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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 2)
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 000-29472
AMKOR TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1722724
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1345 ENTERPRISE DRIVE
WEST CHESTER, PA 19380
(610) 431-9600
(Address of principal executive offices and zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2006
5% CONVERTIBLE SUBORDINATED NOTES DUE 2007
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K/A or any amendment to this Form 10-K/A.[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold as of the last business day of the registrant's most recently
completed second fiscal quarter, June 30, 2002, was approximately $567,696,638.
The number of shares outstanding of each of the issuer's classes of common
equity, as of February 28, 2003, was as follows: 165,155,936 shares of Common
Stock, $0.001 par value.
Documents Incorporated by Reference: None.
EXPLANATORY NOTE: The purpose of this Form 10-K/A No. 2 is to amend the
Form 10-K/A No. 1 filed June 25, 2003. We have made changes to Management's
Discussion and Analysis of Financial Condition and Results of Operations (Item
7) and to the Notes to Consolidated Financial Statements. In order to preserve
the nature and character of the disclosures set forth in our 10-K/A No. 1 as
originally filed, no attempt has been made in this amendment to modify or update
such disclosures. As a result, this 10-K/A contains forward looking information
which has not been updated for events subsequent to March 27, 2003, the date of
our original 2003 10-K, and we direct you to our SEC filings filed subsequent to
March 27, 2003 for additional information.
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TABLE OF CONTENTS
Page
----
PART I ........................................................................................... 3
Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 14
Item 3. Legal Proceedings................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................... 17
PART II........................................................................................... 17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 17
Item 6. Selected Financial Data........................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 46
Item 8. Financial Statements and Supplementary Data....................................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 82
PART III.......................................................................................... 82
Item 10. Directors, Executive Officers and Control Persons; Compliance with Section 16(a)
of the Exchange Act............................................................... 82
Item 11. Executive Compensation............................................................ 85
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................... 89
Item 13. Certain Relationships and Related Transactions.................................... 91
PART IV........................................................................................... 93
Item 14. Controls and Procedures........................................................... 93
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 93
All references in this annual report to "Amkor," "we," "us," "our" or the
"company" are to Amkor Technology, Inc. and its subsidiaries. We refer to the
Republic of Korea, which is also commonly known as South Korea, as "Korea." All
references in this annual report to "ASI" are to Anam Semiconductor, Inc. and
its subsidiaries, an equity investment of ours. As of December 31, 2002, we
owned 21% of ASI's outstanding voting stock. PowerQuad, SuperBGA, FlexBGA,
ChipArray, PowerSOP, MicroLeadFrame, Amkor Technology are trademarks or
registered trademarks of Amkor Technology, Inc. Also, microBGA is a registered
trademark of Tessera, Inc. All other trademarks appearing herein are held by
their respective owners.
2
PART I
ITEM 1. BUSINESS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This business section contains forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors that May Affect Future Operating Performance" in Item
7 of this annual report. These factors may cause our actual results to differ
materially from any forward-looking statement.
OVERVIEW
Amkor is the world's largest subcontractor of semiconductor packaging and
test services. Amkor was incorporated in Delaware in 1997. The company has built
a leading position by:
- Providing a broad portfolio of packaging and test technologies and
services;
- Maintaining a leading role in the design and development of new
package and test technologies;
- Cultivating long-standing relationships with customers, including
many of the world's leading semiconductor companies;
- Developing expertise in high-volume manufacturing; and
- Diversifying our operational scope by establishing production
capabilities in China, Japan and Taiwan, in addition to
long-standing capabilities in Korea and the Philippines.
The semiconductors that we package and test for our customers ultimately
become components in electric systems used in communications, computing,
consumer, industrial, automotive and military applications. Our customers
include, among others, Agilent Technologies, Atmel Corporation, Intel
Corporation, LSI Logic Corporation, Mediatek Inc., Philips Electronics N.V.,
R.F. Microdevices, ST Microelectronics PTE, Sony Semiconductor Corporation and
Toshiba Corporation. The outsourced semiconductor packaging and test market is
very competitive. We also compete with the internal semiconductor packaging and
test capabilities of many of our customers.
Packaging and test are an integral part of the semiconductor manufacturing
process. Semiconductor manufacturing begins with silicon wafers and involves the
fabrication of electronic circuitry into complex patterns, thus creating
individual chips on the wafers. The packaging process creates an electrical
interconnect between the semiconductor chip and the system board. In packaging,
the fabricated semiconductor wafers are cut into individual chips which are then
attached to a substrate and encased in a protective material to provide optimal
electrical and thermal performance. Increasingly, packages are custom designed
for specific chips and specific end-market applications. The packaged chips are
then tested using sophisticated equipment to ensure that each packaged chip
meets its design specifications.
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. (ASI). On February 28, 2003, we sold our wafer fabrication
services business to ASI. We have restated our historical results to reflect our
wafer fabrication services segment as a discontinued operation.
A web site featuring current information regarding Amkor Technology, Inc.
can be found on the internet at www.amkor.com.
3
INDUSTRY BACKGROUND
Semiconductor devices are the essential building blocks used in most
electronic products. As semiconductor devices have evolved, there have been
three important consequences: (1) an increase in demand for computers and
consumer electronics fostered by declining prices for such products; (2) the
proliferation of semiconductor devices into diverse end products such as
consumer electronics, communications equipment and automotive systems; and (3)
an increase in the semiconductor content in electronic products.
TRENDS TOWARD OUTSOURCING
Historically, semiconductor companies packaged semiconductors primarily in
their own factories and relied on subcontract providers to handle overflow
volume. In recent years, semiconductor companies have increasingly outsourced
their packaging and testing to subcontract providers for the following reasons:
SUBCONTRACT PROVIDERS HAVE DEVELOPED EXPERTISE IN ADVANCED PACKAGING
TECHNOLOGIES.
Semiconductor companies are facing ever-increasing demands for
miniaturization, higher lead counts and improved thermal and electrical
performance in semiconductor devices. This trend, coupled with increasing
complexity in the design of semiconductor devices has led many semiconductor
companies to view packaging as an enabling technology requiring sophisticated
expertise and technological innovation. Many semiconductor companies have had
difficulty developing the adequate internal capabilities and are relying on
subcontract providers of packaging and test services as a key source of new
package designs.
SUBCONTRACT PROVIDERS CAN OFFER SHORTER TIME TO MARKET FOR NEW PRODUCTS
BECAUSE THEIR RESOURCES ARE DEDICATED TO PACKAGING AND TEST SOLUTIONS.
We believe that semiconductor companies are seeking to shorten the time to
market for their new products, and that having the right packaging technology
and capacity in place is a critical factor in reducing delays for these
companies.
Semiconductor companies frequently do not have sufficient time to develop
their packaging and test capabilities or the equipment and expertise to
implement new packaging technology in volume. For this reason, semiconductor
companies are leveraging the resources and capabilities of subcontract packaging
and test companies to deliver their new products to market more quickly.
MANY SEMICONDUCTOR MANUFACTURERS DO NOT HAVE THE ECONOMIES OF SCALE TO
OFFSET THE SIGNIFICANT COSTS OF BUILDING PACKAGING AND TEST FACTORIES.
Semiconductor packaging is a complex process requiring substantial
investment in specialized equipment and factories. As a result of the large
capital investment required, this manufacturing equipment must operate at a high
capacity level for an extended period of time to be cost effective. Shorter
product life cycles, faster introductions of new products and the need to update
or replace packaging equipment to accommodate new products have made it more
difficult for semiconductor companies to maintain cost effective manufacturing
and capacity utilization. Subcontract providers of packaging and test services,
on the other hand, can use their equipment to support a broad range of
customers, potentially generating greater manufacturing economies of scale.
THE AVAILABILITY OF HIGH QUALITY PACKAGING AND TESTING FROM SUBCONTRACTORS
ALLOWS SEMICONDUCTOR MANUFACTURERS TO FOCUS THEIR RESOURCES ON SEMICONDUCTOR
DESIGN AND WAFER FABRICATION.
With semiconductor process technology migrating to larger semiconductor
wafers with more and smaller semiconductor dies, new wafer fabrication
facilities are requiring investments of $2 billion or more. Subcontractors have
demonstrated their ability to deliver advanced packaging and test solutions at a
competitive price. Accordingly, semiconductor companies are choosing to focus
their capital resources on core wafer fabrication activities rather than invest
in advanced packaging and test technology.
4
THERE ARE A GROWING NUMBER OF SEMICONDUCTOR COMPANIES WITHOUT FACTORIES,
KNOWN AS "FABLESS" COMPANIES, THAT OUTSOURCE ALL OF THE MANUFACTURING OF THEIR
SEMICONDUCTOR DESIGNS.
Fabless semiconductor companies focus exclusively on the semiconductor
design process and outsource virtually every significant step of the
semiconductor manufacturing process. We believe that fabless semiconductor
companies will continue to be a significant driver of growth in the subcontract
packaging and test industry.
These outsourcing trends, combined with the growth in the number of
semiconductor devices being produced and sold, are increasing demand for
subcontracted packaging and test services. Today, nearly all of the world's
major semiconductor companies use packaging and test service subcontractors for
at least a portion, if not all, of their packaging and test needs.
COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
BROAD OFFERING OF PACKAGE DESIGN, PACKAGING AND TEST SERVICES
Integrating advanced semiconductor technology into electronic end products
often poses unique thermal and electrical challenges, and Amkor employs a large
number of design engineers to create package formats that solve these
challenges. Amkor produces more than 1,000 package types, representing one of
the broadest package offerings in the semiconductor industry. We provide
customers with a wide array of packaging alternatives including traditional
leadframe, advanced leadframe and laminate packages, in both wirebond and flip
chip formats. We are also a leading assembler of complementary metal oxide
silicon ("CMOS") image sensor devices used in digital cameras and cellular
phones, and micro-electromechanical system ("MEMS") devices used in a variety of
end markets, including automotive, industrial and personal entertainment. We
also offer an extensive line of services to test digital, logic, analog and
mixed signal semiconductor devices. We believe that the breadth of our packaging
and test services is important to customers seeking to reduce the number of
their suppliers.
LEADING TECHNOLOGY INNOVATOR
We believe that we are one of the leading providers of advanced
semiconductor packaging and test solutions. We have designed and developed
several state-of-the-art leadframe and laminate package formats including our
MicroLeadFrame(TM), VisionPak(TM), PowerQuad(R), SuperBGA(R), fleXBGA(R) and
ChipArray(R) BGA packages. To maintain our leading industry position, we have
more than 300 employees engaged in research and development focusing on the
design and development of new semiconductor packaging and test technology. We
work closely with customers and technology partners to develop new and
innovative package designs.
LONG-STANDING RELATIONSHIPS WITH PROMINENT SEMICONDUCTOR COMPANIES
Our customer base consists of more than 400 companies, including most of
the world's largest semiconductor companies. Over the last three decades Amkor
has developed long-standing relationships with many of our customers.
ADVANCED MANUFACTURING CAPABILITIES
We believe that our company's manufacturing excellence has been a key
factor in our success in attracting and retaining customers. We have worked with
our customers and our suppliers to develop proprietary process technologies to
enhance our existing manufacturing capabilities. These efforts have directly
resulted in reduced time to market, increased quality and lower manufacturing
costs. We believe our manufacturing cycle times are among the fastest available
from any subcontractor of packaging and test services.
5
COMPETITIVE DISADVANTAGES
You should be aware that our competitive strengths may be diminished or
eliminated due to certain challenges faced by our company and which our
principal competitors may not face, including the following:
- High Leverage and Restrictive Covenants -- Our substantial
indebtedness and the covenants contained in the agreements with our
lenders could materially restrict our operations and adversely
affect our financial condition.
- Risks Associated With International Operations -- We depend on our
factories in the Philippines, Korea, Japan, Taiwan and China. Many
of our customers' operations are also located outside of the U.S. To
the extent political or economic instability or military actions
occur in any of these regions, our operations could be harmed.
- Difficulties Integrating Acquisitions -- We face challenges as we
integrate new and diverse operations and try to attract qualified
employees to support our expansion plans.
In addition, we and our competitors face a variety of operational and
industry risks inherent to the industry in which we operate. For a complete
discussion of risks associated with our business, please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors that May Affect Future Operating Performance" in Item 7 of this annual
report.
STRATEGY
To build upon our leading industry position and to remain a preferred
subcontractor of semiconductor packaging and test services, we are pursuing the
following strategies:
CAPITALIZE ON OUTSOURCING TREND
We believe that while the outsourcing trend has been impacted during the
recent industry downturn, there remains a long-term trend towards more
outsourcing on the part of semiconductor companies. During this downturn, we
believe that many vertically integrated semiconductor companies increased the
use of their in-house packaging and test capabilities in order to minimize the
impact of significant excess internal capacity that resulted from sharply
lowered demand. At the same time, however, a number of vertically integrated
semiconductor companies accelerated their use of outsourcing. In January 2001,
we commenced a 60% Amkor-owned venture with Toshiba Corporation, in which
Toshiba outsourced an entire packaging and test factory to the venture. We also
reached agreement in 2002 with Agilent Technologies, whereby Agilent has ceased
the packaging and testing of certain package types for its semiconductor devices
used in printers, and is now using Amkor as the exclusive provider of packaging
and test services for these package types. We intend to continue to capitalize
on the expected growth in the outsourcing of semiconductor packaging and test
services. We believe semiconductor companies will increasingly outsource
packaging and test services to companies who can provide advanced technology and
high-quality, high-volume manufacturing expertise.
LEVERAGE SCALE AND SCOPE OF PACKAGING AND TEST CAPABILITIES
We are committed to expanding both the scale of our operations and the
scope of our packaging and test services. We believe that our scale and scope
allow us to provide cost-effective solutions to our customers in the following
ways:
- We have the capacity to absorb large orders and accommodate quick
turn-around times;
- We use our size and industry position to obtain low pricing on
materials and manufacturing equipment; and
- We offer an industry-leading breadth of packaging and test services
and can serve as a single source for many of our customers.
6
MAINTAIN OUR TECHNOLOGY LEADERSHIP
We intend to continue to develop leading-edge packaging technologies. We
believe that our focus on research and product development will enable us to
enter new markets early, capture market share and promote the adoption of our
new package designs as industry standards. We seek to enhance our in-house
research and development capabilities through the following activities:
- Collaborating with customers to gain access to technology roadmaps
for next generation semiconductor designs and to develop new
packages that satisfy the requirements of those technology roadmaps;
- Collaborating with companies, such as Toshiba Corporation, Cisco
Systems, Ericsson Corporation and Nokia Group, to design new
packages that function with the next generation of electronic
products; and
- Implementing new package designs by entering into technology
alliances and by licensing leading-edge designs from others. For
example, we have entered into a strategic alliance with Sharp
Corporation to promote chip scale packaging with fleXBGA(R). We have
licensed from Tessera, Inc. its microBGA(R) design. We have also
licensed flip chip package technology from LSI Logic Corporation and
wafer bumping technology from Flip Chip Technologies and Unitive
Technologies. In general, these license agreements are
non-exclusive, royalty-bearing arrangements with terms extending to
various dates between 2008 and 2011.
BROADEN THE GEOGRAPHICAL SCOPE OF OUR MANUFACTURING BASE
Prior to 2001, our company's manufacturing operations were centered in
Korea and the Philippines. In order to diversify our operational footprint and
better serve our customers, we adopted a strategy of expanding our operational
base to key microelectronic manufacturing areas of Asia. During 2001, we
commenced a joint venture with Toshiba Corporation in Japan, we acquired two
businesses in Taiwan, and we established a new factory in China. Our goal is to
build operational scale in these new geographic locations and capitalize on
growth opportunities in their respective markets.
PROVIDE AN INTEGRATED, TURNKEY SOLUTION
We are able to provide a turnkey solution comprised of semiconductor
package design, packaging, test and drop shipment services. We believe that this
will enable customers to achieve faster time to market for new products and
improved cycle times.
STRENGTHEN CUSTOMER RELATIONSHIPS
We intend to further develop our long-standing customer relationships. We
believe that because of today's shortened technology life cycles, integrated
communications are crucial to speed time to market. We have customer support
personnel located near the facilities of major customers and in acknowledged
technology centers. These support personnel work closely with customers to plan
production for existing packages as well as to develop requirements for the next
generation of packaging technology. In addition, we are implementing direct
electronic links with our customers to enhance communication and facilitate the
flow of real-time engineering data and order information.
PURSUE STRATEGIC ACQUISITIONS
We are evaluating candidates for strategic acquisitions and joint ventures
to strengthen our business and expand our geographic reach. We believe that
there are many opportunities to acquire the in-house packaging operations of our
customers and competitors. To the extent we acquire operations of our customers,
we intend to structure any such acquisition to include long-term supply
contracts with those customers. In addition, we intend to enter new markets near
clusters of wafer foundries, which are large sources of demand for packaging and
test services.
7
PACKAGING AND TEST SERVICES
PACKAGING SERVICES
We offer a broad range of package formats designed to provide our
customers with a full array of packaging solutions. Our packages are divided
into two families: traditional, which includes principally traditional leadframe
products, and advanced packages, which includes principally advanced leadframes
and laminate products.
In response to the increasing demands of today's high-performance
electronic products, semiconductor packages have evolved from traditional
leadframe packages and now include advanced leadframe and laminate formats. The
differentiating characteristics of these package formats include (1) the size of
the package, (2) the number of electrical connections the package can support,
(3) the thermal and electrical characteristics of the package, and (4) in the
case of our System-in-Package family of laminate packages, the integration of
multiple active and passive components in a single package.
As semiconductor devices increase in complexity, they often require a
larger number of electrical connections. Leadframe packages are so named because
they connect the electronic circuitry on the semiconductor device to the system
board through leads on the perimeter of the package. Our laminate products,
typically called ball grid array or BGA, use balls on the bottom of the package
to create the electrical connections. This array format can support larger
numbers of electrical connections.
Evolving semiconductor technology has allowed designers to increase the
level of performance and functionality in portable and handheld electronics
products, and this has led to the development of smaller package sizes. In
leading-edge packages, the size of the package is reduced to approximately the
size of the individual chip itself in a process known as chip scale packaging.
The following table sets forth by product type, for the periods indicated,
the amount of our packaging and test net revenues in millions of dollars and the
percentage of such net revenues:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN MILLIONS)
Traditional packages....................... $ 391 27.8% $ 439 32.8% $ 606 30.1%
Advanced packages.......................... 915 65.1 790 59.1 1,286 64.0
Test....................................... 100 7.1 108 8.1 118 5.9
------ ------ ------ ------ ------ ------
Total packaging and test net revenues... $1,406 100.0% $1,337 100.0% $2,010 100.0%
====== ===== ====== ====== ====== ======
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. (ASI). On February 28, 2003, we sold our wafer fabrication
services business to ASI. We restated our historical results to reflect our
wafer fabrication services segment as a discontinued operation.
