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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _______________.
Commission file number 000-31173
ChipPAC, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0463048
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47400 Kato Road, Fremont, California 94538
(Address of Principal Executive Offices, Zip Code)
Registrant's telephone number, including area code (510) 979-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.01 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
Aggregate market value of voting stock held by non-affiliates of
the registrant as of March 13, 2002:
$256,905,709
81,031,705 shares of the Registrant's Class A common stock were outstanding on
March 13, 2002. No shares of the Registrant's Class B common stock were
outstanding on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement related to the 2002 Annual Meeting
of Stockholders, to be filed subsequent to the date hereof - Part III.
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TABLE OF CONTENTS
PAGE
----
PART I ......................................................................... 3
Item 1. BUSINESS ........................................................... 3
Item 2. PROPERTIES ......................................................... 14
Item 3. LEGAL PROCEEDINGS .................................................. 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................ 15
PART II ........................................................................ 16
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ................................................ 16
Item 6. SELECTED FINANCIAL DATA ............................................ 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .......................................... 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ............................................................... 30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................ 32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ........................................... 77
PART III ....................................................................... 77
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................. 77
Item 11. EXECUTIVE COMPENSATION ............................................. 77
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ......................................................... 77
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..................... 77
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K ................................................................ 77
2
Part I
ITEM 1. BUSINESS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "target," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue" or the negative of
these terms or other comparable terminology. These statements are only
predictions and speak only as of their dates. These forward-looking statements
are based largely on our current expectations and are subject to a number of
risks and uncertainties, including those identified under Exhibit 99.1 of this
annual report and other risks and uncertainties indicated from time to time in
our filings with the SEC. Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating these forward-looking statements include changes in external market
factors, changes in our business or growth strategy or an inability to execute
our strategy due to changes in our industry or the economy generally, the
emergence of new or growing competitors and various other competitive factors.
In light of these risks and uncertainties, there can be no assurance that the
matters referred to in the forward-looking statements contained in this annual
report will in fact occur.
Industry
ChipPAC is one of the world's largest independent providers of
semiconductor packaging, test, and distribution services. We offer one of the
broadest portfolios of leaded and laminate packages for integrated circuits. We
supply packaging solutions to the leading semiconductor companies that service
the computing, communications and multi-application end markets. We are a leader
in providing high end packaging solutions, including ball grid array packages,
or BGA packages, the most advanced type of mass produced package. In addition to
providing assembly and test services on a global basis, we are the largest
semiconductor packaging and test service provider in mainland China. As
consumers demand smaller electronic devices with more functionality, there is a
greater requirement for power regulation and generation, which we expect to
drive demand for our power packages. We are the leader in high-volume assembly,
test and distribution of discrete and analog power packages. We are also one of
the leading providers of advanced packaging products that address the needs of
semiconductors used in wireless LAN and handset applications, including
chip-scale, stacked die and flip-chip technologies.
Our online design and characterization process, referred to as
SmartDESIGN(TM), is a proprietary web-based design collaboration system that
provides a higher rate of product qualification, improved technical performance
and shorter time-to-market service for our customers. This system enables us to
link to our customers via the Internet to perform package design, electrical,
thermal and mechanical analysis and to model end system performance.
Outsourcing of packaging and test services to independent packagers like
ChipPAC continues to expand due to several factors, including time-to-market
pressures, cost reduction, resource allocation, equipment utilization, the
increased technological complexity of packaging and the growth of fabless
semiconductor manufacturers. Historically, outsourced semiconductor
manufacturing services have grown faster than the semiconductor market as a
whole. Management believes that the lack of investments in assembly and test
capacity by semiconductor manufacturers during the recent downturn in the
semiconductor industry will position outsourced providers well to capture
enhanced volume levels during the next upturn in the cycle. According to
TechSearch International, Inc., outsourcing for high-end package solutions such
as BGA and chip-scale packages, or CSP, is forecasted to grow at a compounded
annual rate of 11.6% and 12.8%, respectively, from 2000 to 2005.
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The semiconductor industry has historically experienced volatility, with
sharp periodic downturns and slowdowns. These downturns have been characterized
by, among other things, diminished product demand, excess production capacity
and accelerated erosion of selling prices. The semiconductor industry is
presently recovering from a downturn, and we expect conditions to improve in
2002. This downturn has been the worst that the industry has experienced with
year over year decline of 32% (according to the Semiconductor Industry
Association).
Our headquarters are located in Fremont, California and our manufacturing
facilities are strategically located in China, Malaysia and South Korea, to
address the global needs of our customers. We also have design centers in
Arizona and South Korea to provide 24-hour design support to our customers.
The packaging and test industry is highly fragmented as we compete against
a number of established independent packaging houses as well as the internal
capabilities of many of our largest customers. We believe however, that the
following business strengths differentiate us from our competitors:
. High End Technology Expertise--We are one of the world's largest providers
of outsourced BGA packages, which accounted for approximately 46.0% and
55.8% of our packaging revenue for the year ended December 31, 2001 and
2000, respectively. Our BGA packages are used for most high-end
applications such as providing non-microprocessor packaging requirements
for computing and communications devices, including graphics for nVIDIA
Corporation, personal computer chipset for Intel Corporation, Code Division
Multiple Access ("CDMA") chipsets for Qualcomm Incorporated and flash for
wireless handsets. Our advanced package portfolio also includes next
generation flip-chip technology for system on a chip, or SOC, which is used
in network servers and telecom switching devices, as well as multi-die
packaging for digital signal processors, or DSPs, and other wireless
chipsets. In addition, we have critical expertise for testing radio
frequency ("RF") devices. We believe that our advanced technology expertise
and our commitment to research and development will enable us to continue
to drive the development of solutions for next generation semiconductor
packages.
. Leader in Growing Power/Analog Segment--We are the leader in high-volume
semiconductor assembly and test services for discrete, analog, RF
and mixed-signal technologies for power products. Power products manage the
electricity requirements for multiple components, ensuring an accurate and
efficient flow of voltage so electronic devices run longer and more
efficiently. Our Malaysian business supports a number of the world's major
power and analog semiconductor manufacturers, including Fairchild
Semiconductor International, Inc., NEC Corporation, Siliconix Incorporated,
STMicroelectronics, Inc. and Vishay Intertechnology, Inc. As electronics
become increasingly global, portable, complex and performance-driven, the
demand for power regulation increases exponentially. A broad and
fast-growing range of end markets, including portable devices, household
appliances, automotive systems and telecommunications, will continue to
drive power semiconductor usage and the demand for our power products.
. Strategic Geographic Diversification--We are strategically located to take
advantage of industry outsourcing trends. Cahners In-Stat predicts that
within the next ten years, China will be the second largest market in the
world for semiconductors. Our Shanghai, China facility, which was
established in 1994, is the largest packaging and test provider in China,
and we are the first independent provider of chip-scale BGA packages in
that country. We provide local content for products sold into the Chinese
market, including cellular telephones and portable devices where local
content requirements are being driven by the Chinese government. Our
high-volume packaging site for advanced BGA packages is in Ichon, South
Korea, which is significant for its proximity to semiconductor
4
manufacturers entering the wafer foundry business, large semiconductor
customers and an available pool of highly-skilled research and development
and technical staff. Our Malaysian facility in Kuala Lumpur positions us to
benefit from the growth in fabless manufacturing taking place in Southeast
Asia. Our headquarters in Silicon Valley and state-of-the-art research and
development facilities in Arizona and South Korea are located near our
customers and provide us with the distinct ability to work on a
24-hour-basis with our customers in the design process and in supply chain
management.
. New and Diversifying Customer Base--We continue to diversify our customer
base and end markets. In 2001, we provided services to over 70 customers
worldwide. We increased our customer diversification by adding 27 new
customers in 2000 and 14 in 2001, including Fairchild, Linfinity
Microelectronics, Inc., Siliconix, STMicroelectronics, Texas Instruments
Incorporated and Vishay. In particular, we added eight new customers in the
power semiconductor segments. Excluding the effect of our largest customer
in the computing segment, the total revenue from the rest of our customer
base grew at a compound rate of 36.9% from 1999 to 2001.
. Long-Term Partnership with Key Customers--We received approximately 65.9%
of our revenue for the year ended December 31, 2001 with customers we have
long-term agreements with. We believe these agreements provide a
competitive advantage during cycles as price incentives and volume terms
ensure a leading outsourced position with these customers. We have entered
into a supply agreement with Qualcomm under which we will provide packaging
and test services for their CDMA chipsets and RF components. We have a
supply agreement with Fairchild to supply discrete power products for
silicon-based power devices for the computer, communications, industrial,
automotive and space and defense end-user markets. We also have an
agreement with Intersil Corporation to assemble and test its PRISM(R)
wireless LAN chipsets as well as its other analog and mixed signal
semiconductors. Lastly, we support LSI Logic Corporation's flip-chip
technology through a license and supply agreement.
. Among the Leaders in Growing Test Services--Through our long-term
partnerships and existing customer base, we are well positioned to
capitalize on the rapid growth of outsourced testing by semiconductor
producers. This growth in outsourced testing is driven by the increasing
demand for mixed-signal and high performance logic devices that require
greater capital expenditures on testing equipment. We have made significant
capital expenditures on testing equipment that provides us with the
capability to test mixed-signal, digital logic, memory, power and RF
devices. By increasing our emphasis on our test business and adding
capacity, we have significantly increased our test revenue over the last
four quarters, and we expect this growth to continue. Our test business
revenue grew to $45.5 million in 2001, an increase of $35.0 million from
$10.5 million in 1999.
