UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

Commission File Number 000-29472

 

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

1900 South Price Road

Chandler, AZ 85286

(480) 821-5000

(Address of principal executive offices and zip code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act).  Yes o     No þ

 

The number of outstanding shares of the registrant’s Common Stock as of October 31, 2007 was 181,774,586.

 

 

QUARTERLY REPORT ON FORM 10-Q
September 30, 2007

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

 

AMKOR TECHNOLOGY, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Basis of Presentation.  The Consolidated Financial Statements and related disclosures as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The December 31, 2006 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our latest annual report for the year ended December 31, 2006 filed on Form 10-K with the SEC on February 26, 2007. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

 

Use of Estimates.  The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S., using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.

 

New Accounting Standards

 

Recently Adopted Standards

 

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS No. 155”), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. We adopted the provisions of SFAS No. 155 on January 1, 2007. The adoption of this statement did not have an impact on our financial statements and disclosures.

 

In June 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation) (“Issue No. 06-03”). Under Issue No. 06-03, a company must disclose its accounting policy regarding the gross or net presentation of certain taxes. If taxes included in gross revenues are significant, a company must disclose the amount of such taxes for each period for which an income statement is presented (i.e., both interim and annual periods). Taxes within the scope of this Issue are those that are imposed on and concurrent with a specific revenue-producing transaction. Taxes assessed on an entity’s activities over a period of time, such as gross receipts taxes, are not within the scope of the issue. Issue No. 06-03 is effective for the first annual or interim reporting period beginning after December 15, 2006. We adopted the provisions of EITF Issue No. 06-03 on January 1, 2007. We present applicable taxes on a net basis in our consolidated financial statements. The adoption of Issue No. 06-03 did not have an impact on our financial statements and disclosures.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in income tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. FIN 48 requires that we recognize in our consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosures. This interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have an impact on the opening balance of retained earnings. See Note 4 for more information.

 

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of SFAS Statement No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 132(R), Employers’ Disclosure about Pensions and Other Postretirement Benefits (“SFAS No. 158”). SFAS No. 158 requires the recognition of the funded status of a defined benefit pension plan (other than a multi-employer plan) as an asset or liability in the statement of financial position and the recognition of changes in the funded status through comprehensive income in the year in which such changes occur. We adopted the recognition provisions of SFAS No. 158 and initially applied those to the funded status of our defined benefit pension plans as of December 31, 2006. The initial recognition of the funded status of our defined benefit pension plans resulted in a decrease in stockholders’ equity of $11.8 million, which was net of a tax benefit of $0.8 million.

 

SFAS No. 158 also requires that the funded status of a plan be measured as of the date of the year-end statement of financial position effective for fiscal years ending after December 15, 2008. We currently measure our funded status as of the balance sheet date. Accordingly, the adoption of the measurement provisions of SFAS No. 158 will have no impact on our financial statements.

 

Recently Issued Standards

 

The FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that fair value measurements have on earnings. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of this standard on our financial statements and disclosures.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. SFAS No. 159 also amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,” by providing the option to record unrealized gains and losses on held-for-sale and held-to-maturity securities currently. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of this standard on our financial statements and disclosures.

 

 

We account for our stock option plans in accordance with SFAS No. 123(R), Share-Based Payments (“SFAS No. 123(R)”). SFAS No. 123(R) requires that all share-based payments to employees, including grants

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

of employee stock options, be measured at fair value and expensed over the service period (generally the vesting period).

 

The following table presents stock-based employee compensation expense included in the Consolidated Statements of Income:

 

 

Stock Option Plans.  Substantially all of the options granted are generally exercisable pursuant to a two, three or four-year vesting schedule and the term of the options granted is no longer than ten years. On August 6, 2007, the shareholders approved a new stock plan (“2007 Equity Incentive Plan”) that provides for the grant of the following types of incentive awards: (i) stock options, (ii) restricted stock, (iii) restricted stock units, (iv) stock appreciation rights, (v) performance units and performance shares, and (vi) other stock or cash awards. The effective date of this plan is January 1, 2008 and there are 17,000,000 shares of our common stock reserved for issuance under the 2007 Equity Incentive Plan.

 

A summary of the current stock option plans and the respective plan termination dates and shares available for grant as of September 30, 2007 is shown below.

 

 

In order to calculate the fair value of stock options at the date of grant, we used the Black-Scholes option pricing model. Expected volatilities are weighted based on the historical performance of our stock. We also use historical data to estimate the timing and amount of option exercises and forfeitures within the valuation model. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The following assumptions were used to calculate weighted average fair values of the options granted for the three and nine months ended September 30, 2007 and 2006:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The intrinsic value of options exercised for the three and nine months ended September 30, 2007 was $1.2 million and $12.0 million, respectively. The intrinsic value of options exercised for the three and nine months ended September 30, 2006 was less than $0.1 million and $1.5 million, respectively.

 

The following is a summary of all option activity for the nine months ended September 30, 2007:

 

 

Total unrecognized compensation expense from stock options, excluding any forfeiture estimate, was $5.0 million as of September 30, 2007, which is expected to be recognized over a weighted-average period of 1.05 years beginning October 1, 2007.

 

For the nine months ended September 30, 2007 and 2006, cash received from option exercises under all share-based payment arrangements was $36.4 million and $5.0 million, respectively. There was no tax benefit realized. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

 

 

The components of comprehensive income are summarized below:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The components of accumulated other comprehensive loss consisted of the following:

 

 

 

We operate in and file income tax returns in various U.S. and foreign jurisdictions that are subject to examination by tax authorities. Our estimated tax liability is subject to change as examinations of our tax returns are completed by the tax authorities in the respective jurisdictions. We believe that any additional taxes or related interest over the amounts accrued will not have a material effect on our financial condition, results of operations or cash flows, nor do we expect that such examinations will result in a material favorable impact. However, resolution of these matters involves uncertainties and there are no assurances that the outcome will be favorable.

 

Income tax expense for the three and nine months ended September 30, 2007 and 2006 is attributable to foreign withholding taxes and income taxes at certain of our profitable foreign operations. Our effective tax rate of 7.0% for the nine months ended September 30, 2007 reflects the utilization of foreign net operating loss carryforwards and tax holidays in certain foreign jurisdictions. We also released a valuation allowance during the three months ended September 30, 2007 related to deferred tax assets of certain international locations which decreased income tax expense by $5.1 million for the three and nine months ended September 30, 2007. Management believes that sufficient positive evidence now exists to release the remaining valuation allowance for these deferred tax assets. The positive evidence we considered was: (i) the consistent profitability of these operations over a two year period; (ii) the increase in profitability experienced in the third quarter of 2007 based on demand for the products from these operations; and (iii) the visibility we have over the next two years for these operations which is the time frame we expect to realize the deferred tax assets. At September 30, 2007, we had U.S. net operating loss carryforwards totaling $345.0 million, which expire at various times through 2027. Additionally, at September 30, 2007, we had $48.2 million of non-U.S. operating loss carryforwards, which expire at various times through 2012.

 

We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. We also have valuation allowances on certain deferred tax assets in certain foreign jurisdictions. We will release such valuation allowance as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude that the deferred tax assets will be realized.

 

We adopted the provisions of FIN 48 on January 1, 2007. We recognized no cumulative effect of the adoption of FIN 48 to the opening balance of retained earnings as a result of the implementation of FIN 48. The gross amount of unrecognized tax benefits upon adoption of FIN 48 was $11.8 million. The gross amount of unrecognized tax benefits resulting from prior periods increased by $0.1 million during the three months ended September 30, 2007. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.6 million as of January 1, 2007 and $1.7 million as of September 30, 2007. It is reasonably possible that the total amount of unrecognized tax benefits will decrease within 12 months due to statutes of limitations expiring in certain foreign jurisdictions which would decrease our non-US unrecognized tax benefits related to historical foreign revenue attribution by less than $1.0 million.

 

We have recognized $0.1 million of interest and penalties in the Consolidated Statement of Income for the nine months ended September 30, 2007 in connection with our unrecognized tax benefits. Interest and penalties are classified as income taxes in the financial statements. The total amount of interest and penalties included in long-

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

term liabilities in connection with our unrecognized tax benefits is $0.3 million and $0.5 million as of January 1, 2007 and September 30, 2007, respectively.

 

As of January 1, 2007 and September 30, 2007, the following tax years remain subject to examination in the following major tax jurisdictions:

 

China — 2001 through 2006

Japan — 2001 through 2006

Korea — 2001 through 2006

Philippines — 2003 through 2006

Singapore — 2004 through 2006

Taiwan — 2001 through 2006

United States (Federal) — 2003 through 2006

 

 

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts net income and the outstanding shares for the dilutive effect of stock options and convertible debt. The following table summarizes the computation of basic and diluted EPS:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:

 

 

 

Accounts receivable, trade consists of the following:

 

 

 

Inventories consist of the following:

 

 

We report inventories net of the allowance for excess and obsolete inventory of $31.8 million and $25.5 million at September 30, 2007 and December 31, 2006, respectively.