TRADITIONAL PACKAGES
Traditional, leadframe-based packages are the most widely used package
family in the semiconductor industry and are typically characterized by a chip
encapsulated in a plastic mold compound with metal leads on the perimeter. The
most common traditional leadframe package is the SOIC, which accounts for
approximately one half of all integrated circuit (IC) packages produced by the
semiconductor industry. The traditional leadframe package family has evolved
from "through hole design", where the leads are plugged into holes on the
circuit board to "surface mount design", where the leads are soldered to the
surface of the circuit board. We offer a wide range of lead counts and body
sizes to satisfy variations in the size of customers' semiconductor devices.
8
Advanced Packages
Advanced Leadframe Packages
Through a process of continuous engineering and customization, we have
designed several advanced leadframe package types that are thinner and smaller
than traditional leadframe packages, with the ability to accommodate more leads
on the perimeter of the package. These advanced leadframe packages also have
superior thermal and electrical characteristics, which allow them to dissipate
heat generated by high-powered semiconductor devices while providing enhanced
electrical connectivity. We plan to continue to develop increasingly smaller
versions of these packages to keep pace with continually shrinking semiconductor
device sizes and demand for miniaturization of portable electronic products.
One of our newest advanced leadframe package offerings is the
MicroLeadFrame(TM), a family of "leadless" advanced leadframe packages that is
particularly well suited for radio frequency ("RF") and wireless applications.
Our smallest MicroLeadFrame package is only 2mm square and can fit on the head
of a pin.
Laminate Packages
The laminate family employs the ball grid array design which utilizes a
plastic or tape laminate substrate rather than a leadframe substrate and places
the electrical connections on the bottom of the package rather than around the
perimeter.
The ball grid array format was developed to address the need for higher
lead counts required by advanced semiconductor devices. As the number of leads
on leadframe packages increased, leads were placed closer to one another in
order to maintain the size of the package. The increased lead density resulted
in electrical shorting problems, and required the development of increasingly
sophisticated and expensive techniques for producing circuit boards to
accommodate the high number of leads.
The ball grid array format solved this problem by effectively creating
leads on the bottom of the package in the form of small bumps or balls that can
be evenly distributed across the entire bottom surface of the package, allowing
greater distance between the individual leads.
Our first package format in this family was the plastic ball grid array
(PBGA). We have subsequently designed or licensed additional ball grid array
package formats that have superior performance characteristics and features that
enable low-cost, high-volume manufacturing. These new laminate products include:
- SuperBGA(R), which includes a copper layer to dissipate heat and is
designed for low-profile, high-power applications;
- microBGA(R), which is designed to be approximately the same size as
the chip and uses a thinner tape substrate rather than a plastic
laminate substrate; and
- ChipArray(R) BGA, in which the package is only 1.5 mm larger than
the chip itself.
- Tape SuperBGA(R), TapeArray(TM) BGA and Wafer Level Package further
reduce package size and increase manufacturing efficiency.
Other Advanced Packages
To capitalize on an increasing customer demand for higher levels of system
integration, we created our "System-in-Package" (SiP) modules. SiP modules are
integrated solutions that use both advanced packaging and traditional surface
mount techniques to enable the combination of otherwise incompatible
technologies in a single, highly reliable package. Most of our SiP packages are
laminate based. By integrating various system elements into a single-function
block, the SiP module delivers space and power efficiency, high performance, and
lower production costs. Our SiP technology is being used to produce a variety of
devices including power amplifiers for cellular phones, memory cards and
sensors.
9
In order to accommodate the emerging use of digital imaging in a variety
of consumer products, we developed VisionPak(TM), a family of CMOS image
sensor-based packages that can be incorporated in such products as cellular
phones, PDAs, digital cameras and PCs.
We are also a leading outsourced provider of micro-electromechanical
system ("MEMS") based packages that are used in a broad range of industrial and
consumer applications, including automobiles and home entertainment.
TEST SERVICES
Amkor provides a complete range of test solutions including wafer probe,
final test, strip test, marking, bake, drypack, and tape and reel. The devices
we test encompass nearly all technologies produced in the industry today
including digital, linear, mixed signal, RF and integrated combinations of these
technologies. In 2002 Amkor tested over 1.1 billion units making Amkor one of
the highest volume testing companies in the subcontract packaging and test
business. We tested 21%, 16% and 17% of the units that we packaged in 2002, 2001
and 2000, respectively. Our test operations are geographically located with our
packaging operations to improve cycle time and facilitate information flow
between the various manufacturing operations and with our customers.
We are also an industry leader in providing innovative testing solutions
that help to lower the total cost of test for our customers. Two examples of
these innovative approaches are strip test and low cost RF test. In strip test,
we integrate the testing process into the packaging process. This is a
significant departure from the industry standard practice of treating packaging
and test as separate unlinked operations. Using strip test technology,
semiconductor devices are tested while they are still in the format they are
naturally produced in during the packaging process. This process is superior to
traditional non-integrated testing because it allows for large numbers of
devices to be tested at the same time, increases the number of good devices,
improves the quality of the finished device and improves throughput.
In the area of low cost RF test, we have developed one of the lowest cost
test solutions in the industry for testing simple RF devices that are pervasive
in today's cell phones and wireless LAN products. This test approach combines
inexpensive test hardware with integration software to achieve test costs that
are significantly less costly than industry standard test practices. We believe
that our low cost RF test technology provides a competitive advantage for Amkor
and when it is combined with our System in Package packaging technology, offers
our customers one of the industry's lowest total cost solutions.
Amkor also provides value added engineering services in addition to basic
device testing. These services include test program development, test hardware
development, test program conversion to lower cost test systems, device
characterization and reliability qualification testing. In total, Amkor can
provide all of the test engineering services needed by our customers to get
their products ready for high volume production. We believe that this service
will continue to become more valuable to our customers as they face resource
constraints not only in their production testing, but also in their test
engineering and development areas.
WAFER FABRICATION SERVICES
In January 1998, we entered into a supply agreement with ASI to market
wafer fabrication services provided by ASI's semiconductor wafer fabrication
facility using 0.35 micron, 0.25 micron and 0.18 micron complementary metal
oxide silicon ("CMOS") process technology provided by Texas Instruments pursuant
to technology assistance agreements with ASI. On February 28, 2003, we sold our
wafer fabrication services business to ASI. Additionally, we obtained a release
from Texas Instruments regarding our contractual obligations with respect to
wafer fabrication services to be performed subsequent to the transfer of the
business to ASI. We have restated our historical results to reflect our wafer
fabrication services segment as a discontinued operation. In connection with the
disposition of our wafer fabrication business, we recorded, in the first quarter
of 2003, $1.0 million in severance and other exit costs to close our wafer
fabrication services operations in Boise, Idaho and Lyon, France. Also in the
first quarter of 2003, we recognized a pre-tax gain on the disposition of our
wafer fabrication services business of $58.6 million ($51.5 million, net of
tax). The carrying value of the sold net assets associated with the business as
of February 28, 2003 was $2.4 million.
10
RESEARCH AND DEVELOPMENT
Our research and development efforts focus on developing new package
products and improving the efficiency and capabilities of our existing
production processes. We believe that technology development is one of the key
success factors in the semiconductor packaging and test market and believe that
we have a distinct advantage in this area. Our research and development efforts
support our customers' needs for smaller packages, increased performance, and
lower cost. We continue to invest our research and development resources to
further the development of flip chip interconnection solutions, chip scale
packages that are nearly the size of the semiconductor die,
micro-electromechanical system ("MEMS") devices used in a variety of end markets
including automotive, industrial and personal entertainment, our stacked chip
packages that stack as many as three semiconductor dies in a single package, and
System-in-Package technology, that uses both advanced packaging and traditional
surface mount techniques to enable the combination of technologies in a single
chip.
As of December 31, 2002, we had more than 300 employees in research and
development activities. In addition, we involve management and operations
personnel in research and development activities. In 2002, 2001 and 2000, we
spent $31.2 million, $38.8 million and $26.1 million, respectively, on research
and development. We expect to continue to invest in research and development at
similar levels in future periods.
We believe that our focus on research and product development and the
launching of leading-edge package technologies enables us to enter new markets
early, capture market share and promote the adoption of our new package
offerings as industry standards. We license our leading-edge technology such as
MicroLeadFrame(TM) to customers and competitors. We seek to enhance our in-house
research and development capability through the following activities:
- Collaborating with customers to gain access to technology roadmaps
for next generation semiconductor designs and to develop new
packages that satisfy the requirements of those technology roadmaps;
- Collaborating with companies, such as Toshiba Corporation, Cisco
Systems, Ericsson Corporation and Nokia Group, to design new
packages that function with the next generation of electronic
products; and
- Implementing new package designs by entering into technology
alliances and by licensing leading-edge designs from others. For
example, we have entered into a strategic alliance with Sharp
Corporation to promote chip scale packaging with fleXBGA(R). We have
licensed from Tessera, Inc. their microBGA(R) design. We have also
licensed flip chip package technology from LSI Logic Corporation and
wafer bumping technology from Flip Chip Technologies and Unitive
Technologies. In general, these license agreements are
non-exclusive, royalty-bearing arrangements with terms extending to
various dates between 2008 and 2011.
MARKETING AND SALES
We sell our packaging and test services to our customers and support them
through a network of international offices. To better serve our customers, our
offices are located near our largest customers or areas where there is a
concentration of several of our customers. Our office locations include sites in
the U.S. (Chandler, Arizona; Irvine, Santa Clara and San Diego, California;
Boston, Massachusetts; Greensboro, North Carolina; West Chester, Pennsylvania,
and Austin and Dallas, Texas), China, France, Japan, Korea, the Philippines,
Singapore and Taiwan.
To provide comprehensive sales and customer service, we assign each of our
customers a direct support team consisting of an account manager, a technical
program manager, a test program manager and both field and factory customer
support representatives. We also typically support our largest multinational
customers from multiple office locations to make sure we are fully aligned with
their various operational and business entities.
The direct support teams are closely supported by an extended staff of
product managers, process and reliability engineers, marketing and advertising
specialists, information systems technicians and factory personnel. Together,
these direct and extended support teams deliver an array of services to our
customers. These services include:
- managing and coordinating ongoing manufacturing activity;
11
- providing information and expert advice on packaging solutions and
trends;
- managing the start-up of specific packaging and test programs;
- providing a continuous flow of information to the customers
regarding products and programs in process; and
- researching and assisting in the resolution of technical and
logistical issues.
We implement direct electronic links with our customers to achieve near
real time and automated communications of order fulfillment information, such as
inventory control and production schedules, and engineering data, such as
production yields, device specifications and quality indices, and to connect our
customers to our sales and marketing personnel worldwide and to our factories.
Web-enabled tools provide our customers real time access to the status of their
products, the performance of our manufacturing lines, and technical data they
require to support their new product introductions.
CUSTOMERS
As of January 31, 2003, we had more than 400 customers, and our customers
include many of the largest semiconductor companies in the world. The table
below lists our top 50 customers in 2002 based on revenues:
AMI Semiconductor, Inc.
Adaptec, Inc.
Advanced Micro Devices, Inc.
Agere Technologies, Inc.
Agilent Technologies
Altera Corporation
American Micro Systems, Inc.
Analog Devices, Inc.
Atmel Corporation
Austria Mikro Systeme
Cirrus Logic
Conexant Systems Inc.
Cypress Semiconductor
ESS Technology Inc.
Fairchild Semiconductor Corporation
Fujitsu Limited
Infineon Technologies AG
Integrated Circuit Systems, Inc.
Integrated Device Technology, Inc.
Intel Corporation
International Business Machines Corporation
International Rectifier
Intersil Corporation
Lattice Semiconductor Corporation
LSI Logic Corporation
Macronix International Corporation
Maxim Integrated Circuits
Mediatek Inc.
Melexis N.V.
Microchip Technology Inc.
Motorola, Inc.
National Semiconductor Corporation
NEC Corporation Ltd.
Omachi Fuji Co., LTD
ON Semiconductor
PMC - Sierra Inc.
Philips Electronics
R.F Micro Devices
Robert Bosch GmbH
Samsung Electronics Corporation, LTD
Sanyo Electric Co., LTD
Silicon Laboratories Inc.
Skyworks Solutions, Inc.
Sony Semiconductor Corporation
ST Microelectronics PTE
Standard Microsystems
Texas Instruments, Inc.
Toshiba Corporation
Xilinx, Inc.
Zilog Electronics
With the commencement of operations of Amkor Iwate and the acquisition of
a packaging and test facility from Toshiba in 2001, total net revenues derived
from Toshiba accounted for 14.7% and 16.3% of our consolidated net revenues for
2002 and 2001, respectively. Prior to the sale of our wafer fabrication services
business to ASI in February 2003, we derived substantially all of our wafer
fabrication revenues from Texas Instruments (TI), which due to our restatement,
are no longer included in net revenues, but rather, as part of discontinued
operations in the restated Consolidated Statements of Operations.
MATERIALS AND EQUIPMENT
Our packaging operations depend upon obtaining adequate supplies of
materials and equipment on a timely basis. The
12
principal materials used in our packaging process are leadframes or
laminate substrates, gold wire and mold compound. We purchase materials
based on customer forecasts, and our customers are generally responsible
for any unused materials in excess of the quantity that they indicated
that they would need.
We work closely with our primary material suppliers to insure that
materials are available and delivered on time. Moreover, we also negotiate
worldwide pricing agreements with our major suppliers to take advantage of the
scale of our operations. We are not dependent on any one supplier for a
substantial portion of our material requirements.
Our packaging operations depend on obtaining adequate supplies of
manufacturing equipment on a timely basis. We work closely with major equipment
suppliers to insure that equipment is delivered on time and that the equipment
meets our stringent performance specifications.
For a discussion of additional risks associated with our materials and
equipment suppliers, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors that May Affect Future
Operating Performance" in Item 7 of this annual report.
ENVIRONMENTAL MATTERS
The semiconductor packaging process uses chemicals and gases and generates
byproducts that are subject to extensive governmental regulations. For example,
at our foreign manufacturing facilities, we produce liquid waste when silicon
wafers are diced into chips with the aid of diamond saws, then cooled with
running water. Federal, state and local regulations in the United States, as
well as environmental regulations internationally, impose various controls on
the storage, handling, discharge and disposal of chemicals used in our
manufacturing processes and on the factories we occupy.
We have been engaged in a continuing program to assure compliance with
federal, state and local environmental laws and regulations. We do not expect
capital expenditures or other costs attributable to compliance with
environmental laws and regulations to have a material adverse effect on our
business, results of operations or financial condition.
For a discussion of additional risks associated with the environmental
issues, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors that May Affect Future Operating
Performance -- Environmental Regulations" in Item 7 of this annual report.
COMPETITION
The subcontracted semiconductor packaging and test market is very
competitive. We face substantial competition from established packaging and test
service providers primarily located in Asia, including companies with
significant manufacturing capacity, financial resources, research and
development operations, marketing and other capabilities. These companies
include Advanced Semiconductor Engineering, Inc., ASE Test Limited, ASAT Ltd.,
ChipPAC Incorporated, Orient Semiconductor Engineering, ST Assembly and Test
Services, and Siliconware Precision Industries Co., Ltd. Such companies have
also established relationships with many large semiconductor companies that are
current or potential customers of our company. We also compete with the internal
semiconductor packaging and test capabilities of many of our customers.
The principal elements of competition in the subcontracted semiconductor
packaging market include: (1) breadth of package offering, (2) technical
competence, (3) new package design and implementation, (4) manufacturing yields,
(5) manufacturing cycle times, (6) customer service and (7) price. We believe
that we generally compete favorably with respect to each of these factors.
INTELLECTUAL PROPERTY
As of March 20, 2003, we held 224 U.S. patents and had 209 pending
patents. In addition to the U.S. patents, we held 637 patents in foreign
jurisdictions. We expect to continue to file patent applications when
appropriate to protect our proprietary technologies, but we cannot assure you
that we will receive patents from pending or future applications. In addition,
any patents we obtain may be challenged, invalidated or circumvented and may not
provide meaningful protection or other commercial advantage to us.
13
We may need to enforce our patents or other intellectual property rights
or to defend our company against claimed infringement of the rights of others
through litigation, which could result in substantial cost and diversion of our
resources. The semiconductor industry is characterized by frequent claims
regarding patent and other intellectual property rights. If any third party
makes a valid claim against us, we could be required to:
- discontinue the use of certain processes;
- cease the manufacture, use, import and sale of infringing products;
- pay substantial damages;
- develop non-infringing technologies; or
- acquire licenses to the technology we had allegedly infringed.
If we fail to obtain necessary licenses or if we face litigation relating to
patent infringement or other intellectual property matters, our business could
suffer.
EMPLOYEES
As of December 31, 2002, we had 20,276 full-time employees including
approximately 700 employees seconded from Toshiba whose employment will be
transferred to Amkor as of January 1, 2004. Of the total employee population,
13,021 were engaged in manufacturing, 5,650 were engaged in manufacturing
support, 326 were engaged in research and development, 233 were engaged in
marketing and sales and 1,046 were engaged in finance, business management and
administration. We believe that our relations with our employees are good. We
have never experienced a work stoppage in any of our factories. Our employees in
the U.S., the Philippines, Taiwan and China are not represented by a collective
bargaining unit. Certain members of our factories in Korea and Japan are members
of a union, and all employees at these factories are subject to collective
bargaining agreements.
ITEM 2. PROPERTIES
We provide packaging and test services through our factories in Korea,
Philippines, Japan, Taiwan and China. We believe that total quality management
is a vital component of our advanced manufacturing capabilities. We have
established a comprehensive quality operating system designed to: (1) promote
continuous improvements in our products and (2) maximize manufacturing yields at
high volume production without sacrificing the highest quality standards. The
majority of our factories are ISO9001, ISO9002, ISO14001, QS9000 and SAC Level I
certified. Additionally, as we acquire or construct additional factories, we
commence the quality certification process to meet the certification standards
of our existing facilities. We believe that many of our customers prefer to
purchase from quality certified suppliers. In addition to providing world-class
manufacturing services, our factories in the Philippines and Korea provide
purchasing, engineering and customer service support. The size, location, and
manufacturing services provided by each of our company's factories are set forth
in the table below as of February 28, 2003.