Our Services
We offer semiconductor packaging and test services to the semiconductor
industry, with products and service offerings in communications, computing and
multi-applications end markets. Approximately 86.2% and 90.8% of our revenue
were derived from packaging services during the years ended December 31, 2001
and 2000 respectively. Approximately 13.8% and 9.2% of our revenue were derived
from test services during the years ended December 31, 2001 and 2000,
respectively.
Since customers require their suppliers to pass a lengthy and rigorous
qualification process that can be costly to the customers, we believe they
generally do business with a few suppliers. As our services are considered part
of the customer's manufacturing infrastructure, we must have dedicated resources
and systems to provide flexible manufacturing, quick-turns and real-time
information transfers.
5
Packaging
We have provided semiconductor packaging and test services since 1984, and
offer a broad range of packaging formats for a wide variety of electronics
applications. Our two types of packaging services, leaded and substrate, or BGA,
contributed approximately 40.2% and 46.0%, respectively, of revenue for the year
ended December 31, 2001.
Leaded Packaging
Leaded packaging is the most widely used packaging type and is used in
almost every electronics application, including automobiles, household
appliances, desktop and notebook computers and telecommunications. Leaded
packages have been in existence since semiconductors were first produced. Leaded
devices comprised approximately half of the total industry packaging volume.
Leaded packages are characterized by a semiconductor die encapsulated in a
plastic mold compound with metal leads surrounding the perimeter of the package.
With leaded packages, the die is attached to a leadframe (a flat lattice of
leads). The die is then encapsulated in a plastic or ceramic package, with the
ends of the leadframe leads protruding from the edges of the package to enable
connection to a printed circuit board. This packaging type has evolved from
packages designed to be plugged into a printed circuit board by inserting the
leads into holes on the printed circuit board to the more modern surface-mount
design, in which the leads or pins are soldered to the surface of the printed
circuit board. Specific packaging customization and improvements are continually
being engineered to improve electrical and thermal performance, shrink package
sizes and enable multi-chip capability.
We offer a wide range of lead counts and body sizes within this packaging
group to satisfy customer die design variations. Our traditional leaded packages
are at least three millimeters in thickness and include PDIP, PLCC, and SOIC.
Our advanced leaded packages are thinner than our traditional leaded packages,
approximately 1.4 millimeters in thickness or less, and have a finer pitch lead
spacing, allowing for a higher pin count and greater functionality in a smaller
package foot print. Our advanced leaded packages include LFCSP, MQFP, TQFP,
iQUAD, TSSOP and SSOP. Our acquisition of the Malaysian business in 2000, added
power packages to our portfolio.
Power Packaging
Power semiconductors are used in a variety of end-markets, including
telecommunications and networking systems, computers and computer peripherals,
consumer electronics, electronic office equipment, automotive systems and
industrial products. These end markets increasingly depend upon power regulation
in the trend toward smaller devices and longer operating times. Packaging
manufacturers are left to contend with shrinking die geometries owing to
continued emphasis upon greater mobility and portability. Power semiconductors
typically involve higher current and voltage levels than memory, logic and
microprocessor devices. The high current involved with switching on/off high
voltages and the phase control of AC signals results in considerable power
dissipated internally that produces heat. Thus our power packages are designed
in such a way as to conduct the resultant heat away from the die as power is
dissipated, preventing the power device from being destroyed.
Power package assembly is somewhat different from non-power IC assembly as
it often employs special solder alloys requiring different semiconductor bonding
machines. Higher current levels of power semiconductors likewise require larger
diameter aluminum and gold wire than non-power IC's to carry the load. Our
Malaysian facility maintains a vast array of these special machines needed for
power semiconductor assembly and test. With a capacity of over 25.0 million
units per week, we are the industry leader in power package assembly supporting
a number of the world's major power semiconductor manufacturers, including
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semiconductor manufacturers, including Intersil, Fairchild, NEC, Siliconix,
STMicroelectronics and Vishay, whose products are designed into power supplies,
battery chargers, ignition modules, voltage regulators, motor controllers and
power management devices.
BGA Packaging
Substrate packaging, or BGA, represents one of the fastest growing areas in
the packaging industry and is used primarily in computing platforms, networking,
hand held consumer products, wireless communications devices, personal digital
assistants, video cameras, home electronic devices such as DVDs and home video
game machines. BGA technology was first introduced as a solution to problems
associated with the increasingly high lead counts required for advanced
semiconductors. As the number of leads surrounding the integrated circuit
increased, high lead count packages experienced significant electrical shorting
problems. The BGA methodology solved this problem by effectively creating leads
on the bottom surface of the package in the form of small bumps or solder balls.
In a typical BGA package, the semiconductor die is placed on top of a plastic or
tape laminate substrate rather than a leadframe. The die is connected to the
circuitry in the substrate by a series of fine gold wires that are bonded to the
top of the substrate near its edges. On the bottom of the substrate is a grid of
metal balls that connect the packaged device to a printed circuit board.
Benefits of BGA packaging over leaded packaging include:
. smaller size;
. greater pin count, or number of connections to the printed circuit board;
. greater reliability;
. better electrical signal integrity; and higher power dissipation
. easier attachment to a printed circuit board.
We supply our customers with substantially the entire family of BGA
packaging services offered in the marketplace today, including:
. Standard BGA. Standard BGA packaging has a grid array of balls on the
underside of the integrated circuit, and is used in high-performance
applications, like personal computer chipsets, graphic controllers and
DSPs. A standard BGA package generally has greater than 100 pins. Standard
BGA packages have better thermal and electrical performance than leaded
packages. They also feature more advanced surface mount technology,
allowing for easier handling in the packaging process. Standard BGA
packaging services accounted for 73.1%, 79.3% of our BGA packaging revenue
in the years ended December 31, 2001 and 2000, respectively.
. Chip-Scale BGA. Chip-scale BGA packaging includes all packages where the
package is less than 1.2 times the size of the silicon die. Chip-scale BGA
is a substrate-based package that is designed for memory devices and other
medium pin count semiconductors and requires dense ball arrays in very
small package sizes, like wireless telephones and personal digital
assistants, video cameras, digital cameras and pagers.
. System-in-Package (SiP) is family of chip-scale-Packages that contain many
(1-4) stacked semiconductor die in one package. This technology allows
greater functionality in the same package footprint and thickness without
significant cost increase. These packages are used in wireless handsets,
consumer products and mobile computing applications.
. Flip-chip BGA packaging in which the silicon die is directly attached to
the substrate using gold bumps instead of solder balls provides the most
dense interconnect at the lowest cost and highest performance. Flip-chip
BGA technology is used in a wide array of applications ranging from
consumer products to highly sophisticated
7
application specific integrated circuits, referred to as ASIC, computer
chipsets, graphics and memory packages. While we believe that flip-chip BGA
represents the next generation of BGA packaging technology, we believe that
standard BGA and chip-scale BGA packaging will experience long life cycles
as have many of our leaded packaging solutions.
The following chart summarizes the different types of packaging
services we offer and revenue for the year ended December 31, 2001. The full
names of each packaging type are provided in the Glossary accompanying our
registration statement on Form S-1 (Registration Number 333-39428).
Year Ended Year Ended
December 31, 2001 December 31, 2000
- ----------------------------------------------
% of
Revenue total Revenue % of Total Package Types Application Pin
(In millions) Assembly (In millions) Assembly Count
Leaded Revenue Revenue
$ 104.9 37.0% $ 132.2 29.4% Traditional: PDIP, PLCC, SOIC, SSOP, Telecommunications, 2 - 84
TSOP, TSSOP, SIP, DPAK, automobiles, household
D2PAK, Power, and Hermetic and appliances, and
desktop and notebook
computers
Personal computers
$ 27.2 9.6% $ 40.8 9.1% Advanced: MQFP, TQFP, LQFP, and telecommunications 32 - 208
and iQUAD (TM)
Laminate
$ 110.9 39.2% $ 218.3 48.7% BGA: PBGA, M2BGA (TM) Personal computer 100 - 2000
TBGA, EBGA, and chipsets,
Flip PAC (TM) graphic controllers,
high-end
network servers
products,
application specific
integrated
circuits,
microprocessors
and memory packages.
$ 40.2 14.2% $ 57.7 12.8% Chip Scale EconoCSP (TM), M2CSP (TM), Wireless telephones, 6 - 352
Packages Micro BGA (TM), LFCSP, personal
(CSP): BCC, and Flip Chip CSP digital assistants,
(CSP): video cameras, wireless pagers,
and wirelss LAN
8
Test Services
We also provide our customers with semiconductor test services for a number
of device types, including mixed-signal, digital logic, memory, power and RF
devices. Semiconductor testing measures and ensures the performance,
functionality and reliability of a packaged device, and requires knowledge of
the specific applications and functions of the devices being tested. In order to
enable semiconductor companies to improve their time-to-market, streamline their
operations and reduce costs, there has been an increasing trend toward
outsourcing both packaging and test services. We have capitalized on this trend
by enhancing our test service capabilities. Our test revenue was essentially
flat in 2001 compared to 2000 in a year where overall sales in the industry were
significantly down compared to the prior year. In 2000, we achieved 251%
year-over-year growth in test revenue compared to 1999. The acquisition of the
Malaysian business expanded our mixed-signal testers and provides us with
critical expertise for testing RF devices, one of the fastest growth areas for
test outsourcing. We have also noted an increased demand from our customers to
provide both assembly and test services on a full turn-key basis.
