest .............................. (119,621) (190,006) (40,102)
Minority interest in loss of CSP ........................... - - 7,483
----------- ----------- -----------
Net loss ................................................... $ (119,621) $ (190,006) $ (32,619)
=========== =========== ===========
Other comprehensive loss -
foreign currency translation ............................ $ (62,020) $ (8,794) $ -
----------- ----------- -----------
Comprehensive loss ......................................... $ (181,641) $ (198,800) $ (32,619)
=========== =========== ===========
Net loss per share and ADS:
Basic net loss per share ................................... $ (0.24) $ (0.24) $ (0.03)
Diluted net loss per share ................................. $ (0.24) $ (0.24) $ (0.03)
Basic net loss per ADS ..................................... $ (2.44) $ (2.42) $ (0.32)
Diluted net loss per ADS ................................... $ (2.44) $ (2.42) $ (0.32)
Number of shares (in thousands) used in computing:
- basic net loss per share .............................. 490,407 784,541 1,035,181
- diluted net loss per share ............................ 490,407 784,541 1,035,181
Number of ADS (in thousands) used in computing:
- basic net loss per ADS ................................ 49,041 78,454 103,518
- diluted net loss per ADS .............................. 49,041 78,454 103,518
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 65
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
In thousands
<TABLE>
<CAPTION>
SUBSCRIP- ADDITIONAL
TION PAID-IN
ORDINARY SHARES RECEIVABLE CAPITAL
----------------------------- ----------- -----------
NO.
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ........... 502,351 $ 143,183 $ (10,943) $ 275,031
Net loss ............................. - - - -
Distribution ......................... - - - -
Payment of subscription receivable ... - - 1,260 -
Other changes in unearned
compensation, net ............... - - - 3,093
Issuance of shares ................... 1,103 201 (882) 700
Amortization of stock compensation ... - - - -
Foreign currency translation ......... - - - -
----------- ----------- ----------- -----------
Balance at December 31, 1997 ......... 503,454 143,384 (10,565) 278,824
Net loss ............................. - - - -
Payment of subscription receivable ... - - 1,193 -
Other changes in unearned
compensation, net ............... - - - (4,601)
Issuance of shares ................... 496,653 78,049 (2,969) 415,747
Amortization of stock compensation ... - - - -
Foreign currency translation ......... - - - -
----------- ----------- ----------- -----------
Balance at December 31, 1998 ......... 1,000,107 221,433 (12,341) 689,970
Net loss ............................. - - - -
Issuance of shares ................... 6,133 959 (1,302) 2,991
Payment of subscription receivable ... - - 1,801 -
Other changes in unearned
compensation, net ............... - - - 15,526
Amortization of stock compensation ... - - - -
Cancellation of partly paid shares ... (14,762) (2,570) 11,842 (11,642)
Amortization of stock compensation ... - - - 6,938
Initial public offering, net of
expenses ........................ 287,500 44,707 - 503,414
Share options issued and charged
to SMP .......................... - - - 459
----------- ----------- ----------- -----------
Balance at December 31, 1999 ......... 1,278,978 $ 264,529 - $ 1,207,656
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPRE- TOTAL
UNEARNED RETAINED HENSIVE SHARE-
COMPEN- EARNINGS INCOME HOLDERS'
SATION (DEFICIT) (LOSS) EQUITY
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ........... $ (752) $ 64,600 $ 18,118 $ 489,237
Net loss ............................. - (119,621) - (119,621)
Distribution ......................... - (93) - (93)
Payment of subscription receivable ... - - - 1,260
Other changes in unearned
compensation, net ............... (3,093) - - -
Issuance of shares ................... - - - 19
Amortization of stock compensation ... 2,024 - - 2,024
Foreign currency translation ......... - - (62,020) (62,020)
----------- ----------- ----------- -----------
Balance at December 31, 1997 ......... (1,821) (55,114) (43,902) 310,806
Net loss ............................. - (190,006) - (190,006)
Payment of subscription receivable ... - - - 1,193
Other changes in unearned
compensation, net ............... 4,601 - - -
Issuance of shares ................... - - - 490,827
Amortization of stock compensation ... (2,780) - - (2,780)
Foreign currency translation ......... - - (8,794) (8,794)
----------- ----------- ----------- -----------
Balance at December 31, 1998 ......... - (245,120) (52,696) 601,246
Net loss ............................. - (32,619) - (32,619)
Issuance of shares ................... - - - 2,648
Payment of subscription receivable ... - - - 1,801
Other changes in unearned
compensation, net ............... (15,526) - - -
Amortization of stock compensation ... 12,138 - - 12,138
Cancellation of partly paid shares ... 3,388 - - 1,018
Amortization of stock compensation ... - - - 6,938
Initial public offering, net of
expenses ........................ - - - 548,121
Share options issued and charged
to SMP .......................... - - - 459
----------- ----------- ----------- -----------
Balance at December 31, 1999 ......... - $ (277,739) $ (52,696) $ 1,141,750
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 66
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999
In thousands of US Dollars
<TABLE>
<CAPTION>
1997 1998 1999
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................. (119,621) (190,006) (32,619)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in loss of CSP ................................. 1,272 5,577 9,528
Equity in loss of SMP ................................. - 14,857 23,282
Depreciation and amortization ......................... 173,762 226,903 271,406
Foreign exchange (gain) loss .......................... 41,734 (4,843) (8,003)
Loss on disposal of property, plant and equipment ..... 623 7,342 2,656
Minority interest in loss of CSP ...................... - - (7,483)
Costs on termination of development program ........... - 31,776 -
Stock-based compensation .............................. 2,024 (2,780) 20,094
Others ................................................ (491) 475 (2,093)
Change in operating working capital:
Accounts receivable ................................... (106,390) 36,545 (49,066)
Amounts due from ST and ST affiliates ................. 3,166 257 5,407
Amounts due from CSP .................................. (666) (1,095) (8,314)
Amounts due from SMP .................................. - (5,568) 2,224
Inventories ........................................... (22,664) 28,069 (4,143)
Prepaid expenses ...................................... 129 164 (717)
Trade accounts payable ................................ 7,189 (4,408) 109
Accrued operating expenses ............................ 23,091 27,550 35,763
Other current liabilities ............................. (1,532) (17,967) 3,889
Amounts due to ST and ST affiliates ................... 4,346 3,696 2,165
Advances to suppliers .................................... (18,875) 61 4,884
Income taxes payable ..................................... 116 325 2,085
-------- -------- --------
Net cash (used in) provided by operating activities ...... (12,787) 156,930 271,054
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired on consolidation of CSP .................... - - 3,056
Proceeds from sale of property, plant and equipment ...... 256 2,246 19,981
Purchase of property, plant and equipment ................ (410,551) (279,368) (340,305)
Technology license fees paid ............................. (5,878) (7,790) (5,200)
Investment in CSP ........................................ (6,108) (34,492) (8,976)
Investment in SMP ........................................ - (39,186) (45,989)
-------- -------- --------
Net cash used in investing activities .................... (422,281) (358,590) (377,433)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdrafts .......................................... (1,502) 1,643 (3,082)
Customer deposits, net ................................... 79,755 (60,851) (30,076)
Loans from ST and ST affiliates
- borrowings ......................................... 824,288 410,051 69,500
- repayments ......................................... (681,235) (738,400) (69,500)
Long term debt
- borrowings ......................................... 258,245 193,900 70,500
- repayments ......................................... (25,615) (8,993) (65,748)
Issuance of shares by the Company ........................ 1,279 492,909 552,570
Issuance of shares by CSP to minority shareholders ....... - - 32,360
Capital lease payments ................................... (3,407) (5,317) (4,680)
-------- -------- --------
Net cash provided by financing activities ................ 451,808 284,942 551,844
</TABLE>
F-6
<PAGE> 67
<TABLE>
<CAPTION>
1997 1998 1999
$ $ $
<S> <C> <C> <C>
Net increase in cash and cash equivalents ............... 16,740 83,282 445,465
Effect of exchange rate changes on cash
and cash equivalents ................................. (19) (7,448) (88)
Cash and cash equivalents at the beginning of the year .. 7,064 23,785 99,619
-------- -------- --------
Cash and cash equivalents at the end of the year ........ 23,785 99,619 544,996
======== ======== ========
Supplemental Cash Flow Information
Interest paid (net of amounts capitalized) .............. 9,597 25,451 21,211
Income taxes paid (received) ............................ 206 285 (248)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 68
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
1. BUSINESS AND ORGANIZATION
Chartered Semiconductor Manufacturing Ltd (the "Company") is an
independent semiconductor foundry providing wafer fabrication services
and technologies. The Company operates in Singapore and has service
operations in seven countries in North America, Europe and Asia. Its
principal markets are the United States of America, Taiwan, Europe and
Japan.