14
APPROXIMATE
FACTORY SIZE
LOCATION (SQUARE FEET) SERVICES
Our Factories
Korea
Seoul, Korea (K1)................................ 670,000 Packaging services
Package and process development
Bucheon, Korea (K2) (1).......................... 271,000 Packaging services
Pupyong, Korea (K3).............................. 428,000 Packaging and test services
Kwangju, Korea (K4).............................. 885,000 Packaging and test services
Philippines
Muntinlupa, Philippines (P1) (2)................. 602,000 Packaging and test services
Packaging and process development
Muntinlupa, Philippines (P2) (2)................. 112,000 Packaging services
Province of Laguna, Philippines (P3) (2)......... 406,000 Packaging and test services
Province of Laguna, Philippines (P4)(2).......... 200,000 Test services
Taiwan
Lung Tan, Taiwan................................. 246,000 Packaging and test services
China
Shanghai, China (3).............................. 145,000 Packaging and test services
Japan
Kitakami, Japan (3).............................. 147,000 Packaging and test services
(1) The land associated with this facility is leased from ASI. The buildings
are owned by Amkor.
(2) As a result of foreign ownership restrictions in the Philippines, the land
associated with our Philippine factories is leased from subsidiaries in
which Amkor controls a minority interest, generally a 40% interest. Amkor
owns the buildings at our P1, P3 and P4 facilities and leases the
buildings at our P2 facility.
(3) Leased facility.
We expect to complete the closing of the K2 facility in Bucheon, South
Korea during the second quarter of 2003. We will transfer most of its packaging
operations into our K4 factory in Kwangju, South Korea. Our operational
headquarters is located in Chandler, Arizona, and our administrative
headquarters, which is leased, is located in West Chester, Pennsylvania. In
addition to an executive staff, the Chandler, Arizona campus houses sales and
customer service for the southwest region and product management planning and
marketing. The West Chester location houses finance and accounting, legal, and
information systems, and serves as a satellite sales office for our eastern
sales region. Our sales offices are located throughout the U.S. (Austin, Texas;
Boston, Massachusetts; Chandler, Arizona; Dallas, Texas; Greensboro, North
Carolina; Irvine, San Diego and Santa Clara, California; and West Chester,
Pennsylvania) and internationally in France, Singapore, Taiwan, the Philippines,
Japan and Korea.
ITEM 3. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those
noted below. While management, including internal counsel, currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on our financial position or
overall trends in results of operations, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the possibility
of a material adverse impact on the net income of the period in which the ruling
occurs. The estimate of the potential impact on our financial position or
overall results of operations for the following legal proceedings could change
in the future.
15
Fujitsu Limited v. Cirrus Logic, Inc.
On April 16, 2002, Amkor was served with a Third Party Complaint in an
action entitled Fujitsu Limited v. Cirrus Logic, Inc., No. 02-CV-01627 JW,
pending in the United States District Court for the Northern District of
California, San Jose Division. In this action, Fujitsu alleges that
semiconductor devices it purchased from Cirrus Logic are defective in that a
certain epoxy mold compound used in the manufacture of the chip causes a short
circuit which renders Fujitsu disk drive products inoperable. Fujitsu did not
specify the amount of damages sought. Cirrus Logic, in response, denied the
allegations of the complaint, counterclaimed against Fujitsu for unpaid
invoices, and filed its Third Party Complaint against Amkor alleging that any
liability for chip defects should be assigned to Amkor because Amkor assembled
the subject semiconductor devices. Upon receipt of the Third Party Complaint,
Amkor filed an Answer denying all liability, and its own Third Party Complaint
against Sumitomo Bakelite Co., Ltd., the Japanese manufacturer of the allegedly
defective epoxy mold compound. Sumitomo Bakelite Co., Ltd., filed an Answer
denying liability. The case is in discovery. Currently, the matter is scheduled
to proceed to trial in January 2004.
Amkor believes it has meritorious defenses to Cirrus Logic's Third Party
Complaint and intends to vigorously defend the case. Moreover, Amkor believes it
has valid third party claims against Sumitomo Bakelite should the epoxy mold
compound in question be found to be defective. However, no assurance can be
given that an adverse result cannot occur, or that any adverse result would not
have a material impact upon Amkor. In this regard, other customers of Amkor have
made inquiry about the epoxy mold compound in issue, which was widely used in
the semiconductor industry, and no assurance can be given that claims similar to
that of Cirrus Logic will not be made against Amkor by other customers in the
future.
Amkor Technology, Inc. v. Motorola, Inc.
On August 16, 2002, Amkor filed a complaint against Motorola, Inc. in an
action captioned Amkor Technology, Inc. v. Motorola, Inc., C.A. No. 02C-08-160
CHT, pending in the Superior Court of the State of Delaware in and for New
Castle County. In this action, Amkor is seeking declaratory judgment relating to
a controversy between Amkor and Motorola concerning: (i) the assignment by
Citizen Watch Co., Ltd. ("Citizen") to Amkor of a Patent License Agreement dated
January 25, 1996 between Motorola and Citizen (the "License Agreement") and
concurrent assignment by Citizen to Amkor of Citizen's interest in U.S. Patents
5,241,133 and 5,216,278 (the "'133 and `278 patents"); and (ii) Amkor's
obligation to make certain payments pursuant to an Immunity Agreement dated June
30, 1993 between Amkor and Motorola (the "Immunity Agreement").
Amkor and Motorola have recently 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 will be
dismissed or otherwise disposed of without further litigation. The claims
relating to the License Agreement and the `133 and `278 Patents remain pending,
with a trial date currently scheduled for Fall 2003.
Amkor believes it will prevail on the merits in this case. Moreover,
should it be determined that the License Agreement or Citizen's interest in the
`133 and `278 Patents were not successfully transferred to Amkor, Amkor believes
it has recourse against Citizen. However, no assurance can be given that an
adverse outcome in the case cannot occur, or that any adverse outcome would not
have a material impact on Amkor.
Alcatel Business Systems
On November 5, 1999, Amkor agreed to sell certain semiconductor parts to
Alcatel Microelectronics, N.V. ("AME"), a subsidiary of Alcatel S.A. The
components were manufactured by Anam Semiconductor, Inc. ("Anam") for Amkor. 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 Amkor were defective. On
March 18, 2002, ABS and its insurer filed suit against Amkor and Anam in the
Paris Commercial Court of France. That court has commenced a special proceeding
before a technical expert to report on the facts of the dispute. The report of
the court appointed expert is not expected before December 2003. Amkor has
denied all liability and intends to vigorously defend itself. Additionally,
Amkor has entered into a written agreement with Anam whereby Anam has agreed to
indemnify Amkor against any and all loss related to the claims of AME, ABS and
ABS' insurer.
In response to the Paris lawsuit, on May 22, 2002, Amkor filed a petition
to compel arbitration in the United States District Court for the Eastern
District of Pennsylvania against ABS, AME, and ABS' insurer, claiming that any
dispute
16
regarding is subject to the arbitration clause of the November 5, 1999 agreement
between Amkor and AME. ABS and ABS' insurer have refused to arbitrate. This
action is currently in discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth fiscal quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"AMKR." Public trading of the common stock began on May 1, 1998. Prior to that,
there was no public market for our common stock. The following table sets forth,
for the periods indicated, the high and low sale price per share of our common
stock as quoted on the Nasdaq National Market.
High Low
---- ---
2002
First Quarter............... $22.31 $13.00
Second Quarter.............. 24.25 3.90
Third Quarter............... 6.10 1.20
Fourth Quarter.............. 7.47 1.61
2001
First Quarter............... $23.63 $14.63
Second Quarter.............. 25.00 14.88
Third Quarter............... 22.48 10.52
Fourth Quarter.............. 18.02 9.42
There were approximately 391 holders of record of our common stock as of
February 28, 2003.
DIVIDEND POLICY
Since our public offering in 1998, we have never paid a dividend to our
stockholders. We currently expect to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. In addition, our secured bank debt
agreements and the indentures governing our senior, senior subordinated and
convertible subordinated notes restrict our ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
None.
17
EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of
December 31, 2002, all of which have been approved by our stockholders:
(C)
(A) NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE (B) FOR FUTURE ISSUANCE
ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLAN
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES
OPTIONS OPTIONS REFLECTED IN COLUMN (A))
------- ------- ------------------------
Equity compensation plans approved by stockholders........ 6,573,263 $14.15 10,614,998(1)-(4)
(1) Includes 10,096,837 options were reserved for issuance under the 1998
Stock Plan, 343,161 were reserved for issuance under the 1998 Stock Option
Plan for French Employees and 175,000 options were reserved for issuance
under the 1998 Director Option Plan. On November 8, 2002, we initiated a
voluntary stock option replacement program such that employees and members
of our board of directors could elect to surrender their existing options
and be granted new options no earlier than six months and one day after
the tendered options were cancelled. We will issue new option grants equal
to the same number of shares surrendered by the employees. Pursuant to the
terms and conditions of the offer to exchange, a total of 1,633 eligible
employees participated and our company has accepted for cancellation
options to purchase an aggregate of 7,115,891 shares of our company's
common stock under the 1998 Stock Plan, an aggregate of 35,000 shares of
our company's common stock under the 1998 Director Option Plan and an
aggregate of 248,200 shares of our company's common stock under the 1998
Stock Plan for French Employees. Subject to the terms and conditions of
the offer to exchange, our company will grant new options to purchase
7,399,091 shares of our common stock no earlier than June 12, 2003 in
exchange for the options tendered by eligible employees and members of our
board of directors and accepted by our company. The exercise price will
equal the fair market value of common stock as of the new grant date.
(2) As of December 31, 2002, no shares of common stock were available for sale
under the Stock Purchase Plan; however, there is a provision for an annual
replenishment to bring the number of shares of common stock available for
sale under the plan up to 1,000,000 as of each January 1.
(3) As of December 31, 2002, a total of 10,096,837 shares were reserved for
issuance under the 1998 Stock Plan, and there is a provision for an annual
replenishment to bring the number of shares of common stock reserved for
issuance under the plan up to 5,000,000 as of each January 1. As of
January 1, 2003, since there were in excess of 5,000,000 shares available
for issuance under the plan, no additional shares were made available
pursuant to the annual replenishment provision.
(4) As of December 31, 2002, a total of 343,161 shares of common stock are
reserved for issuance under the French Plan, and there is a provision for
an annual replenishment to bring the number of shares of common stock
reserved for issuance under the plan up to 250,000 as of each January 1.
As of January 1, 2003, since there were in excess of 250,000 shares
available for issuance under the plan, no additional shares were made
available pursuant to the annual replenishment provision. The French Plan
will terminate in April 2003. Amkor intends to implement a new French
Plan, subject to shareholder approval in 2003.
18
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
We have derived the selected historical consolidated financial data
presented below for, and as of the end of, each of the years in the five-year
period ended December 31, 2002 from our restated consolidated financial
statements. You should read the selected consolidated financial data set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our restated consolidated financial
statements and the related notes, included elsewhere in this annual report.
The summary consolidated financial data below reflects the following
transactions on a historical basis (i) our 1999 acquisition of K4 from Anam
Semiconductor, Inc. (ASI) for $582.0 million together with its related
financing, (ii) our 2000 acquisitions of K1, K2 and K3 from ASI for $950.0
million and equity investment in ASI of $459.0 million together with the related
financing for the acquisitions and investment, (iii) our 2001 acquisitions of
Amkor Iwate Corporation, Sampo Semiconductor Corporation and Taiwan
Semiconductor Technology Corporation (a prior equity investment) and (iv) our
2002 acquisitions of semiconductor packaging businesses from Citizen Watch Co.,
Ltd. and Agilent Technologies, Inc. We historically marketed the output of
fabricated semiconductor wafers provided by a wafer fabrication foundry owned
and operated by ASI. On February 28, 2003, we sold our wafer fabrication
services business to ASI. We restated our historical results to reflect our
wafer fabrication services segment as a discontinued operation.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net revenues ................................. $ 1,406,178 $ 1,336,674 $ 2,009,701 $ 1,617,235 $ 1,452,285
Cost of revenues ............................. 1,310,563 1,284,423 1,442,320 1,297,358 1,208,806
----------- ----------- ----------- ----------- -----------
Gross profit ................................. 95,615 52,251 567,381 319,877 243,479
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ........ 179,888 191,136 179,143 133,053 109,312
Research and development ................... 31,189 38,786 26,057 11,436 8,251
Loss on disposal of fixed assets, net ...... 2,496 14,515 1,355 1,805 1,837
Amortization of goodwill and other
acquired intangibles (a) ................. 6,992 84,962 63,080 17,105 1,454
Special charges (b) ........................ 291,970 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses .............. 512,535 329,399 269,635 163,399 120,854
----------- ----------- ----------- ----------- -----------
Operating income (loss) ...................... (416,920) (277,148) 297,746 156,478 122,625
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense, net ...................... 147,497 164,064 119,840 45,364 18,005
Foreign currency loss ...................... 906 872 4,812 308 4,493
Other (income) expense, net (c) ............ (1,014) (3,586) (60) 23,312 7,666
----------- ----------- ----------- ----------- -----------
Total other expense ................... 147,389 161,350 124,592 68,984 30,164
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes, equity
investment losses, minority interest and
discontinued operations ................... (564,309) (438,498) 173,154 87,494 92,461
Equity investment losses (f,g) ............... (208,165) (100,706) (20,991) (1,969) --
Minority interest (h) ........................ (1,932) (1,896) -- -- (559)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes ........................ (774,406) (541,100) 152,163 85,525 91,902
----------- ----------- ----------- ----------- -----------
Income tax expense (benefit) (d,e) ........... 60,683 (84,613) 14,362 19,526 21,406
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations ..... (835,089) (456,487) 137,801 65,999 70,496
----------- ----------- ----------- ----------- -----------
Discontinued operations:
Income from wafer fabrication services
business, net of tax ..................... 8,330 5,626 16,352 10,720 4,964
----------- ----------- ----------- ----------- -----------
Net income (loss) (d) ........................ $ (826,759) $ (450,861) $ 154,153 $ 76,719 $ 75,460
=========== =========== =========== =========== ===========
Basic income (loss) per common share:
From continuing operations ................. $ (5.09) $ (2.91) $ 0.95 $ 0.55 $ 0.66
From discontinued operations ............... 0.05 0.04 0.11 0.09 0.05
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share ...... $ (5.04) $ (2.87) $ 1.06 $ 0.64 $ 0.71
=========== =========== =========== =========== ===========
Diluted income (loss) per common share:
From continuing operations ................. $ (5.09) $ (2.91) $ 0.91 $ 0.55 $ 0.66
From discontinued operations ............... 0.05 0.04 0.11 0.08 0.04
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share ...... $ (5.04) $ (2.87) $ 1.02 $ 0.63 $ 0.70
=========== =========== =========== =========== ===========
Shares used in computing basic income (loss)
per common share (pro forma for 1998) ...... 164,124 157,111 145,806 119,341 106,221
19
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Shares used in computing diluted income
(loss) per common share (pro forma
for 1998) ...................................... 164,124 157,111 153,223 135,067 116,596
OTHER FINANCIAL DATA:
Depreciation and amortization including debt
issue costs from continuing operations ......... $331,516 $462,912 $330,824 $178,771 $118,676
Capital expenditures from continuing operations .. 95,104 158,595 478,950 239,854 102,142
YEAR ENDED
DECEMBER 31,
1998
----
PRO FORMA DATA (UNAUDITED) (D):
Historical income before income taxes, equity investment
losses, minority interest and discontinued operations . $ 92,461
Pro forma provision for income taxes .................. 25,906
--------
Pro forma income before equity investment losses,
minority interest and discontinued operations ......... 66,555
Historical equity investment losses ..................... --
Historical minority interest ............................ (559)
--------
Pro forma net income from continuing operations ......... $ 65,996
========
Basic pro forma income from continuing
operations per common share .......................... $ 0.62
========
Diluted pro forma income from continuing
operations per common share .......................... $ 0.61
========
DECEMBER 31,
------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 311,249 $ 200,057 $ 93,517 $ 98,045 $ 227,587
Short term investments ........................... -- -- -- 136,595 1,000
Working capital .................................. 163,498 139,097 62,311 164,435 133,451
Total assets ..................................... 2,557,984 3,223,318 3,393,284 1,755,089 1,003,597
Total long-term debt ............................. 1,737,690 1,771,453 1,585,536 687,456 221,846
Total debt, including short-term borrowings and
current portion of long-term debt .............. 1,808,713 1,826,268 1,659,122 693,921 260,503
Stockholders' equity ............................. 231,367 1,008,717 1,314,834 737,741 490,361
(a) As of January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets. We reclassified
$30.0 million of intangible assets previously identified as an assembled
workforce intangible to goodwill. Additionally, we stopped amortizing
goodwill of $659.1 million.
(b) During 2002, we recorded $292.0 million of special charges. Special
charges, in thousands, were comprised of:
Impairment of long-lived assets ........ $190,266
Impairment of goodwill ................. 73,080
Lease termination and other exit costs . 28,624
--------
$291,970
========
(c) In 1999 we recognized a pre-tax loss of $17.4 million as a result of the
early conversion of $153.6 million principal amount of our 5 3/4%
convertible subordinate notes due 2003.
(d) Prior to our reorganization in April 1998, our predecessor, Amkor
Electronics, Inc. ("AEI"), elected to be taxed as an S Corporation under
the Internal Revenue Code of 1986 and comparable state tax laws. As a
result AEI did not recognize any provision for federal income tax expense.
The pro forma provision for income taxes reflects the U.S. federal income
taxes that would have been recorded if AEI had been a C Corporation prior
to April 1998.
(e) During 2002, we recorded a $138.2 million charge to establish a valuation
allowance against our deferred tax assets consisting primarily of U.S. and
Taiwanese net operating loss carryforwards and tax credits.
(f) As of January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets. We stopped
amortizing equity method goodwill of $118.6 million associated with our
investment in ASI.
(g) During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value.
ASI is a publicly traded company on the Korean stock exchange.
Additionally during 2002, we recorded a loss of $1.8 million on the
disposition of a portion of our interest in ASI to Dongbu.
(h) In 2002 and 2001, minority interest reflects Toshiba's 40% ownership
interest in Amkor Iwate in Japan as well as shares that we did
20
not acquire in connection with our two acquisitions in Taiwan. In 1998,
minority interest reflects ASI's 40% interest in the earnings of
Amkor/Anam Pilipinas, Inc. ("AAP"), one of our subsidiaries in the
Philippines.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the federal securities laws, including but not limited to statements
regarding: (1) the condition and growth of the industry in which we operate,
including trends toward increased outsourcing, reductions in inventory and
demand and selling prices for our services, (2) our anticipated capital
expenditures and financing needs, (3) our belief as to our future capacity
utilization rates, revenue, gross margins and operating performance, (4)
statements regarding the future of our relationship with ASI, and (5) 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," or the negative of these terms or other comparable
terminology. Because such statements include risks and uncertainties, actual
results may differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
following discussion as well as in "Risk Factors that May Affect Future
Operating Performance." The following discussion provides information and
analysis of our results of operations for the three years ended December 31,
2002 and our liquidity and capital resources. You should read the following
discussion in conjunction with our restated consolidated financial statements
and the related notes, included elsewhere in this annual report as well as other
reports we file with the Securities and Exchange Commission.