 

 

Property, plant and equipment consists of the following:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table reconciles our activity related to property, plant and equipment as presented on the Condensed Consolidated Statements of Cash Flows to property, plant and equipment additions as reflected in the Consolidated Balance Sheets:

 

 

 

The change in the carrying value of goodwill, all of which relates to our packaging services segment, is as follows:

 

 

In March 2007, we increased goodwill by $0.8 million for additional consideration paid with respect to an earn-out provision in connection with our investment in Unitive Semiconductor Taiwan.

 

During the second quarter of 2007, in accordance with the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, we performed our annual impairment test on goodwill and concluded that goodwill was not impaired.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Intangibles as of September 30, 2007 consist of the following:

 

 

Intangibles as of December 31, 2006 consist of the following:

 

 

Amortization of identifiable intangible assets was $2.4 million for each of the three months ended September 30, 2007 and 2006. Amortization of identifiable intangible assets was $8.0 million and $7.1 million for the nine months ended September 30, 2007 and 2006, respectively.

 

Based on the amortizing intangible assets recognized in our balance sheet at September 30, 2007, amortization for each of the next five fiscal years is estimated as follows:

 

 

 

Accrued expenses consist of the following:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Following is a summary of short-term borrowings and long-term debt:

 

 

Debt of Amkor Technology Inc.

 

Senior Secured Credit Facilities

 

In November 2005, we entered into a $100.0 million first lien revolving credit facility available through November 2009, with a letter of credit sub-limit of $25.0 million. Interest is charged under the credit facility at a floating rate based on the base rate in effect from time to time plus the applicable margins which range from 0.0% to 0.5% for base rate revolving loans, or LIBOR plus 1.5% to 2.25% for LIBOR revolving loans. The LIBOR-based

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

interest rate at September 30, 2007 was 6.73%; however, no borrowings were outstanding on this credit facility. As of September 30, 2007, we had utilized $0.2 million of the available letter of credit sub-limit, and had $99.8 million available under this facility. The borrowing base for the revolving credit facility is based on the valuation of our eligible accounts receivable. We incur commitment fees on the unused amounts of the revolving credit facility ranging from 0.25% to 0.50%, based on our liquidity. This facility includes a number of affirmative and negative covenants, which could restrict our operations. If we were to default under the first lien revolving credit facility, we would not be permitted to draw additional amounts, and the banks could accelerate our obligation to pay all outstanding amounts.

 

In October 2004, we entered into a $300.0 million second lien term loan with a group of institutional lenders. The term loan bore interest at a rate of LIBOR plus 450 basis points (9.87% at December 31, 2006); and would have matured in October 2010. The loan was secured by a second lien on substantially all of our U.S. subsidiaries’ assets, including a portion of the shares of certain of our foreign subsidiaries. The second lien term loan was refinanced and paid in full in April 2007 with the proceeds of the $300.0 million, 7-year secured credit facility with Woori Bank in Korea. In connection with the prepayment of the second lien term loan, we recorded a loss on debt retirement of $15.7 million in April 2007, which included $9.0 million in prepayment fees and $6.7 million of unamortized deferred debt issuance costs. This repayment transaction fully discharged all of our obligations under the second lien term loan and fully discharged all subsidiary guarantees and releases all the collateral securing the second lien term loan.

 

Senior and Senior Subordinated Notes

 

In February 2001, we issued $500.0 million of 9.25% Senior Notes due February 2008 (the “2008 Notes”). As of December 31, 2005, we had purchased $29.5 million of these notes. In January 2006, we purchased an additional $30.0 million of these notes and recorded a gain on extinguishment of $0.7 million which is included in debt retirement costs, net, which was partially offset by the write-off of a proportionate amount of our deferred debt issuance costs of $0.2 million. A portion of the 2008 Notes are not redeemable prior to their maturity. In April 2006, we announced a tender offer for the 2008 Notes. We used the net proceeds from the 2016 Notes (described below) to purchase $352.3 million in notes tendered. We recorded a $20.2 million loss on extinguishment related to premiums paid for the purchase of the 2008 Notes and a $2.2 million charge for the associated unamortized deferred debt issuance costs. Both charges are included in debt retirement costs, net in the Consolidated Statements of Income.

 

In March 2004, we issued $250.0 million of 7.125% Senior Notes due March 2011 (the “2011 Notes”). The 2011 Notes were priced at 99.321%, yielding an effective interest rate of 7.25%. The 2011 Notes are redeemable by us at any time provided we pay the holders a “make-whole” premium.

 

In May 2003, we issued $425.0 million of 7.75% Senior Notes due May 2013 (the “2013 Notes”). The 2013 Notes are not redeemable at our option until May 2008 whereupon the notes become redeemable at specified prices.

 

In May 2006, we issued $400.0 million of 9.25% Senior Notes due June 2016 (the “2016 Notes”). The Notes are redeemable by us prior to June 1, 2011 provided we pay the holders a “make-whole” premium. After June 1, 2011, the 2016 Notes are redeemable at specified prices. In addition, prior to June 1, 2009, we may redeem up to 35% of the 2016 Notes at a specified price with the proceeds of certain equity offerings. After deducting fees to the underwriter, the net proceeds were used to purchase a portion of the 2008 Notes, and to pay respective accrued interest and tender premiums.

 

In May 1999, we issued $200.0 million of 10.5% Senior Subordinated Notes due May 2009 (the “2009 Notes”). In June 2006, we used the proceeds from the May 2011 Notes (described below) in connection with a partial call of the 2009 Notes for which $178.1 million of the 2009 Notes were repurchased. We recorded a $3.1 million loss on extinguishment related to premiums paid for the purchase of the 2009 Notes and a $2.2 million charge for the associated unamortized deferred debt issuance costs. Both charges are included in debt retirement costs, net. In June 2007, we redeemed the remaining $21.9 million of the 2009 Notes outstanding with cash on hand,

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

and the indenture has been terminated. We recorded a charge of $0.2 million to write-off the unamortized deferred debt issuance costs in June 2007.

 

The senior notes contain a number of affirmative and negative covenants, which could restrict our operations.

 

Senior Subordinated and Subordinated Convertible Notes

 

In May 2006, we issued $190.0 million of our 2.5% Convertible Senior Subordinated Notes due May 2011 (the “May 2011 Notes”). The May 2011 Notes are convertible at any time prior to the maturity date into our common stock at a price of $14.59 per share, subject to adjustment. The May 2011 Notes are subordinated to the prior payment in full of all of our senior debt. After deducting fees to the underwriter, the net proceeds from the issuance of the May 2011 Notes were used to repurchase a portion of the 2009 Notes, pay respective accrued interest and call premiums. The senior subordinated notes contain a number of affirmative and negative covenants which could restrict our operations.

 

In March 2000, we issued $258.8 million of our 5.0% Convertible Subordinated Notes due March 2007 (the “2007 Notes”). The 2007 Notes were subordinated to the prior payment in full of all of our senior and senior subordinated debt. In November 2003, we repurchased $112.3 million of our 2007 Notes with the proceeds of an equity offering. In June 2006, we repurchased $4.0 million of our 2007 Notes at 99.875%. In March 2007, we repaid the remaining balance of $142.4 million at the maturity date with cash on hand.

 

In November 2005, we issued $100.0 million of our 6.25% Convertible Subordinated Notes due December 2013 (the “December 2013 Notes”) in a private placement to James J. Kim, our Chairman and Chief Executive Officer, and certain Kim family members. The December 2013 Notes are presented as long-term debt, related party on the Consolidated Balance Sheets. The December 2013 Notes are convertible at any time prior to the maturity date into our common stock at an initial price of $7.49 per share (the market price of our common stock on the date of issuance of the December 2013 Notes was $6.20 per share), subject to adjustment. The December 2013 Notes are subordinated to the prior payment in full of all of our senior and senior subordinated debt. In March 2006, we filed a registration statement with the SEC registering the notes and the shares of common stock issuable upon conversion, pursuant to the requirements of a registration rights agreement. The proceeds from the sale of the December 2013 Notes were used to purchase a portion of the 2006 Notes described above. The December 2013 Notes are not redeemable at our option until December 2010.

 

Debt of Subsidiaries

 

Secured Term Loans

 

In April 2007, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”), entered into a $300.0 million, 7-year secured term loan (“Term Loan”) with Woori Bank. The Term Loan is guaranteed on an unsecured basis by Amkor Technology, Inc (“Amkor”). The Term Loan is secured by substantially all the land, factories, and equipment located at our ATK facilities. The Term Loan bears interest at Woori’s base rate plus 50 basis points (6.61% as of September 30, 2007) and amortizes in 28 equal quarterly payments through April 2014. The proceeds of the Term Loan were used to refinance Amkor’s existing $300.0 million second lien term loan, due October 2010 (see above). We incurred $3.4 million in debt issuance costs in connection with the Woori loan, which amount was funded from cash on hand.