The Company is a subsidiary of Singapore Technologies Pte Ltd ("ST"),
which is itself ultimately wholly-owned by Temasek Holdings (Private)
Limited ("Temasek"). Temasek is the holding company through which the
corporate investments of the government of Singapore are held.
In March 1997, the Company, Hewlett-Packard Europe B.V. ("HP Europe")
and EDB Investments Pte Ltd ("EDBI") formed Chartered Silicon Partners
Pte Ltd ("CSP"), in which the Company had a non-controlling 51% equity
interest which was accounted for on the equity method. Effective October
1, 1999, the Company, HP Europe and EDBI amended their strategic
alliance agreement by eliminating some of CSP's minority shareholders'
approval rights over CSP's annual business plan. It also increased the
thresholds for asset dispositions, borrowings and capital expenditures
that would require the approval of CSP's minority shareholders. As a
result of the amendment, the Company treats CSP as a consolidated
subsidiary from October 1, 1999 forward. HP Europe has subsequently
assigned its strategic alliance agreement relating to CSP to Agilent
Technologies Europe B.V.
Effective October 1, 1999, the Company amended its strategic alliance
agreement relating to CSP. As a consequence of these changes, the
Company ceased equity-accounting of its investment in CSP and
consolidated CSP from that date. The following is a summary of the
effect of the consolidation of CSP from that date:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents ............. $ 3,056
Accounts receivable ................... 13,288
Prepaid expenses ...................... 388
Technology license agreements ......... 8,333
Property, plant and equipment, net .... 136,826
Accounts payable ...................... (9,990)
Accrued operating expenses ............ (7,810)
Amount due to ST and ST affiliates .... (1,974)
Other current liabilities ............. (171)
Long-term debt ........................ (76,000)
Minority interest ..................... (32,286)
---------
Investment in CSP ..................... $ 33,660
=========
</TABLE>
In January 1998, the Company and Lucent Technologies Microelectronics
Pte Ltd formed Silicon Manufacturing Partners Pte Ltd ("SMP"), in which
the Company has a 49% equity interest. The Company accounts for SMP on
the equity method. See Note 2(d).
F-8
<PAGE> 69
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States ("US
GAAP") consistently applied for all periods.
(b) USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance
with US GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the consolidated accounts
of Chartered Semiconductor Manufacturing Ltd and its majority owned and
controlled affiliates. Intercompany accounts and transactions have been
eliminated in consolidation.
(d) INVESTMENT IN CSP AND SMP
The equity accounting method is applied for the investment in SMP, as
well as for the investment in CSP in the period prior to October 1,
1999. The Company's share of the results of their operations is included
in the consolidated statement of operations. The Company's equity
interest in these equity affiliates, including its share of accumulated
post-formation results, was included as investment in CSP (prior to
October 1, 1999) and SMP in the consolidated balance sheet.
(e) FUNCTIONAL CURRENCY
Through June 30, 1998, the Company's functional currency was Singapore
dollars. Effective July 1, 1998, the Company changed its functional
currency to US dollars.
The Singapore dollar was the functional currency of the Company because,
historically, the Singapore dollar was the currency of primary economic
environment in which the operations of the Company were conducted.
However, significant changes in economic facts necessitated a change in
the Company's functional currency from the Singapore dollar to the US
dollar. The Company's business has changed in that a more significant
portion of its revenue is derived from companies based outside of
Singapore, principally the United States. There continues to be less
financial dependence of the Company on its parent. There are ongoing
changes in sources of financing from Singapore dollars to US dollars.
With more of the Company's transactions and cash flows denominated in US
dollars, the functional currency changed effective July 1, 1998 from the
Singapore dollar to the US dollar.
F-9
<PAGE> 70
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
Concurrently with the change in functional currency, the Company
converted the majority of its debt financing to US dollars by entering
into forward exchange contracts which had the effect of redenominating
the non-US dollar loans to US dollar loans.
The change in functional currency was recognized through the translation
of Singapore dollar amounts of the Company's non-monetary assets,
principally property, plant and equipment at June 30, 1998, to US
dollars on July 1, 1998 with those US dollar amounts becoming the
accounting basis for those assets at July 1, 1998 and for subsequent
periods. The $52,696 cumulative translation adjustment at July 1, 1998
in shareholders' equity prior to the change remains as a separate
component of accumulated other comprehensive loss.
(f) FOREIGN CURRENCY TRANSACTIONS
Assets and liabilities which are denominated in foreign currencies are
converted into the functional currency at the rates of exchange
prevailing at the balance sheet date. Income and expenses are converted
at the rates of exchange at transaction dates prevailing during the
year. Foreign currency transaction gains or losses are included in
results of operations, except as described below with respect to forward
foreign exchange contracts utilized as a hedge against firm commitments.
(g) REVENUE RECOGNITION
Revenue represents the invoiced value of goods and services supplied,
excluding goods and services tax, less allowance for returns. Revenue is
recognized upon shipment of goods.
(h) GRANTS
Asset-related government grants consist of grants for the purchase of
equipment used for research and development activities. Asset-related
grants are presented in the consolidated balance sheet as deferred
grants and are credited to other income on the straight-line basis over
the estimated useful lives of the relevant assets.
Income-related government grants are subsidies of training and research
and development expenses. Income-related grants are credited to other
income when it becomes probable that expenditures already incurred will
constitute qualifying expenditures for purposes of reimbursement under
the grants, which is typically substantially concurrent with the
expenditures. See Note 16.
(i) FAB START-UP COSTS
The Company expenses costs related to start-up activities, including fab
start-up costs, as they are incurred.
(j) RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, were
$26,553, $43,419 and $58,894 in 1997, 1998 and 1999, respectively.
F-10
<PAGE> 71
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
(k) STOCK-BASED EMPLOYEE COMPENSATION
The Company measures stock-based employee compensation cost for
financial statement purposes in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and its related interpretations and includes pro forma information
in Note 24 in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Compensation cost for stock options granted to employees in connection
with the Company's fixed option plan is measured as the excess of fair
market value of the stock subject to the option at the grant date over
the exercise price of the option. Compensation cost for options granted
to employees under the Company's variable option plans is recorded over
the requisite vesting periods based upon the current market value of the
Company's stock at the end of each period.
Compensation cost for stock options granted to non-employees in
connection with the Company's fixed option plan is measured as the fair
market value of the stock options valued based upon an option pricing
model over the period in which the options vest.
(l) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities in the financial statements and their
respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded for loss carryforwards and other
deferred tax assets where it is more likely than not that such loss
carryforwards and deferred tax assets will not be realized.
(m) DERIVATIVES
Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains
and losses related to qualifying hedges of firm commitments are deferred
and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. Any contracts held or issued that do not
meet the requirements of a hedge are recorded at fair value in the
balance sheet and any changes in that fair value recognized in income.
(n) NET INCOME (LOSS) PER SHARE
The computation of basic net income (loss) and diluted net income (loss)
per share are presented in conformity with SFAS No. 128, "Earnings Per
Share" for all periods presented.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income (loss) per share computations prepared
in accordance with SFAS No. 128.
F-11
<PAGE> 72
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998
PER
SHARE
LOSS SHARES AMOUNT LOSS SHARES
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Basic net loss
per share ......... $(119,621) 490,407 $ (0.24) (190,006) 784,541 $ (0.24)
========= ========= ========= ========= ========= =========
Effect of dilutive
securities ........ - -
--------- ---------
Diluted net loss
per share ......... $(119,621) 490,407 $ (0.24) (190,006) 784,541 $ (0.24)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999
PER
SHARE
LOSS SHARES AMOUNT
(THOUSANDS)
<S> <C> <C> <C>
Basic net loss
per share ......... (32,619) 1,035,181 $ (0.03)
========= ========= =========
Effect of dilutive
securities ........ -
---------
Diluted net loss
per share ......... (32,619) 1,035,181 $ (0.03)
========= ========= =========
</TABLE>
The Company has excluded all outstanding stock options and shares
subject to repurchase by ST from the calculation of diluted net loss per
share for the years ended December 31, 1997 and 1998 and all outstanding
stock options from the calculation of diluted net loss per share for the
year ended December 31, 1999 under SFAS No. 128 because all such
securities are anti-dilutive for those periods. The total number of
shares excluded from the calculations of diluted net loss per share were
13,156,240, 27,015,600 and 15,102,942 for the years ended December 31,
1997, 1998 and 1999, respectively. All amounts have been restated to
reflect the impact of the capital restructuring described in Note 18.