Amkor is the world's largest subcontractor of semiconductor packaging and
test services. The company has built a leading position by:
- Providing a broad portfolio of packaging and test technologies and
services; - Maintaining a leading role in the design and development
of new package and test technologies;
- Cultivating long-standing relationships with customers, including
many of the world's leading semiconductor companies;
- Developing expertise in high-volume manufacturing; and
- Diversifying our operational scope by establishing production
capabilities in China, Japan and Taiwan, in addition to
long-standing capabilities in Korea and the Philippines.
The semiconductors that we package and test for our customers ultimately
become components in electric systems used in communications, computing,
consumer, industrial, automotive and military applications. Our customers
include, among others, Agilent Technologies, Atmel Corporation, Intel
Corporation, LSI Logic Corporation, Mediatek Inc., Philips Electronics N.V.,
R.F. Microdevices, ST Microelectronics PTE, Sony Semiconductor Corporation and
Toshiba Corporation. The outsourced semiconductor packaging and test market is
very competitive. We also compete with the internal semiconductor packaging and
test capabilities of many of our customers.
Packaging and test are an integral part of the semiconductor manufacturing
process. Semiconductor manufacturing begins with silicon wafers and involves the
fabrication of electronic circuitry into complex patterns, thus creating
individual chips on the wafers. The packaging process creates an electrical
interconnect between the semiconductor chip and the system board. In packaging,
the fabricated semiconductor wafers are cut into individual chips which are then
attached to a substrate and encased in a protective material to provide optimal
electrical and thermal performance. Increasingly, packages are custom designed
for specific chips and specific end-market applications. The packaged chips are
then tested using sophisticated equipment to ensure that each packaged chip
meets its design specifications.
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. (ASI). On February 28, 2003, we sold our wafer fabrication
services business to
21
ASI. We restated our historical results to reflect our wafer fabrication
services segment as a discontinued operation.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Based on industry estimates, from 1981 through 2002,
there were 12 years when semiconductor industry growth, measured by revenue
dollars, was 10% or less and 10 years when growth was 19% or greater. Since
1981, the semiconductor industry declined in 1985, 1996, 1998 and 2001. The
semiconductor industry declined an unprecedented 32% in 2001 and experienced a
1% growth in 2002 as compared to 2001. The historical trends in the
semiconductor industry are not necessarily indicative of the results of any
future period. Semiconductor industry analysts are forecasting significant
growth in the semiconductor industry in each of 2003 and 2004. The strength of
the semiconductor industry is dependent primarily upon the strength of the
computer and communications systems markets as well as the strength of the
worldwide economy. Although significant recovery was noted in most of our
company's packaging services during the second quarter of 2002, our test
services assets and several packaging services assets remained at low
utilization rates relative to our projections, and are no longer expected to
reach previously anticipated utilization levels. We recognized total impairment
charges of $263.4 million during the second quarter of 2002. The nature of the
impairment charges was as follows: (1) $18.7 million impairment charge to reduce
the carrying value of the test and packaging assets to be disposed to their fair
value less cost to sell; (2) $171.6 million impairment charge to reduce the
carrying value of test assets and certain packaging assets that are held and
used to fair value, and (3) $73.1 million goodwill impairment charge associated
with our test services reporting unit.
The first calendar quarter is typically a seasonally down quarter for
Amkor. On the basis of customers' forecasts, we currently expect packaging and
test revenue for the first quarter of 2003 to be around 10% lower than packaging
and test revenues for the fourth quarter of 2002. We expect that first quarter
of 2003 gross margin will be around 11%. Our profitability is dependent upon the
utilization of our capacity, semiconductor package mix and the average selling
price of our services. 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 profitability. Prices for
packaging and test services have declined over time. Historically, we have been
able to partially offset the effect of price declines by successfully developing
and marketing new packages with higher prices, such as advanced leadframe and
laminate packages, by negotiating lower prices with our material vendors, and by
driving engineering and technological changes in our packaging and test
processes which resulted in reduced manufacturing costs. We expect that average
selling prices for our packaging and test services will continue to decline in
the future. If our semiconductor package mix does not shift to new technologies
with higher prices or we cannot reduce the cost of our packaging and test
services to offset a decline in average selling prices, our future operating
results will suffer. Average selling prices for 2002 declined 16% as compared to
average selling prices in 2001. Average selling prices for 2001 declined 14% as
compared to average selling prices in 2000. These declines in average selling
prices significantly impacted our gross margins in 2002 and 2001.
OVERVIEW OF OUR HISTORICAL RESULTS
OUR HISTORICAL RELATIONSHIP WITH ASI
Historically we performed packaging and test services at our factories in
the Philippines and subcontracted for additional services with ASI, which
operated four packaging and test facilities in Korea. Beginning in the fourth
quarter of 1998 ASI's business was severely affected by the economic crisis in
Korea. ASI was part of the Korean financial restructuring program known as the
"Workout" program beginning in October 1998. The Workout program was the result
of an accord among Korean financial institutions to assist in the restructuring
of Korean business enterprises. The process involved negotiation between ASI's
banks and ASI, and did not involve the judicial system. The Workout process
restructured the terms of ASI's significant bank debt. Although ASI's operations
continued uninterrupted during the process, it caused concern among our
customers that we could potentially lose access to ASI's services. As a result,
we decided to acquire ASI's packaging and test operations to ensure continued
access to the manufacturing services previously provided by ASI. During the
course of negotiations for the purchase of the packaging and test operations,
both ASI management and the ASI bank group presented a counter-proposal whereby,
in addition to the purchase of the packaging and test operations, we would also
make an equity investment in ASI. The bank group and ASI management proposed
this structure because they believed the equity investment would reflect a level
of commitment from us to continue our ongoing business relationship with ASI
after the sale of its packaging and test operations to Amkor.
In May 1999, we acquired K4, one of ASI's packaging and test facilities,
and in May 2000 we acquired ASI's remaining packaging and test facilities, K1,
K2 and K3. With the completion of our acquisition of K1, K2 and K3, we no longer
depend upon ASI for packaging or test services. In May 2000 we also committed to
a $459.0 million equity investment in ASI, and
22
fulfilled this commitment in installments taking place over the course of 2000.
In connection with the May 2000 transactions with ASI, we obtained independent
appraisals to support the value and purchase price of each of the packaging and
test operations and the equity investment. We invested a total of $500.6 million
in ASI including an equity investment of $41.6 million made in October 1999 and,
as a result acquired a total of 47.7 million shares of ASI common stock.
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business, we entered into a series of transactions
beginning in the second half of 2002:
- In September 2002, we sold 20 million shares of ASI common stock to
Dongbu Group for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we
entered into the share sale agreement. We received $58.1 million in
net cash proceeds and 42 billion Korean Won (approximately $35.4
million at a spot exchange rate as of December 31, 2002) of interest
bearing notes from Dongbu Corporation payable in two equal principal
payments in September 2003 and February 2004. The Dongbu Group
comprises Dongbu Corporation, Dongbu Fire Insurance Co., Ltd. and
Dongbu Life Insurance Co., Ltd., all of which are Korean
corporations and are collectively referred herein as "Dongbu."
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction.
- In separate transactions designed to facilitate a future merger
between ASI and Dongbu, (i) we acquired a 10% interest in Acqutek
from ASI for $1.9 million, the market value of the shares as
publicly traded in Korea; (ii) we acquired the Precision Machine
Division (PMD) of Anam Instruments, a related party to Amkor, for $8
million, its fair value; and (iii) Anam Instruments, which had been
partially owned by ASI, utilized the proceeds from the sale of PMD
to us to buy back all of the Anam Instruments shares owned by ASI.
Acqutek supplies materials to the semiconductor industry and is
publicly traded in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, held a 25%
ownership interest in Acqutek at the time of our acquisition of our
interest in Acqutek. We have historically purchased and continue to
purchase leadframes from Acqutek. PMD supplies sophisticated die
mold systems and tooling to the semiconductor industry and
historically over 90% of its sales were to Amkor. We determined the
fair value of PMD based on projected cash flows discounted at a rate
commensurate with the risk involved. At the time of our acquisition
of PMD, Anam Instruments was owned 20% by ASI and 20% by a family
member of James Kim.
- On February 28, 2003, we sold our wafer fabrication services
business to ASI for total consideration of $62 million. We
negotiated the fair value of our wafer fabrication services business
with ASI and Dongbu. The parties calculated fair value based on an
assessment of projected cash flows discounted at a rate commensurate
with the risk involved. We obtained a release from Texas Instruments
regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of
the business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different conclusions as to fair value. It is likely that we would not have
entered into the Acqutek or PMD transactions absent the share sale to Dongbu and
the sale of the wafer fabrication services business to ASI. Had these
transactions not been interrelated, we may have utilized a different negotiation
strategy for the investment in Acqutek and the acquisition of PMD, which could
have resulted in us reaching a different conclusion of the fair value of both of
these transactions.
Due to the protracted downturn in the semiconductor industry, we made the
decision to sell our wafer fabrication services business in order to redeploy
the proceeds from that sale into our primary business of semiconductor assembly
and test. This decision was further supported by the fact that we had no
assurances that ASI would have the financial resources and capability to provide
the next generation of technology to serve our customer needs. The opportunity
to divest ourselves of the business arose in connection with our sale of the ASI
shares to Dongbu. As part of that transaction, it was agreed that Dongbu and we
would enter into negotiations, upon completion of the share sale, to determine
the terms and conditions on which we would sell the business to ASI. The sale
was completed on February 28, 2003, thereby completing another step towards our
stated goal of monetizing all of our interests in ASI. As of that date, we
reduced our ownership interest in ASI from 42% to 16%.
In consideration of the transactions discussed above, we restated our
historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded $1.0 million in severance and other exit costs
to close our wafer fabrication services operations in Boise, Idaho and
23
Lyon, France in the first quarter of 2003. Also in the first quarter of 2003, we
recognized a pre-tax gain on the disposition of our wafer fabrication services
business of $58.6 million ($51.5 million, net of tax). The carrying value of
the sold net assets associated with the business as of February 28, 2003 was
$2.4 million. In addition, pursuant to the definitive agreements, (1) Amkor and
Dongbu agreed to use reasonable best efforts to cause Dongbu Electronics and ASI
to be merged together as soon as practicable, (2) Amkor and Dongbu agreed to
cause ASI to use the proceeds ASI received from its sale of stock to Dongbu to
purchase shares in Dongbu Electronics and (3) Amkor and Dongbu agreed to use
their best efforts to provide releases and indemnifications to the chairman,
directors and officers of ASI, either past or incumbent, from any and all
liabilities arising out of the performance of their duties at ASI between
January 1, 1995 and December 31, 2001. The last provision would provide a
release and indemnification for James Kim, our CEO and Chairman, and members of
his family. We are not aware of any claims or other liabilities which these
individuals would be released from or for which they would receive
indemnification.
At January 1, 2002 Amkor owned 47.7 million shares or 42% of ASI's voting
stock. During 2002, we divested 21 million shares of ASI stock and at December
31, 2002 Amkor owned 26.7 million shares of ASI or 21%. The carrying value of
our remaining investment in ASI at December 31, 2002 was $77.5 million, or $2.90
per share. On March 24, 2003, we sold an additional 7 million shares of ASI
common stock to an investment bank for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximates
the carrying value of those shares.
Subsequent to the sale of a portion of our investment in ASI to Dongbu in
2002, we were unable to identify another strategic buyer. ASI's common stock,
which is listed on the Korean Stock Exchange, is relatively thinly traded and
subject to volatile swings in daily trading volumes. In an effort to continue to
monetize our investment in ASI's common stock, we evaluated, in consultation
with a financial institution, the most efficient method to divest a large block
of shares into the market without destabilizing the share price of ASI's common
stock. As of March 24, 2003, we consummated a series of transactions proposed by
the financial institution. We irrevocably sold a block of 7 million shares of
ASI common stock to the financial institution for 24.4 billion Korean won ($19.5
million based on the spot exchange rate as of the transaction date, or $2.81 per
share). We also entered into a nondeliverable call option with the financial
institution for $6.8 million, the fair value of the option at that date plus the
transaction costs. The call option is scheduled to expire December 2003 and is
indexed to ASI's share price with a strike price of $1.97 per share, or
approximately 70% of the then market value of ASI's common stock. The value of
the option declined $2.2 million as of March 31, 2003 as a result of ASI's share
price declining from 3,511 Korean won per share, or $2.81 per share, at March
24, 2003 to 3,150 Korean won at March 31, 2003.
The call option allows us to continue to monetize our investment in ASI at
a fixed price with unlimited upside and limited downside economics. In addition,
it provides us with the economic benefits of selling shares through a dollar
averaging sales program without incurring the transaction costs associated with
multiple small quantity sales. The call premium provides the financial
institution some downward protection if the market for ASI's common stock
destabilized as it sells its investment in ASI's common stock into the market.
If ASI's share price declines below the market price of ASI's stock on the date
we purchased the call option, then the net proceeds from the exercise of the
option could be less than the $6.8 million we paid for the call option. All
ownership rights and privileges associated with the 7 million shares of ASI's
common stock sold were irrevocably transferred to the financial institution. In
no event can the financial institution put the shares back to Amkor nor can
Amkor reacquire the shares from the financial institution.
As of March 24, 2003, we owned 19.7 million shares of ASI, or 16% of ASI's
voting stock. Beginning March 24, 2003, we ceased accounting for our investment
in ASI under the equity method of accounting and commenced accounting for our
investment as a marketable security that is available for sale.
OUR 2002 ACQUISITIONS
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The business acquired
includes a manufacturing facility, over 80 employees and intellectual property.
The purchase price included a $7.8 million cash payment at closing. We are
required to make additional payments one year from closing for the amount of the
deferred purchase price as well as contingent payments. Based on the resolution
of the contingency as of January 2003, the total amount of additional payments
due in April 2003 is 1.7 billion Japanese yen ($14.3 million based on the spot
exchange rate at December 31, 2002). We recorded $19.6 million of intangible
assets for patent
24
rights that are amortizable over 7 years.
In January 2002, we acquired Agilent Technologies, Inc.'s packaging
business related to semiconductor packages utilized in printers for $2.8 million
in cash. The acquired tangible assets were integrated into our existing
manufacturing facilities. The purchase price was principally allocated to the
tangible assets. Our results of operations were not significantly impacted by
this acquisition.
In October 2002, we terminated negotiations with Fujitsu Limited to acquire
Fujitsu's packaging and test operation in Kagoshima, Japan pursuant to the April
2002 memorandum of understanding between our company and Fujitsu.
OUR VENTURE WITH TOSHIBA CORPORATION
As of January 1, 2001, Amkor Iwate Corporation commenced operations with
the acquisition of a packaging and test facility at a Toshiba factory located in
the Iwate prefecture in Japan. We currently own 60% of Amkor Iwate and Toshiba
owns the balance of the outstanding shares. By January 2004 we are required to
purchase the remaining 40% of the outstanding shares of Amkor Iwate from
Toshiba. The share purchase price will be determined based on the performance of
the venture during the three-year period but cannot be less than 1 billion
Japanese yen and cannot exceed 4 billion Japanese yen ($8.4 million to $33.7
million based on the spot exchange rate at December 31, 2002). Amkor Iwate
provides packaging and test services principally to Toshiba's Iwate factory
under a long-term supply agreement that provides for services to be performed on
a cost plus basis during the term of the joint venture and subsequently at
market based rates. The supply agreement with Toshiba's Iwate factory terminates
two years subsequent to our acquisition of Toshiba's ownership interest in Amkor
Iwate.
OUR ACQUISITIONS OF TAIWAN SEMICONDUCTOR TECHNOLOGY CORPORATION AND SAMPO
SEMICONDUCTOR CORPORATION
In July 2001, we acquired, in separate transactions, Taiwan Semiconductor
Technology Corporation (TSTC) and Sampo Semiconductor Corporation (SSC) in
Taiwan. The results of TSTC and SSC have been included in the accompanying
consolidated financial statements since the acquisition dates. Our results of
operations were not significantly impacted by these acquisitions. In connection
with earn-out provisions that provided for additional purchase price based in
part on the results of the acquisitions, we issued an additional 1.8 million
shares in January 2002 and recorded an additional $35.2 million in goodwill.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
------ ------ ------
Net revenues ................................................. 100.0% 100.0% 100.0%
Gross profit ................................................. 6.8 3.9 28.2
Operating income (loss) ...................................... (29.6) (20.7) 14.8
Income (loss) before income taxes, equity investment losses,
minority interest and discontinued operations .............. (40.1) (32.8) 8.6
Net income (loss) from continuing operations ................. (59.4) (34.2) 6.9
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Revenues. Net revenues increased $69.5 million, or 5.2%, to $1,406.2
million in 2002 from $1,336.7 million in 2001. This increase in net revenues for
2002, excluding the impact of our acquisitions and expansion in Japan, Taiwan
and China, was principally attributed to an overall unit volume increase of
19.7% which was driven by a 42.0% increase for advanced packages and a 1.2%
increase in our traditional packages. Partially offsetting the volume increases,
average selling prices for 2002 declined 16% as compared to average selling
prices in 2001. Our Japanese joint venture, Amkor Iwate, provides packaging and
test services principally to Toshiba's Iwate factory under a long-term supply
agreement on a cost plus basis during the term of the joint venture.
Accordingly, the revenues associated with this facility fluctuate
proportionately with its costs. The revenues of Amkor Iwate declined $12.4
million in 2002
25
compared to 2001 due primarily to lower costs associated with a shift in product
mix, and, to a lesser extent, the strengthening of the U.S. dollar relative to
the Japanese yen. Our acquisitions in Taiwan and expansion into China
contributed $54.6 million to the increase in net revenues for 2002.
Prices for packaging and test services have declined over time.
Historically, we have been able to partially offset the effect of price declines
by successfully developing and marketing new packages with higher prices, such
as advanced leadframe and laminate packages, by negotiating lower prices with
our material vendors, and by driving engineering and technological changes in
our packaging and test processes which resulted in reduced manufacturing costs.
During 2002, the decline in average selling prices significantly impacted our
gross margins as compared to the comparable period a year ago.