 

In June 2005, Unitive Semiconductor Taiwan, a Taiwanese subsidiary, entered into a New Taiwan Dollar (“NT$”) 400.0 million (approximately $12.2 million) term loan due June 20, 2008 (the “UST Note”), which accrues interest at the Taiwan 90-Day Commercial Paper Secondary Market rate plus 2.25% (4.72% and 4.23% as of September 30, 2007 and December 31, 2006, respectively). Interest payments are due monthly and principal payments are due quarterly. The proceeds of the UST Note were used to satisfy notes previously held by Unitive Semiconductor Taiwan. Amkor has guaranteed the repayment of this loan. The agreement governing the UST Note

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

includes a number of affirmative and negative covenants which could restrict our operations. If we were to default under the facility, the lenders could accelerate our obligation to pay all outstanding amounts.

 

In November 2005, Amkor Technology Taiwan, Inc., a Taiwanese subsidiary, entered into a NT$1.8 billion (approximately $53.5 million) syndication loan due November 2010 (the “Syndication Loan”), which accrues interest at the Taiwan 90-Day Commercial Paper Primary Market rate plus 1.2% (4.13% and 3.22% as of September 30, 2007 and December 31, 2006, respectively). Interest payments are due quarterly and principal payments are due semi-annually. Amkor has guaranteed the repayment of this loan. The agreement governing the Syndication Loan includes a number of affirmative, negative and financial covenants, which could restrict our operations. If we were to default under the facility, the lenders could accelerate our obligation to pay all outstanding amounts.

 

Secured Equipment and Property Financing

 

Our secured equipment and property financing consists of loans secured with specific assets at our Japanese, Singaporean and Chinese subsidiaries. Our credit facility in Japan provides for equipment financing on a three-year basis for each piece of equipment purchased. The Japanese facility accrues interest at 3.59% on all outstanding balances and has maturities at various times between 2006 and 2008. In December 2005, our Singaporean subsidiary entered into a loan with a finance company for $10.0 million, which accrues interest at 4.86% and is due December 2008. The loan, guaranteed by Amkor is secured by a monetary security deposit and certain equipment in our Singapore facility. In May 2004, our Chinese subsidiary entered into a $5.5 million credit facility secured with buildings at one of our Chinese production facilities and is payable ratably through January 2012. The interest rate for the Chinese financing at September 30, 2007 and December 31, 2006, was 6.73% and 6.14%, respectively. These equipment and property financings contain affirmative and negative covenants, which could restrict our operations, and, if we were to default on our obligations under these financings, the lenders could accelerate our obligation to repay amounts borrowed under such facilities.

 

Revolving Credit Facilities

 

Amkor Iwate Corporation, a Japanese subsidiary (“AIC”), had a revolving line of credit with a Japanese bank for 2.5 billion Japanese yen (approximately $21.2 million) that matured in September 2007. We renewed this facility for 2.5 billion Japanese yen (approximately $21.6 million). The line of credit matures in September 2008 and accrues interest at the Tokyo Interbank Offering Rate (“TIBOR”) plus 0.6%. The interest rate at September 30, 2007 ranged from 1.34% to 1.35%, and December 31, 2006 ranged from 0.97% to 1.04%. Amounts drawn on the line of credit were $6.9 million and $7.6 million at September 30, 2007 and December 31, 2006, respectively.

 

Additionally, AIC has a revolving line of credit at a Japanese bank for 300.0 million Japanese yen (approximately $2.4 million), maturing in June 2008, that accrues interest at TIBOR plus 0.5%. The interest rate at September 30, 2007 and at December 31, 2006 was 1.24% and 0.92%, respectively. There was $0.9 million drawn on the line of credit as of September 30, 2007. There were no amounts outstanding at December 31, 2006.

 

Our Philippine subsidiary has a revolving line of credit of 895.0 million Philippine peso (approximately $18.5 million), maturing in October 2007, that accrues interest at LIBOR plus 1.0% (6.23% at September 30, 2007 and December 31, 2006). There were no amounts outstanding at September 30, 2007 and December 31, 2006.

 

In January 2006, Amkor Assembly & Test (Shanghai) Co. Ltd., a Chinese subsidiary (“AATS”), entered into a $15.0 million working capital facility which accrues interest at LIBOR plus 1.25%, and was paid off at maturity in January 2007 with cash on hand. The borrowings outstanding as of December 31, 2006 were $15.0 million. At December 31, 2006, the interest rate ranged from 6.62% to 6.81% based on the dates of borrowing.

 

Unitive Semiconductor Taiwan had a revolving line of credit with a Taiwan bank for NT$60.0 million (approximately $1.9 million) that matured in June 2007. We renewed this facility for NT$20.0 million (approximately $0.6 million) in August 2007. The line of credit matures in June 2008 and accrues interest at a variable

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

interest rate. The interest rate at September 30, 2007 and December 31, 2006 was 4.44% and 3.60%, respectively. There were no amounts drawn on the line of credit as of September 30, 2007 and December 31, 2006.

 

These lines of credit contain certain affirmative and negative covenants, which could restrict our operations. If we were to default on our obligations under any of these lines of credit, we would not be permitted to draw additional amounts, and the lenders could accelerate our obligation to pay all outstanding amounts.

 

Other Debt

 

Other debt includes debt related to our Taiwanese subsidiaries with fixed and variable interest rates that matured in June 2007. The interest rate on this debt ranged from 3.14% to 4.5% as of December 31, 2006.

 

Interest expense related to short-term borrowings and long-term debt is presented net of interest income in the accompanying Consolidated Statements of Income. Interest income for the three and nine months ended September 30, 2007 was $2.8 million and $6.6 million, respectively. For the three and nine months ended September 30, 2006, interest income was $1.3 million and $4.9 million, respectively.

 

Compliance with Debt Covenants

 

We were in compliance with all of our covenants as of September 30, 2007 and December 31, 2006.

 

 

Our Philippine, Taiwanese and Japanese subsidiaries sponsor defined benefit plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon costs computed by independent actuaries. The components of net periodic pension cost for these defined benefit plans are as follows:

 

 

For the three and nine months ended September 30, 2007, $0.5 million and $1.4 million, respectively, was contributed to fund the pension plans. In the fourth quarter of 2007, we anticipate contributing an additional $8.0 million to fund the pension plans.

 

Our Korean subsidiary participates in an accrued severance plan that covers employees and directors with at least one year of service. Eligible employees are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service, seniority and rate of pay at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. Our contributions to the National Pension Plan of the Republic of Korea are deducted from accrued severance benefit liabilities. For the three months ended September 30, 2007 and 2006, the provision recorded for severance benefits was $9.7 million and $7.6 million, respectively. For the nine months ended September 30, 2007

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

and 2006, the provision recorded for severance benefits was $33.1 million and $24.7 million, respectively. The balance recorded in pension and severance obligations for accrued severance at our Korean subsidiary was $170.2 million and $142.3 million at September 30, 2007 and December 31, 2006, respectively.

 

 

Other non-current liabilities consist of the following:

 

 

Customer advances relate to supply agreements with customers where we commit capacity in exchange for customer prepayment of services.

 

 

As of September 30, 2007, we have outstanding $0.2 million of standby letters of credit and have available an additional $24.8 million. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

 

We generally warrant that our services will be performed in a professional and workmanlike manner and in compliance with our customers’ specifications. We accrue costs for known warranty issues. Historically, our warranty costs have been immaterial.

 

Legal Proceedings

 

We are involved in claims and legal proceedings and we may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our results of operations or financial condition. Except as indicated below, we currently believe that the ultimate outcome of these claims and proceedings, individually and in the aggregate, will not have a material adverse impact on our financial position, results of operations or cash flows. Our evaluation of the potential impact of these claims and legal proceedings on our financial position, results of operations or cash flows could change in the future. We currently are party to the legal proceedings described below. Attorney fees related to legal matters are expensed as incurred.

 

Tessera, Inc. v. Amkor Technology, Inc.