(o) COMPREHENSIVE INCOME
The Company applied SFAS No. 130, "Reporting Comprehensive Income" with
respect to reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
(loss) consists of net income (loss) and foreign currency translation
adjustments and is presented in the consolidated statements of
operations and comprehensive income (loss).
(p) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments that are readily
convertible into cash and have original maturities of three months or
less.
(q) INVENTORIES
Inventories are stated at the lower of cost, determined on the weighted
average basis, or market (net realizable value).
(r) TECHNOLOGY LICENSE AGREEMENTS
F-12
<PAGE> 73
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
The Company has entered into technology license agreements requiring the
payment of licensing fees and royalties. The agreed fees and royalties
are recorded as a liability and an intangible asset. The intangible
assets are amortized to results of operations on the straight-line basis
over their estimated useful lives. See Note 7.
F-13
<PAGE> 74
(s) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on the straight-line method
over the following periods:
<TABLE>
<S> <C>
Buildings - 20 years (or, if shorter, the
remaining period of the lease of
the land on which the buildings
are erected)
Mechanical and electrical installations - 10 years
Equipment and machinery - 5 years
Office and computer equipment - 2 to 5 years
</TABLE>
The Company capitalizes interest with respect to major assets under
installation and construction until such assets are ready for use. See
Note 9 for details of capitalized interest. Repairs and replacements of
a routine nature are expensed, while those that extend the life of an
asset are capitalized.
Plant and equipment under capital leases are stated at the present value
of minimum lease payments. Plant and equipment held under capital leases
and leasehold improvements are amortized straight-line over the shorter
of the lease term or estimated useful life of the asset.
(t) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(u) OPERATING LEASES
Rental payments under operating leases are expensed on a straight-line
basis over the periods of the respective leases.
(v) CONCENTRATION OF RISK
The Company is an independent foundry that fabricates integrated
circuits on silicon wafers for customers in the semiconductor industry.
The five largest customers of the Company accounted for 48%, 43% and 38%
of net revenue in the years ended December 31, 1997, 1998 and 1999,
respectively (see Note 21). The Company believes that the concentration
of its credit risk in trade receivables is mitigated substantially by
its credit evaluation process, credit policies and credit control and
collection procedures.
F-14
<PAGE> 75
In addition, certain of the Company`s treasury management activities are
undertaken by ST or carried out together with other companies in the ST
Group. The Company participates in a pooled cash management arrangement
and places short-term advances with other companies in the ST Group. The
Company also contracts substantially all of its forward purchases of
foreign exchange with ST, where required for the purpose of hedging
future foreign currency commitments. See Notes 3 and 23(f).
(w) SEGMENT DISCLOSURES
Disclosures on business segments are made under SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information".
Under SFAS No. 131, a public company reports descriptive information
about its reportable operating segments. Operating segments, as defined,
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company operates in a single reportable
segment.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash at banks and in hand ............ $ 6,747 $432,094
Cash equivalents - ST pooled cash .... 92,872 112,902
-------- --------
$ 99,619 $544,996
======== ========
</TABLE>
Certain of the Company`s treasury management activities are undertaken
by ST or its affiliates. The Company participates in a pooled cash
management arrangement under which the Company may place surplus cash
with ST as short-term advances of less than three months.
4. ACCOUNTS RECEIVABLE
Trade accounts receivable at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Trade receivables .................. $ 76,264 $ 122,712
Allowance for doubtful accounts .... (4,979) (5,547)
--------- ---------
$ 71,285 $ 117,165
========= =========
</TABLE>
F-15
<PAGE> 76
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
Movements in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Beginning ...................... $ 7,175 $ 3,957 $ 4,979
Utilized in year ............... - - (322)
Charge (credit) for the year ... (2,058) 993 890
Translation adjustment ......... (1,160) 29 -
------- ------- -------
Ending ......................... $ 3,957 $ 4,979 $ 5,547
======= ======= =======
</TABLE>
Other receivables at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Advances to suppliers ................ $ 4,944 $ 227
Loans to employees ................... 1,097 1,480
Deposits ............................. 466 785
Receivable from research partners .... 3,333 6,726
Others ............................... 2,863 14,843
------- -------
$12,703 $24,061
======= =======
</TABLE>
5. INVENTORIES
Inventories at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Raw materials ........................... $ 6,279 $ 3,908
Work in process ......................... 17,206 21,650
Consumable supplies and spares .......... 10,184 8,186
-------- --------
33,669 33,744
Allowance for inventory obsolescence .... (4,193) (125)
-------- --------
$ 29,476 $ 33,619
======== ========
</TABLE>
Movements in the allowance for inventory obsolescence are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Beginning ................. $ 654 $ 458 $ 4,193
Utilized in year .......... (1,467) - (4,133)
Charge for the year ....... 1,114 3,744 65
Translation adjustment .... 157 (9) -
------- ------- -------
Ending .................... $ 458 $ 4,193 $ 125
======= ======= =======
</TABLE>
F-16
<PAGE> 77
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
6. INVESTMENT IN CSP AND SMP
The investment in CSP at December 31, 1998 and the investment in SMP at
December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
CSP
Cost .......................................... $ 40,600 $ -
Share of retained post-formation loss ......... (6,849) -
Translation adjustments ....................... 407 -
-------- --------
$ 34,158 $ -
======== ========
SMP
Cost .......................................... $ 39,186 $ 85,175
Share of retained post-formation loss ......... (14,857) (38,139)
-------- --------
$ 24,329 $ 47,036
======== ========
</TABLE>
CSP and SMP are semiconductor foundries providing wafer fabrication
services and technologies. The Company accounts for its 49% investment
in SMP using the equity method. Because the minority owners of CSP had
certain approval or veto rights which allowed them to participate in
management, CSP was not consolidated and was accounted for using the
equity method until September 30, 1999.
On October 1, 1999, the strategic alliance agreement relating to CSP was
revised and, since then, the Company has accounted for its 51%
investment in CSP on a consolidated basis.
Under the terms of the strategic alliance agreements, the Company is
committed to making an equity investment in CSP of up to $215,429, of
which $83,259 has been invested, and in SMP of up to $122,200, of which
$85,175 has been invested.
Under the strategic alliance agreement with the majority shareholder of
SMP, in arriving at the share of net income attributable to the Company,
the Company is entitled to the margins from sales to customers directed
to SMP by the Company, after deducting 49% share of the overhead costs
of SMP. Accordingly, SMP's net results are not expected to be shared in
the same ratio as the equity holding. The Company accounts for its due
share of SMP's net results in accordance with the terms in the foregoing
agreement.
SMP commenced recording of sales in the quarter ended June 30, 1999
which amounted to $27,707 in the current year ended December 31, 1999.
F-17
<PAGE> 78
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
Shown below is aggregated summarized financial information for CSP
(prior to October 1, 1999) and SMP:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Current assets .................... $ 21,151 $ 40,495
Property, plant and equipment ..... 240,574 300,556
Short-term debt ................... (75,460) -
Other current liabilities ......... (38,642) (52,821)
Long-term debt .................... (31,000) (187,000)
--------- ---------
Shareholders' equity .............. $ 116,623 $ 101,230
========= =========
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net revenue ....... $ - $ - $ 66,143
Gross loss ........ - - (47,839)
Operating loss .... (2,571) (42,430) (74,180)
Net loss .......... (2,494) (41,256) (66,493)
</TABLE>
7. TECHNOLOGY LICENSE AGREEMENTS
Technology license agreements at December 31, 1998 and 1999 consist of
the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Technology licenses, at cost ............................ $ 32,284 $ 62,284
Accumulated amortization ................................ (25,368) (33,758)
-------- --------
$ 6,916 $ 28,526
======== ========
Future payments under the agreements are as follows:
Unconditional fixed obligations payable ................. $ 39,250 $ 69,250
Total payments to date .................................. (30,770) (45,970)
-------- --------
$ 8,480 $ 23,280
======== ========
Current installments (see note 14) ...................... $ 1,280 $ 11,280
Non-current installments (see note 16) .................. 7,200 12,000
-------- --------
$ 8,480 $ 23,280
======== ========
</TABLE>
F-18
<PAGE> 79
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
8. DEVELOPMENT PROGRAM TERMINATION COSTS
During 1998, the Company discontinued its technology transfer and
licensing arrangement entered into for a development program which the
Company decided to terminate. In connection with the discontinuation of
this development program, certain equipment previously purchased and yet
to be placed into production was identified by management in 1998 as
redundant and to be disposed of in the near term. The Company recorded a
non-cash impairment loss of $30,938 in adjusting the carrying value of
such equipment to $5,961, the estimated fair value of such equipment
less selling costs, and wrote off all unamortized technology license
costs of $838. The impaired equipment was removed from service for all
purposes at the time the impairment charge was recognized. The Company
sold one item of equipment in 1999 and is in the process of evaluating
bids to purchase the remaining equipment and expects to complete these
disposals in 2000. Additionally, the Company recorded a $6,500 charge
for a final cash settlement amount in 1999 for the termination of the
licensing arrangement.