Gross Profit (Loss). Gross profit increased $43.4 million, or 83.0%, to
$95.6 million in 2002 from $52.3 million in 2001. Our cost of revenues consists
principally of costs of materials, labor and depreciation. 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. As a result of acquisitions in Japan and Taiwan in
2001 as well as other geographic expansions, we substantially increased our
fixed costs.
Gross margins as a percentage of net revenues increased 2.9 percentage
points to 6.8% in 2002 as compared to 3.9% in 2001 principally as a result of
the following:
- Increased capacity utilization as a result of increased unit volumes
at our factories in Korea and the Philippines together with the
impact of our cost savings initiatives at those factories caused an
approximate 8 percentage point increase in gross margins.
- Material cost savings contributed approximately 5 percentage points
to the increase in gross margins.
- Reduced depreciation expense of approximately $42 million as a
result of the impact of the fixed asset impairment charge recorded
as of June 30, 2002 caused an approximate 2% percentage points
increase in gross margins. A discussion of the second quarter
impairment charge is presented within the discussion of special
charges below.
- Reduced depreciation expense of approximately $17 million as a
result of the impact of the change in estimated useful lives of
certain packaging equipment beginning with the fourth quarter of
2002 caused an approximate 1% percentage point increase in gross
margins. A discussion of the change in estimated useful lives is set
forth below.
The positive impacts on gross margins were partially offset by:
- Average selling price erosion across our product lines caused an
estimated 12 percentage points decline in gross margins.
- Our acquisitions in Taiwan and expansion into China contributed
approximately 1.6 percentage points to the decline in gross margin
as a result of the costs associated with ramping and reconfiguring
operations at these facilities.
Depreciation accounting requires estimation of the useful lives of the
assets to be depreciated as well as adoption of a method of depreciation. We
calculate depreciation using the straight-line method over the estimated useful
lives of the depreciable assets. We have historically estimated the useful lives
of our machinery and equipment to be three to five years, with the substantial
majority of our packaging assets having estimated useful lives of four years.
Effective with the fourth quarter of 2002, we changed the estimated useful lives
of certain of our packaging equipment from four years to seven years for
depreciation purposes, which is in line with our historical usage and consistent
with other companies in our industry. We did not extend the useful lives of the
packaging equipment associated with the second quarter impairment charge based
on our expected use of that equipment and the associated cash flows. This change
decreased our net loss by approximately $16.7 million, or $0.10 per share. There
was no offsetting impact to our tax provision related to the change in useful
lives because of our consolidated net losses for 2002 and our recognition of a
valuation allowance against the associated net operating loss carryforwards.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $11.2 million, or 5.9%, to $179.9 million, or
12.8% of net revenues, in 2002 from $191.1 million, or 14.3% of net revenues, in
2001. The decrease in these costs was largely attributed to $12.6 million in
cost reductions principally related to our U.S. based administrative overhead
cost reduction initiatives; partially offset by $0.9 million for increased
administrative costs related to
26
our factories. Our factory administrative expenses increased overall as a result
of our 2002 and 2001 acquisitions offset by factory cost reduction initiatives.
Research and Development. Research and development expenses decreased $7.6
million to $31.2 million, or 2.2% of net revenues, in 2002 from $38.8 million,
or 2.9% of net revenues, in 2001. The decrease in these costs was primarily
attributable to our corporate cost reduction initiatives, which included closing
our two U.S. research and development facilities during the second and third
quarters of 2002 and consolidating these activities within our existing
Asian-based research and development facilities. Our research and development
efforts support our customers' needs for smaller packages and increased
functionality. We continue to invest our research and development resources to
further the development of flip chip interconnection solutions, chip scale
packages that are nearly the size of the semiconductor die,
micro-electromechanical system ("MEMS') devices used in a variety of end markets
including automotive, industrial and personal entertainment, our stacked chip
packages that stack as many as three semiconductor dies in a single package, and
System-in-Package technology, that uses both advanced packaging and traditional
surface mount techniques to enable the combination of technologies in a single
chip.
Amortization of Goodwill and Other Acquired Intangibles. As of January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets. We reclassified $30.0 million of intangible assets
previously identified as an assembled workforce intangible to goodwill.
Additionally, we stopped amortizing goodwill of $659.1 million. The cessation of
amortization reduced amortization expense by $80.2 million for 2002 as compared
with 2001.
Special Charges. During 2002, we recorded $292.0 million of special
charges. Special charges, in thousands, were comprised of:
Impairment of long-lived assets ......... $190,266
Impairment of goodwill .................. 73,080
Lease termination and other exit costs .. 28,624
--------
$291,970
========
During 2001, the semiconductor industry declined an unprecedented 32%,
which impacted the utilization rates of our packaging and test assets. During
the second quarter of 2002, total packaging and test revenues grew over 21% as
compared to the first quarter of 2002. We experienced significant recovery in
most of our company's packaging services. However, our test services assets and
several packaging services assets:
- did not contribute significantly to the growth experienced during
the second quarter of 2002,
- remained at low utilization rates relative to our projections and
- were no longer expected to reach previously anticipated utilization
levels.
In addition, as of June 30, 2002, we experienced a 72% decline in our
market capitalization as compared to March 31, 2002. These events triggered an
impairment review in accordance with SFAS No. 144. This review included a
company-wide evaluation of underutilized assets and a detailed update of our
operating and cash flow projections.
Based on our company-wide evaluation of underutilized assets, we identified
$19.8 million of test and packaging assets to be disposed. We recognized an
$18.7 million impairment charge to reduce the carrying value of the test and
packaging fixed assets to be disposed to their fair value less cost to sell.
Fair value of the assets to be disposed was determined with the assistance of an
appraisal firm and available information on the resale value of the equipment.
As of December 31, 2002, we disposed of $5.4 million of the $19.8 million
identified assets, and intend to sell the remaining balance of these items by
December 31, 2003.
Upon the completion of the process to identify the packaging and test net
assets to be disposed, we reviewed our assets to be held and used for
impairment. Based on the June 30, 2002 operating and cash flow projections, we
determined that the carrying value of our test services assets and several
packaging services assets being held and used, including intangible assets that
we are amortizing, exceeded the anticipated cash
27
flows attributable to those assets. We grouped our long-lived assets with other
assets and liabilities at the lowest level for which identifiable cash flows
were largely independent of the cash flows of other assets and liabilities. For
our company, the lowest level of identifiable cash flows is at the test
reporting unit level and for our packaging services reporting unit at the
package type level.
Our test reporting unit and the outsourced integrated circuit test services
industry were adversely impacted by excess capacity at the large integrated
device manufacturers. We expected that when the semiconductor industry recovered
the integrated device manufactures' demand for outsourced test services would
also recover. However, that anticipated recovery failed to materialize in
connection with the initial recovery we noted in the semiconductor industry
during the first half of 2002 due to continued excess test capacity held by the
large integrated device manufacturers. We no longer expect that the demand for
our test services on our existing technology platforms will return to the
previously anticipated rates. Several of our package types based on more mature
technologies and processes, including older leadframe and laminate package
types, were adversely impacted by a technology shift to matrix and high density
leadframes and the movement from multi-layer laminate substrates to tape and
chip arrays and stacked-die packages. We expected that when the semiconductor
industry recovered there would still be sufficient demand for these more mature
products. However, that anticipated recovery failed to materialize in connection
with the initial recovery we noted in the semiconductor industry during the
first half of 2002 due to these technology shifts and the related significant
excess capacity in the industry. We no longer expect that the demand for these
package types will return to the previously anticipated rates. Additionally, we
experienced insufficient demand related to select investments in advanced
package technologies principally as a result of alternative advanced package
technologies which became industry standard.
As of June 30, 2002, we recognized a $171.6 million impairment charge to
reduce the carrying value of test and packaging assets to be held and used to
their fair value. The components of the this charge were as follows:
CARRYING FAIR IMPAIRMENT
VALUE VALUE CHARGE
----- ----- ------
(IN MILLIONS)
Test assets:
Property, plant and equipment and acquired intangibles .. $ 95.4 $ 21.9 $ 73.5
Packaging assets:
Property, plant and equipment .......................... 157.7 59.6 98.1
------ ------ ------
$ 253.1 $ 81.5 $ 171.6
====== ====== ======
An appraisal firm was engaged to assist in the determination of the fair
value of the assets held for use. The determination of fair value was based on
projected cash flows using a discount rate commensurate with the risk involved.
We estimate that depreciation expense will be reduced by approximately $77
million during the twelve month period following the second quarter of 2002. The
impact to depreciation expense will diminish quarterly as these assets reach the
end of their respective useful lives.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Accordingly, we retested goodwill for
impairment as of June 30, 2002, and concluded that the carrying value of the
assets and liabilities associated with the test services reporting unit exceeded
its fair value. As of June 30, 2002, we recognized a $73.1 million goodwill
impairment charge. Such impairment charge was measured by comparing the implied
fair value of the goodwill associated with the test services reporting unit to
its carrying value. An appraisal firm was engaged to assist in the determination
of the fair value of our reporting units. The determination of fair value was
based on projected cash flows using a discount rate commensurate with the risk
involved.
During 2002, we recorded $28.6 million of charges related to the
consolidation of our worldwide facilities to increase operational efficiency and
reduce costs. The charges were comprised of $20.8 million to write-off leasehold
improvements and other long-lived assets and $7.8 million for lease termination
and other exit costs. Our consolidation efforts included:
- Transferring the packaging operations at our K2 site in Bucheon,
South Korea into our K4 factory in Kwangju, South Korea and closing
the K2 facility;
28
- Merging our factory operations in Taiwan into a single location; and
- Consolidating select U.S. office locations and closing our San Jose
test facility.
The charges associated with the consolidation initiatives in Korea, Taiwan
and the U.S. were $10.0 million, $13.8 million and $4.8 million, respectively.
We expect to complete the closing of the K2 facility during the second quarter
of 2003 and the other activities were substantially completed during 2002. We
have undertaken, and may continue to undertake, a variety of measures to reduce
our operating costs including consolidating packaging lines, reducing our
worldwide headcount, reducing compensation levels, shortening work schedules,
improving factory efficiencies, negotiating cost reductions with our vendors and
closing non-critical manufacturing facilities. These restructuring activities
will result in a reduction of operating expenses of approximately $17 million
per year. We began recognizing a portion of these savings in the fourth quarter
of 2002.
Other (Income) Expense. Other expenses, net decreased $14.0 million, to
$147.4 million, or 10.5% of net revenues, in 2002 from $161.3 million, or 12.1%
of net revenues, in 2001. The net decrease in other expenses was primarily a
result of a decrease in interest expense of $16.6 million. Net interest expense
in 2001 included $13.4 million of unamortized deferred debt issuance costs
expensed in connection with the repayment in February, May and November 2001 of
term loans outstanding under our secured bank facility and the reduction of the
revolving line of credit commitment.
Provision (Benefit) for Income Taxes. During 2002, we recorded a $138.2
million charge to establish a valuation allowance against our deferred tax
assets consisting primarily of U.S. and Taiwanese net operating loss
carryforwards and tax credits. In connection with our divestiture in 2002 of 21
million shares of ASI common stock, we realized a capital loss of approximately
$117.0 million and recognized a U.S. tax benefit of $44.5 million for which we
provided a full valuation allowance because we did not have any offsetting
capital gains. The total change in the valuation allowance against our deferred
tax assets was $182.7 million in 2002. Generally accepted accounting principles
require companies to weigh both positive and negative evidence in determining
the need for a valuation allowance. In light of our three years of cumulative
losses, an unprecedented industry downturn and continued poor visibility of
customer demand, we determined in the fourth quarter that a valuation allowance
representing substantially all of our deferred tax assets was appropriate. These
negative factors outweighed our forecasted future profitability and expectation
that we will be able to utilize our net operating loss carryforwards. We will
resume the recognition of deferred tax assets when we return to profitability.
Additionally, until we utilize our net operating loss carryforwards, the income
tax provision will reflect modest levels of foreign taxation. In December 2002,
we utilized $33.3 million of U.S. net operating losses by carrying back such
amounts to offset U.S. reported taxable income in prior years. At December 31,
2002, our company has remaining U.S. net operating losses available to be
carried forward totaling $375.5 million expiring between 2021 and 2022.
Additionally, at December 31, 2002, our company had non-U.S. net operating
losses available to be carried forward totaling $61.2 million expiring between
2003 and 2012.
Equity Investment Losses. Our earnings included our share of losses in our
equity affiliates, principally ASI, in 2002 of $33.9 million compared to $100.7
million ($65.2 million excluding the amortization of equity method goodwill) in
2001. As of January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets. We stopped amortizing
equity method goodwill of $118.6 million associated with our investment in ASI.
The cessation of amortization reduced equity in loss of investees by $35.5
million for 2002 as compared with the corresponding period.
During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value.
Additionally during 2002, we recorded a loss of $1.8 million on the disposition
of a portion of our interest in ASI to Dongbu. With Dongbu's purchase of 12.0
million newly issued shares of ASI together with its purchase of 20 million
shares from our company and our disposition of an additional 1 million shares of
ASI stock as payment of transaction costs to our financial advisors in
connection with the transaction with Dongbu, our ownership interest in ASI was
reduced to approximately 21%.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Revenues. Net revenues decreased $673.0 million, or 33.5%, to $1,336.7
million in 2001 from $2,009.7 million in 2000. This decrease in net revenues,
excluding the impact of acquisitions, was primarily attributable to a 37.3%
decrease in overall unit volumes in 2001 compared to 2000. This overall unit
volume decrease was driven by a 34.6% unit volume decrease for advanced
leadframe and laminate packages and a 39.4% decrease in our traditional
leadframe business as a
29
result of a broad based decrease in demand for semiconductors. Average selling
prices across all product lines eroded by approximately 13.9% for 2001 as
compared to 2000. Partially offsetting the decrease in overall unit volumes and
average selling price erosion was the benefit of $231.0 million in net revenues
related to acquisitions which were completed since January 1, 2001.
Gross Profit. Gross profit decreased $515.1 million, or 90.8%, to $52.3
million in 2001 from $567.4 in 2000. Our cost of revenues consists principally
of costs of materials, labor and depreciation. Because a substantial portion of
our costs at our factories is fixed, significant increases or decreases in
capacity utilization rates have a significant effect on our gross profit. As a
result of our May 2000 acquisition of K1, K2 and K3 and our 2001 acquisitions in
Japan and Taiwan, we substantially increased our fixed costs.
Gross margins as a percentage of net revenues decreased 86.0% to 3.9% of
net revenues in 2001 as compared to 28.2% of net revenues in 2000 principally as
a result the following:
- Decreasing unit volumes in 2001 at our factories in Korea and the
Philippines that caused an approximate 41% decline in gross margins
as a result of the factories' substantial fixed and labor costs to
be distributed over a smaller revenue base. This decline in gross
margins is net of the benefit of our 2001 cost reduction initiatives
to reduce labor and other factory overhead costs.
- Average selling price erosion across our product lines caused an
estimated 40% decline in gross margins.
- Our acquisitions in 2001 contributed approximately 10% to the
decline in gross margin. This is principally attributed to the
long-term supply agreement between Amkor Iwate and Toshiba, which
provides for packaging and test services to be performed on a cost
plus basis which produces a resulting gross margin less than our
historical margins in 2000.
As a result of the decline in the semiconductor industry and the
reductions of our customers' forecasted demand, our provision for excess and
obsolete inventory increased $7.9 million to a total provision of $17.9 million
in 2001 as compared to $10.0 million in 2000. During 2001, we wrote-off and
contemporaneously disposed of $10.6 million of inventory. In general we order
raw materials based on the customers' forecasted demand and we do not maintain
any finished goods inventory. If our customers change their forecasted
requirements and we are unable to cancel our raw materials order or if our
vendors require that we order a minimum quantity that exceeds the current
forecasted demand, we will experience a build-up in raw material inventory. We
will either seek to recover the cost of the materials from our customers or
utilize the inventory in production. However, we may not be successful in
recovering the cost from our customers or being able to use the inventory in
production, which we would consider as part of our reserve estimate. Our reserve
for excess and obsolete inventory is based on forecasted demand we receive from
our customers. When a determination is made that the inventory will not be
utilized in production it is written-off and disposed.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $12.0 million, or 6.7%, to $191.1 million, or
14.3% of net revenues, in 2001 from $179.1 million, or 8.9% of net revenues, in
2000. The increase in these costs was due to:
- Increased costs of $16.0 million related to the acquisitions in
Japan and Taiwan, the commencement of operations in China and the
increased staffing of our Japanese sales force;
- An overall decrease of $6.6 million in our factories in Korea and
the Philippines as a result of our cost reduction initiatives in the
first and second quarters of 2001 that were partially offset by the
increased selling, general and administrative costs assumed in
connection our May 2000 acquisition of K1, K2 and K3; and
- Decreased costs of $1.8 million principally related our U.S. based
administrative overhead cost reduction initiatives in the first and
second quarters of 2001.
Research and Development. Research and development expenses increased
$12.7 million to $38.8 million, or 2.9% of net revenues, in 2001 from $26.1
million, or 1.3% of net revenues, in 2000. Increased research and development
expenses resulted from the acquisition of the packaging and test research and
development group within ASI related to the K1, K2 and K3 transaction. Our
research and development efforts support our customers' needs for smaller
packages and increased functionality. We continue to invest our research and
development resources to continue the development of our Flip Chip
30
interconnection solutions, our System-in-Package technology, that uses both
advanced packaging and traditional surface mount techniques to enable the
combination of technologies in a single package, and our Chip Scale packages
that are nearly the size of the semiconductor die.
Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles increased $21.9 million to $85.0 million
from $63.1 million in 2000 principally as a result of our May 2000 acquisition
of K1, K2 and K3 and to a lesser extent our January 2001 acquisition of Amkor
Iwate.
Loss on Disposal of Fixed Assets. Loss on disposal of fixed assets
increased $13.1 million to $14.5 million from $1.4 million in 2000 principally
as a result of the disposition of production equipment and construction
materials in Korea.
Other (Income) Expense. Other expenses, net increased $36.8 million, to
$161.4 million, or 12.1% of net revenues, in 2001 from $124.6 million, or 6.2%
of net revenues, in 2000. The net increase in other expenses was primarily a
result of a net increase in interest expense of $44.3 million. The increased
interest expense resulted from the financing related to our May 2000 acquisition
of K1, K2 and K3 and our investment in ASI and our 2001 financing activities.
Net interest expense for 2001 also included $13.4 million of unamortized
deferred debt issuance costs expensed in connection with the repayment in
February, May and November 2001 of term loans outstanding under our secured bank
facility and the reduction of the revolving line of credit commitment. Other
expenses were favorably impacted by a change in foreign currency gains and
losses of $3.9 million for 2001 as compared with the corresponding period in the
prior year.