In order to test the capability of a semiconductor device, a semiconductor
company will provide us with its proprietary test program and specify the test
equipment to run that program. Alternatively, our customers at times may consign
their test equipment to us. Our test operators place devices to be tested on a
socketed, custom load board and insert the load board into the test equipment
which then tests the devices using software programs developed and supplied by
our customers. The cost of any specific test and the time, usually measured in
seconds, to run a test vary depending on the complexity of the semiconductor
device and the customer's test program.
In addition to final test services, we also provide "burn in" test
services. Through "burn in," a semiconductor is inserted into a socket and
subjected to extreme hot and cold temperatures over a period of time. "Burn in"
tests are typically conducted to determine overall reliability of a
semiconductor under extreme conditions.
Other Services
We also provide a full range of other value-added services, including:
. Design and Characterization Services. We offer design and
characterization services at our Chandler, Arizona and Ichon, South Korea
facilities. Our design engineers at these facilities select, design and
develop the appropriate package, leadframe or substrate for that device
by simulating the semiconductor's performance and end-use environment.
. Dry Pack Services. In order to prevent the failure of any semiconductors
due to exposure to moisture during shipping, we "dry pack" most of our
packaged integrated circuits in specially sealed, environmentally secure
containers.
. Tape and Reel Services. Many electronic assembly lines utilize "tape and
reel" methods in which semiconductors are attached to a tape to enable
faster attachment to the printed circuit board. We offer a service in
which we ship packaged and tested devices on a tape and reel mechanism
rather than in a tray, to facilitate the assembly process.
. Drop Shipment. In order to enable semiconductor companies to improve
their time-to-market and reduce supply chain and handling costs, we offer
drop shipment services in which we ship packaged semiconductor devices
directly to those companies that purchase devices from our customers.
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. Wafer Probe. We offer a wafer sort operation where an electrical test is
performed on die while still in wafer form. This process establishes
which die on each wafer are suitable to be assembled into a final
package.
Customers
In 2001, we provided packaging and test services to over 70 customers
worldwide. We increased our customer diversification by adding 16 new customers
in 2001 including Fairchild, Linfinity Microelectronics, Siliconix,
STMicroelectronics, Texas Instruments and Vishay. Our customers also include
Atmel Corporation, International Business Machines Corporation, Intel, Intersil,
LSI Logic, nVIDIA, Qualcomm and Samsung Semiconductor. All of these customers
are representative of our various services offered.
In 2001 and 2000, the Company had four and two customers, respectively,
over 10% of sales. These customers were as follows:
Year ended December 31,
-----------------------
Customer 2001 2000
-------- ---- ----
Intersil 20.2% (less than)10%
Intel 18.3% 34.4%
LSI Logic 12.8% 12.6%
Atmel 10.0% (less than)10%
We anticipate that this customer concentration will decrease as we add
new customers for which we have already become qualified and customers with
which we are undergoing qualification.
Our customers are located around the world, but principally in the
United States of America, Asia and Europe. The following table details the
percentage of total revenue we received from each of these principal geographic
locations:
Year Ended
December 31,
-----------
2001 2000
---- ----
United States of America ....... 92% 83%
Asia ........................... 6 14
Europe ......................... 2 3
--- ---
Total ....................... 100% 100%
=== ===
In general, our customers principally rely on at least two independent
packagers. A packaging company must pass a lengthy and rigorous qualification
process that can take a minimum of three months for a typical leaded package and
can take more than six months for a typical BGA package and, in each case, can
cost the customer approximately $250,000 to $300,000. Once a primary packager
has been selected, that packager gains insight into its customer's business
operations and an understanding of its products as part of the overall working
relationship. These factors, combined with the pressures of a semiconductor
company to meet the time-to-market demands of its customers, result in high
switching costs for semiconductor companies, making them adverse to changing or
adding additional suppliers. We have been successful in attracting new customers
because we are one of a few independent packaging and test companies that offers
packaging, test and distribution services for a full portfolio of packages.
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Marketing, Sales and Customer Support
We provide sales support to our customers through an international network of
offices coordinated from our British Virgin Islands company and located in:
. United States of America:
. Fremont, California
. Chandler, Arizona,
. Boston, Massachusetts,
. Dallas, Texas,
. Palm Bay, Florida,
. Kampen, The Netherlands,
. Tokyo, Japan,
. Shanghai, China,
. Ichon, South Korea,
. Singapore and
. Kuala Lumpur, Malaysia
Our account managers, applications engineers, customer service
representatives and sales support personnel form teams that focus on a specific
customer or geographic region.
As is industry practice, we operate with essentially no order backlog
due to our quick cycle times. Customers deliver near-term forecasts and release
production die to us in daily or weekly increments for packaging, test and
distribution. These near-term forecasts guide us as to anticipated volumes, but
provide no meaningful backlog statistics. Substantially all of our materials
inventory is purchased based on customer forecasts, we carry small quantities of
inventory and we have relatively low levels of finished goods inventory.
Our marketing efforts focus on creating a brand awareness and
familiarity with our advanced device packaging technologies and an understanding
of our end-user market applications in wireless handset and PDA graphics, PC
chipsets, wireless LAN, memory, storage and networking. We market our leadership
in advanced packaging, test technology, and distribution and our ability to
supply a broad line of packaging and test services to the semiconductor
industry. We target engineers and executive level decision makers through a
direct sales force, the delivery of "white papers" at industry conferences,
quarterly mailings of technical brochures and newsletters, advertisements in
trade journals and our website.
Suppliers
Our packaging operations depend upon obtaining adequate supplies of
materials on a timely basis. The principal materials used in our packaging
process are lead frames, rigid and flexible substrates, gold wire and molding
compound. We purchase materials based on the demand forecasts of our customers.
Our customers are responsible for the costs of any unique materials that we
purchase but do not use, particularly those lead frames and substrates that are
ordered on the basis of customer-supplied forecasts. We work closely with our
primary materials suppliers to insure the timely availability of materials
supplies, and we are not dependent on any one supplier for a substantial portion
of our materials requirements. We do not see the need for long-term supply
contracts and therefore have no significant agreements with materials suppliers.
The materials we procure are normally available and we are able to meet our
production requirements from multiple sources through periodic negotiation and
placement of written purchase orders. We combine our global
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requirements into centrally negotiated blanket purchase orders to gain economies
of scale in procurement and more significant volume discounts. Approximately
82.0% and 65.0% of our substrate costs in the years ended December 31, 2001 and
2000, respectively, were incurred from the purchase of materials from South
Korea, with the balance coming primarily from Japan and Taiwan. We expect that
in the next several years, an increasing portion of our materials will be
supplied from sources in China, Taiwan, and Southeast Asia.
Our packaging operations and expansion plans also depend on obtaining
adequate quantities of equipment on a timely basis. To that end, we work closely
with our major equipment suppliers to insure that equipment deliveries are on
time and the equipment meets our stringent performance specifications.
Intellectual Property
Our ability to develop and provide advanced packaging technologies and
designs for our customers depends in part on our proprietary know-how, trade
secrets and other non-patented, confidential technologies, which we either own
or license from third parties. We have licenses to use numerous third party
patents, patent applications and other technology rights, as well as trademark
rights, in the operation of our business. Under the patent and technology
license agreement that we entered into with Hynix Semiconductor, which we refer
to as the Hynix Semiconductor License, we obtained a non-exclusive license to
use intellectual property in connection with our packaging activities.
Following expiration of its initial term on December 31, 2003, the
Hynix Semiconductor License may be extended by us from year to year upon payment
of a nominal annual license fee. Hynix Semiconductor may terminate the Hynix
Semiconductor License prior to December 31, 2003 if we breach the Hynix
Semiconductor License and do not cure that breach within the applicable time
period, or in the event of our bankruptcy or similar event, or if a force
majeure event prevents performance of the agreement.
In August 2001, we entered into a License Agreement with Fujitsu
Limited, which we refer to as the Bump Chip Carrier ("BCC") License Agreement,
under which we have obtained a non-transferable, non-exclusive and world-wide
license, under certain Fujitsu patents and technical information relating to
Fujitsu's proprietary BCC technology. The BCC License terminates in August 2006.
Subsequent to the five- year term of the license, the agreement shall be
extended on an annual basis, unless notification of intent to terminate the
agreement is made by either party.
We have entered into a License Agreement with Tessera, Inc., which we
refer to as the Tessera License, under which we have obtained a worldwide,
royalty-bearing, non-exclusive license under specified Tessera patents,
technical information and trademarks relating to Tessera's proprietary IC
packages, most significantly its mBGA(TM), or micro BGA, packages. The Tessera
License will run until the expiration of the last Tessera patent licensed under
the Tessera License. Accordingly, the expiration of the Tessera License will not
occur until sometime after February 2018, which is the earliest date that all
patents licensed under the Tessera License may expire.
In connection with our recapitalization in 1999, (see Note 1 to the
consolidated financial statements), we obtained a non-exclusive sublicense from
Hynix Semiconductor under patents owned by Motorola for use in connection with
our BGA packaging process. The initial term of our sublicense under the Motorola
patents will expire on December 31, 2002. This sublicense requires Hynix
Semiconductor to use commercially reasonable efforts to extend or renew its
license from Motorola prior to its expiration on December 31, 2002 and obtain
from Motorola the right to grant us a sublicense on the same terms and
conditions as those of any extended or renewed license.