F-19
<PAGE> 80
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1999 consist of
the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
COST
Buildings ..................................... $ 147,685 $ 153,023
Mechanical and electrical installations ....... 268,606 252,589
Equipment and machinery ....................... 1,048,744 1,260,608
Office and computer equipment ................. 63,112 68,523
Assets under installation and construction .... 11,555 360,371
---------- ----------
Total cost ................................. $1,539,702 $2,095,114
========== ==========
ACCUMULATED DEPRECIATION
Buildings ..................................... $ 16,153 $ 23,961
Mechanical and electrical installations ....... 70,502 87,293
Equipment and machinery ....................... 441,815 664,721
Office and computer equipment ................. 29,262 37,033
---------- ----------
Total accumulated depreciation ............. $ 557,732 $ 813,008
========== ==========
Property, plant and equipment (net) ........... $ 981,970 $1,282,106
========== ==========
</TABLE>
Depreciation charged to results of operations amounted to $166,844,
$219,900 and $264,683 for 1997, 1998 and 1999, respectively. Buildings
consist of wafer plants, including administrative offices, built on land
licensed to ST and Technology Parks Pte Ltd, and sub-leased to the
Company. See Note 22.
Included in property, plant and equipment are assets acquired under
capital lease obligations with a cost and related accumulated
depreciation of approximately $24,000 and $16,000, respectively, at
December 31, 1998 and $31,973 and $27,691, respectively, at December 31,
1999.
Capitalized interest relating to property, plant and equipment amounted
to $10,500, $5,970 and $3,793 in the years ended December 31, 1997, 1998
and 1999, respectively.
10. CAPITAL LEASES
Future minimum lease payments under the US dollar denominated capital
leases for equipment and machinery as of December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Payable in year ending December 31,
1999 ................................................... $ 5,363 $ -
2000 ................................................... 6,387 6,496
2001 ................................................... 8,106 8,196
-------- --------
Total minimum lease payments .............................. 19,856 14,692
Amounts representing interest at rates ranging
from 5.90% to 6.06% per annum .......................... (2,113) (1,103)
-------- --------
Present value of minimum lease payments ................... 17,743 13,589
Less current installments of capital lease obligations .... (4,329) (5,767)
-------- --------
Obligations under capital leases, excluding
current installments ................................... $ 13,414 $ 7,822
======== ========
</TABLE>
F-20
<PAGE> 81
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
The minimum lease payments are guaranteed by ST.
11. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Singapore dollar loans at fixed rates of 4% to 4.25% ... $ 408,277 $ 355,903
Singapore dollar loans at floating rates ............... 60,314 59,756
US dollar loan at floating rates ....................... - 128,000
--------- ---------
468,591 543,659
Less current installments .............................. (49,046) (119,991)
--------- ---------
Long-term debt, excluding current installments ......... $ 419,545 $ 423,668
========= =========
</TABLE>
All long-term debts are unsecured.
The fixed rate Singapore dollar loans are guaranteed by ST and contain
certain covenants which restrict the ability of the Company to pay
dividends without prior approval from the lender. Effective November 1,
1999, the Company's management and services support agreement with ST
includes a charge for such guarantees. See note 22. Prior to that date,
the Company was not separately charged for the guarantees. The loans are
repayable in semi-annual installments and mature between 2002 and 2005.
The floating rate Singapore dollar loans comprise two loans of equal
amounts. Interest is charged at 2% above the lending bank's first tier
savings rate in respect of one loan (3.50% and 3% as of December 31,
1998 and 1999), respectively and 1% above the arithmetic mean of
Singapore inter-bank rates for deposits quoted by specified banks to the
lender (6.44% and 4.06% as of December 31, 1998 and 1999), respectively.
The loans are repayable in June 2002 and February 2002 respectively. See
note 23(f).
The floating rate US dollar loan is unsecured and bears interest of
0.56% above the arithmetic mean of Singapore inter-bank rates for
deposits quoted by specified banks to the lender (6.75% as of December
31, 1999). The loans are repayable in semi-annual installments and
mature between 2000 and 2002.
Annual maturities of long-term loans as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Payable in year ending December 31,
2000 ................................ $119,991
2001 ................................ 119,991
2002 ................................ 179,747
2003 ................................ 68,772
2004 ................................ 27,579
Thereafter .......................... 27,579
--------
$543,659
========
</TABLE>
F-21
<PAGE> 82
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
12. ADDITIONAL CREDIT FACILITIES AND BANK OVERDRAFTS
As of December 31, 1999, the Company has unutilized banking facilities
of approximately $177,838 for short-term advances and bankers'
guarantees and an unutilized facility with ST of approximately $100,000.
The weighted average rate of interest payable on the bank overdrafts was
6.0% as of December 31, 1998.
13. ACCRUED OPERATING EXPENSES
Accrued operating expenses at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Accrual for employee bonuses and related expenses .... $ 14,732 $ 40,992
Accrual for vacation liability ....................... 2,237 4,460
Accrual for technology costs (see Note 23(g)) ........ 7,853 12,126
Unbilled raw materials ............................... 52,113 53,367
Accrual for interest costs ........................... 5,971 5,817
Others ............................................... 2,012 10,385
-------- --------
$ 84,918 $127,147
======== ========
</TABLE>
Movements in accrual for technology costs are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Beginning .............. $ 4,261 $ 5,847 $ 7,853
Charge for the year .... 1,586 2,006 4,273
------- ------- -------
Ending ................. $ 5,847 $ 7,853 $12,126
======= ======= =======
</TABLE>
14. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Obligations payable under technology license
agreements ................................... $ 1,280 $11,280
Customer deposits (see note 15) ................. 22,795 2
Others .......................................... 2,055 5,941
------- -------
$26,130 $17,223
======= =======
</TABLE>
15. CUSTOMER DEPOSITS
Deposits are received from customers to secure the allocation of agreed
levels of wafer capacity. These non-interest bearing deposits are
refundable at the end of the agreed period of such allocated capacity,
typically about five years.
F-22
<PAGE> 83
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
16. OTHER LIABILITIES
Other liabilities at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Obligations payable under technology license agreements .... $ 7,200 $12,000
Deferred grants (see below) ................................ 2,873 3,501
Deferred gain on forward contracts ......................... 20,012 11,974
------- -------
$30,085 $27,475
======= =======
</TABLE>
The Company has obtained approval for funding of certain research and
development projects from the Economic Development Board of Singapore
("EDB"), under the Research and Development Assistance Scheme ("RDAS")
administered by EDB. The program provides for funds to be disbursed to
the Company over the terms of the projects.
17. INCOME TAXES
The Company has been granted pioneer status under the Economic Expansion
Incentives (Relief from Income Tax) Act, Chapter 86 of Singapore (the
"Act"), for sub-micron technology manufacturing in four of its fabs,
effective for ten years from January 1, 1991, July 1, 1996 and January
1, 1998, and the earlier of initial fab production date and December 1,
2000, respectively.
During the pioneer status period, the Singapore-resident income from
pioneer trade is exempt from income tax, subject to compliance with the
conditions stated in the certificate and the Act. Income derived from
non-pioneer trade during the pioneer period, however, is subject to
income tax at the prevailing enacted rate of tax.
In addition, three fabs have been granted post-pioneer status, which
entitles them to a concessionary tax rate of 10% for five years after
the expiration of their pioneer status in 2006, 2007, and the earlier of
ten years from the initial fab production date and December 1, 2000,
respectively.
The tax-exempt profits arising from the pioneer trade can be distributed
as tax-exempt dividends which are not subject to Singapore income tax in
the hands of the holders of ordinary shares. Losses arising in the
pioneer status period are available for carryforward to be offset
against profits arising in subsequent periods, including profits arising
after the pioneer status period. Profits arising during the pioneer
status period offset any accumulated pioneer loss carryforward balance.