Provision (Benefit) for Income Taxes. Our effective tax rate in 2001 and
2000 was (19.3%) and 8.3%, respectively. The change in the effective tax rate in
2001 was due to operating losses in jurisdictions for which there is no
offsetting tax benefit from tax holidays as well as operating losses in
jurisdictions with higher corporate income tax rates. The tax returns for open
years are subject to changes upon final examination. Changes in the mix of
income from our foreign subsidiaries, expiration of tax holidays and changes in
tax laws and regulations could result in increased effective tax rates for us in
the future.
Equity Investment Losses. Our earnings included our share of losses in our
equity affiliates, principally ASI, in 2001 of $65.2 million compared to our
share of their income in 2000 of $3.9 million. Our earnings also included the
amortization of the excess of the cost of our investment above of our share of
the underlying net assets of $35.5 million and $24.9 million in 2001 and 2000,
respectively. Our investment in ASI increased to 42% as of October 2000 from 40%
as of September 2000, 38% as of May 2000 and 18% as of October 1999.
RESULTS OF DISCONTINUED OPERATIONS
On February 28, 2003, we sold our wafer fabrication services business to
ASI. Additionally, we obtained a release from Texas Instruments regarding our
contractual obligations with respect to wafer fabrication services to be
performed subsequent to the transfer of the business to ASI. We restated our
historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded, in the first quarter of 2003, $1.0 million in
severance and other exit costs to close our wafer fabrication services
operations in Boise, Idaho and Lyon, France. Also in the first quarter of 2003,
we recognized a pre-tax gain on the disposition of our wafer fabrication
services business of $58.6 million ($51.5 million, net of tax). The carrying
value of the sold net assets associated with the business as of February 28,
2003 was $2.4 million.
QUARTERLY RESULTS
The following table sets forth our unaudited restated consolidated
financial data, including as a percentage of our net revenues, for the last
eight fiscal quarters ended December 31, 2002. Our results of operations have
varied and may continue to vary from quarter to quarter and are not necessarily
indicative of the results of any future period. The results of the semiconductor
packaging businesses acquired from Citizen Watch Co., Ltd. and Agilent
Technologies, Inc.'s in 2002 are included in the consolidated financial data
from the date of the acquisitions. The results of the 2001 acquisitions of Amkor
Iwate Corporation, Sampo Semiconductor Corporation and the consolidated results
of Taiwan Semiconductor Technology Corporation (a prior equity investment) are
included in the consolidated financial data from the date of the acquisitions.
The quarterly results stated below reflect improved gross margins in the
third and fourth quarters of 2003. In addition to the impact of increased
revenues from overall unit volumes and material cost reductions, gross margins
were positively impacted by the reduction of depreciation expense resulting from
the fixed asset impairment charge recorded in the second quarter of
31
2002 and the impact of the change in the estimated useful lives of certain
packaging equipment during the fourth quarter of 2002. Also, margins were
improved as a result of consolidation efforts which reduced rental expense and
depreciation. The total cost reductions related to the impairment charge, change
in useful lives and consolidation efforts positively impacted gross margins by
$20 million and $41 million in the third and fourth quarters of 2002,
respectively.
We believe that we have included in the amounts stated below all necessary
adjustments, consisting only of normal recurring adjustments, for a fair
presentation of our selected quarterly data. You should read our selected
quarterly data in conjunction with our restated consolidated financial
statements and the related notes, included elsewhere in this report.
Our net revenues, gross profit and operating income are generally lower in
the first quarter of the year as compared to the fourth quarter of the preceding
year primarily due to the combined effect of holidays in the U.S. and Asia.
Semiconductor companies in the U.S. generally reduce their production during the
holidays at the end of December which results in a significant decrease in
orders for packaging and test services during the first two weeks of January. In
addition, we typically close our factories in the Philippines for holidays in
January, and we close our factories in Korea for holidays in February.
The calculation of basic and diluted per share amounts for each quarter is
based on the average shares outstanding for that period; consequently, the sum
of the quarters may not necessarily be equal to the full year basic and diluted
net income (loss) per share.
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net revenues....................................... $ 373,189 $ 393,563 $ 350,471 $ 288,955
Cost of revenues .................................. 312,006 346,053 344,026 308,478
--------- --------- --------- ---------
Gross profit (loss)............................ 61,183 47,510 6,445 (19,523)
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative.............. 42,249 45,118 46,981 45,540
Research and development......................... 6,654 7,622 8,769 8,144
Loss (gain) on disposal of assets, net........... (416) (200) 1,438 1,674
Amortization of goodwill and other acquired
intangibles.................................... 1,997 2,000 1,743 1,252
Special charges.................................. 9,985 13,819 268,166 --
--------- --------- --------- ---------
Total operating expenses....................... 60,469 68,359 327,097 56,610
--------- --------- --------- ---------
Operating income (loss)............................ 714 (20,849) (320,652) (76,133)
Other expense, net................................. 34,509 37,566 37,629 37,685
--------- --------- --------- ---------
Loss before income taxes, equity investment losses,
minority interest and discontinued operations (33,795) (58,415) (358,281) (113,818)
Equity investment losses .......................... (42,125) (14,299) (53,071) (98,670)
Minority interest income (loss).................... 306 423 (908) (1,753)
--------- --------- --------- ---------
Loss from continuing operations before
income taxes..................................... (75,614) (72,291) (412,260) (214,241)
--------- --------- --------- ---------
Income tax expense (benefit)....................... 122,574 (11,078) (26,709) (24,104)
--------- --------- --------- ---------
Loss from continuing operations.................... (198,188) (61,213) (385,551) (190,137)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax............................. 2,072 1,906 2,023 2,329
--------- --------- --------- ---------
Net loss........................................... $(196,116) $ (59,307) $(383,528) $(187,808)
========= ========= ========= =========
Basic and diluted income (loss) per common share:
from continuing operations....................... $ (1.20) $ (0.37) $ (2.34) $ (1.16)
from discontinued operations..................... 0.01 0.01 0.01 0.01
--------- --------- --------- ---------
Net loss per common share...................... $ (1.19) $ (0.36) $ (2.33) $ (1.15)
========= ========= ========= =========
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net revenues....................................... $ 297,309 $ 288,529 $ 311,423 $ 439,413
Cost of revenues................................... 311,127 304,521 307,334 361,441
--------- --------- --------- ---------
Gross profit (loss)............................ (13,818) (15,992) 4,089 77,972
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative.............. 44,866 45,464 49,151 51,655
Research and development......................... 10,365 9,784 8,135 10,502
Loss (gain) on disposal of assets, net 9,861 3,132 398 1,124
Amortization of goodwill and other acquired
intangibles.................................... 21,263 21,214 20,573 21,912
Special charges.................................. -- -- -- --
--------- --------- --------- ---------
Total operating expenses....................... 86,355 79,594 78,257 85,193
--------- --------- --------- ---------
Operating income (loss)............................ (100,173) (95,586) (74,168) (7,221)
Other expense, net................................. 41,067 35,420 42,309 42,554
--------- --------- --------- ---------
Loss before income taxes, equity investment losses,
minority interest and discontinued operations (141,240) (131,006) (116,477) (49,775)
Equity investment losses .......................... (24,452) (23,661) (26,345) (26,248)
Minority interest income (loss).................... (423) (645) (828) --
--------- --------- --------- ---------
Loss from continuing operations before
income taxes..................................... (166,115) (155,312) (143,650) (76,023)
--------- --------- --------- ---------
Income tax expense (benefit)....................... (27,467) (25,177) (26,229) (5,740)
--------- --------- --------- ---------
Loss from continuing operations.................... (138,648) (130,135) (117,421) (70,283)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax............................. 2,036 1,391 1,130 1,069
--------- --------- --------- ---------
Net loss........................................... $(136,612) $(128,744) $(116,291) $ (69,214)
========= ========= ========= =========
Basic and diluted income (loss) per common share:
from continuing operations....................... $ (0.86) $ (0.81) $ (0.77) $ (0.46)
from discontinued operations..................... 0.01 0.01 0.01 0.01
--------- --------- --------- ---------
Net loss per common share...................... $ (0.85) $ (0.80) $ (0.76) $ (0.45)
========= ========= ========= =========
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
--------- --------- --------- ---------
Net revenues....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues .................................. 83.6 87.9 98.2 106.8
--------- --------- --------- ---------
Gross profit (loss)............................ 16.4 12.1 1.8 (6.8)
--------- --------- --------- ---------
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------- --------- --------- ---------
Net revenues....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues .................................. 104.6 105.5 98.7 82.3
--------- --------- --------- ---------
Gross profit (loss)............................ (4.6) (5.5) 1.3 17.7
--------- --------- --------- ---------
32
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative.............. 11.3 11.5 13.4 15.8
Research and development......................... 1.8 1.9 2.5 2.8
Loss (gain) on disposal of assets, net (0.1) (0.1) 0.4 0.6
Amortization of goodwill and other acquired
intangibles.................................... 0.5 0.5 0.5 0.4
Special charges.................................. 2.7 3.5 76.5 --
--------- --------- --------- ---------
Total operating expenses....................... 16.2 17.4 93.3 19.6
--------- --------- --------- ---------
Operating income (loss)............................ 0.2 (5.3) (91.5) (26.3)
Other expense, net................................. 9.2 9.5 10.7 13.0
--------- --------- --------- ---------
Loss before income taxes, equity investment losses,
minority interest and discontinued operations (9.1) (14.8) (102.2) (39.4)
Equity investment losses........................... (11.3) (3.6) (15.1) (34.1)
Minority interest.................................. 0.1 0.1 (0.3) (0.6)
--------- --------- --------- ---------
Loss from continuing operations before
income taxes..................................... (20.3) (18.4) (117.6) (74.1)
--------- --------- --------- ---------
Income tax expense (benefit)....................... 32.8 (2.8) (7.6) (8.3)
--------- --------- --------- ---------
Loss from continuing operations.................... (53.1) (15.6) (110.0) (65.8)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax............................. 0.6 0.5 0.6 0.8
--------- --------- --------- ---------
Net loss........................................... (52.6)% (15.1)% (109.4)% (65.0)%
========= ========= ========= =========
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative.............. 15.1 15.8 15.8 11.8
Research and development......................... 3.5 3.4 2.6 2.4
Loss (gain) on disposal of assets, net 3.3 1.1 0.1 0.3
Amortization of goodwill and other acquired
intangibles.................................... 7.2 7.4 6.6 5.0
Special charges.................................. -- -- -- --
--------- --------- --------- ---------
Total operating expenses....................... 29.0 27.6 25.1 19.4
--------- --------- --------- ---------
Operating income (loss)............................ (33.7) (33.1) (23.8) (1.6)
Other expense, net................................. 13.8 12.3 13.6 9.7
--------- --------- --------- ---------
Loss before income taxes, equity investment losses,
minority interest and discontinued operations (47.5) (45.4) (37.4) (11.3)
Equity investment losses........................... (8.2) (8.2) (8.5) (6.0)
Minority interest.................................. (0.1) (0.2) (0.3) --
--------- --------- --------- ---------
Loss from continuing operations before
income taxes..................................... (55.9) (53.8) (46.1) (17.3)
--------- --------- --------- ---------
Income tax expense (benefit)....................... (9.2) (8.7) (8.4) (1.3)
--------- --------- --------- ---------
Loss from continuing operations.................... (46.6) (45.1) (37.7) (16.0)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax............................. 0.7 0.5 0.4 0.2
--------- --------- --------- ---------
Net loss........................................... (45.9)% (44.6)% (37.3)% (15.8)%
========= ========= ========= =========
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor industry analysts have forecasted significant growth in the
semiconductor industry in 2003 and 2004. The first calendar quarter is typically
a seasonally down quarter for Amkor. On the basis of customers' forecasts, we
currently expect packaging and test revenue for the first quarter of 2003 to be
around 10% lower than packaging and test revenues for the fourth quarter of
2002. We expect that first quarter of 2003 gross margin be around 11%.
Net cash provided by (used in) operating, investing and financing
activities from continuing operations and cash provided by discontinued
operations for the last eight fiscal quarters ended December 31, 2002 were as
follows:
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
--------- --------- --------- ---------
(IN THOUSANDS)
(IN THOUSANDS)
Operating activities from continuing operations ... $ 63,753 $ 48,050 $ 20,713 $ (19,341)
Investing activities from continuing operations ... (19,798) 26,218 (38,668) (22,317)
Financing activities from continuing operations ... 2,416 (16,977) (2,061) 5,240
Discontinued operations............................ 29,412 17,363 5,997 9,859
QUARTER ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------- --------- --------- ---------
(IN THOUSANDS)
(IN THOUSANDS)
Operating activities from continuing operations ... $ (2,784) $ 15,869 $ 56,814 $ 71,065
Investing activities from continuing operations ... (23,031) (25,774) (40,771) (78,534)
Financing activities from continuing operations ... (115,036) (1,467) 111,284 119,905
Discontinued operations............................ 12,807 326 4,206 2,058
33
Our improved operating performance resulting from the increased demand for
our services and the effect of our cost savings initiatives contributed to our
increasing cash provided by operating activities during 2002. Additionally, our
cash provided by operating activities for 2002 benefited from a favorable change
in our working capital and the settlement of a $19.8 million claim for
reimbursement of value-added-tax receivables previously classified as a
long-term asset on our balance sheet. Changes in accounts payable and accrued
expenses contributed $52.7 million to our cash provided by operating activities
in 2002 partially offset by an increase in accounts receivable of $39.3 million.
Increased material purchases because of our improved sales drove the increase in
accounts payable. Increased accrued expenses resulted from rising employee costs
principally from reinstating various factory employee bonus programs suspended
during the unprecedented downturn. Increased sales in the fourth quarter of 2002
in comparison to the year ago period led to the increase in accounts receivable.
Our cash and cash equivalents balance as of December 31, 2002 was $311.2
million, and we have up to $89 million available under our $100 million
revolving line of credit which is subject to borrowing base of qualified
receivables. Our ongoing primary cash needs are for debt service, principally
interest, equipment purchases, and working capital. Additionally, we may require
cash to consummate business combinations to diversify our geographic operations
and expand our customer base.
In June 2002 and September 2002 we amended our existing bank debt
covenants to provide further flexibility with respect to capital expenditures,
investment restrictions and other financial covenants measured in part by our
liquidity and earnings. As part of the September 2002 amendment, lenders under
our bank credit facility agreed to extend the existing financial covenant
framework through December 31, 2003. Our secured debt encompasses a $97.1
million term loan and the unused revolving line of credit. The term loan
maintained its scheduled amortization of approximately $0.25 million per quarter
through September 2003 and then $12 million per quarter beginning in December
2003 through September 2005. The bank credit facility will revert to its
original covenant structure in January 2004. Additionally, the reduced levels of
our operating cash flow in 2001 required us to renegotiate our bank debt
covenants in March 2001, June 2001 and September 2001. In connection with the
September 2001 amendment, our revolving line of credit was reduced from a $200
million commitment to $100 million, the interest rate on the Term B loans was
increased from LIBOR plus 3% to LIBOR plus 4%, and we prepaid $125 million of
the Term B loans in November 2001 from cash on hand. In general, covenants in
the agreements governing our existing debt, and debt we may incur in the future,
may materially restrict our operations, including our ability to incur debt, pay
dividends, make certain investments and payments and encumber or dispose of
assets. In addition, financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event our results of
operations do not meet our plans and we are unable to amend such financial
covenants prior to default. A default under one debt instrument may also trigger
cross-defaults under our other debt instruments. As of December 31, 2002 and
through the date of this filing, we were in compliance with all financial
covenants. An event of default under one or more of our debt instruments, if not
cured or waived, could have a material adverse effect on us. Our credit and debt
ratings were lowered in August 2002, and accordingly, it may be difficult for us
to secure additional financing, if we need it, on satisfactory terms or at all.
During this industry downturn, our business strategy has been in part to
enhance our financial flexibility. In February 2001 and May 2001, we raised
$500.0 million through the sale of 9.25% senior notes due 2008 and $250.0
million through the sale of 5.75% convertible subordinated notes due 2006,
respectively. Of the combined net proceeds of $733.0 million, we used $509.5
million to repay amortizing term loans under our secured credit facility. The
balance of the net proceeds supports our expansion efforts and general corporate
and working capital purposes. In May 2001 holders of the 5.75% convertible
subordinated notes due May 2003, following our announced plan to redeem these
notes, converted $50.2 million of their notes into 3.7 million shares of our
common stock. We now have, and for the foreseeable future will continue to have,
a significant amount of indebtedness. As of December 31, 2002, we had total debt
of $1,808.7 million debt and had available to us a $100.0 million revolving line
of credit, which is subject to borrowing base of qualified receivables, under
which no amounts were drawn. Our indebtedness requires us to dedicate a
substantial portion of our cash flow from operations to service payments on our
debt, with such payments principally for interest. For 2002, interest expense
payable in cash was $143.4 million.
34
We expect to spend up to $125.0 million in capital expenditures in 2003.
During 2002, 2001 and 2000, we made capital expenditures related to continuing
operations of $95.1 million, $158.6 million and $479.9 million, respectively.
Our capital expenditures in 2002 were focused on increasing capacity for
MicroLeadFrame(TM), flip chip and digital micro-mirror devices.
We continue to diversify our operations geographically. In January 2002,
we acquired Agilent Technologies, Inc.'s packaging business related to
semiconductor packages utilized in printers for $2.8 million in cash. The
purchase price was principally allocated to the tangible assets. In April 2002,
we acquired the semiconductor packaging business of Citizen Watch Co., Ltd.
located in the Iwate prefecture in Japan. The business acquired includes a
manufacturing facility, over 80 employees and intellectual property. The
purchase price included a $7.8 million cash payment at closing and we are
required to make additional payments one year from closing for the amount of the
deferred purchase price as well as contingent payments. Based on the resolution
of the contingency as of January 2003, the total amount of additional payments
due in April 2003 is 1.7 billion Japanese yen ($14.3 million based on the spot
exchange rate at December 31, 2002). In October 2002, we terminated negotiations
with Fujitsu Limited to acquire Fujitsu's packaging and test operation in
Kagoshima, Japan pursuant to the April 2002 memorandum of understanding between
our company and Fujitsu. In July 2001, we acquired, in separate transactions,
Taiwan Semiconductor Technology Corporation (TSTC) and Sampo Semiconductor
Corporation (SSC) in Taiwan. The combined purchase price, including the
settlement of a January 2002 earn-out provision, was paid with the issuance of
6.7 million shares of our common stock valued at $123.1 million, the assumption
of $34.8 million of debt and $3.7 million of cash consideration, net of acquired
cash. In January 2001, Amkor Iwate Corporation commenced operations and acquired
from Toshiba a packaging and test facility located in the Iwate prefecture in
Japan financed by a short-term note payable to Toshiba of $21.1 million and
$47.0 million in other financing from a Toshiba affiliate. We currently own 60%
of Amkor Iwate and Toshiba owns 40% of the outstanding shares, which shares we
are required to purchase by January 2004. The share purchase price will be
determined based on the historical performance of the joint venture, but cannot
be less than 1 billion Japanese yen and cannot exceed 4 billion Japanese yen
($8.4 million to $33.7 million based on the spot exchange rate at December 31,
2002).