 

On March 2, 2006, Tessera, Inc. filed a Request for Arbitration (the “Request”) with the International Court of Arbitration of the International Chamber of Commerce, captioned Tessera, Inc. v. Amkor Technology, Inc. The subject matter of the arbitration is a Limited TCC License Agreement (“Agreement”) entered into between Tessera and our predecessor in 1996. The Agreement licenses certain patents and know-how relating to semiconductor packaging. In their Request, Tessera alleges breach of contract and asserts Amkor owes Tessera royalties under the Agreement in an amount between $85 and $115 million for semiconductor packages assembled by us through 2005 and that Amkor has thereafter continued to assemble semiconductor packages subject to additional royalties, which Tessera alleges are substantial. In our Answer and Counterclaim, we denied that any royalties were owed, and asserted that we are not using any of the licensed Tessera patents or know-how. We also asserted defenses and counterclaims of invalidity and unenforceability of the four patents identified by Tessera in their Request as the basis for their claim (U.S. Patent Nos. 5,679,977, 5,852,326, 6,433,419 and 6,465,893). On November 10, 2006,

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Tessera provided their Preliminary Claim Charts and added two additional patents to the proceeding, U.S. Patent Nos. 6,133,627 and 5,861,666.

 

On April 17, 2007, Tessera served notice to Amkor that it has terminated the Agreement, which is the basis for the breach of contract dispute in the ICC Arbitration. Amkor has disputed Tessera’s purported notice that it is entitled to terminate the Agreement and the Arbitration Panel has denied Tessera’s pre-hearing motion to terminate the Agreement and deferred that issue until the hearing. Also on April 17, 2007, Tessera instituted an action in Federal District Court for the Eastern District of Texas against certain of Amkor’s customers, and on May 15, 2007, at Tessera’s request, the United States International Trade Commission (“ITC”) instituted an investigation of certain Amkor customers. Both the ITC investigation and the Texas action allege infringement of two of the same patents asserted by Tessera in the arbitration, and Tessera may seek to include in those actions some of the same products packaged by Amkor that are at issue in the arbitration. Although Amkor has not been named as a respondent in the ITC investigation or a defendant in the Texas action, Amkor has received notification from a customer of a request for indemnification in connection with Tessera’s claims in those actions. Amkor has not accepted such request for indemnification.

 

The arbitration is currently set for a hearing beginning March 2008. Although we believe that we have meritorious defenses and counterclaims in this matter and will seek a judgment in our favor, it is not possible to predict the outcome of the arbitration or the total cost of resolving this controversy including the impact of possible future claims of additional royalties by Tessera. The final resolution of this controversy could result in significant liabilities and could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Securities Class Action Litigation

 

On January 23, 2006, a purported securities class action suit entitled Nathan Weiss et al. v. Amkor Technology, Inc. et al., was filed in U.S. District Court for the Eastern District of Pennsylvania against Amkor and certain of its current and former officers. Subsequently, other law firms filed two similar cases, which were consolidated with the initial complaint. In August 2006 and again in November 2006, the plaintiffs amended the complaint. The plaintiffs added additional officer, director and former director defendants and allege improprieties in certain option grants. The amended complaint further alleges that defendants improperly recorded and accounted for the options in violation of generally accepted accounting principles and made materially false and misleading statements and omissions in its disclosures in violation of the federal securities laws, during the period from July 2001 to July 2006. The amended complaint seeks certification as a class action pursuant to Fed. R. Civ. Proc. 23, compensatory damages, costs and expenses, and such other further relief as the Court deems just and proper. On December 28, 2006, pursuant to motion by defendants, the U.S. District Court for the Eastern District of Pennsylvania transferred this action to the U.S. District Court for the District of Arizona.

 

On September 25, 2007, the U.S. District Court for the District of Arizona dismissed this case with prejudice. On October 23, 2007, plaintiffs filed a notice of appeal from the dismissal in the U.S. Circuit Court of Appeals for the Ninth Circuit.

 

Shareholder Derivative Lawsuits

 

On February 23, 2006, a purported shareholder derivative lawsuit entitled Scimeca v. Kim, et al. was filed in the U.S. District Court for the District of Arizona against certain of Amkor’s current and former officers and directors. Amkor is named as a nominal defendant. In September 2006 and again in November 2006, the plaintiff amended the complaint to add allegations relating to option grants and added additional defendants, including the remaining members of the current board, former board members, and former officers. The complaint includes claims for violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, abuse of control, waste of corporate assets, unjust enrichment and mismanagement, and is generally based on the same allegations as in the securities class action litigation described above.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

On August 29, 2007, the U.S. District Court for the District of Arizona granted our motion to dismiss this case. We do not know whether the plaintiffs will appeal the decision or take further action.

 

On March 2, 2006, a purported shareholder derivative lawsuit entitled Khan v. Kim, et al. was filed in the Superior Court of the State of Arizona against certain of Amkor’s current and former officers and directors. Amkor is named as a nominal defendant. The complaint includes claims for breach of fiduciary duty and unjust enrichment, and is based on allegations similar to those made in the previously filed federal shareholder derivative action. This action was stayed pending resolution of the federal derivative suit referenced above, and in July 2007, was dismissed by the court without prejudice.

 

On or about October 10, 2006, a purported shareholder derivative lawsuit entitled Feldgus v. Kim, et al. was filed in the Superior Court of the State of Arizona against certain of Amkor’s current and former officers and directors. Amkor is named as a nominal defendant. The complaint includes claims for breach of fiduciary duty and unjust enrichment and contains allegations relating to option grants similar to those made in the previously filed federal shareholder derivative action referred to above. This action has been stayed pending resolution of the federal derivative suit referenced above.

 

The derivative complaints seek monetary damages, an order directing us to take all necessary actions to improve corporate governance as may be necessary, equitable and/or injunctive relief as permitted by law, disgorgement, restitution, costs, fees, expenses and such other relief as the Court deems just and proper.

 

Securities and Exchange Commission Investigation

 

In August 2005, the Securities and Exchange Commission (“SEC”) issued a formal order of investigation regarding certain activities with respect to Amkor securities. The primary focus of the investigation appears to be activities during the period from June 2003 to July 2004. We believe that the investigation continues to relate primarily to transactions in our securities by certain individuals, and that the investigation may in part relate to whether tipping with respect to trading in our securities occurred. The matters at issue involve activities with respect to Amkor securities during the subject period by certain insiders or former insiders and persons or entities associated with them, including activities by or on behalf of certain current and former members of the Board of Directors and Amkor’s Chief Executive Officer. Amkor has cooperated fully with the SEC on the formal investigation and the informal inquiry that preceded it. Amkor cannot predict the outcome of the investigation. In late 2006, our former general counsel, whose employment with us terminated in March of 2005, was indicted by the United States Attorney’s Office for the Eastern District of Pennsylvania for violation of securities laws, on charges that the former general counsel traded in Amkor securities on the basis of material non-public information. In October 2007, a jury convicted the former general counsel on those charges. In April 2007, the SEC filed a civil action against our former general counsel based on substantially the same allegations as contained in the indictment.

 

As previously disclosed, in July 2006, the Board of Directors established a Special Committee to review our historical stock option practices and informed the SEC of these efforts. The SEC informed us in 2006 that it expanded the scope of its investigation and requested that we provide documentation related to these matters. We intend to continue to cooperate with the SEC.

 

Amkor Technology, Inc. v. Motorola, Inc.

 

In August 2002, we filed a complaint against Motorola, Inc. (“Motorola”) seeking declaratory judgment relating to a controversy between us and Motorola concerning: (i) the assignment by Citizen Watch Co., Ltd. (“Citizen”) to us of a Patent License Agreement dated January 25, 1996 between Motorola and Citizen (the “License Agreement”) and concurrent assignment by Citizen to us of Citizen’s interest in U.S. Patents 5,241,133 and 5,216,278 (the “’133 and ’278 Patents”) which patents relate to ball grid array packages; and (ii) our obligation to make certain payments pursuant to an immunity agreement (the “Immunity Agreement”) dated June 30, 1993 between us and Motorola, pending in the Superior Court of the State of Delaware in and for New Castle County.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We and Motorola resolved the controversy with respect to all issues relating to the Immunity Agreement, and all claims and counterclaims filed by the parties in the case relating to the Immunity Agreement were dismissed or otherwise disposed of without further litigation. The claims relating to the License Agreement and the ’133 and ’278 Patents remained pending.

 

We and Motorola both filed motions for summary judgment on the remaining claims, and oral arguments were heard in September 2003. On October 6, 2003, the Superior Court of Delaware ruled in favor of us and issued an Opinion and Order granting our motion for summary judgment and denying Motorola’s motion for summary judgment. Motorola filed an appeal in the Supreme Court of Delaware. In May 2004, the Supreme Court reversed the Superior Court’s decision, and remanded for further development of the factual record. The bench trial in this matter was concluded on January 27, 2006. Post-trial briefs were submitted and post-trial oral arguments were heard by the Court in April 2006. Additional post-trial oral arguments were heard by the Court on September 11, 2006. A decision from the Court is still pending. Although we believe that we have meritorious claims in this matter and will continue to seek judgment in our favor, as of the date of this quarterly report, it is not possible to predict the outcome of this litigation or the total cost of resolving this controversy, including the impact of possible future claims for royalties which may be made by Motorola if the final outcome is unfavorable. The final resolution of this controversy could result in potential liabilities that could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Alcatel Business Systems v. Amkor Technology, Inc., Anam Semiconductor, Inc.