Pioneer loss carryforwards are available indefinitely, subject to more
than 50% of the Company's equity staying with the same shareholders from
the incurrence of the tax loss to its utilization. However, there is no
consolidated group taxation offset allowed between the fabs. As of
December 31, 1999, the Company has pioneer loss carryforwards of
$94,786.
The income tax expense for the years ended December 31, 1997, 1998 and
1999 represents income tax payable on non-pioneer trade income,
principally interest income.
F-23
<PAGE> 84
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
A reconciliation of the expected tax expense at the statutory rate of
tax to the actual tax expense is as follows:
<TABLE>
1997 1998 1999
<S> <C> <C> <C>
Income taxes computed at Singapore
statutory tax rate of 26% ......................... $(31,009) $(49,177) $ (9,872)
Permanent non-deductible expenses .................... - - 9,220
Pioneer status relief ................................ - - (4,769)
Pioneer losses not recognized as deferred benefit .... 30,534 45,893 -
Non-deductible investee losses ....................... - 3,561 8,531
Settlement of prior years' tax claims ................ - - (880)
All other items, net ................................. 830 588 (99)
-------- -------- --------
Income tax expense (benefit) ......................... $ 355 $ 865 $ 2,131
======== ======== ========
</TABLE>
As of December 31, 1998 and 1999, there are no material deferred tax
assets or liabilities since profits during the pioneer status period are
not taxable and all temporary differences are expected to reverse within
the pioneer status period. Accordingly, no deferred tax assets or
liabilities have been recognized.
18. SHARE CAPITAL
The Company's authorized share capital at December 31, 1999 was
comprised of 3,076,923,079 ordinary shares of Singapore dollars S$0.26
par value each.
Share capital at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Issued share capital ............. $160,272 $203,368
Capital reduction (see below) .... 61,161 61,161
-------- --------
$221,433 $264,529
======== ========
</TABLE>
On November 6, 1992, the Company reorganized its paid-up share capital
by the extinguishment of accumulated losses of $61,161 against the
paid-up share capital in a capital reduction sanctioned by the High
Court of Singapore. The capital reduction does not qualify as a
quasi-reorganization under US GAAP and accordingly has not been
reflected in the financial statements.
On September 13, 1999, the Company restructured its share capital with
the issuance of one additional fully paid A ordinary share and the
cancellation of 20 partly-paid A ordinary shares for every 20 partly
paid A ordinary shares. This was approved by the High Court of Singapore
on September 30, 1999. Subsequently, the Company on October 14, 1999
merged the A ordinary shares and B ordinary shares into one class of
ordinary shares and effected a share split which resulted in each
ordinary share with a par value of S$0.4888 being sub-divided into 1.88
ordinary shares with a par value of S$0.26 each.
All share and per share amounts have been presented herein to reflect
the impact of this capital restructuring.
Under Singapore law, all increases in share capital (including rights
issues) require prior shareholders' approval. Singapore law does not
provide for the issue of shares of no par value and, except with court
approval, prohibits the issue of shares at a discount to par value.
F-24
<PAGE> 85
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
19. ADDITIONAL PAID-IN CAPITAL
Additional paid-in capital as of December 31, 1998 and 1999 represents
principally the excess of proceeds received from issues of share capital
(net of the costs of issue) over the par value of shares issued, which
under Singapore law must be credited to the share premium account. The
share premium may only be applied in paying up unissued shares to be
issued to shareholders, paying up in whole or in part the balance unpaid
on shares in issue, in writing off preliminary expenses and share and
debenture issue expenses and by provision for premiums payable on the
redemption of redeemable preferred shares. The share premium account had
a balance of $1,207,656 as of December 31, 1999.
20. RETAINED EARNINGS
Singapore law allows dividends to be paid only out of profits of the
Company. Shareholders of ordinary shares are not liable for Singapore
income tax on dividends paid by the Company out of its tax exempt
profits from pioneer activities.
21. BUSINESS SEGMENT DATA AND MAJOR CUSTOMERS
The Company operates in a single reportable segment, providing wafer
foundry services. All of the Company's products are manufactured and
delivered in Singapore.
The following table presents revenues by country of domicile of
customer:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
USA .......... $198,288 $265,398 $477,213
Taiwan ....... 140,799 134,171 98,842
Singapore .... 25,385 6,409 490
France ....... 1,368 2,255 25,844
Japan ........ 562 4,976 20,338
Sweden ....... - 236 51,015
Others ....... 13,359 9,177 20,516
-------- -------- --------
$379,761 $422,622 $694,258
======== ======== ========
</TABLE>
Revenues from major customers, as a percentage of total revenue, were as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Customer A ................................................. 1.0 % 9.6 % 11.1 %
Customer B ................................................. 14.0 7.6 6.7
Customer C ................................................. 10.4 1.0 5.5
Customer D ................................................. 14.6 9.3 0.9
Others ..................................................... 60.0 72.5 75.8
------ ------ ------
100.0 % 100.0 % 100.0 %
====== ====== ======
</TABLE>
The top five customers of the Company accounted for 48%, 43% and 38% of
the Company's net revenue in the years ended December 31, 1997, 1998 and
1999, respectively.
F-25
<PAGE> 86
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
As a result of such concentration of the customer base, loss or
cancellation of business from, or significant changes in scheduled
deliveries or decreases in the prices of products sold to, any of these
customers could materially and adversely affect the Company's results of
operations or financial position.
22. RELATED PARTY TRANSACTIONS
(a) ST
ST, one of Singapore's largest industrial conglomerates, is indirectly
wholly-owned by the government of Singapore. The Company transacts
business with ST and its affiliates in the normal course of their
respective businesses, including ST Assembly Test Services Ltd
("STATS").
In addition to the transactions with related parties disclosed in Note
12, the Company had the following significant transactions with related
parties:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
ST
Management fees ............................ $ 5,719 $ 4,897 $ 3,820
Reimbursement of expenses incurred on
behalf of the Company .................... 5,594 5,697 6,496
Rental for leasehold land from ST .......... 2,128 2,020 2,615
Interest expense ........................... 12,729 6,552 -
Affiliates of ST
Services purchased from STATS .............. 13,261 22,700 33,905
Other services purchased ................... 3,034 1,362 7,593
Net revenue ................................ 20,917 6,247 59,031
Property, plant and equipment purchased .... 1,051 924 588
Building construction costs ................ 2,575 1,101 126
Interest expense ........................... - 2,310 95
======= ======= =======
</TABLE>
The fabs of the Company are built on land held on long-term operating
leases from entities controlled by the government of Singapore. Fab 1 is
built on land leased by the Company from Technology Parks Pte Ltd
("TPPL"), a private company wholly-owned by Jurong Town Corporation
("JTC"), under a long-term lease which expires in 2017, with an option,
subject to certain conditions, to extend by another 30 years. JTC is a
statutory board established by the Singapore government to develop and
manage industrial estates in Singapore.
Fabs 2, 3 and 6 occupy land leased by ST from JTC. The Company has
entered into sub-leases with ST in respect of the underlying land for
the entire term of the lease between ST and JTC. The leases expire at
different times between 2024 and 2027 with an option, subject to certain
conditions, to extend for another 30 years.
Rental rates on JTC and TPPL leases are subject to revisions at market
rates at periodic intervals in accordance with the rental agreements,
with such increases generally capped at 8% to 10% per annum.
F-26
<PAGE> 87
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
ST provides management and corporate services to the Company. ST also
provides staff loans to senior management staff of the Company,
including loans related to subscription amounts associated with the
employee share plans described in Note 24. Management fees and expenses
incurred on behalf of, or allocated to, the Company by ST are charged to
the Company. Under a service agreement dated November 1, 1999, annual
management fees are payable for the provision of specified services on
mutually agreed terms which the Company believes approximates the cost
of providing those services. Fees are also payable as a proportion of
revenues for affiliation and network benefits. In addition, fees are
payable as a percentage of guarantees and similar financial support
provided. Prior to November 1, 1999, these services were subject to a
management fee computed based on certain percentages of capital
employed, revenue, manpower and payroll.
Short term financing is also provided by ST to the Company (generally on
3 to 6 months renewable basis) using ST's cost competitive corporate
banking advantage in the banking community. Surplus funds are placed
with ST from time to time. Advances to and from ST bear interest at
rates comparable to rates offered by commercial banks in Singapore. The
Company also participates with ST in a cash management program managed
by a bank. Under the program, cash balances are pooled and daily cash
surpluses or shortfalls may, on a short-term basis, be lent to or
borrowed from other ST affiliates participating in the arrangement at
prevailing inter-bank rates. The Company controls its bank accounts,
subject to such program.