We have entered into three license agreements with LSI Logic. Under the
first license, which we refer to as the LSI flip-chip license, we received a
worldwide, non-exclusive, royalty-bearing license to use LSI packaging
technology and technical information to manufacture, use and sell flip-chip
semiconductor devices having at least 200 solder balls. Our rights under the LSI
flip-chip license will become perpetual and irrevocable upon our payment of fees
or January 1, 2004, whichever
12
occurs first. LSI Logic may terminate the LSI flip-chip license if, before our
rights have become perpetual and irrevocable, we breach the LSI flip-chip
license and do not cure that breach within the applicable time period, or in the
event of our bankruptcy or similar event.
Our second license from LSI Logic, which we refer to as the LSI CSP
license, grants us a worldwide, non-exclusive license under LSI packaging
technology and technical information to manufacture, use and sell semiconductor
device assemblies having an overall height of less than 1.2 millimeter. Our
rights under the LSI CSP license are perpetual but LSI Logic may terminate the
LSI CSP license if we breach the LSI CSP license and do not cure that breach
within the applicable time period, or in the event of our bankruptcy or similar
event.
Our third license from LSI Logic, which we refer to as the LSI EPBGA
license, grants us a worldwide, non-exclusive license under LSI packaging
technology and technical information to manufacture, use and sell semiconductor
device assemblies having EPBGA (enhanced plastic ball grid array) packaging. Our
rights under the LSI EPBGA license are perpetual but LSI Logic may terminate the
LSI EPBGA license if we breach the LSI EPBGA license and do not cure that breach
within the applicable time period, or in the event of our bankruptcy or similar
event.
In connection with our acquisition of the Malaysian business, we acquired
ownership of all Intersil patents, technical information and copyrights used
exclusively in or associated exclusively with the Malaysian business and,
additionally, Intersil granted us a worldwide, non-exclusive, royalty-free
license under other Intersil patents, copyrights and technical information which
are also used in or related to the operation of the Malaysian business. This
Intersil license is perpetual and irrevocable.
Our primary registered trademark and trade name is "ChipPAC(R)." We own or
are licensed to use other secondary trademarks.
Research and Development
Our research and development efforts are focused on developing new
packages, assembly and test technologies and on improving the efficiency and
capabilities of our existing packaging and test services. Technology development
is a basic competence of ChipPAC and a key competitive factor in the packaging
industry. We have invested considerable resources and we are among the leaders
in new product and technology development. During the past two years, we have
introduced the following new package families:
. Flip-Chip CSP Flip-Chip chip scale package
. EconoCSP/(TM)/ Econo chip scale package
. M/2/CSP/(TM)/ Molded multi-die chip scale package
. MicroBGA Micro ball grid array
. LFCSP/(TM)/ Lead frame chip scale package
. EconoLGA/(TM)/ Econo land grid array
. M/2/BGA/(TM)/ Molded multi-die ball grid array
. FlipPAC/(TM)/ Flip package
. TBGA-I Tape ball grid array one electrical plane
. TBGA-II Tape ball grid array two electrical plane
. TEBGA+ Thermally enhanced ball grid array plus integrated
passive component
. iModule/(TM)/ Integrated module
Materials engineering plays a critical role in advanced packaging and has
enabled us to develop environmentally friendly lead free and halogen free
packaging already required by several of our customers.
We have established two design centers where new packages are designed
and fully characterized for performance and tested both for package and system
level reliability to meet end customer needs.
During 2001 and 2000, we spent approximately $14.2 million and $12.0
million, respectively, on research and development.
13
Competition
The packaging and test industry is highly fragmented. Our primary
competitors and their primary locations are as follows:
. Advanced Semiconductor Engineering, Inc.--Taiwan
. Amkor Technology, Inc.--South Korea and the Philippines
. ASE Test Limited--Taiwan and Malaysia
. Siliconware Precision Industries Co., Ltd.--Taiwan
Each of these companies has significant packaging capacity, financial
resources, research and development operations, marketing and other
capabilities, and has some degree of operating experience. These companies also
have established relationships with many large semiconductor companies, which
are current or potential customers of ours. We also compete with the internal
packaging and testing capabilities of many of our largest customers. We believe
the principal elements of competition in the independent semiconductor packaging
market include time-to-market, breadth of packaging services, technical
competence, design services, quality, yield, customer service and price. We
believe that we compete favorably in these areas.
Due in significant part to the lengthy and costly process of qualifying a
supplier, most semiconductor manufacturers generally have two or more sources of
packaging services.
Employees
As of December 31, 2001, we employed 5,445 full-time employees, of whom
approximately 109 were employed in research and development, 5,039 in packaging
and test services and 297 in marketing, sales, customer service and
administration.
Approximately 1,400 of our employees at the Ichon, South Korea facility
are represented by ChipPAC Korea Labor Union and are covered by collective
bargaining and wage agreements. The collective bargaining agreement, which
covers basic union activities, working conditions and welfare programs, among
other things, is effective to May 1, 2003 and the wage agreement is effective to
May 1, 2002. We believe that we have good relationships with our employees and
unions.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Fremont, California, and we
provide all packaging, test and distribution services through facilities in
Ichon and Chungju, South Korea, Shanghai, China and Kuala Lumpur, Malaysia. The
Ichon facility was founded in 1985 and is both ISO-9002 and QS-9000 certified.
The Shanghai facility was founded in 1994 and is also ISO-9002 certified and
QS-9000 certified. The Kuala Lumpur facility is ISO-9002, QS-9000 and ISO-14001
certified.
14
The following chart summarizes the information about our facilities:
Principal Packaging or
Facility Location Leased/Owned Sq. Ft. Functions/Services Service Provided
- --------------------- -------------- ------- ------------------------ -----------------------------
Fremont, California Leased 56,320 Executive Offices, Sales, Marketing,
Research and Development, Administration and
Sales, Marketing and Design Review Services
Administration
Pleasanton, California Leased 1,800 Sales, Marketing and Sales, Marketing and
Administration Administration Services
Chandler, Arizona Leased 5,000 Research and Development, Design and Characteri-
Sales and Marketing zation Services
Shanghai, China Owned (1) 442,000 Packaging and Test Services, Leaded IC, Chip-Scale
Warehousing Services Packaging, Test and
Distribution Services
Ichon, South Korea Leased 474,000 Packaging and Test Services, Advanced Leaded, BGA
Research and Development, Packaging, Chip-Scale,
Warehousing Services Flip-Chip, Test and
Distribution Services
Chungju, South Korea Leased 129,000 Electroplating Electroplated Leadframes
Leadframes
for
Ichon, South Korea
Kuala Lumpur, Malaysia Owned (1) 524,000 Packaging and Test Services, Discrete Power, Leaded
Warehousing Services IC, Test and
Distribution Services
- --------
(1) Building and improvements are owned by ChipPAC but upon the termination of
the existing long-term land lease revert to the lessor in the years 2044
end 2086 for our facilities in Shanghai, China and Kuala Lumpur,
Malaysia, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any legal proceedings, the outcome of which we
believe would have a material adverse effect on our business, financial
condition or results of operations. From time to time, however, we are involved
in claims that arise in the ordinary course of business, and we maintain
insurance that we believe to be adequate to cover these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 2001.
15
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock is traded on the Nasdaq National Market under
the symbol "CHPC." Public trading of the Class A common stock began on August 9,
2000. Prior to that, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sale
price per share of the our Class A common stock as quoted on the Nasdaq National
Market.
HIGH LOW
2002 ------- -------
January 1, 2002 - March 15, 2002 ................ $ 9.950 $ 5.230
2001
Fourth Quarter .................................. 8.590 1.850
Third Quarter ................................... 11.590 1.800
Second Quarter .................................. 10.690 3.750
First Quarter ................................... 6.675 2.781
2000
Fourth Quarter .................................. 12.375 2.188
August 9, 2000 - September 30, 2000 ............. 19.500 11.188
As of March 5, 2002, there were approximately 95 stockholders of record of
our Class A common stock.
DIVIDEND POLICY
We have not in the past paid, and do not expect for the foreseeable future
to pay dividends on our common stock. Instead, it is anticipated that all
earnings, if any, in the foreseeable future will be used for working capital and
other general corporate purposes. The payment of dividends by us to holders of
our common stock is prohibited by our senior credit facility and is restricted
by the indenture relating to our senior subordinated notes. Any future
determination to pay dividends will be at the discretion of the board of
directors and will depend upon, among other factors, the results of operations,
financial condition, capital requirements and contractual restrictions.
16
ITEM 6. SELECTED FINANCIAL DATA
ChipPAC, Inc.
Selected Historical Financial Data
(In thousands)
For the Years Ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Statement of Operations Data
Revenue $ 328,701 $ 494,411 $ 375,530 $ 334,081 $ 289,429
Gross profit 31,113 109,144 58,042 63,716 60,191
Operating income (loss) (55,229) 62,330 12,619 40,429 25,518
Net income (loss) (93,736) 12,056 (7,308) 32,303 (46,118)
Net income (loss) available to
common stockholders (93,736) 2,869 (11,528) 32,303 (46,118)
Net income (loss) per share available to
common stockholders:
Basic ($1.36) $ 0.05 ($0.30) $ 0.83 ($1.19)
Diluted ($1.36) $ 0.05 ($0.30) $ 0.83 ($1.19)
-------------------------------------------------------------
Shares use in per share calculation:
Basic 68,878 57,067 38,935 38,861 38,861
Diluted 68,878 58,253 38,935 38,861 38,861
-------------------------------------------------------------
Other Financial Data:
Depreciation and amortization $ 59,909 $ 45,049 $ 56,701 $ 45,855 $ 40,682
Debt issue amortization 2,112 1,950 774 -- --
Acquisition of property and equipment 46,392 93,174 57,856 61,332 136,594
Balance Sheet Data (at period end):
Cash and cash equivalents $ 41,872 $ 18,850 $ 32,117 $ 68,767 $ 3,067
Accounts receivable, less allowance for
doubtful accounts 32,034 45,904 30,003 37,729 30,156
Working capital (17,981) (16,296) 10,224 20,320 29,637
Total assets 430,715 469,245 343,429 359,472 233,241
Total long-term debt, including current portion 333,627 290,200 300,000 133,715 152,410
Mandatorily redeemable preferred stock -- -- 82,970 -- --
Total stockholders' equity (deficit) (23,226) 65,697 (122,886) 113,191 9,472
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations covers in part periods prior to the completion of our
recapitalization in August 1999 and prior to our initial public offering in
August 2000. As part of our recapitalization, we entered into financing
arrangements and, as a result, we have a different capital structure. As a
result of the initial public offering, we again significantly changed our
capitalization. Accordingly, the results of operations for periods subsequent to
the recapitalization and initial public offering are not necessarily comparable
to prior periods. The following discussion should be read in conjunction with
the consolidated financial statements contained in this annual report.