 

On November 5, 1999, we agreed to sell certain semiconductor parts to Alcatel Microelectronics, N.V. (“AME”), a subsidiary of Alcatel S.A. The parts were manufactured for us by Anam Semiconductor, Inc. (“ASI”) and delivered to AME. AME transferred the parts to another Alcatel subsidiary, Alcatel Business Systems (“ABS”), which incorporated the parts into cellular phone products. In early 2001, a dispute arose as to whether the parts sold by us were defective.

 

Paris Commercial Court.  On March 18, 2002, ABS and its insurer filed suit against us and ASI in the Paris Commercial Court of France, claiming damages of approximately 50.4 million Euros (approximately $71.9 million based on the spot exchange rate at September 30, 2007.) We denied all liability associated with this claim. On March 27, 2007, the French Supreme Court (the highest court in the French judicial system) issued a final non-appealable ruling in our favor that the Paris Commercial Court does not have jurisdiction over this matter. Based on this ruling, we do not anticipate any further proceedings in the French courts on this matter.

 

Arbitration.  In December 2006, ABS filed a demand with the American Arbitration Association (“AAA”) for arbitration in Pennsylvania under the November 1999 agreement, which demand is based on substantially the same claims raised in the French lawsuit described above. The arbitration filed with the AAA in December 2006 remains pending, and is not affected by the French Supreme Court’s final ruling in our favor described above.

 

We previously entered into agreements with ASI whereby ASI agreed to indemnify us against all costs, liabilities, damages, expenses and judgments resulting from or arising out of the claims of AME, ABS and ABS’ insurer in the above matters. In January 2007, Dongbu Electronics (now known as Dongbu Hitek) (“Dongbu”), successor in interest to ASI, acknowledged that it is the indemnifying party with respect to claims against us in the now-ended French proceeding described above, and in this Arbitration matter, although Dongbu has subsequently questioned the scope of their indemnity obligation. We continue to believe that Dongbu is obligated to indemnify us for these claims.

 

Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.

 

In November 2003, we filed a complaint against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) with the International Trade Commission (“ITC”) in Washington, D.C., alleging infringement of our United States Patent Nos. 6,433,277; 6,455,356 and 6,630,728 (collectively the “Amkor Patents”) and seeking an exclusionary order barring the importation by Carsem of infringing products.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Subsequently, we filed a complaint in the Northern District of California, alleging infringement of the Amkor Patents and seeking an injunction enjoining Carsem from further infringing the Amkor Patents, treble damages plus interest, costs and attorney’s fees. We allege that by making, using, selling, offering for sale, or importing into the U.S. the Carsem Dual and Quad Flat No-Lead Package, Carsem has infringed on one or more of our Micro LeadFrame packaging technology claims in the Amkor Patents. The District Court action had been stayed pending resolution of the ITC case. The ITC Administrative Law Judge (“ALJ”) conducted an evidentiary hearing during July and August of 2004 in Washington D.C. and issued an initial determination that Carsem infringed some of our patent claims relating to our Micro LeadFrame package technology, that some of our 21 asserted patent claims are valid, and that all of our asserted patent claims are enforceable. However, the ALJ did not find a statutory violation of the Tariff Act. We filed a petition in November 2004 to have the ALJ’s ruling reviewed by the full International Trade Commission. The ITC ordered a new claims construction related to various disputed claim terms and remanded the case to the ALJ for further proceedings. On November 9, 2005, the ALJ issued an Initial Determination that Carsem infringed some of our patent claims and ruled that Carsem violated Section 337 of the Tariff Act. The ITC subsequently authorized the ALJ to reopen the record on certain discovery issues related to third party documents. On February 9, 2006, the ITC ordered a delay in issuance of the Final Determination, pending resolution of the third party discovery issues. The discovery issues are the subject of a subpoena enforcement action which is pending in the District Court for the District of Columbia. The case we filed in 2003 in the Northern District of California remains stayed pending completion of the ITC investigation.

 

 

We purchase leadframe inventory from Acqutek Semiconductor & Technology Co., Ltd. James J. Kim, our Chairman and Chief Executive Officer, owns approximately 17.7% of Acqutek Semiconductor & Technology Co., Ltd. The purchases are arms length and on terms consistent with our non-related party vendors. For the three months ended September 30, 2007 and 2006, purchases from Acqutek Semiconductor & Technology Co., Ltd. were $5.0 million and $4.3 million, respectively. For the nine months ended September 30, 2007 and 2006, purchases from Acqutek Semiconductor and Technology Co., Ltd. were $13.3 million and $11.7 million, respectively. Amounts due to Acqutek Semiconductor & Technology Co., Ltd. at September 30, 2007 and December 31, 2006 were $1.8 million and $1.3 million, respectively.

 

Mr. JooHo Kim is an employee of Amkor and a brother of Mr. James J. Kim, our Chairman and Chief Executive Officer. Mr. JooHo Kim, together with his wife and children, own 96.1% of Jesung C&M, a company that provides cafeteria services to Amkor Technology Korea, Inc. The services provided by Jesung C&M are subject to competitive bid. For the three months ended September 30, 2007 and 2006, purchases from Jesung C&M were $1.6 million. For the nine months ended September 30, 2007 and 2006, purchases from Jesung C&M were $4.6 million and $4.9 million, respectively. Amounts due to Jesung C&M at September 30, 2007 and December 31, 2006 were $0.5 million.

 

 

In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we have determined we have two reportable segments, packaging and test. Packaging and test are integral parts of the process of manufacturing semiconductor devices and our customers will engage with us for both packaging and test services, or just packaging or test services. Our packaging services process creates an electrical interconnect between the semiconductor chip and the system board through wire bonding or bumping technologies. In packaging, individual chips are separated from the fabricated semiconductor wafers, attached to a substrate and then encased in a protective material to provide optimal electrical connectivity and thermal performance. Our test services include the probing of fabricated wafers and testing of packaged chips using sophisticated equipment to ensure that design specifications are satisfied.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The accounting policies for segment reporting are the same as those for our consolidated financial statements. We evaluate our operating segments based on gross margin and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column includes other corporate adjustments, sales office and corporate property, plant and equipment.

 

 

 

During the second quarter of 2007, we commenced a phased transition of wafer level processing production from our wafer bumping facility in North Carolina to our facility in Taiwan as part of our ongoing efforts to help our customers shorten time-to-market and get closer to the upstream production sources. The North Carolina facility will primarily focus on research and development activities after the transition is complete. We expect to complete the transition of production to Taiwan by April 2008. In April 2007, the specific details surrounding the related reduction in force were communicated to the impacted employees at our North Carolina facility. The costs associated with this activity are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (as amended). We recorded charges for termination benefits during the three and nine months ended September 30, 2007, respectively of $0.3 million and $0.7 million which were primarily included in cost of goods sold. The amount recorded in accrued expenses for termination benefits was $0.6 million as of September 30, 2007. We currently anticipate that an additional $0.4 million related to termination benefits will be charged primarily to cost of goods sold over the remaining employment service period through April 2008. We anticipate total termination benefits of $1.0 million will be paid through April 2008.

 

 

In October 2005, we divested a specialty test operation and recognized a gain of $4.4 million. In the three months ended September 30, 2007, we recognized an additional gain of $1.7 million as a result of an earn-out provision provided in the asset purchase agreement. We received the cash in October 2007.

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact are considered forward looking statements, including but not limited to statements regarding: trends in outsourcing and inventory levels in the supply chain, demand and selling prices for our services and products; future capacity utilization rates, revenue, gross margins and operating performance; our ability to focus capital investments on increasing advanced laminate, test services, wafer bump and flip chip packaging capacity and information systems and technology; entry into supply agreements with customers; forecasted customer demand; anticipated tax rate; sufficient cash flows and liquidity to fund working capital, estimated capital expenditures of $285 million to $300 million, and debt service requirements; no declaration of cash dividends; our substantial indebtedness; our expectations regarding continued compliance with our debt covenants; the continued service of key senior management and technical personnel; increase in the scope and growth of our operations and ability to implement expansion plans; our ability to offset an increase in fixed commodity prices; the favorable outcome of litigation proceedings; our ability to comply with environmental regulations and foreign laws; our ability to quickly respond to a natural disaster or terrorist attack; the condition, growth and cyclical nature of the semiconductor industry; our contractual obligations; and other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. These forward-looking statements involve a number of risks, uncertainties, assumptions and other factors that could affect future results and events to differ materially from historical and expected results and those expressed or implied in the forward looking statements, including, but not limited to, those set forth in the following discussion as well as in “Risk Factors that May Affect Future Operating Performance” set forth in this quarterly report on Form 10-Q in Part II, Item 1A “Risk Factors.” The following discussion provides information and analysis of our results of operations for the three and nine months ended September 30, 2007 and our liquidity and capital resources. You should read the following discussion in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this quarterly report, as well as other reports we file with the Securities and Exchange Commission.