Tritech Microelectronics Ltd ("Tritech"), an ST affiliate and a fabless
designer of semiconductor products, was previously a major customer of
the Company. The sales to Tritech were made on substantially the same
terms as those available to third parties for similar products and
volumes committed. The Company has not made sales to Tritech since it
was placed under judicial management on July 2, 1999. Tritech commenced
winding-up proceedings on October 15, 1999.
At December 31, 1998 and 1999, there were the following amounts due from
or to ST and its affiliates.
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Amounts due from ST
Other receivables .................................. $ - $ 282
Amounts due from ST affiliates
Accounts receivable
Trade, net of allowance for doubtful accounts .... 1,481 933
Others ........................................... 1,110 407
------- -------
$ 2,591 $ 1,622
======= =======
Amounts due to ST
Other current liabilities .......................... $ 4,654 $ 292
Amounts due to ST affiliates
Accounts payable, trade ............................ 4,916 9,483
Other current liabilities .......................... 1,037 -
------- -------
$10,607 $ 9,775
======= =======
</TABLE>
F-27
<PAGE> 88
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
(b) CSP AND SMP
The Company provides management and corporate support services including
accounting, financial, sales and marketing services, to CSP and SMP and
allocates a portion of its costs to CSP and SMP. The Company commenced
recording such recharges in 1998, which amounted to $17,623 and $19,684
in the year ended December 31, 1998 and 1999, respectively. The Company
is also committed to purchase a specified percentage of SMP's output or
compensate SMP for any costs it incurs in connection with unused
capacity arising from such specified percentage not purchased.
(c) LEASES
Rental expense with ST for the years ended December 31, 1997, 1998 and
1999 was $2,128, $2,020 and $2,615 respectively.
Minimum future rental payments on non-cancellable operating leases of
factory land leased from ST as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
Payable in year ending December 31,
2000 ................................ $ 1,919
2001 ................................ 1,919
2002 ................................ 1,919
2003 ................................ 1,919
2004 ................................ 1,919
Thereafter .......................... 36,789
-------
$46,384
=======
</TABLE>
23. COMMITMENTS AND CONTINGENCIES
(a) LEASES
Rental expense, excluding amounts payable to ST disclosed in Note 22(a),
for the years ended December 31, 1997, 1998 and 1999 was $2,058, $1,949
and $2,163, respectively.
Minimum future rental payments on non-cancellable operating leases of
apartments, excluding amounts payable to ST disclosed in Note 22(b), as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
Payable in year ending December 31,
2000 ................................ $3,401
2001 ................................ 2,100
2002 ................................ 276
2003 ................................ 243
2004 ................................ 243
Thereafter .......................... 3,090
------
$9,353
======
</TABLE>
F-28
<PAGE> 89
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
(b) TECHNOLOGY PARTNER AGREEMENT
In addition to the technology license agreements described in Note 7,
the Company has entered into an agreement with a technology partner
under which the Company is required to allocate wafer capacity, as part
of the consideration for the process technology the partner transferred
and licensed to the Company. The agreement will expire in 2002.
(c) SUBSCRIPTION AND PARTICIPATION AGREEMENTS
The Company entered into subscription and participation agreements with
seven customers (the "Equity Investor Customers"), a technology partner
and an investor to raise equity for the establishment of a fab. Under
the agreements, the Equity Investor Customers, technology partner and
the investor subscribed for shares with the right to subscribe for new
shares pro-rata to their interest in the Company. The subscription and
participation agreements were terminated with effect from November 5,
1999.
The Company continues to be committed to provide the Equity Investor
Customers and technology partner with rights to wafer capacity first
granted under those agreements.
(d) DEPOSIT AGREEMENTS
The Company entered into deposit and supply agreements with six
customers under which the customers are required to maintain deposits
with the Company to secure wafer capacity. As of December 31, 1999,
deposits held by the Company amounted to $39,806. These agreements,
expiring on December 31, 2000 and December 31, 2002, require the Company
to make available capacity to customers over the terms of the
agreements.
(e) CAPITAL EXPENDITURE
The Company had the following capital commitments as of December 31,
1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Contracts for capital expenditure ........... $ 362,761 $ 876,263
</TABLE>
(f) FORWARD FOREIGN EXCHANGE CONTRACTS
The Company had the following notional amounts of forward foreign
exchange contracts as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Forward foreign exchange contracts ............ $ 522,087 $ 512,760
</TABLE>
In conjunction with the change in the functional currency effective July
1, 1998, the Company entered into forward foreign exchange contracts to
hedge the principal and interest obligations associated with its
Singapore dollar denominated loans with the effect of redenominating
them to US dollars.
F-29
<PAGE> 90
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage identified foreign currency risks (prior to July 1, 1998,
principally Japanese yen and US dollars; subsequent to June 30, 1998,
principally Japanese yen and Singapore dollars). See Note 2(e). Foreign
currency forward contracts are generally used to reduce the potential
impact of increases in foreign currency exchange rates on existing
long-term debt, and to a lesser extent are used to hedge foreign
currency purchase commitments. The term of forward contracts rarely
exceeds five years. Foreign currency forward contracts used to hedge
firm commitments are carried at market value and are recorded as other
assets or other liabilities in the accompanying consolidated balance
sheet. Changes in market values of these agreements are deferred, and
included in the basis of the hedged asset upon purchase.
The Company is exposed to credit losses in the event of nonperfomance by
the counterparties to its foreign currency exchange contracts. The
Company anticipates, however, that counterparties will be able to fully
satisfy their obligations under the contracts. The Company does not
obtain collateral or other security to support financial instruments
subject to credit risk but monitors the credit standing of
counterparties. See also Note 2(v).
(g) CONTINGENCIES
As is typical in the semiconductor industry, the Company has from time
to time received communications from third parties asserting patents
that cover certain of the Company's technologies and alleging
infringement of certain intellectual property rights of others. The
Company has acquired certain technology licenses for use in its business
and may seek to obtain other licenses in the future. There can be no
assurance that the Company will be able to obtain such future licenses
on commercially reasonable terms, or at all.
The Company has accrued a liability for, and charged to its results of
operations in the periods presented, the estimated costs of obtaining
such licenses for third party technology. The amounts so accrued were
$7,853 and $12,126 as of December 31, 1998 and 1999, respectively. No
assurance can be given that such provisions are adequate.
24. SHARE OPTIONS AND INCENTIVE PLANS
The Company determines the fair market values of the ordinary shares
underlying each option grant by averaging (i) discounted cashflow
valuation; (ii) last twelve months' revenue multiplied by a composite
industry comparable revenue to market capitalization factor and (iii)
book value at each grant date multiplied by a composite industry
comparable book value to market capitalization factor.
F-30
<PAGE> 91
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
(a) 1995 OWNERSHIP PLAN
The Company adopted the Chartered Semiconductor Manufacturing Employees'
Share Ownership Plan (the "1995 Ownership Plan") in 1995 and terminated
it on September 30, 1999 by converting the total amount paid up on the
partly paid shares into an equivalent number of fully paid shares, and
the unpaid subscription amounts into 1999 Option Plan options. The plan
was administered by a committee nominated by the directors and provided
for the grant of options to employees and directors of the Company and
certain of its affiliates. The exercise period of the options was 30
days and the subscription price for each share which could be purchased
upon exercise of the options was determined by the committee but could
not be less than Singapore dollars S$0.80. The subscription price was
payable in installments, the first installment of 5% of the subscription
price being payable upon exercise of the option, the second installment
of 95% of the subscription price being payable over a period between the
second and fifth years following the date the option is granted,
however, such cumulative second installment due could be deferred and
payable at each successive anniversary date. Interest was payable on
outstanding installments at 8% per annum, but in 1997, the plan was
revised to allow ST to bear all interest on behalf of the employees.
Where employees failed to pay the second installment within seven years
of the date of grant of the option, the employees were required to sell
their shares to an ST affiliate at the greater of 5% of the market value
of the shares, as determined by the committee, or 5% of the net asset
value of the shares. Employees leaving the employment of the Company
were entitled to retain those shares which had been fully paid for,
while shares not fully paid for were either required to be sold to the
ST affiliate or, in certain circumstances, were allowed to be fully
paid. Shares which were not fully paid for could not be sold. Shares
which were fully paid for were required to be offered to the ST
affiliate at the greater of the market value of the shares, as
determined by the committee, or net asset value of the shares before
they could be sold to any other party.