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business, we entered into a series of transactions
beginning in the second half of 2002:
- In September 2002, we sold 20 million shares of ASI common stock to
Dongbu Group for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we
entered into the share sale agreement. We received $58.1 million in
net cash proceeds and 42 billion Korean Won (approximately $35.4
million at a spot exchange rate as of December 31, 2002) of interest
bearing notes from Dongbu Corporation payable in two equal principal
payments in September 2003 and February 2004. The Dongbu Group
comprises Dongbu Corporation, Dongbu Fire Insurance Co., Ltd. and
Dongbu Life Insurance Co., Ltd., all of which are Korean
corporations and are collectively referred herein as "Dongbu."
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction.
- In separate transactions designed to facilitate a future merger
between ASI and Dongbu, (i) we acquired a 10% interest in Acqutek
from ASI for $1.9 million, the market value of the shares as
publicly traded in Korea; (ii) we acquired the Precision Machine
Division (PMD) of Anam Instruments, a related party to Amkor, for $8
million, its fair value; and (iii) Anam Instruments, which had been
partially owned by ASI, utilized the proceeds from the sale of PMD
to us to buy back all of the Anam Instruments shares owned by ASI.
Acqutek supplies materials to the semiconductor industry and is
publicly traded in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, held a 25%
ownership interest in Acqutek at the time of our acquisition of our
interest in Acqutek. We have historically purchased and continue to
purchase leadframes from Acqutek. PMD supplies sophisticated die
mold systems and tooling to the semiconductor industry and
historically over 90% of its sales were to Amkor. We determined the
fair value of PMD based on projected cash flows discounted at a rate
commensurate with the risk involved. At the time of our acquisition
of PMD, Anam Instruments was owned 20% by ASI and 20% by a family
member of James Kim.
- On February 28, 2003, we sold our wafer fabrication services
business to ASI for total consideration of $62 million. We
negotiated the fair value of our wafer fabrication services business
with ASI and Dongbu. The parties calculated fair value based on an
assessment of projected cash flows discounted at a rate commensurate
with the risk involved. We obtained a release from Texas Instruments
regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of
the business to ASI.
35
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different conclusions as to fair value. It is likely that we would not have
entered into the Acqutek or PMD transactions absent the share sale to Dongbu and
the sale of the wafer fabrication services business to ASI. Had these
transactions not been interrelated, we may have utilized a different negotiation
strategy for the investment in Acqutek and the acquisition of PMD, which could
have resulted in us reaching a different conclusion of the fair value of both of
these transactions.
In addition, pursuant to the definitive agreements, (1) Amkor and Dongbu
agreed to use reasonable best efforts to cause Dongbu Electronics and ASI to be
merged together as soon as practicable, (2) Amkor and Dongbu agreed to cause ASI
to use the proceeds ASI received from its sale of stock to Dongbu to purchase
shares in Dongbu Electronics and (3) Amkor and Dongbu agreed to use their best
efforts to provide releases and indemnifications to the chairman, directors and
officers of ASI, either past or incumbent, from any and all liabilities arising
out of the performance of their duties at ASI between January 1, 1995 and
December 31, 2001. The last provision would provide a release and
indemnification for James Kim, our CEO and Chairman, and members of his family.
We are not aware of any claims or other liabilities which these individuals
would be released from or for which they would receive indemnification.
At January 1, 2002 Amkor owned 47.7 million shares or 42% of ASI's voting
stock. During 2002, we divested 21 million shares of ASI stock and at December
31, 2002 Amkor owned 26.7 million shares of ASI or 21%. The carrying value of
our remaining investment in ASI at December 31, 2002 was $77.5 million, or $2.90
per share. On March 24, 2003, we sold an additional 7 million shares of ASI
common stock to an investment bank for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximates
the carrying value of those shares.
Subsequent to the sale of a portion of our investment in ASI to Dongbu in
2002, we were unable to identify another strategic buyer. ASI's common stock,
which is listed on the Korean Stock Exchange, is relatively thinly traded and
subject to volatile swings in daily trading volumes. In an effort to continue to
monetize our investment in ASI's common stock, we evaluated, in consultation
with a financial institution, the most efficient method to divest a large block
of shares into the market without destabilizing the share price of ASI's common
stock. As of March 24, 2003, we consummated a series of transactions proposed by
the financial institution. We irrevocably sold a block of 7 million shares of
ASI common stock to the financial institution for 24.4 billion Korean won ($19.5
million based on the spot exchange rate as of the transaction date, or $2.81 per
share). We also entered into a nondeliverable call option with the financial
institution for $6.8 million, the fair value of the option at that date plus the
transaction costs. The call option is scheduled to expire December 2003 and is
indexed to ASI's share price with a strike price of $1.97 per share, or
approximately 70% of the then market value of ASI's common stock. The value of
the option declined $2.2 million as of March 31, 2003 as a result of ASI's share
price declining from 3,511 Korean won per share, or $2.81 per share, at March
24, 2003 to 3,150 Korean won at March 31, 2003.
The call option allows us to continue to monetize our investment in ASI at
a fixed price with unlimited upside and
36
limited downside economics. In addition, it provides us with the economic
benefits of selling shares through a dollar averaging sales program without
incurring the transaction costs associated with multiple small quantity sales.
The call premium provides the financial institution some downward protection if
the market for ASI's common stock destabilized as it sells its investment in
ASI's common stock into the market. If ASI's share price declines below the
market price of ASI's stock on the date we purchased the call option, then the
net proceeds from the exercise of the option could be less than the $6.8 million
we paid for the call option. All ownership rights and privileges associated with
the 7 million shares of ASI's common stock sold were irrevocably transferred to
the financial institution. In no event can the financial institution put the
shares back to Amkor nor can Amkor reacquire the shares from the financial
institution.
As of March 24, 2003, we owned 19.7 million shares of ASI, or 16% of ASI's
voting stock. Beginning March 24, 2003, we ceased accounting for our investment
in ASI under the equity method of accounting and commenced accounting for our
investment as a marketable security that is available for sale. We intend to
sell our remaining investment in ASI. The ultimate level of proceeds from the
sale of our remaining investment in ASI could be less than the current carrying
value.
We believe that our existing cash balances, available credit lines, cash
flow from operations and available equipment lease financing will be sufficient
to meet our projected capital expenditures, debt service, working capital and
other cash requirements for at least the next twelve months. We may require
capital sooner than currently expected. We cannot assure you that additional
financing will be available when we need it or, if available, that it will be
available on satisfactory terms. In addition, the terms of the secured bank
facility, senior notes and senior subordinated notes significantly reduce our
ability to incur additional debt. Failure to obtain any such required additional
financing could have a material adverse effect on our company.
A summary of our contractual commitments as of December 31, 2002 are as follows:
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------
2004 - 2006 - AFTER
TOTAL 2003 2005 2007 2008
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Total debt, including capital lease obligations $1,808,713 $71,023 $98,863 $937,426 $701,401
Operating lease obligations ................... 101,176 9,865 13,966 14,004 63,341
---------- ---------- ---------- ---------- ----------
Total contractual obligations ................. $1,909,889 $80,888 $112,829 $951,430 $764,742
========== ========== ========== ========== ==========
We have a $100.0 million revolving line of credit through March 2005 of
which the entire balance was available as of December 31, 2002. We are required
to purchased Toshiba's ownership interest in Amkor Iwate by January 1, 2004 at a
purchase price that will be determined based on the historical performance of
the joint venture but cannot be less than 1 billion Japanese yen and cannot
exceed 4 billion Japanese yen ($8.4 million to $33.7 million based on the spot
exchange rate at December 31, 2002). Additionally, in connection with our
acquisition of a semiconductor packaging business from Citizen Watch Co., Ltd.
we are required to make additional payments one year from closing for the amount
of the deferred purchase price as well as contingent payments. Based on the
resolution of the contingency as of January 2003, the total amount of additional
payments due in April 2003 is 1.7 billion Japanese yen ($14.3 million based on
the spot exchange rate at December 31, 2002). Such amount was accrued as of the
acquisition date and is reflected as a liability on our balance sheet as of
December 31, 2002. We have committed by January 2004 to purchase for 559.7
million Japanese yen, or $4.7 million at current exchange rates, a tract of land
adjacent to the Amkor Iwate facility that is currently being leased. This
commitment can be terminated for approximately $1.8 million.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. A summary of our significant
accounting policies used in the preparation of our consolidated financial
statements appears in Note 1 of the notes to the consolidated financial
statements. Our preparation of this annual report on Form 10-K/A requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements and the reported amounts of revenue and expenses during the
reporting
37
period. There can be no assurance that actual results will not differ from those
estimates.
Revenue Recognition and Risk of Loss. Revenues from packaging
semiconductors and performing test services are recognized upon shipment or
completion of the services. Our company does not take ownership of
customer-supplied semiconductor wafers. Title and risk of loss remains with the
customer for these materials at all times. Accordingly, the cost of the
customer-supplied materials is not included in the consolidated financial
statements. Prior to the sales of our wafer fabrication services business on
February 28, 2003, we recorded wafer fabrication services revenues upon shipment
of completed wafers. Such policies are consistent with provisions in the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
Provision for Income Taxes. We operate in and file income tax returns in
various U.S. and non-U.S. jurisdictions which are subject to examination by tax
authorities. Our tax returns have been examined through 1998 in the Philippines
and the U.S., through 1999 in Japan, through 2000 in Taiwan and through 2001 in
China. The tax returns for open years in all jurisdictions in which we do
business are subject to changes upon examination. We believe that we have
estimated and provided adequate accruals for the probable additional taxes and
related interest expense that may ultimately result from examinations related to
our transfer pricing and local attribution of income resulting from significant
intercompany transactions, including ownership and use of intellectual property,
in various U.S. and non-U.S. jurisdictions. Our estimated tax liability is
subject to change as examinations of specific tax years are completed 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 or results of operations, nor do we expect that examinations
to be completed in the near term would have a material effect. As of December
31, 2002 and 2001, the accrual for current taxes and estimated additional taxes
was $48.8 million and $53.4 million, respectively. In addition, changes in the
mix of income from our foreign subsidiaries, expiration of tax holidays and
changes in tax laws or regulations could result in increased effective tax rates
in the future.
Additionally, we record the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying consolidated balance sheets, as well as operating loss and
tax credit carryforwards. During 2002, we recorded a $138.2 million charge to
establish a valuation allowance against our deferred tax assets consisting
primarily of U.S. and Taiwanese net operating loss carryforwards and tax
credits. In connection with our divestiture in 2002 of 21 million shares of ASI
common stock, we realized a capital loss of approximately $117.0 million and
recognized a U.S. tax benefit of $44.5 million for which we provided a full
valuation allowance because we did not have any offsetting capital gains. The
total change in the valuation allowance against our deferred tax assets was
$182.7 million in 2002. Generally accepted accounting principles require
companies to weigh both positive and negative evidence in determining the need
for a valuation allowance. In light of our three years of cumulative losses, an
unprecedented industry downturn and continued poor visibility of customer
demand, we determined in the fourth quarter that a valuation allowance
representing substantially all of our deferred tax assets was appropriate. These
negative factors outweighed our forecasted future profitability and expectation
that we will be able to utilize our net operating loss carryforwards. We will
resume the recognition of deferred tax assets when we return to profitability.
Additionally, until we utilize our net operating loss carryforwards, the income
tax provision will reflect modest levels of foreign taxation. In December 2002,
we utilized $33.3 million of U.S. net operating losses by carrying back such
amounts to offset U.S. reported taxable income in prior years. At December 31,
2002, our company has remaining U.S. net operating losses available to be
carried forward totaling $375.5 million expiring between 2021 and 2022.
Additionally, at December 31, 2002, our company had non-U.S. net operating
losses available to be carried forward totaling $61.2 million expiring between
2003 and 2012.
Valuation of Long-Lived Assets. We assess the carrying value of long-lived
assets which includes property, plant and equipment, intangible assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important which could trigger
an impairment review include the following:
- significant under-performance relative to expected historical or
projected future operating results;
- significant changes in the manner of our use of the asset;
- significant negative industry or economic trends; and
- our market capitalization relative to net book value.
Upon the existence of one or more of the above indicators of impairment,
we would test such assets for a potential
38
impairment. The carrying value of a long-lived asset is considered impaired when
the anticipated cash flows are less than the asset's carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved.
During 2001, the semiconductor industry declined an unprecedented 32%,
which impacted the utilization rates of our packaging and test assets. During
the second quarter of 2002, total packaging and test revenues grew over 21% as
compared to the first quarter of 2002. We experienced significant recovery in
most of our company's packaging services. However, our test services assets and
several packaging services assets:
- did not contribute significantly to the growth experienced during
the second quarter of 2002,
- remained at low utilization rates relative to our projections and
- were no longer expected to reach previously anticipated utilization
levels.
In addition, as of June 30, 2002, we experienced a 72% decline in our
market capitalization as compared to March 31, 2002. These events triggered an
impairment review in accordance with SFAS No. 144. This review included a
company-wide evaluation of underutilized assets and a detailed update of our
operating and cash flow projections.
Based on our company-wide evaluation of underutilized assets, we
identified $19.8 million of test and packaging assets to be disposed. We
recognized an $18.7 million impairment charge to reduce the carrying value of
the test and packaging fixed assets to be disposed to their fair value less cost
to sell. Fair value of the assets to be disposed was determined with the
assistance of an appraisal firm and available information on the resale value of
the equipment. As of December 31, 2002, we disposed of $5.4 million of the $19.8
million identified assets, and intend to sell the remaining balance of these
items by December 31, 2003.
Upon the completion of the process to identify the packaging and test net
assets to be disposed, we reviewed our assets to be held and used for
impairment. Based on the June 30, 2002 operating and cash flow projections, we
determined that the carrying value of our test services assets and several
packaging services assets being held and used, including intangible assets that
we are amortizing, exceeded the anticipated cash flows attributable to those
assets. We grouped our long-lived assets with other assets and liabilities at
the lowest level for which identifiable cash flows were largely independent of
the cash flows of other assets and liabilities. For our company, the lowest
level of identifiable cash flows is at the test reporting unit level and for our
packaging services reporting unit at the package type level.
Our test reporting unit and the outsourced integrated circuit test
services industry were adversely impacted by excess capacity at the large
integrated device manufacturers. We expected that when the semiconductor
industry recovered the integrated device manufactures' demand for outsourced
test services would also recover. However, that anticipated recovery failed to
materialize in connection with the initial recovery we noted in the
semiconductor industry during the first half of 2002 due to continued excess
test capacity held by the large integrated device manufacturers. We no longer
expect that the demand for our test services on our existing technology
platforms will return to the previously anticipated rates. Several of our
package types based on more mature technologies and processes, including older
leadframe and laminate package types, were adversely impacted by a technology
shift to matrix and high density leadframes and the movement from multi-layer
laminate substrates to tape and chip arrays and stacked-die packages. We
expected that when the semiconductor industry recovered there would still be
sufficient demand for these more mature products. However, that anticipated
recovery failed to materialize in connection with the initial recovery we noted
in the semiconductor industry during the first half of 2002 due to these
technology shifts and the related significant excess capacity in the industry.
We no longer expect that the demand for these package types will return to the
previously anticipated rates. Additionally, we experienced insufficient demand
related to select investments in advanced package technologies principally as a
result of alternative advanced package technologies which became industry
standard.
As of June 30, 2002, we recognized a $171.6 million impairment charge to
reduce the carrying value of test and packaging assets to be held and used to
their fair value. The components of the this charge were as follows:
39
CARRYING FAIR IMPAIRMENT
VALUE VALUE CHARGE
------ ------ ------
(IN MILLIONS)
Test assets:
Property, plant and equipment and acquired intangibles $95.4 $21.9 $73.5
Packaging assets:
Property, plant and equipment 157.7 59.6 98.1
------ ------ ------
$253.1 $81.5 $171.6
====== ====== ======
An appraisal firm was engaged to assist in the determination of the fair
value of the assets held for use. The determination of fair value was based on
projected cash flows using a discount rate commensurate with the risk involved.
We estimate that depreciation expense will be reduced by approximately $77
million during the twelve month period following the second quarter of 2002. The
impact to depreciation expense will diminish quarterly as these assets reach the
end of their respective useful lives.
In 2002, Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
ceased amortization of goodwill. In lieu of amortization, we were required to
perform an initial impairment review of our goodwill as of January 1, 2002 and
then on an annual basis or between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Based on the comparison of the fair value
of the reporting units with their respective carrying values each as of January
1, 2002, we concluded that goodwill associated with our packaging and test
services reporting units was not impaired as of adoption. Since we tested our
long-lived assets for recoverability as of June 30, 2002, we retested goodwill
for impairment as of June 30, 2002, and concluded that the carrying value of the
assets and liabilities associated with the test services reporting unit exceeded
its fair value. As of June 30, 2002, we recognized a $73.1 million goodwill
impairment charge. Such impairment charge was measured by comparing the implied
fair value of the goodwill associated with the test services reporting unit to
its carrying value. An appraisal firm was engaged to assist in the determination
of the fair value of our reporting units. The determination of fair value was
based on projected cash flows discounted at a rate commensurate with the risk
involved.
Depreciation accounting requires estimation of the useful lives of the
assets to be depreciated as well as adoption of a method of depreciation. We
have historically calculated depreciation using the straight-line method over
the estimated useful lives of the depreciable assets. We have historically
estimated the useful lives of our machinery and equipment to be three to five
years, with the substantial majority of our packaging assets having estimated
useful lives of four years. Effective with the fourth quarter of 2002, we
changed the estimated useful lives of certain of our packaging equipment from
four years to seven years for depreciation purposes, which is in line with our
historical usage and consistent with other companies in our industry. We did not
extend the useful lives of the packaging equipment associated with the second
quarter impairment charge based on our expected use of that equipment and the
associated cash flows. This change reduced depreciation expense by approximately
$17 million per quarter. Our decision to change the estimated useful lives of
such packaging equipment was based on the following:
- historical experience;
- expected future cash flows;
- prevailing industry practice;
- consultations with an independent appraisal firm; and
- consultations with equipment manufacturers.