 

Results of Operations

 

Overview

 

Amkor is one of the world’s largest subcontractors of semiconductor packaging and test services. Packaging and test are integral parts of the process of manufacturing semiconductor devices. This process begins with silicon wafers and involves the fabrication of electronic circuitry into complex patterns, thus creating large numbers of individual chips on the wafers. The fabricated wafers are then probed to ensure the individual devices meet design specifications. The packaging process creates an electrical interconnect between the semiconductor chip and the system board. In packaging, individual chips are separated from the fabricated semiconductor wafers, and typically attached through wire bond or wafer bump technologies to a substrate or leadframe, and then encased in a protective material. Packages are designed to provide optimal electrical connectivity and thermal performance. The packaged chips are then tested using sophisticated equipment to ensure that each packaged chip meets its design specifications. Increasingly, packages are custom designed for specific chips and specific end-market applications. We are able to provide turnkey solutions including semiconductor wafer bump, wafer probe, wafer backgrind, package design and assembly, test and drop shipment services.

 

Our net income for the three months ended September 30, 2007 was $60.6 million, or $0.30 per diluted share, versus net income for the three months ended September 30, 2006 of $52.8 million, or $0.27 per diluted share. In the three months ended September 30, 2007, sales decreased $24.7 million or 3.5% to $689.1 million from $713.8 million in the three months ended September 30, 2006 driven by a decrease in leadframe packages and modules business partially offset by an increase in our advanced laminate packages.

Gross margin for the three months ended September 30, 2007 was 24.7% compared to 24.9% for the three months ended September 30, 2006 primarily resulting from higher labor costs offset by lower material costs due to a change in product mix.

 

We continue to manage our production lines, allocate assets and selectively expand our capacity. Capital additions during the three months ended September 30, 2007 totaled $77.7 million. We expect that our full year 2007 capital additions will be in the range of $285 million to $300 million, which is subject to adjustment based on business conditions. Our capital investments have been, and we expect will continue to be, primarily focused on increasing our advanced laminate, test services, wafer bump and flip chip packaging capacity. In addition, we continue to make investments in our information systems.

 

Cash provided by operating activities increased $33.8 million to $414.5 million for the nine months ended September 30, 2007 as compared to $380.7 million for the nine months ended September 30, 2006. Cash flows from operations generated during the nine months ended September 30, 2007 funded capital purchases of $159.9 million leaving $254.6 million of free cash flow (defined below). Please see the Liquidity and Capital Resources section below for a further analysis of the changes in our financial position and cash flows during the first nine months of 2007.

 

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:

 

 

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

 

Net Sales.  Sales decreased $24.7 million, or 3.5%, to $689.1 million in the three months ended September 30, 2007 from $713.8 million in the three months ended September 30, 2006 driven by a decrease in leadframe packages and modules business partially offset by an increase in our advanced laminate packages.

 

Packaging Net Sales.  Packaging net sales decreased $24.4 million, or 3.8%, to $616.5 million in the three months ended September 30, 2007 from $640.9 million in the three months ended September 30, 2006. While net sales decreased 3.8%, packaging unit volume increased 2.1% to 2.3 billion units in the three months ended September 30, 2007 from 2.2 billion units in the third quarter of 2006. The decrease in net sales is principally driven by a change in product mix that reflects a decrease in leadframe packages and our modules business partially offset by an increase in our advanced laminate packages. To a lesser extent, price reductions contributed to the decline in net sales.

 

Test Net Sales.  Test net sales were unchanged at $73.1 million for both the three months ended September 30, 2007 and the three months ended September 30, 2006.

 

Cost of Sales.  Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Because a substantial portion of our costs at our factories is fixed, relatively insignificant increases or decreases in capacity utilization rates can have a significant effect on our gross margin.

 

Material costs as a percent of revenue decreased to 37.3% for the three months ended September 30, 2007 from 39.2% for the three months ended September 30, 2006 because packages with less material content accounted for a larger portion of our sales resulting in lower overall material costs.

 

Labor costs as a percentage of net sales increased to 16.4% for the three months ended September 30, 2007 from 14.4% for the three months ended September 30, 2006 due to higher labor and benefit costs attributable in part to wage increases and the weakening of the U.S. dollar partially offset by a net reduction in headcount.

As a percentage of net sales, other manufacturing costs were essentially flat at 21.6% for the three months ended September 30, 2007 and 21.5% for the three months ended September 30, 2006.

 

Stock-based compensation included in cost of sales was $0.3 million for the three months ended September 30, 2007 and $0.9 million for the three months ended September 30, 2006.

 

Gross Profit.  Gross profit decreased $7.9 million to $169.9 million, or 24.7% of net sales in the three months ended September 30, 2007 from $177.8 million, or 24.9% of net sales, in the three months ended September 30, 2006. The decrease in gross profit was due primarily to higher labor costs at our factories, partially offset by lower overall material costs due to a change in product mix.

 

Packaging Gross Profit.  Gross profit for packaging decreased $7.3 million to $147.8 million, or 24.0% of packaging net sales, in the three months ended September 30, 2007 from $155.1 million, or 24.2% of packaging net sales, in the three months ended September 30, 2006. The packaging gross profit decrease was due primarily to higher labor costs at our factories, partially offset by lower overall material costs from a change in product mix.

 

Test Gross Profit.  Gross profit for test decreased $0.2 million to $22.6 million, or 30.9% of test net sales, in the three months ended September 30, 2007 from $22.8 million, or 31.2% of test net sales, in the three months ended September 30, 2006. This slight decrease was primarily due to increased depreciation costs as a result of our capital expenditures for test equipment.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses decreased $4.4 million, or 6.4%, to $64.1 million for the three months ended September 30, 2007, from $68.5 million for the three months ended September 30, 2006 principally reflecting higher spending in the three months ended September 30, 2006 for professional fees due to the stock option investigation and other related matters. This is partially offset by increased spending in the three months ended September 30, 2007 for professional fees related to our global enterprise resource planning implementation and increased legal costs.

 

Research and Development.  Research and development activities are currently focused on advanced laminate, flip chip and wafer level packaging services. Research and development expenses increased $0.6 million to $10.3 million, or 1.5% of net sales for the three months ended September 30, 2007 from $9.7 million, or 1.4% of net sales in the three months ended September 30, 2006 primarily due to increased labor and benefits costs.

 

Gain on Sale of Specialty Test Operations.  In October 2005, we divested a specialty test operation and recognized a gain of $4.4 million. In the three months ended September 30, 2007, we recognized an additional gain of $1.7 million as a result of an earn-out provision provided in the asset purchase agreement. We received the cash in October 2007.

 

Other (Income) Expense.  Other expenses, net, decreased $9.2 million from the three months ended September 30, 2006 to the three months ended September 30, 2007. This decrease is primarily driven by a decrease of $7.2 million in net interest expense in the three months ended September 30, 2007 compared to the three months ended September 30, 2006, due to our continued focus on strengthening our liquidity by reducing debt as well as refinancing debt with lower interest rate borrowings.

 

Income Tax Expense.  Income tax expense for the three months ended September 30, 2007 and 2006 is attributable to foreign withholding taxes and income taxes at certain of our profitable foreign operations. For the full year of 2007, we anticipate an effective income tax rate of approximately 7.6%, which reflects the utilization of foreign net operating loss carryforwards, tax holidays, and the release of a valuation allowance in certain foreign jurisdictions. The effective rate for the three months ended September 30, 2007 and 2006 was 1.9% and 5.2%, respectively. The decrease is primarily attributable to the release of a valuation allowance on certain foreign deferred tax assets during the three months ended September 30, 2007. Management believes that sufficient positive evidence now exists to release the remaining valuation allowance for these deferred tax assets. The positive evidence we considered was: (i) the consistent profitability of these operations over a two year period; (ii) the increase in profitability experienced in the third quarter of 2007 based on demand for the products from these operations; and (iii) the visibility we have over the next two years for these operations which is the time frame we expect to realize the deferred tax assets.

At September 30, 2007, we had U.S. net operating loss carryforwards totaling $345.0 million, which expire at various times through 2027. Additionally, at September 30, 2007, we had $48.2 million of non-U.S. operating loss carryforwards, which expire at various times through 2012. We maintain a valuation allowance on substantially all of our deferred tax assets, including our net operating loss carryforwards, and will release such valuation allowance as the related deferred tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude that the deferred tax assets will be realized.

 

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

 

Net Sales.  Net sales decreased $53.0 million, or 2.6%, to $1,992.6 million for the nine months ended September 30, 2007 from $2,045.5 million for the nine months ended September 30, 2006 principally driven by a decrease in leadframe packages partially offset by an increase in our advanced laminate packages.