The 1995 Ownership Plan was accounted for in accordance with variable
plan accounting.
Total compensation expense (income) recognized for stock-based
compensation under the plan for the years ended December 31, 1997, 1998
and 1999 were $1,853, $(2,609) and $8,081 respectively.
Information for December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Shares outstanding at beginning of year (in thousands) .... 13,451 12,859 11,436
Shares granted during the year (in thousands) ............. 1,103 - -
Shares fully paid and partly paid shares converted
to fully paid shares during the year (in thousands) .... (1,695) (1,423) (2,894)
Shares cancelled during the year (in thousands) ........... - - (2,626)
Shares converted to 1999 Option Plan (in thousands) ....... - - (5,916)
Shares outstanding at year end (in thousands) ............. 12,859 11,436 -
Subscription price for shares issued in 1995 at ........... $ 0.77 $ 0.77 -
Subscription price for shares issued in 1996 from ......... $ 0.92 $ 0.92 -
to ..................................................... $ 0.98 $ 0.98 -
Subscription price for shares issued in 1997 at ........... $ 0.83 $ 0.83 -
Weighted average grant date fair value of options ......... $ 1.31 - -
Subscription receivable at year end ....................... $ 10,565 $ 9,247 -
</TABLE>
F-31
<PAGE> 92
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
The fair value of option grants was estimated using the Black-Scholes
option pricing model with the following assumptions used: dividend yield
of 0% and expected lives of 10 years. The weighted average expected
volatility used for option grants was 57.0% in 1997. The weighted
average risk free interest rate used was 6.84%.
(b) 1997 OWNERSHIP PLAN
The Company adopted the Chartered Semiconductor Manufacturing Employees'
Share Ownership Plan 1997 (the "1997 Ownership Plan") in 1997 and
terminated it on September 30, 1999 by converting the total amount paid
up on the partly paid shares into an equivalent number of fully paid
shares, and the unpaid subscription amounts into 1999 Option Plan
options. The terms of the 1997 Ownership Plan were substantially similar
to the 1995 Ownership Plan except that (i) interest was not charged on
outstanding and unpaid installments and (ii) the cumulative unpaid
second installments due could be deferred and paid at each successive
anniversary date but were not due until ten years after the date of
grant of the option.
The 1997 Ownership Plan was accounted for in accordance with variable
plan accounting.
Total compensation expense (income) recognized for stock-based
compensation under the plan for the years ended December 31, 1997, 1998
and 1999 were $171, $(171) and $2,922 respectively.
Information for December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Shares outstanding at beginning of year (in thousands) .... - - 4,021
Shares granted during the year (in thousands) ............. 2,792 5,341 2,526
Partly paid shares converted to fully paid shares
during the year (in thousands) ......................... - - (327)
Shares cancelled during the year (in thousands) ........... - - (937)
Shares converted to 1999 Option Plan (in thousands) ....... - - (5,283)
Shares granted pending issuance at year end
(in thousands) ......................................... (2,792) (1,320) -
Shares outstanding at year end (in thousands) ............. - 4,021 -
Subscription price for shares issued in 1997 at ........... $ 0.74 $ 0.74
Subscription price for shares issued in 1998 from ......... - $ 0.59
to ..................................................... - $ 0.84 -
Subscription price for shares issued in 1999 at ........... - - $ 0.55
Weighted average grant date fair value of shares .......... $ 1.50 $ 1.13
$ 1.05
Subscription receivable at year end ....................... - $ 3,094 -
</TABLE>
The fair value of option grants was estimated using the Black-Scholes
option pricing model with the following assumptions used: dividend yield
of 0% and expected lives of 10 years. The weighted average expected
volatility used for option grants was 55.0%, 70.0% and 71.0% in 1997,
1998 and 1999, respectively. The weighted average risk free interest
rate used was 5.96%, 5.29% and 5.52% in 1997, 1998 and 1999,
respectively.
F-32
<PAGE> 93
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
(c) 1999 OPTION PLAN
Effective March 30, 1999, the Company adopted the Chartered
Semiconductor Manufacturing Ltd Share Ownership Plan 1999 (the "1999
Option Plan") which provides for a maximum of 107 million shares
(subject to adjustment under the plan) to be reserved for option grants.
Options granted under the plan may include nonstatutory options as well
as incentive stock options intended to qualify under Section 422 of the
United States Internal Revenue Code.
The plan is administered by a committee appointed by the directors.
Employees, outside directors and consultants are eligible for the grant
of options except for (i) employees of affiliates and SMP, and outside
directors and consultants, who are not eligible for the grant of
incentive stock options; (ii) employees, outside directors and
consultants of affiliates resident in the United States, who are not be
eligible for the grant of options; and (iii) employees of SMP resident
in the United States, who are not eligible for the grant of options.
The exercise price of an incentive stock option is the fair market value
of the shares at the date of the grant. In certain circumstances, the
exercise price may be higher than the fair market value but in no event
will the exercise price be below the par value of the share.
Option periods do not exceed 10 years from the date of grant. Upon
leaving the employment of the Company, outstanding options remain
exercisable for a specified period.
Information on options granted is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
<S> <C> <C>
Outstanding at beginning of year (in thousands) .... - -
Granted (in thousands) ............................. 25,208 $ 1.52
Conversion from 1995 and 1997 Ownership Plans
(in thousands) .................................. 11,199 $ 0.78
Exercised (in thousands) ........................... (2,630) $ 0.79
-------
Outstanding at end of year (in thousands) .......... 33,777 $ 1.33
=======
Exercisable at end of year (in thousands) .......... 11,295 $ 1.11
Weighted average fair value of options granted
during the year ................................. $ 1.26
=======
</TABLE>
F-33
<PAGE> 94
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
NUMBER AVERAGE WEIGHTED WEIGHTED
RANGE OUTSTANDING REMAINING AVERAGE NUMBER AVERAGE
OF EXERCISE AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/1999 LIFE PRICE 12/31/1999 PRICE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.54 to 17,054 8.1 years $ 0.68 8,075 $ 0.75
$0.98
$2.00 16,723 9.2 years $ 2.00 3,220 $ 2.00
--------- ---------
33,777 11,295
========= =========
</TABLE>
The options vest over five years and expire on dates ranging from
October 2004 to October 2009. The 1999 Option Plan is accounted for in
accordance with fixed-plan accounting under APB 25. Total compensation
expense recognized for 1999 totalled $9,091.
The fair value of the 1999 option grant is estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used: dividend yield 0%, risk free interest rate of 6.1%,
expected volatility of 60.6% and expected lives of 10 years.
Options over 451,920 shares of the Company were granted in 1999 to
employees of SMP. SMP will bear the stock based compensation charge in
respect of these options.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS 123, the Company's net
income would have been reduced or increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net loss
As reported .............. $ (119,621) $ (190,006) $ (32,619)
Pro forma ................ $ (119,790) $ (195,464) $ (26,186)
Basic net loss per share
As reported .............. $ (0.24) $ (0.24) $ (0.03)
Pro forma ................ $ (0.24) $ (0.25) $ (0.03)
Diluted net loss per share
As reported .............. $ (0.24) $ (0.24) $ (0.03)
Pro forma ................ $ (0.24) $ (0.25) $ (0.03)
</TABLE>
F-34
<PAGE> 95
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
25. FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
1998 1999
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
$ $ $ $
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents .... $ 99,619 $ 99,619 $544,996 $544,996
Accounts receivable ........... 83,988 83,988 141,226 141,226
Amounts due from ST
and affiliates .............. 9,254 9,254 7,946 7,946
LIABILITIES:
Accounts payable .............. 31,359 31,359 152,401 152,401
Bank overdrafts ............... 3,082 3,082 - -
Amounts due to ST
and affiliates .............. 10,607 10,607 9,775 9,775
Long-term debt ................ 468,591 458,031 543,659 538,270
Technology obligations
payable ..................... 7,200 6,879 12,000 11,287
DERIVATIVES:
Forward foreign exchange ...... 4,199 42,620 6,553 39,148
</TABLE>
Cash and cash equivalents, bank overdrafts, amounts owing from and to ST
and affiliates, accounts receivable and accounts payable. The carrying
amounts approximate fair value in view of the short term nature of these
balances.
Long-term debt. The fair value is based on current interest rates
available to the Company for issuance of debts of similar terms and
remaining maturities.
Technology obligations payable. The fair value is based on the
discounted present value of future payment obligations.