Overview
In 1997, we were incorporated as a distinct entity and established as the
parent of a stand-alone worldwide business. Prior to this time, we operated as a
separate division of Hyundai Electronics, now Hynix Semiconductor, one of the
world's largest semiconductor manufacturers and a member of the Hyundai Group,
the South Korean conglomerate. In 1999, as part of a recapitalization, a group
of equity investors along with management obtained control of ChipPAC. This
transaction was accounted for as a recapitalization.
Our revenue consists of fees charged to our customers for packaging,
testing, and distribution of their integrated circuits. From 1996 to 2001,
revenue increased from $179.2 million to $328.7 million, a cumulative annual
growth rate of 11.4%, primarily from the growth of substrate, or BGA packaging,
and, in 2000, from the growth of test revenue and the acquisition of our
Malaysian business. The semiconductor industry is however inherently volatile,
with sharp periodic downturns and slowdowns. These downturns have been
characterized by, among other things, diminished product demand, excess
production capacity and accelerated erosion of selling prices. The semiconductor
industry is presently recovering from the worst downturn in its history. We
expect conditions to improve in 2002. Due to the severity of this downturn for
the semiconductor industry and for our customers, we have also experienced the
first decline in revenue on a year-over-year basis in our history. This in turn
has had a significant impact on our operating results. Our revenue for the year
ended December 31, 2001 declined to $328.7 million or by 33.5% compared to the
year ended December 31, 2000.
The semiconductor industry has historically experienced volatility, with
sharp periodic downturns and slowdowns. These downturns have been characterized
by, among other things, diminished product demand, excess production capacity
and accelerated erosion of selling prices. The semiconductor industry is
presently recovering from a downturn, and we expect conditions to improve in
2002. Based on current general economic and semiconductor market expectations,
we believe it is likely we could achieve 11.0% revenue growth in 2002 as
compared to 2001. This growth assumes a replenishment of inventory in the
electronics supply chain, gradual recovery in our end markets and ramp-up of new
customers acquired in 2001. Based on these assumptions, we believe gross margins
could increase to approximately 18.0% to 20.0%, in the second half of 2002 as
compared to approximately 5.2% for the second half of 2001 and that operating
income could be approximately 8.8% of revenue in the second half of 2002. Based
on these estimates, we expect to be profitable on a quarterly basis by the end
of 2002. If our current assumptions and estimates are correct, operating
expenses (selling, general, administrative, and research and development
expenses) are expected to be approximately 12.0% of revenue for 2002.
Management is constantly re-evaluating estimates and the expectations
above could and probably will change as the year unfolds.
18
The following table describes the composition of revenue by product group
and test services, as a percentage of total revenue:
Year Ended
December 31,
-------------------
2001 2000 1999
----- ----- -----
Laminate ...................... 46.0% 55.8% 68.1%
Leaded ........................ 40.2 35.0 29.1
Test .......................... 13.8 9.2 2.8
----- ----- -----
Total ...................... 100.0% 100.0% 100.0%
===== ===== =====
Quarterly Results (Unaudited)
The following table describes our unaudited historical quarterly sales,
gross profit, earnings per share and net income:
2001 2000
------------------------------------------ -------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- ------- -------- -------- -------- -------- -------- --------
(in thousands, except per share amount)
Revenue ....................................... $ 89,859 $87,373 $ 74,662 $ 76,807 $97,469 $108,979 $155,795 $132,168
Gross profit .................................. 11,721 11,460 2,025 5,907 20,422 26,141 35,568 27,013
Gross margin .................................. 13.0% 13.1% 2.7% 7.7% 21.0% 24.0% 22.8% 20.4%
Writedown of impaired assets .................. - - - 34,688 - - - -
Restructuring charge .......................... 2,962 - - 3,270 - - - -
Income (loss) before extraordinary item ....... $ (9,667) $(7,513) $(16,441) $ (60,115) $ 2,160 $ 5,632 $ 3,944 $ 2,710
Income (loss) per share available to common
stockholders before extraordinary item
Basic ....................................... $ (0.14) $ (0.11) $ (0.24) $ (0.87) $ (0.01) $ 0.06 $ 0.03 $ 0.04
Diluted ..................................... (0.14) (0.11) (0.24) (0.87) (0.01) 0.05 0.03 0.04
Net income (loss) ............................. $ (9,667) $(7,513) $(16,441) $ (60,115) $ 2,160 $ 5,635 $ 1,554 $ 2,710
19
Results of Operations
The following table describes our results of operations based on the
percentage relationship of operating and other financial data to revenue during
the periods shown:
Year Ended
December 31,
-------------------
2001 2000 1999
----- ----- -----
Historical Statement of Operations Data:
Revenue ............................................................... 100.0% 100.0% 100.0%
Gross margin ......................................................... 9.4 22.1 15.5
Selling, general & administrative .................................... 9.5 7.0 5.7
Research & development ............................................... 4.3 2.4 3.3
Restructuring/other expenses ......................................... 12.4 -- 3.2
----- ---- ----
Operating income ..................................................... (16.8)% 12.6% 3.4%
===== ==== ====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue. Revenue was $328.7 million in the year ended December 31,
2001, a decrease of 33.5% from the year ended December 31, 2000. The decline in
revenue is a result of lower end-market demand for our customers' products. This
decrease was realized across all the end markets we serve and was not
significantly concentrated in any one end market. We believe that our customers
purchased product for their inventory in amounts consistent with historical
demand. Thus, as end-user demand dropped, our customers' inventories increased,
thereby decreasing demand for our products.
Gross Profit. Gross profit during the year ended December 31, 2001 was
$31.1 million, a decrease of 71.5% from the year ended December 31, 2000. The
majority of the decrease was caused by lower demand leading to lower equipment
utilization as well as lower average selling prices in the year ended December
31, 2001 compared to the year ended December 31, 2000. Equipment utilization was
52.0% and 57.0% for the years ended December 31, 2001 and 2000, respectively.
Although reductions in force, furloughs, plant shutdown days and other cost
saving methods were used in the year ended December 31, 2001, they were
insufficient to offset the decline in revenue.
Selling, General, and Administrative. Selling, general, and
administrative expenses were $31.2 million in the year ended December 31, 2001,
a decrease of 10.3% from the year ended December 31, 2000. Expenses declined
compared to 2000, because we implemented strict cost controls in reaction to the
decline in revenue and because of the reductions in force we implemented in the
first quarter of 2001. In addition, we incurred staffing expenses in the second
half of 2000 related to our initial public offering that did not occur in 2001.
20
Research and development expenses for the year ended December 31, 2001
were $14.2 million, or 4.3% of revenue, compared to $12.0 million, or 2.4% of
revenue, in the year ended December 31, 2000. Our research and development
expenses in 2001 represent an 18.3% increase from similar expenses in 2000. The
increases were mainly due to expenses related to power packaging technology, new
processes development and flip-chip technology development.
Restructuring, write down of impaired assets and other charges. During
the year ended December 31, 2001, the Company wrote down impaired assets by
$34.7 million. The asset write down relates primarily to the Company's
manufacturing assets in the assembly and test facilities in South Korea and
Malaysia. The Company determined that due to excess capacity the future expected
cash flows related to equipment for certain niche package types will not be
sufficient to recover the carrying value of the manufacturing equipment for
those package types in the facility. The carrying values of these assets were
written down to the estimated fair market value and will continue to be
depreciated over the remaining useful lives. There were no equivalent write offs
in the year ended December 31, 2000.
In addition, we recorded expenses associated with reduction in force
and furlough costs of $4.7 million and a loss reserve of $1.5 million on
executive officers loans forgiveness in 2002, that occurred in the year
ended December 31, 2001 with no comparable costs in 2000.
Interest Expense. Total outstanding interest bearing debt increased to
$383.6 million at December 31, 2001 compared to $298.0 million at December 31,
2000. The increase in debt was primarily due to draw down of our revolving
credit line for general corporate purposes and issuance of $50.0 million of
convertible debt and $15.0 million of additional high yield borrow in June 2001.
Related interest expense was $37.2 million for the year ended December 31, 2001,
a decrease of 5.6% compared to the year ended December 31, 2000. The reduction
in interest expense was primarily due to reduced interest rates on our debt.
Foreign Currency Gains. Net foreign currency gains were $0.19 million
and $2.17 million for the years ended December 31, 2001 and 2000, respectively.
These non-cash gains are primarily due to the fluctuations between the exchange
rate of the United States Dollar and the South Korean Won related to long-term
pension benefits payable to our South Korean employees.