 

Packaging Net Sales.  Packaging net sales decreased $62.0 million, or 3.4%, to $1,779.1 million in the nine months ended September 30, 2007 from $1,841.1 million in the nine months ended September 30, 2006. Packaging unit volume decreased 4.1% to 6.3 billion units in the nine months ended September 30, 2007 from 6.6 billion units in the 2006 period. The decrease in net sales and unit volume is principally attributed to a decrease in leadframe packages partially offset by an increase in our advanced laminate packages. To a lesser extent, price reductions contributed to the decline in net sales.

 

Test Net Sales.  Test net sales increased $9.2 million, or 4.5%, to $214.2 million in the nine months ended September 30, 2007 from $205.0 million in the nine months ended September 30, 2006, principally due to increased test times resulting from a change in product mix.

 

Cost of Sales.  Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Because a substantial portion of our costs at our factories is fixed, relatively insignificant increases or decreases in capacity utilization rates can have a significant effect on our gross margin.

 

Material costs as a percent of revenue decreased from 39.2% for the nine months ended September 30, 2006 to 37.7% for the nine months ended September 30, 2007 primarily due to a change in product mix resulting in lower material costs per product.

 

Labor as a percentage of net sales, increased to 16.5% for the nine months ended September 30, 2007, from 14.8% for the nine months ended September 30, 2006, due to increased labor wages at our factories, and the depreciation of the U.S. dollar, partially offset by a net reduction in headcount.

 

Other manufacturing costs increased to 21.8% for the nine months ended September 30, 2007, from 21.5% for the nine months ended September 30, 2006, due to lower revenue. Other manufacturing costs in absolute dollars decreased as a result of the decreased volume partially offset by increased depreciation costs as a result of our capital expenditures which are focused on increasing our advanced laminate, test services, wafer bump and flip chip packaging capacity.

 

Stock-based compensation included in cost of sales amount to $1.0 million for the nine months ended September 30, 2007 compared to $1.6 million for the nine months ended September 30, 2006.

 

Gross Profit.  Gross profit decreased $22.8 million to $479.0 million, or 24.0% of net sales in the nine months ended September 30, 2007 from $501.8 million, or 24.5% of net sales, in the nine months ended September 30, 2006. This decrease in gross profit was due primarily to higher labor costs at our factories partially offset by lower overall material costs due to product mix.

 

Packaging Gross Profit.  Gross profit for packaging decreased $24.7 million to $412.9 million, or 23.2% of packaging net sales, in the nine months ended September 30, 2007 from $437.6 million, or 23.8% of packaging net sales, in the nine months ended September 30, 2006. The packaging gross profit decrease was primarily due to higher labor costs at our factories offset by lower overall material costs due to a change in product mix.

 

Test Gross Profit.  Gross profit for test increased $0.4 million to $65.3 million, or 30.5% of test net sales, in the nine months ended September 30, 2007 from $64.9 million, or 31.7% of test net sales, in the nine months ended

September 30, 2006. This increase was primarily due to increased test times resulting from a change in product mix partially offset by increased depreciation costs as a result of our capital expenditures.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased slightly by $0.5 million, or 0.2%, to $189.1 million for the nine months ended September 30, 2007, from $188.6 million for the nine months ended September 30, 2006. In the nine months ended, September 30, 2007 we had increased spending on professional fees related to our global enterprise resource planning implementation and increased litigation activity. For the nine months ended September 30, 2006, we had increased spending for professional fees due to the stock option investigation and other related matters.

 

Research and Development.  Research and development activities are currently focused on advanced laminate, flip chip and wafer level packaging services. Research and development expenses increased $1.5 million to $30.9 million, or 1.6% of net sales for the nine months ended September 30, 2007 from $29.4 million, or 1.4% of net sales in the nine months ended September 30, 2006. Our increase in our research and development expenses was primarily related to increased labor and benefits costs.

 

Gain on Sale of Specialty Test Operations.  In October 2005, we divested a specialty test operation and recognized a gain of $4.4 million. In the three months ended September 30, 2007, we recognized an additional gain of $1.7 million as a result of an earn-out provision provided in the asset purchase agreement. We received the cash in October 2007.

 

Other (Income) Expense.  Other expenses, net, decreased $40.4 million to $123.2 million, or 6.2% of net sales, for the nine months ended September 30, 2007 from $163.6 million, or 8.0% of net sales, for the nine months ended September 30, 2006. In the nine months ended September 30, 2007 we recognized $15.9 million of debt retirement costs compared to $27.4 million in the nine months ended September 30, 2006. In addition, there was a decrease of $22.9 million in net interest expense in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, due to our continued focus to strengthen our liquidity by reducing debt as well as refinancing debt with lower interest rate instruments.

 

Income Tax Expense.  Income tax expense for the nine months ended September 30, 2007 and 2006 is attributable to foreign withholding taxes and income taxes at certain of our profitable foreign operations. For the full year 2007, we anticipate an effective income tax rate of approximately 7.6%, which reflects the utilization of foreign net operating loss carryforwards and tax holidays in certain foreign jurisdictions. The effective rate for the nine months ended September 30, 2007 and 2006 was 7.0%. The decrease attributable to the release of a valuation allowance on certain foreign deferred tax assets for the nine months ended September 30, 2007 was offset by an increase in tax in certain profitable foreign jurisdictions. Additionally, the effective tax rate for the nine months ended September 30, 2007 reflects certain discrete period items recorded in the first and second quarters of 2007.

 

At September 30, 2007, we had U.S. net operating loss carryforwards totaling $345.0 million, which expire at various times through 2027. Additionally, we had $48.2 million of non-U.S. net operating loss carryforwards, which expire at various times through 2012. We maintain a full valuation allowance on substantially all of our deferred tax assets, including our net operating loss carryforwards, and will release such valuation allowance as the related deferred tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude that the deferred tax assets will be realized.

 

Liquidity and Capital Resources

 

We generated net income of $126.2 million and $111.0 million for the nine months ended September 30, 2007 and 2006, respectively. During the nine months ended September 30, 2007 and 2006, we recorded in connection with refinancing transactions $15.9 million and $27.4 million, respectively of net debt retirement costs in connection with refinancing transactions. Our operating activities provided cash totaling $414.5 million and $380.7 million in the nine months ended September 30, 2007 and 2006, respectively. In March 2007, we used existing cash resources to retire the remaining $142.4 million in 5% convertible notes at maturity, and in June 2007 we redeemed the remaining $21.9 million of the 2009 10.5% senior subordinated notes outstanding with cash on hand.

In April 2007, we entered into a $300.0 million, 7-year secured credit facility with Woori Bank (“Term Loan”). The Term Loan is secured by substantially all the land, factories, and equipment located at our Korean facilities. The Term Loan bears interest at Woori’s base rate plus 50 basis points (6.61% as of September 30, 2007) and amortizes in 28 equal quarterly payments through April 2014. The proceeds of the Term Loan were used to refinance a $300.0 million second lien term loan due October 2010, which bore interest at a rate of LIBOR plus 450 basis points (9.86% at March 31, 2007). This financing transaction, together with payment of prepayment fees and accrued and unpaid interest, fully discharged all of our obligations under the second lien term loan and fully discharged all subsidiary guarantees and releases all the collateral securing the second lien term loan.

 

We have a significant level of debt, with $1,803.4 million outstanding at September 30, 2007, of which $161.9 million is current. The terms of our debt require significant scheduled principal payments in the coming years, including $27.7 million during the remainder of 2007, $151.5 million in 2008, $54.6 million in 2009, $54.7 million in 2010, $482.6 million in 2011 and $1,032.3 million thereafter.

 

The interest payments required on our debt are also substantial. For example, in the nine months ended September 30, 2007, we paid $89.8 million of interest. (See “Capital Additions and Contractual Obligations” below for a summary of principal and interest payments.) We were in compliance with all debt covenants at September 30, 2007 and expect to remain in compliance with these covenants through September 30, 2008.

 

In order to reduce leverage and future cash interest payments, we may from time to time repurchase our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transactions may be made in the open market or through privately negotiated transactions and are subject to the terms of our indentures and other debt agreements, market conditions and other factors.

 

We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. During the nine months ended September 30, 2007, we had capital additions of $192.6 million and for all of 2007 we currently anticipate making capital additions in the range of $285 million to $300 million, which estimate is subject to adjustment based on business conditions. Our 2007 capital additions budget remains focused on strategic growth areas of advanced laminate, test services, wafer bump and flip chip packaging capacity.

 

The source of funds for our operations, including making capital expenditures and servicing principal and interest obligations with respect to our debt, are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities, or proceeds from any additional debt or equity financing. As of September 30, 2007, we had cash and cash equivalents of $335.0 million and $99.8 million available under our senior secured revolving credit facility.