Forward foreign exchange contracts. The fair value is estimated by
reference to market quotations for forward contracts with similar terms
adjusted where necessary for maturity differences, and was a net asset
approximately $42,620 and $39,148, respectively, at December 31, 1998
and 1999.
Limitations. Fair value estimates are made at a specific point in time,
and are based on relevant market information and information about the
financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
F-35
<PAGE> 96
CHARTERED SEMICONDUCTOR MANUFACTURING LTD AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
In thousands of US Dollars (except share data)
26. RECENT CHANGES IN US GAAP
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133,
as recently amended, is effective for fiscal years beginning after June
15, 2000. Management believes the adoption of SFAS No. 133 will not have
a material effect on the Company's financial position or results of
operations.
F-36
<PAGE> 1
EXHIBIT 10.18
REDACTED FOR CONFIDENTIALITY
FIRST ANCILLARY AGREEMENT TO THE TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
This Agreement, a First Ancillary Agreement to the May 20, 1999
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT (TTLA) is made effective
January 24, 2000 ("Effective Date"), by and between Chartered
Semiconductor Manufacturing LTD ("CSM"), a Singapore Corporation, with
principal offices located at 60 Woodlands Industrial Park D, Street 2,
Singapore 738406, Chartered Silicon Partners PTE LTD ("CSP"), a
Singapore Corporation, with principal offices located at 60 Woodlands
Industrial Park D, Street 2, Singapore 738406, and Motorola, Inc.
("Motorola"), a Delaware corporation, with principal offices located at
1303 East Algonquin Road, Schaumburg, Illinois 60196.
WHEREAS, Motorola, CSM and CSP desire to revise and update
certain Sections of the TTLA existing between the parties.
NOW THEREFORE, in consideration for the mutual promises
contained herein, the Parties agree as follows:
This First Ancillary Agreement amends Confidentiality Section 9,
particularly to amend Section 9.4, and adds Sections 9.5 and 9.6 to the
May 20, 1999 TECHNOLOGY TRANSFER AND LICENSE AGREEMENT between the
Parties as follows:
SECTION 9.4 IS HEREBY DELETED AND REPLACED WITH THE FOLLOWING LANGUAGE:
9.4 Notwithstanding anything to the contrary in this Agreement, CSM and CSP
will construct a firewall between each of them and any Joint Projects
between CSM or CSP and parties not subject to this Agreement including
Lucent and CSM's joint venture fab with Lucent. This firewall shall
protect the Technical Confidential Information provided or disclosed by
Motorola to CSM or CSP from disclosure to individuals working on or who
will be working on such Joint Projects or in such joint venture fab.
Except as provided in Section 9.5, such firewall shall include CSM and
CSP not assigning employees having knowledge of such Technical
Confidential Information provided or disclosed by Motorola to work on
such Joint Projects or in such joint venture fab for a period of
******************** from the end of the period such employees were
exposed to Technical Confidential Information. For the purposes of this
Section 9.4, Section 9.5, and Section 9.6, "Technical Confidential
Information" shall mean Confidential Information of a technical nature
including but not limited to process recipes, detailed sequences of
steps in a factory control system regarding the manufacture of products,
specific equipment configurations unique to the Logic Process
Technologies. "Technical Confidential Information" shall not include
information of business, marketing, commercial, or financial nature and
any information which is authorized for disclosure pursuant to Sections
2.1.1 or 9.3 of this Agreement. Further, for purposes of
CONFIDENTIAL TREATMENT REQUESTED
The asterisked portions of this document have been
omitted and are filed separately with the Securities and
Exchange Commission.
<PAGE> 2
this Section 9.4, and Section 9.5, "Joint Projects" shall mean projects
between CSM or CSP and parties not subject to this Agreement, for
development of new manufacturing processes, new process technologies or
significant developments to other process technology, such as new
stand-alone blocks of process technology that are separate from but may
be coupled with the other process technology and when coupled with other
process technology, enable the manufacture of products having increased
functionality. "Joint Projects" shall not include improvements to other
process technology such as changes or additions to a process which
improves or modifies it in some manner, including but not limited to
increasing manufacturing throughput, increasing the performance, quality
or yield of devices manufactured using the process, decreasing the cost
of utilizing the process, or enabling the use of different materials.
ADD THE FOLLOWING SECTIONS 9.5 AND 9.6:
9.5 CSM and CSP shall not be restricted from transferring process technology
that is not Logic Process Technologies, including but not limited to
process technology developed in Joint Projects, into or out of the CSP
fab, provided however that only Chartered Employees may enter the CSP
fab as part of the transfer. "Chartered Employees" shall mean employees
of CSM or CSP or employees of Agilent Technologies, Inc. assigned
full-time to CSM or CSP. Provided that the Chartered Employees that are
part of the transfer are not exposed to the process recipes, or detailed
sequences of steps in a factory control system regarding the manufacture
of products, which constitute portions of the Technical Confidential
Information, and were not working directly with the Technical
Confidential Information prior to the start of the transfer, they are
free to be immediately reassigned. Further, CSM and CSP may utilize
expert Chartered Employees not normally assigned to the CSP fab to
resolve problems that arise with either quantity or quality that result
from using the other process technologies transferred into CSP. Provided
these expert Chartered Employees are not exposed to the process recipes,
or detailed sequences of steps in a factory control system regarding the
manufacture of products, which constitute portions of the Technical
Confidential Information, they are free to be immediately reassigned.
Also, CSM and CSP are free to utilize Chartered Employees to provide
centralized services including quality assurance, supply management, and
certain equipment maintenance and repair. Provided the Chartered
Employees providing these centralized services are not exposed to the
process recipes, or detailed sequences of steps in a factory control
system regarding the manufacture of products, which constitute portions
of the Technical Confidential Information, they are free to be
immediately reassigned.
9.6 Assurances: Motorola shall have the right to review the CSP procedures
for protecting Logic Process Technologies from inadvertently
contaminating other process technologies. Motorola shall provide
reasonable notice of such reviews, and such reviews shall occur no more
frequently than once each
2
<PAGE> 3
calendar quarter. Further, Motorola shall, at its own expense, have the
right to have a technical audit performed by a mutually agreed upon
third party. This technical audit shall be narrowly focused, based upon
specific concerns raised by the Motorola review of the CSP procedures.
The selection of the mutually agreed upon third party to perform the
technical audit shall occur within five (5) working days of receipt by
CSP of the specific concerns raised by the Motorola review of the CSP
procedures. The mutually agreed upon third party shall be granted access
to all necessary confidential information, but shall not include any
non-Motorola confidential information in reporting the results of the
technical audit to Motorola. The duration of the technical audit shall
not exceed twenty-one (21) days.
IN WITNESS WHEREOF, the undersigned Parties have duly executed this First
Ancillary Agreement as of the Effective Date.
Chartered Silicon Partners Pte Ltd
By: /s/ Lance Mills
-----------------------------------------------
Title: Agilent CSP Program Manager
--------------------------------------------
Date: January 24, 2000
---------------------------------------------
Chartered Semiconductor Manufacturing Ltd
By: /s/ Brian Klene
-----------------------------------------------
Title: VP Strategic Development
--------------------------------------------
Date: January 24, 2000
---------------------------------------------
Motorola, Inc.
By: Wayne K. Nesbit
-----------------------------------------------
Title: Vice President & Director
--------------------------------------------
Worldwide External Technology
--------------------------------------------
Date: January 10, 2000
---------------------------------------------
3
<PAGE> 1
EXHIBIT 23
[On the letterhead of Allen & Gledhill]
20th March, 2000
Chartered Semiconductor Manufacturing Ltd,
60 Woodlands Industrial Park D, Street 2
Singapore 738406
Dear Sirs,
Chartered Semiconductor Manufacturing Ltd
Annual Report on Form 20-F
We have acted as Singapore legal advisers to Chartered Semiconductor
Manufacturing Ltd (the "Company") in connection with its Annual Report on Form
20-F for the fiscal year ended 31st December, 1999 filed by the Company with the
Securities and Exchange Commission ("SEC") in the United States on or about 20th
March, 2000 (the "Annual Report").
We hereby consent to the filing of this letter as an exhibit to the
Annual Report and to the use of our name under the caption "Risk Factors - It
may be difficult for you to enforce any judgment obtained in the United States
against us or our affiliates" in the Annual Report. In giving such consent, we
do not hereby admit that we are in the category of persons whose consent is
required under Section 7 of the United States Securities Act of 1933, as amended
or the rules and regulations of the SEC thereunder.
Yours faithfully,
/s/ ALLEN & GLEDHILL
--------------------