Other (Income) and Expenses. Other (income) and expenses, net, was
($0.4) million and $7.9 million for the years ended December 31, 2001 and 2000,
respectively. Other expenses for December 31, 2000 includes the one-time payment
of $8.0 million, paid to Bain Capital and SXI Group in exchange for the
termination of two advisory agreements, which were entered into during our
recapitalization in 1999. There were no equivalent expenditures related to this
one-time payment in the year ended December 31, 2001.
Accretion of Dividends and Recorded Value of the Intel Warrant.
Accretion of dividends on preferred stock and the recorded value of the Intel
Warrant was $0 in the year ended December 31, 2001, compared to $9.2 million in
the year ended December 31, 2000. All preferred stock was redeemed or converted
to non-dividend bearing Class A common stock concurrent with our initial public
offering in August 2000. The Intel Warrant expired unexercised in February 2001.
Income Taxes. Income tax expense was $2.6 million and $3.6 million for
the years ended December 31, 2001 and 2000,respectively, for an effective tax
rates of approximately (2.8%) in 2001 and 20.0% in 2000. Concurrently with our
recapitalization on August 5, 1999, the company was reorganized and as a result
now has operations and earnings in jurisdictions with relatively low income tax
rates, or where we enjoy tax holidays or other similar tax benefits.
Net (Loss) Income Available to Common Stockholders. As a result of the
items above, net (loss) available to common stockholders increased to ($93.7)
million for the year ended December 31, 2001, compared to net income of $2.9
million for the year ended December 31, 2000.
21
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue. Revenue in 2000 increased 31.7% to $494.4 million from $375.5
million in 1999. We experienced strong increases across all product lines.
Laminate sales increased 7.9% over 1999. Leaded sales, not including those
attributable to our acquisition of the Malaysian business, increased 32.2% over
1999 and test revenue increased 186.4% over 1999. Increases in revenue were
broadly distributed across all of our end markets, but the communications
segment showed an increase of 99.4%. During the last six months of 2000, the
Malaysian business contributed $44.0 million in revenue.
Gross Profit. Gross Profit increased to $109.1 million in 2000 from
$58.0 million in 1999, resulting in a gross margin of 22.1% compared to 15.5% in
1999. Effective January 1, 2000 we re-evaluated the estimated useful lives of
our property, plant and equipment. Based on our internal assessment of
historical experience, a third party appraisal, and future expectations of the
useful lives of our property, plant and equipment, the useful lives were changed
from five years to eight years. The net book values of assembly and test product
equipment and furniture and fixtures already in use are now being depreciated
over the remaining useful life, based on eight years from the date the assets
were originally placed in service. This change resulted in depreciation expense
for the year ended December 31, 2000 being $29.0 million lower than we would
have recorded if we had continued to use five-year lives. The remaining increase
in gross profit was attributable to improved materials procurement and greater
efficiency due to high utilization rates partially offset by an increase in
average labor costs, the effect of the Malaysian business acquisition, and the
strengthening of the South Korean Won against the U.S. Dollar in 2000 versus the
prior year.
Selling, General, and Administrative. Selling, general and
administrative expenses increased to $34.8 million in 2000 from $21.2 million in
1999. As a percentage of revenue, these expenses increased to 7.0% from 5.7%. In
2000 we hired new personnel at the management level to accommodate both our
expanded operations and our transition to a public company. As a result, we
incurred additional expenses associated with hiring in the areas of
administration, sales, and marketing.
Research and Development. Research and development expenses decreased
to $12.0 million in 2000 from $12.4 million in 1999. As a percentage of revenue,
these expenses decreased to 2.4% from 3.3%. The decrease, as a percentage of
revenue, was mainly caused by the additional revenue from the Malaysia business
that did not require as high research and development expenditures in 2000 as
the required intellectual property and process technology for the Malaysian
business was acquired in the purchase.
Restructuring and Other Charges. As a result of our recapitalization,
we were contractually required to make a one-time change of control payment to
our unionized South Korean employees of approximately $11.8 million. The payment
was recorded as an operating expense during the year ended December 31, 1999.
This expense did not reoccur in 2000.
Interest Income. Interest income decreased to $0.8 million in 2000
compared to $2.8 million in 1999. The average cash balance maintained in 2000
was significantly lower than in 1999 due to the working capital and fixed asset
investments needed to support our growth.
22
Interest Expense. Interest expense for 2000 increased 85.8% to $39.4
million in 2000 from $21.2 million in 1999. This is primarily due to 12 months
of interest expense on the debt incurred as part of the recapitalization
compared to five months of interest payments in 1999. In addition, we incurred
interest expense on the debt incurred to complete the Malaysian acquisition.
Foreign Currency Gains. The foreign currency gain was $2.2 million in
2000 compared to $1.2 million in the prior year period. The exposure to foreign
currency gains and losses has been significantly mitigated by two related
factors. First, we negotiated with the large majority of our material and
equipment suppliers to denominate purchase transactions in U.S. Dollars. Second,
on October 1, 1999, we changed our functional currency to the U.S. Dollar from
the local currencies of the South Korean and Chinese subsidiaries.
Other Income/Expense. Other expense increased $7.9 million in 2000
compared to other income of $0.7 million in 1999. This was primarily due to the
one time charge of $8.0 million to end the management services agreements with
Bain Capital and SXI group.
Income Taxes. Income tax expense was $3.6 million in 2000 compared to
$1.9 million in 1999. Our effective tax rate was 20.0% in 2000 compared to
(48.5%) in 1999. Our effective tax rate during 1999 was adversely affected by
losses of the operations in China, for which no tax benefit was realized. The
recapitalization also changed the tax structure and overall effective tax rate
compared to 1999.
Extraordinary Loss. We incurred an extraordinary loss of $2.4 million
and $1.4 million, net of tax benefit, for the years ended December 31, 2000 and
1999, respectively. The 2000 extraordinary loss was related to the early
repayment of our senior term debt that was used in the acquisition of Intersil's
Malaysian business that was subsequently repaid using proceeds from our initial
public offering. In 1999, the extraordinary loss was related to the early
retirement of debt upon the recapitalization of our company.
Net Income. As a result of the items described above, our net income
increased to $12.1 million in 2000 compared to a net loss of $7.3 million in
1999.
CRITICAL ACCOUNTING POLICIES
We believe the following accounting policies are most important to the
portrayal of our financial condition and results of operations and require our
significant judgments.
We have made and expect to continue to make significant investments in
fixed assets, intellectual property and related intangible assets. Management
evaluates the valuation of these assets every quarter paying special attention
to events or changes in circumstances that would indicate that their carrying
amount might not be recoverable. We determine whether or not the assets are
recoverable based on estimated undiscounted future cash flows to be generated by
the assets and if not, we calculate the amount of the impairment charge based on
estimated discounted future cash flows to be generated by the assets or
appraised fair value. If different assumptions or conditions were to prevail
rather than those used in estimating future cash flows, significantly different
determination of recoverability or of fair value for these assets and results of
operations could be reported. We recorded an asset impairment charge of $34.7
million for the year ended December 31, 2001.
In addition, management uses judgment when setting expected asset
useful lives for long-lived assets. The asset useful lives used are based on
historical experience and future expectations. However, business conditions or
underlying technology may change in the future which could cause a change in
asset lives. Any change in lives would cause a significant change in
depreciation and amortization. After the recapitalization (see Note 1 to the
consolidated financial statements), we reassessed the asset useful lives for our
long-lived assets in 2000 and changed the useful lives from five years to eight
years. This change resulted in depreciation expense for the year ended December
31, 2000 being $29.0 million lower than would have been recorded using five-year
lives.
23
We record estimated reductions to revenue for customer programs and
incentive offerings including special pricing agreements, price protection,
promotions and other volume-based incentives. If market conditions were to
decline, we may take actions to increase customer incentive offerings possibly
resulting in an incremental reduction of revenue at the time the incentive is
offered. Furthermore, if anticipated volume levels turn out to be different,
this would impact reductions to revenue and accrued customer rebates.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We write down inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions less costs to dispose. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
In the year ended December 31, 2001, we increased the valuation
allowance to reduce deferred tax assets to the amount, we believe, is more
likely than not to be realized. While we have considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance, in the event we were to determine that we would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should we determine that we would
not be able to realize all or part of our net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
Liquidity and Capital Resources
Our ongoing primary cash needs are for operations and equipment
purchases. We spent $46.4 million on capital expenditures during the year ended
December 31, 2001 compared to $93.2 million in capital expenditures during the
year ended December 31, 2000. We anticipate spending $30.0 million in capital
expenditures in 2002, not including any buy out of operating leases, which we
expect will not exceed $18.0 million in 2002. We no longer have the ability to
borrow additional funds under the $20.0 million capital expenditure line portion
of our senior credit facilities, which expired on July 31, 2001. Outstanding
borrowing on the capital expenditure line at December 31, 2001 was $14.1 million
and bore a weighted average interest rate of 6.77% in 2001.
24
Under the terms of the agreement relating to our acquisition of the
Malaysian business, during the period from June 1, 2000 to June 30, 2003,
Intersil is entitled to receive additional contingent incentive payments based
upon the achievement of milestones relating to the transfer of business
previously subcontracted by Intersil to a third party. In the event that
Intersil were to achieve all the milestones, we would pay Intersil an additional
sum of approximately $17.9 million in the aggregate. As of December 31, 2001, we
have cumulatively paid Intersil $7.9 million under this arrangement.