 

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities together with existing cash and cash equivalents and availability under our senior secured revolving credit facility will be sufficient to fund our working capital, capital expenditure and debt service requirements through at least September 30, 2008. Thereafter, our liquidity will continue to be affected by, among other things, the performance of our business, our capital expenditure levels and our ability to either repay debt out of operating cash flow or refinance debt with the proceeds of debt or equity offerings at or prior to maturity. If our performance or access to the capital markets differs materially from our expectations, our liquidity may be adversely impacted.

 

If we fail to generate the necessary net income or operating cash flows to meet the funding needs of our business beyond September 30, 2008 due to a variety of factors, including the cyclical nature of the semiconductor industry and the other factors discussed in Part II, Item 1A “Risk Factors”, our liquidity would be adversely affected. We would consider taking a variety of actions, including: attempting to reduce our high fixed costs (for example, closing facilities and reducing the size of our work force), curtailing or reducing planned capital additions, raising additional equity, borrowing additional funds, refinancing existing indebtedness or taking other actions. There can be no assurance, however, that we will be able to successfully take any of these actions, including adjusting our expenses sufficiently or in a timely manner, or raising additional equity, increasing borrowings or completing

refinancings on any terms or on terms which are acceptable to us. Our inability to take these actions as and when necessary would materially adversely affect our liquidity, results of operations and financial condition.

 

Many of our debt agreements restrict our ability to pay dividends. We have never paid a dividend to our shareholders and we do not anticipate paying any cash dividends in the foreseeable future. We expect cash flows, if any, to be used in the operation and expansion of our business and the repayment of debt.

 

Cash flows

 

Cash provided by operating activities was $414.5 million for the nine months ended September 30, 2007 compared to $380.7 million for the nine months ended September 30, 2006. Free cash flow (defined below) increased by $126.2 million to $254.5 million for the nine months ended September 30, 2007 compared to $128.3 million for the nine months ended September 30, 2006.

 

Net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2007 and 2006 was as follows:

 

 

Operating activities:  Our cash flow from operating activities for the nine months ended September 30, 2007 increased $33.8 million to $414.5 million from $380.7 million for the nine months ended September 30, 2006. This increase in operating cash flows is a result of positive changes in assets and liabilities and lower interest paid, partially offset by the payment of prepayment fees in connection with refinancings. Our operating income for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 and adjusted for depreciation and amortization and other operating activities and non-cash items decreased $31.3 million largely attributed to decreased utilization of our capacity and our significant fixed costs at our factories. Net interest expense for the nine months ended September 30, 2007 decreased by $22.9 million as compared with the nine months ended September 30, 2006 as a result of reduced debt levels as well as refinancing debt with lower interest rate instruments. Operating cash flows for the nine months ended September 30, 2007 were reduced by $9.0 million for prepayment fees in connection with refinancing our second lien term loan. Changes in assets and liabilities increased operating cash flows by $47.3 million for the nine months ended September 30, 2007 compared with the nine months ended September 30, 2006 driven largely by reduced levels of receivables, inventory and accounts payable in line with the reduced unit volumes and changes in sales mix as well as an increase in employee benefit liabilities. Other changes in operating activities including foreign currency losses, other income and expenses, taxes and minority interest accounted for $3.8 million of the increase in operating cash flows.

 

Investing activities:  Our cash flows used in investing activities for the nine months ended September 30, 2007 decreased by $95.9 million to $156.6 million from $252.5 million for the nine months ended September 30, 2006. This decrease was primarily due to a $92.5 million decrease in payments for property, plant and equipment from $252.4 million in the nine months ended September 30, 2006 to $159.9 million in the nine months ended September 30, 2007. Investing activities were higher in 2006 principally as a result of our expansion of our facilities in China and Singapore. Investing activities during the nine months ended September 30, 2007 included increased proceeds from the sale of property, plant and equipment of $5.1 million primarily attributable to a sale of real property in Korea that had been used for administrative purposes.

 

Financing activities:  Our net cash used in financing activities for the nine months ended September 30, 2007 was $169.0 million, compared with $145.7 million for the nine months ended September 30, 2006. The net cash used in financing activities for the nine months ended September 30, 2007 was primarily driven by the repayment of the $142.4 million of our 5% convertible notes at maturity in March 2007, and the redemption of the remaining $21.9 million 2009 10.5% senior subordinated notes in June 2007. The net cash used in financing activities for the nine months ended September 30, 2006 was primarily driven by the repayment of the $132.0 million for our 5.75%

convertible subordinated notes at maturity in June 2006. Proceeds from the issuance of stock through our stock compensation plans for the nine months ended September 30, 2007 was $36.4 million, compared with $5.0 million for the nine months ended September 30, 2006.

 

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. Free cash flow represents net cash provided by operating activities less investing activities related to the acquisition of property, plant and equipment. Free cash flow is not defined by generally accepted accounting principles (“GAAP”) and our definition of free cash flow may not be comparable to similar companies and should not be considered a substitute for cash flow measures in accordance with GAAP. We believe free cash flow provides our investors and analysts useful information to analyze our liquidity and capital resources.

 

 

Debt Instruments and Related Covenants

 

We now have, and for the foreseeable future will continue to have, a significant amount of indebtedness. Our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to service payments on our debt. (See table included in “Capital Additions and Contractual Obligations” below). Total debt decreased to $1,803.4 million at September 30, 2007 from $2,005.3 at December 31, 2006. In March 2007, we used existing cash resources to retire the remaining $142.4 million in 5% convertible notes at maturity. In June 2007, we redeemed the remaining $21.9 million of the 2009 10.5% Senior Subordinated Notes outstanding with cash on hand. Amkor Technology, Inc. also guarantees certain debt of our subsidiaries.

 

We were in compliance with all our debt covenants contained in our loan agreements at September 30, 2007. Additional details about our debt are available in Note 11 accompanying the Consolidated Financial Statements included within Part I, Item 1 of this quarterly report.

 

Capital Additions and Contractual Obligations

 

Our capital additions were $192.6 million for the nine months ended September 30, 2007. We expect that our full year 2007 capital additions will be in the range of $285 million to $300 million, as discussed above in the “Overview.” Ultimately, the amount of our 2007 capital additions will depend on several factors including, among others, the performance of our business, the need for additional capacity to service anticipated customer demand and the availability of suitable cash flow from operations or financing. The following table reconciles our activity related to property, plant and equipment payments as presented on the Condensed Consolidated Statements of Cash Flow statement to property, plant and equipment additions as reflected in the Consolidated Balance Sheets:

 

The following table summarizes our contractual obligations at September 30, 2007, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

 

 

 

 

In addition to the obligations identified in the table above, non-current liabilities recorded in our Consolidated Balance Sheet at September 30, 2007, include $206.0 million related to pension and severance obligations, which the timing of the ultimate payment of these obligations was uncertain at September 30, 2007. Additionally, $21.1 million of customer advances are included in non-current liabilities as of September 30, 2007 and relate to supply agreements with customers where we commit capacity in exchange for customer prepayment of services. Generally customers forfeit the prepayment if the capacity is not utilized per contract terms.

 

The table above excludes liabilities we have with respect to unrecognized tax benefits. As discussed in Note 4 to our Consolidated Financial Statements, we adopted the provisions of FIN 48 on January 1, 2007. At September 30, 2007, the gross amount of our unrecognized tax benefits was approximately $11.7 million, which does not generally represent future cash payments because of the interaction with other tax attributes available such as net operating loss or tax credit carryforwards. Due to the high degree of uncertainty regarding the amount and the timing of any future cash outflows associated with our FIN 48 liabilities, we are unable to reasonably estimate the amount and period of ultimate settlement with the various taxing authorities. As management would expect cash outflows with respect to FIN 48 liabilities to occur over an indeterminate number of future years, it is unlikely that any payment of existing liabilities would have a material adverse affect on liquidity in any future period.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet guarantees or other off-balance sheet arrangements as of September 30, 2007. Operating lease commitments are included in the contractual obligation table above.

 

Contingencies, Indemnifications and Guarantees

 

Details about our contingencies, indemnifications and guarantees are available in Note 14 accompanying the Consolidated Financial Statements included within Part I, Item 1 of this quarterly report. As for our contingencies related to our patent litigation, securities litigation, and other litigation and legal matters, if an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our results of operations in the period in which the ruling occurs. Our evaluation of the potential impact from the legal proceedings, discussed in Note 14 accompanying the Consolidated Financial Statements, on our financial position, results of operations, or cash flows, could change in the future.

Critical Accounting Policies

 

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. During the nine months ended September 30, 2007, there have been no significant changes in our critical accounting policies.

 

New Accounting Pronouncements

 

For information regarding recent accounting pronouncements, see Note 1 to the Consolidated Financial Statements included within Part I, Item 1 of this quarterly report.