In June 2001, we issued $50.0 million of 8.0% convertible subordinated
notes and $15.0 million of 12.75% senior subordinated notes in a private
placement. A majority of these funds were used to pay down our term loans and
revolving loans under the senior credit facility. The $50.0 million of 8.0%
convertible subordinated notes are convertible into shares of our Class A common
stock at a conversion price of $9.96 per share, subject to adjustment at any
time prior to June 15, 2011 and bear an interest rate of 8.0% per annum. The
$15.0 million of 12.75% senior subordinated notes bear an interest rate of
12.75% per annum and mature on August 1, 2009.
As of December 31, 2001, our total debt consisted of $383.6 million of
borrowings, which was comprised of $50.0 million of revolving loans, (which
fully utilized the borrowing capacity under our revolving loans), $118.6 million
in term loans, $165.0 million of senior subordinated notes and $50.0 million of
convertible subordinated notes. The revolving credit line under our senior
credit facilities matures on July 31, 2005, and had a weighted average interest
rate of 6.0% in 2001. The term loans mature on July 31, 2005, have amortization
payments due each quarter and had a weighted average interest rate of 8.2% in
2001.
Our total potential commitments on our loans, operating leases,
Intersil incentive payments, royalty and license agreements as of December 31,
2001, were as follows: (in thousands)
Within 1
--------
Total Year 2 - 3 Years 4 - 5 Years After 5 Years
----- ---- ------------ ------------- -------------
On balance sheet commitments:
Senior credit facilities $168,627 $50,000 $40,004 $78,623 $ -
Senior subordinated notes 165,000 - - - 165,000
Convertible subordinated notes 50,000 - - - 50,000
----------------------------------- ---------------------------------
Total on balance sheet
commitments 383,627 50,000 40,004 78,623 215,000
----------------------------------- ---------------------------------
Off balance sheet commitments:
Operating leases 85,436 16,790 23,690 13,760 31,196
Royalty/licensing agreements 1,000 1,000 - - -
Restructuring, net 3,324 3,324 - - -
Contingent payments to
Intersil (relating to purchase
of Malaysian business) 10,020 6,544 3,476 - -
----------------------------------- ---------------------------------
Total off balance sheet
commitments 99,780 27,658 27,166 13,760 31,196
----------------------------------- ---------------------------------
Total commitments $483,408 $77,658 $67,170 $92,384 $246,196
=====================================================================
25
Our senior credit facilities require that we meet specified financial
tests, including, without limitation, a maximum leverage ratio, a minimum
interest coverage ratio, minimum fixed charge coverage ratio, a maximum senior
leverage ratio and, for 2002 only, a minimum consolidated adjusted EBITDA
amount. In conjunction with our $65.0 million private placement in June 2001,
the lenders of our senior credit facilities amended the financial tests for the
period July 1, 2001 through December 31, 2004. Our senior credit facilities also
contain covenants restricting our operations. There were no violations of these
covenants through December 31, 2001 amended as follows. On December 31, 2001,
these covenants were waived for 2002 and three new covenants were established
for 2002: (1) a requirement to raise at least $20.0 million in junior capital by
March 1, 2002, which was fulfilled by us through an underwritten public offering
of our Class A common stock, which was completed in January 2002, (2) a minimum
EBITDA requirement based on a rolling 12 months ending March 31, 2002, June 30,
2002, September 30, 2002 and December 31, 2002, of $30.0 million, $26.0 million,
$32.0 million and $40.0 million, respectively, and (3) a capital expenditures
limit of $30.0 million in 2002 with an exemption for a buyout of existing
operating leases.
In January 2002 we issued 11.4 million shares of our Class A common stock
in an underwritten public offering. Not only did this offering meet the
requirements of our debt instruments but the net proceeds of the offering also
allowed us to pay off the entire amount outstanding under our revolving loans
and a portion of the principal amount of our term loans. See a further
discussion of this offering and the use of proceeds from it below under
"Subsequent Common Stock Offering."
The weakness in demand in 2001 for packaging and test services has
adversely affected our cash flows from operations. We believe that our existing
cash balances, cash flows from operations and available borrowings under our
senior credit facilities provide sufficient cash resources to meet our projected
operating and other cash requirements for the next twelve months. An event of
default under any debt instrument, if not cured or waived, could have a material
adverse effect on us. We may require capital sooner than currently expected. We
cannot assure you that additional financing will be available when we need it
or, if available, that it will be available on satisfactory terms. In addition,
the terms of our senior credit facilities and senior subordinated notes
significantly reduce our ability to incur additional debt. Failure to obtain any
such required additional financing could have a material adverse effect on our
company.
Other than the covenants on the debt as discussed above, we have no
performance guarantees or unconsolidated entities. Our off-balance sheets
commitments are limited to equipment operating leases, leases on office and
manufacturing space and additional contingent incentive payments to Intersil.
Our total off-balance obligations are approximately $99.8 million.
In 2001, 2000, and 1999 cash (used in) provided by operations was ($12.2)
million, $46.2 million, and $45.9 million, respectively. Cash from operations
mainly consisted of net (loss) income plus depreciation and amortization less
utilization for working capital.
In 2001, 2000, and 1999 cash used in investing activities was $52.8
million, $130.5 million, and $56.5 million, respectively. In 2001 and 1999, cash
used in investing activities mainly was invested in property and equipment. In
2000, in addition to the acquisition of property and equipment, cash was
invested in the purchase of the Malaysian business, including purchased
intellectual property.
In 2001, 2000, and 1999, cash provided by (used in) financing activities
was $88.0 million, $71.0 million, and ($26.5) million, respectively. Cash was
mainly provided by or used in debt issuance, debt prepayment, stock issuance,
and stock redemption.
Derivative Financial Instruments
In 1999, we entered into foreign forward contracts to mitigate the effect
of foreign currency movements on the cost of materials and equipment. The
contracts entered into required the purchase of South Korean Won or Japanese Yen
and the delivery of U.S. Dollars, and generally had maturities which did not
exceed three months. Because the contracts entered into did not qualify as
hedges under generally accepted accounting principles in the United States of
America, the gains and losses from the contracts were recorded as foreign
currency gains and losses. We had a net loss of $0.8 million in 1999 arising
from forward foreign currency contracts. We had no gain or loss in 2001 and
2000.
26
As of December 31, 2001, we had no foreign currency contracts
outstanding.
Recent Accounting Pronouncements
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
business combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting. The use of the pooling-of-interest method of
accounting is no longer allowed. SFAS No. 142 requires that goodwill and other
intangible assets will no longer be amortized but shall be reviewed and tested
annually for impairment. SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001, and early adoption is permitted for companies
with a fiscal year beginning after March 15, 2001. We expect that the adoption
of SFAS No.141 and 142 on January 1, 2002, will not have a material effect on
our financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets," which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be disposed of" and the accounting and reporting
provision of Accounting Principles Board ("APB") No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 addresses financial accounting and reporting for impairment or disposal
of long-lived assets including amortizable intangibles and is effective for
fiscal years beginning December 15, 2001 as well as interim periods within those
fiscal years. SFAS No. 144 does not apply to the impairment of goodwill and
non-amortizable intangibles. We are currently reviewing this statement to
determine its effect on our financial position and results of operations.
Acquisition of Malaysian Business
On June 30, 2000, we consummated our acquisition of Intersil's packaging
and test operations located in Kuala Lumpur, Malaysia along with related
intellectual property for approximately $71.5 million in cash and preferred
stock. In connection with the acquisition, we entered into a five-year supply
agreement with Intersil to provide Intersil assembly and test services on an
exclusive basis. The Malaysian business increases opportunities in high growth
advanced communications products, provides a presence in Malaysia near emerging
wafer foundries, broadens our package portfolio and enhances our intellectual
property in key areas. In addition, the Malaysian business expands our
mixed-signal testing capabilities and provides us with critical expertise in RF
testing.
We accounted for the Malaysian acquisition using purchase accounting. Under
purchase accounting, the total purchase price of the Malaysian business is
allocated to the acquired assets and liabilities based on their relative fair
values as of the closing date of the acquisition. The purchase price of $71.5
million represents the total of the cash consideration (including direct costs
of the acquisition) and the estimated fair value of the Class C preferred stock
exchanged for the whole of the issued shares of the Malaysian business and
certain intellectual property associated with it.
The terms of the acquisition of the Malaysian business require us to pay
until June 30, 2003 additional contingent incentive payments to Intersil based
on the achievement of milestones with respect to the transfer of the seller's
packaging business, currently subcontracted by Intersil to third parties, to us.
We will record these contingent payments as additional purchase price if and
when they are earned and paid on a quarterly basis. In the event that Intersil
were to achieve all the milestones, we would pay Intersil an additional sum of
approximately $17.9 million in the aggregate. For the years ended December 31,
2001 and 2000, we have paid $7.5 million and $0.4 million, respectively, for a
cumulative total of $7.9 million. These payments increased the effective
purchase price and were allocated to non-current assets. Additionally, $2.4
million of other purchase price adjustments were recorded based on the
difference between the final closing balance sheet and the estimated closing
balance sheet of the Malaysian business and deferred tax of $3.1 million on the
total of these purchase price adjustments. This resulted in a further increase
in non-current assets.
27
The amount and components of the purchase price along with the allocation
of the purchase price to assets purchased and liabilities assumed as of December
31, 2001 were as follows:
(in millions)
Purchase Price:
Cash consideration ..................................... $62.8
Estimated fair value of Class C preferred stock ........ 15.8
Deferred taxes ......................................... 3.1
Expenses ............................................... 5.0
Less: payment due from Intersil ......................... (1.8)
-----
$84.9
=====
Allocation of Purchase Price:
Land and buildings .................................... $19.3
Plant and equipment ................................... 66.4
Intellectual property ................................. 14.2
Restructuring accrual ................................. (7.4)
Deferred taxes ........................................ (4.1)
Net other assets and liabilities ...................... (3.5)
-----
$84.9
=====
There is no goodwill arising from the acquisition of the Malaysian
business. The fair value of total assets and liabilities exceeded the purchase
price by $42.8 million. This amount has been allocated in full to non-current
assets as summarized below:
Excess of
Estimated Fair Value Over
Fair Purchase Price Adjusted
Non-current asset Value Allocated Fair Value
- ----------------- ----- --------- ----------
(in millions)
Land and buildings .................. $ 27.9 $( 8.6) $ 19.3
Plant and equipment ................. 93.9 (27.5) 66.4
Intellectual property ............... 20.9 (6.7) 14.2
------ ------ ------
$142.7 $(42.8) $ 99.9
====== ====== ======
Intellectual property we acquired along with the Malaysian business
primarily consists of trade secrets and patents. The estimated average useful
life of these assets is between five and nine years.
28
An accrual of $7.4 million was established for expected costs of
restructuring the Malaysian business. As of December 31, 2001 and 2000, $2.3
million and $4.9 million of these one time non-recurring costs have been
incurred in connection with our factory reorganization, product discontinuance
and employee related costs. As of December 31, 2001, a total of $0.2 million
remains for completion of the purchase activities. We began formulating exit
plans and termination data during our due diligence relating to the acquisition
of the Malaysian business. The accrual was originally comprised of $5.0 million
for involuntary termination benefits and $2.4 million of other exit activities.
Actual involuntary termination benefits and other exit costs amounted to $7.0
million and $0.2 million, respectively. The projected number of planned
reductions in head count as a result of this planned restructuring was 380
employees, with an actual reduction of 373 employees. All restructuring
activities were completed in the year ended December 31, 2001, and there are no
unresolved contingencies or purchase price allocation issues.
The results of operations of the Malaysian business have been included with
our results of operations for periods subsequent to June 30, 2000. Set forth
below is the unaudited pro forma combined summary of operations of our Company
for the years ended December 31, 2000 and 1999, as if the acquisition had been
made on January 1, 1999 (in thousands, except for per share amounts).
Pro Forma Disclosure
December 31,
2000 1999
--------------------------
(unaudited) (unaudited)
Net sales $536,326 $477,394
Income before extraordinary item 9,165 7,009
Net income 6,775 6,749
Earnings per share
Basic $ 0.10 $ 0.12
-------- --------
Diluted $ 0.10 $ 0.12
-------- --------
Shares used in per share calculation:
Basic 68,367 54,002
-------- --------
Diluted 69,553 54,601
-------- --------
29
Subsequent Common Stock Offering
On January 30, 2002, we sold 10,000,000 shares of Class A common stock
in an underwritten public offering at a public offering price of $6.00 per
share. In connection with this sale, we received net proceeds of approximately
$56.2 million, after deducting underwriting discounts, commissions and estimated
offering expenses.
We used the net proceeds of the $56.2 million from this offering to pay
down term loans and revolving loans, respectively. The term loans had a weighted
average interest rate of 8.2% for the year ended December 31, 2001, have
scheduled amortization payments each quarter and mature on July 31, 2005. The
revolving loans had a weighted average interest rate of 6.0% for the year ended
December 31, 2001 and mature on July 31, 2005.
On February 14, 2002, we sold an additional 1,425,600 shares of Class A
common stock in conjunction with the underwriter's exercise of their over
allotment option at the public offering price of $6.00 per share. In connection
with this sale, we received net proceeds of approximately $8.0 million, after
deducting underwriting discounts and commissions and estimated offering
expenses. We used $4.0 million of the net proceeds from the sale of the
additional shares sold on February 14, 2002 to further pay down term loans. As
of February 14, 2002, our term loans had a remaining balance of approximately
$86.2 million and our revolving loans had been repaid in its entirety.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. We have no derivative financial
instruments. We have long-term debt that carries fixed and variable interest
rates. A fluctuation in interest rates of 1% would increase our annual interest
charge by approximately $2.9 million. The exposure to foreign currency gains and
losses has been significantly mitigated by two related factors. First, we
negotiated with the large majority of our material and equipment suppliers to
denominate purchase transactions in U.S. Dollars. Second, on October 1, 1999, we
changed our functional currency to the U.S. Dollar from the local currencies of
our South Korean and Chinese subsidiaries.
For the years ended December 31, 2001, 2000 and 1999, we generated
approximately 8.1%, 16.7%, and 11.3% of total revenue, respectively, from
international markets, primarily from customers in South Korea. In addition, all
of the facilities currently used to provide packaging services are located in
China, Malaysia and South Korea.
Moreover, many of our customers' operations are located in countries
outside of the United States of America. We cannot determine if our future
operations and earnings will be affected by new laws, new regulations, a
volatile political climate, changes in or new interpretations of existing laws
or regulations or other consequences of doing business outside the United States
of America particularly in China, Malaysia and South Korea. If future operations
are negatively affected by these changes, sales or profits may suffer.
Investment Risk
All of our investments are at fixed rates; therefore, the fair value of
these instruments is affected by changes in market interest rates. We believe
that the market risk arising from our holdings of investments is minimal as all
of our investments mature within one year.
30
Foreign Currency Risk
Based on the our overall currency rate exposure at December 31, 2001, a
near term 10% appreciation or depreciation in the value of the U.S. dollar would
have an insignificant effect on our financial position, results of operations
and cash flows over the next fiscal year. There can be no assurance, however,
that there will not be a material impact further in the future.
A portion of our costs is denominated in foreign currencies like the
Chinese Renminbi, the Malaysian Ringgit and the South Korean Won. As a result,
changes in the exchange rates of these currencies or any other applicable
currencies to the U.S. dollar will affect the cost of goods sold and operating
margins and could result in exchange losses. We cannot fully predict the impact
of future exchange rate fluctuations on our profitability. From time to time, we
may have engaged in, and may continue to engage in, exchange rate hedging
activities in an effort to mitigate the impact of exchange rate fluctuations.
However, we cannot assure that any hedging technique we implement will be
effective. If it is not effective, we may experience reduced operating margins.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants .......................................... 33
Consolidated Balance Sheets -- December 31, 2001 and 2000 .................. 34
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001 .......................... 35
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2001 .......................... 36
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2001 ................................... 38
Notes to Consolidated Financial Statements ................................. 40
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 2001
32
Report of Independent Accountants
To the Stockholders and Board of Directors of ChipPAC, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and cash
flows, present fairly, in all material respects, the financial position of
ChipPAC, Inc. and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 30, 2002, except for Note 20, as to which the date is February 14, 2002
33
ChipPAC, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 41,872 $ 18,850
Accounts receivable, less allowance for doubtful accounts of $449 and $972 32,034 45,904
Inventories (Note 6) 12,481 21,250
Prepaid expenses and other current assets 4,515 6,720
----------- ---------
Total current assets 90,902 92,724
Property, plant and equipment, net (Note 6) 304,650 334,733
Other assets (Note 6) 35,163 41,788
----------- ---------
Total assets $ 430,715 $ 469,245
=========== =========
Liabilities and stockholders' equity (Deficit)
Current liabilities:
Revolving Loans $ 50,000 $ 7,800
Accounts payable 31,045 54,663
Accrued expenses and other current liabilities (Note 6) 27,838 39,757
Current portion of long-term debt -- 6,800
----------- ---------
Total current liabilities 108,883 109,020
Long-term debt, less current portion 283,627 283,400
Convertible subordinated note 50,000 --
Other long-term liabilities 11,431 11,128
----------- ---------
Total liabilities 453,941 403,548
----------- ---------
Commitments (Note 15)
Stockholders' equity (deficit):
Common stock, Class A - par value $0.01 per share; 250,000,000 shares authorized,
69,404,000 and 68,438,000 shares issued and outstanding at December 31, 2001 and
2000 694 685
Common stock, Class B - par value $0.01 per share; 250,000,000 shares, no
shares issued or outstanding at December 31, 2001 and 2000 -- --
Warrants - Class A common stock -- 1,250
Additional paid in capital 110,043 104,509
Receivable from stockholders (985) (1,505)
Accumulated other comprehensive income 9,169 9,169
Accumulated deficit (142,147) (48,411)
----------- ---------
Total stockholders' equity (deficit) (23,226) 65,697
----------- ---------
Total liabilities and stockholders'
equity (deficit) $ 430,715 $ 469,245
=========== =========
The accompanying notes are an integral part of these financial statements.
34
ChipPAC, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
For the Years Ended
December 31,
2001 2000 1999
--------- --------- ---------
Revenue $ 328,701 $ 494,411 $ 375,530
Cost of revenue 297,588 385,267 317,488
--------- --------- ---------
Gross profit 31,113 109,144 58,042
Operating expenses: --------- --------- ---------
Selling, general and administrative 31,199 34,799 21,219
Research and development 14,223 12,015 12,362
Restructuring, write down of impaired assets and other
charges 40,920 -- 11,842
--------- --------- ---------
Total operating expenses 86,342 46,814 45,423
--------- --------- ---------
Operating income (loss) (55,229) 62,330 12,619
Non-operating (income) expenses:
Interest expense 37,214 39,432 21,241
Interest income (688) (843) (2,751)
Foreign currency gains