We believe that our principal competitors depreciate their packaging
assets over periods of six to eight years. The change of the estimated useful
lives is considered a change in estimate and was accounted for prospectively
beginning with the fourth quarter of 2002.
40
Evaluation of Equity Investments. We evaluate our investments for
impairment due to declines in market value that are considered other than
temporary. In the event of a determination that a decline in market value is
other than temporary, a charge to earnings is recorded for the unrealized loss,
and a new cost basis in the investment is established. The stock prices of
semiconductor companies' stocks, including ASI and its competitors, have
experienced significant volatility during the past several years. The weakness
in the semiconductor industry has affected the demand for the wafer output from
ASI's foundry and the market value of ASI's stock as traded on the Korea Stock
Exchange. During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value.
Additionally during 2002, we recorded a loss of $1.8 million on the disposition
of a portion of our interest in ASI to Dongbu. At January 1, 2002 Amkor owned
47.7 million shares or 42% of ASI's voting stock. During 2002, we divested 21
million shares of ASI stock and at December 31, 2002 Amkor owned 26.7 million
shares of ASI or 21%. On March 24, 2003, we sold an additional 7 million shares
of ASI common stock to an investment bank for 24.4 billion Korean won ($19.5
million based on the spot exchange rate as of the transaction date) which
approximates the carrying value of those shares. As part of that sale, we
purchased a nondeliverable call option for $6.8 million that expires December
2003 and is indexed to ASI's share price with a strike price of $1.97 per share.
The net proceeds from the exercise of the option could be less than the current
carrying value and could expire unexercised losing our entire investment in the
option. As of March 24, 2003, we owned 19.7 million shares of ASI, or 16% of
ASI's voting stock. Beginning March 24, 2003, we ceased accounting for our
investment in ASI under the equity method of accounting and commenced accounting
for our investment as a marketable security that is available for sale. We
intend to sell our remaining investment in ASI. The ultimate level of proceeds
from the sale of our remaining investment in ASI could be less than the current
carrying value.
Valuation of Inventory. In general we order raw materials based on
customers' forecasted demand and we do not maintain any finished goods
inventory. If our customers change their forecasted requirements and we are
unable to cancel our raw materials order or if our vendors require that we order
a minimum quantity that exceeds the current forecasted demand, we will
experience a build-up in raw material inventory. We will either seek to recover
the cost of the materials from our customers or utilize the inventory in
production. However, we may not be successful in recovering the cost from our
customers or be able to use the inventory in production and accordingly if we
believe that it is probable that we will not be able to recover such costs we
adjust our reserve estimate. Additionally, our reserve for excess and obsolete
inventory is based on forecasted demand we receive from our customers. When a
determination is made that the inventory will not be utilized in production it
is written-off and disposed.
MARKET RISK SENSITIVITY
Our company is exposed to market risks, primarily related to foreign
currency and interest rate fluctuations. In the normal course of business, we
employ established policies and procedures to manage the exposure to
fluctuations in foreign currency values and changes in interest rates.
FOREIGN CURRENCY RISKS
Our company's primary exposures to foreign currency fluctuations are
associated with transactions and related assets and liabilities denominated in
Philippine pesos, Korean won, Japanese yen, Taiwanese dollar and Chinese yuan.
The objective in managing these foreign currency exposures is to minimize the
risk through minimizing the level of activity and financial instruments
denominated in those currencies. Our use of derivative instruments including
forward exchange contracts has been insignificant throughout 2002 and 2001 and
it is expected our use of derivative instruments will continue to be minimal.
The peso-based financial instruments primarily consist of cash, non-trade
receivables, deferred tax assets and liabilities, non-trade payables, accrued
payroll, taxes and other expenses. Based on the portfolio of peso-based assets
and liabilities at December 31, 2002 and 2001, a 20% increase in the Philippine
peso to U.S. dollar spot exchange rate as of the balance sheet dates would
result in a decrease of approximately $0.5 million and $3.9 million,
respectively, in peso-based net assets.
The won-based financial instruments primarily consist of cash, non-trade
receivables, non-trade payables, accrued payroll, taxes and other expenses.
Based on the portfolio of won-based assets and liabilities at December 31, 2002
and 2001, a 20% increase in the Korean won to U.S. dollar spot exchange rate as
of the balance sheet dates would result in a decrease of approximately $10.3
million and $3.8 million, respectively, in won-based net assets.
41
The Taiwanese dollar-based financial instruments primarily consist of cash,
non-trade receivables, deferred tax assets and liabilities, non-trade payables,
accrued payroll, taxes, debt and other expenses. Based on the portfolio of
Taiwanese dollar-based assets and liabilities at December 31, 2002 and 2001, a
20% increase in the Taiwanese dollar to U.S. dollar spot exchange rate as of the
balance sheet dates would result in a decrease of approximately $1.8 million and
$1.9 million, respectively, in Taiwanese dollar-based net assets.
The yuan-based financial instruments primarily consist of cash, non-trade
receivables, deferred tax assets and liabilities, non-trade payables, accrued
payroll, taxes and other expenses. Based on the portfolio of yuan-based assets
and liabilities at December 31, 2002 and 2001, a 20% increase in the Chinese
yuan to U.S. dollar spot exchange rate as of the balance sheet dates would
result in a decrease of approximately $1.0 million and $0.7 million,
respectively, in yuan-based net assets.
The yen-based financial instruments primarily consist of cash, non-trade
receivables, deferred tax assets and liabilities, non-trade payables, accrued
payroll, taxes, debt and other expenses. Our exposure to the yen is principally
as a result of our 2001 acquisition of Amkor Iwate Corporation and our 2002
acquisition of a semiconductor packaging business of Citizen Watch Co., Ltd.
Based on the portfolio of yen-based assets and liabilities at December 31, 2002
and 2001, a 20% decrease in the Japanese yen to U.S. dollar spot exchange rate
as of the balance sheet date would result in an increase of approximately $15.5
million and $15.6 million, respectively, in yen-based net liabilities.
INTEREST RATE RISKS
Our company has interest rate risk with respect to our long-term debt. As
of December 31, 2002, we had a total of $1,808.7 million of debt of which 91%
was fixed rate debt and 9% was variable rate debt. Our variable rate debt
principally consisted of short-term borrowings and amounts outstanding under our
secured bank facilities that included term loans and a $100.0 million revolving
line of credit of which no amounts were drawn as of December 31, 2002. The fixed
rate debt consisted of senior notes, senior subordinated notes, convertible
subordinated notes and foreign debt. As of December 31, 2001, we had a total of
$1,826.3 million of debt of which 91% was fixed rate debt and 9% was variable
rate debt. Changes in interest rates have different impacts on our fixed and
variable rate portions of our debt portfolio. A change in interest rates on the
fixed portion of the debt portfolio impacts the fair value of the instrument but
has no impact on interest incurred or cash flows. A change in interest rates on
the variable portion of the debt portfolio impacts the interest incurred and
cash flows but does not impact the fair value of the instrument. The fair value
of the convertible subordinated notes is also impacted by the market price of
our common stock.
The table below presents the interest rates, maturities and fair value of
our fixed and variable rate debt as of December 31, 2002.
YEAR ENDING DECEMBER 31,
------------------------------------------------------------ FAIR
2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
----------- ----------- ----------- ----------- ----------- ------------- -------- ------------
Long-term debt:
Fixed rate debt $ 15,426 $ 1,072 $ 310 $ 675,000 $ 258,750 $ 700,000 $1,650,558 $ 1,234,146
Average interest rate 4.0% 4.0% 4.0% 8.0% 5.0% 9.6% 8.2%
Variable rate debt $ 55,597 $ 55,367 $ 42,114 $ 2,877 $ 799 $ 1,401 $ 158,155 $ 158,155
Average interest rate 2.6% 5.4% 5.4% 4.1% 3.2% 3.2% 4.4%
EQUITY PRICE RISKS
Our outstanding 5.75% convertible subordinated notes due 2006 and 5%
convertible subordinated notes due 2007 are convertible into common stock at
$35.00 per share and $57.34 per share, respectively. We intend to repay our
convertible subordinated notes upon maturity, unless converted. If investors
were to decide to convert their notes to common stock, our future earnings would
benefit from a reduction in interest expense and our common stock outstanding
would be increased. If we paid a premium to induce such conversion, our earnings
could include an additional charge.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The following section discloses the known material risks facing our
company. Additional risks and uncertainties that are
42
presently unknown to us or that we currently deem immaterial may also impair our
business operations. We cannot assure you that any of the events discussed in
the risk factors below will not occur. If they do, our business, financial
condition or results of operations could be materially adversely affected.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND ELECTRONIC PRODUCTS
INDUSTRIES -- WE OPERATE IN VOLATILE INDUSTRIES, AND INDUSTRY DOWNTURNS HARM OUR
PERFORMANCE.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Because our business is, and will continue to be,
dependent on the requirements of semiconductor companies for subcontracted
packaging and test services, any downturn in the semiconductor industry or any
other industry that uses a significant number of semiconductor devices, such as
the personal computer and telecommunication devices industries, could have a
material adverse effect on our business. Although we experienced significant
recovery in most of our company's packaging services during 2002, there
continues to be significant uncertainty throughout the industry related to
market demand which is hindering visibility throughout the supply chain. That
lack of visibility makes it difficult to forecast whether the recovery we are
experiencing will be sustained. If industry conditions do not continue to
improve, we could continue to sustain significant losses which could materially
impact our business including our liquidity.
FLUCTUATIONS IN OPERATING RESULTS - OUR RESULTS HAVE VARIED AND MAY VARY
SIGNIFICANTLY AS A RESULT OF FACTORS THAT WE CANNOT CONTROL
Many factors could materially and adversely affect our revenues, gross
profit and operating income, or lead to significant variability of quarterly or
annual operating results. Our profitability is dependent upon the utilization of
our capacity, semiconductor package mix, the average selling price of our
services and our ability to control our costs including labor, material,
overhead and financing costs. Our operating results have varied significantly
from period to period. During the three year period ended December 31, 2002, our
revenues, gross margins and operating income have fluctuated significantly as a
result of the following factors over which we have little or no control and
which we expect to continue to impact our business:
- fluctuation in demand for semiconductors and the overall health of the
semiconductor industry,
- changes in our capacity utilization,
- declining average selling prices,
- changes in the mix of semiconductor packages,
- absence of backlog and the short-term nature of our customers' commitments
and the impact of these factors on the timing and volume of orders relative
to our production capacity,
- changes in costs, availability and delivery times of raw materials and
components,
- changes in labor costs to perform our services,
- the timing of expenditures in anticipation of future orders,
43
- changes in effective tax rates,
- high leverage and restrictive covenants,
- international events that impact our operations including the impact of
Severe Acute Respiratory Syndrome (SARS) and environmental events such as
earthquakes, and
- difficulties integrating acquisitions and ability to attract qualified
employees to support our geographic expansion.
We have historically been unable to accurately predict the impact of these
factors upon our results for a particular period. We also expect that these
factors as well the factors set forth below, which have not significantly
impacted our recent historical results, may impair our future business
operations and may materially and adversely affect our revenues, gross profit
and operating income, or lead to significant variability of quarterly or annual
operating results:
- the availability and cost of financing for expansion,
- loss of key personnel or the shortage of available skilled workers,
- rescheduling and cancellation of large orders,
- warranty and product liability claims;
- intellectual property transactions and disputes, and
- fluctuations in our manufacturing yields.
DECLINING AVERAGE SELLING PRICES -- THE SEMICONDUCTOR INDUSTRY PLACES DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS.
Prices for packaging and test services and wafer fabrication services have
declined over time. Historically, we have been able to partially offset the
effect of price declines by successfully developing and marketing new packages
with higher prices, such as advanced leadframe and laminate packages, by
negotiating lower prices with our material vendors, and by driving engineering
and technological changes in our packaging and test processes which resulted in
reduced manufacturing costs. Average selling prices for 2002 declined 16% as
compared to average selling prices in 2001. Average selling prices for 2001
declined 14% as compared to average selling prices in 2000. These declines in
average selling prices significantly impacted our gross margins in 2002 and
2001. We expect that average selling prices for our packaging and test services
will continue to decline in the future. If our semiconductor package mix does
not shift to new technologies with higher prices or we cannot reduce the cost of
our packaging and test services to offset a decline in average selling prices,
our future operating results will suffer.
HIGH LEVERAGE AND RESTRICTIVE COVENANTS -- OUR SUBSTANTIAL INDEBTEDNESS COULD
MATERIALLY RESTRICT OUR OPERATIONS AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We now have, and for the foreseeable future will have, a significant amount
of indebtedness. As of December 31, 2002, total debt was $1,808.7 million. We
have a $100.0 million revolving line of credit of which no amounts were drawn as
of December 31, 2002. In addition, despite current debt levels, the terms of the
indentures governing our indebtedness may limit our ability to increase our
indebtedness, but they do not prohibit us or our subsidiaries from incurring
substantially more debt. If new debt is added to our consolidated debt level,
the related risks that we now face could intensify.
In June 2002 and September 2002 we amended our existing bank debt covenants
to provide further flexibility with respect to capital expenditures, investment
restrictions and other financial covenants measured in part by our liquidity and
earnings. As part of the September 2002 amendment, lenders under our senior
secured credit facility agreed to extend the existing financial covenant
framework through December 31, 2003. Our senior secured debt encompasses a $97.1
million term loan and the unused revolving line of credit. The term loan
maintained its scheduled amortization of $0.25 million per quarter through
September 2003 and then approximately $12 million per quarter beginning in
December 2003 through September 2005. The bank debt facility will revert to its
original covenant structure in January 2004. In general, covenants in the
agreements governing our existing debt, and debt we may incur in the future, may
materially restrict our operations, including our ability to incur debt, pay
dividends, make certain investments and payments and encumber or dispose of
assets. In addition, financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event our results of
operations do not meet our plans and we are unable to amend such financial
covenants prior to default. A
44
default under one debt instrument may also trigger cross-defaults under our
other debt instruments. As of December 31, 2002 and through the date of this
filing, we were in compliance with all financial covenants. An event of default
under one or more of our debt instruments, if not cured or waived, could have a
material adverse effect on us. Our credit and debt ratings were lowered in
August 2002, and accordingly, it may be difficult for us to secure additional
financing, if we need it, on satisfactory terms or at all. Our substantial
indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures,
research and development and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from operations
to service interest and principal payments on our debt;
- limit our flexibility to react to changes in our business and the industry in
which we operate;
- place us at a competitive disadvantage to any of our competitors that have
less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
In January 2004 we are required to purchase the 40% of the outstanding
shares of Amkor Iwate which are currently owned by Toshiba. The share purchase
price will be determined based on the performance of the venture during the
three-year period but cannot be less than 1 billion Japanese yen and cannot
exceed 4 billion Japanese yen ($8.4 million to $33.7 million based on the spot
exchange rate at December 31, 2002). Based on our current estimates of the
venture's performance, we expect to pay an estimated $10 - 15 million to acquire
Toshiba's interest in Amkor Iwate. Additionally, we expect to pay an additional
$2 million to terminate our commitment to purchase a tract of land adjacent to
the Amkar Iwate facility.
We were required to pay to Citizen Watch Co., Ltd. 1.7 billion Japanese yen
in deferred purchase price and other contingent payments in connection with our
purchase of the semiconductor packaging business of Citizen Watch Co, Ltd. We
are withholding payment of 1.4 billion yen ($11.8 million based on the spot
exchange rate at December 31, 2002) of this amount pending resolution of a
controversy relating to the patents acquired in connection with the acquisition.
RELATIONSHIP WITH ASI -- OUR FINANCIAL PERFORMANCE CAN BE ADVERSELY AFFECTED BY
ASI'S FINANCIAL PERFORMANCE
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. (ASI). We derived 92.8%, 79.4% and 80.7% of our wafer
fabrication services revenues for 2002, 2001 and 2000, respectively, from Texas
Instruments pursuant to a manufacturing and purchase agreement between our
company, ASI and Texas Instruments. On February 28, 2003, we sold our wafer
fabrication services business to ASI. Additionally, we obtained a release from
Texas Instruments regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of the business
to ASI. We restated our historical results to reflect our wafer fabrication
services segment as a discontinued operation. In connection with the disposition
of our wafer fabrication business, we recorded, during the first quarter of
2003, $1.0 million in severance and other exit costs to close our wafer
fabrication services operations in Boise, Idaho and Lyon, France. Also in the
first quarter of 2003, we recognized a pre-tax net gain on the disposition of
our wafer fabrication services business of $58.6 million. The carrying value of
the disposed net assets associated with the business as of February 28, 2003 was
$2.4 million. In addition, pursuant to the agreements between Amkor and Dongbu,
(1) Amkor and Dongbu agreed to use reasonable best efforts to cause Dongbu
Electronics and ASI to be merged together as soon as practicable, (2) Amkor and
Dongbu agreed to cause ASI to use the proceeds ASI received from its sale of
stock to Dongbu to purchase shares in Dongbu Electronics and (3) Amkor and
Dongbu agreed to use their best efforts to provide releases and indemnifications
to the chairman, directors and officers of ASI, either past or incumbent, from
any and all liabilities arising out of the performance of their duties at ASI
between January 1, 1995 and December 31, 2001. The last provision would provide
a release and indemnification for James Kim, our CEO and Chairman, and members
of his family. We are not aware of any claims or other liabilities which these
individuals would be released from or for which they would receive
indemnification.
At January 1, 2002 Amkor owned 47.7 million shares or 42% of ASI's voting
stock. During 2002, we divested 21 million shares of ASI stock and at December
31, 2002 Amkor owned 26.7 million shares of ASI or 21%. On March 24,
45
2003, we sold an additional 7 million shares of ASI common stock to an
investment bank for 24.4 billion Korean won ($19.5 million based on the spot
exchange rate as of the transaction date) which approximates the carrying value
of those shares. As part of that sale, we purchased a nondeliverable call option
for $6.8 million that expires December 2003 and is indexed to ASI's share price
with a strike price of $1.97 per share. The net proceeds from the exercise of
the option could be less than the current carrying value and could expire
unexercised losing our entire investment in the option. As of March 24, 2003, we
owned 19.7 million shares of ASI, or 16% of ASI's voting stock. Beginning March
24, 2003, we ceased accounting for our investment in ASI under the equity method
of accounting and commenced accounting for our investment as a marketable
security that is available for sale. We intend to sell our remaining investment
in ASI. The ultimate level of proceeds from the sale of our remaining investment
in ASI could be less than the current carrying value.
ABSENCE OF BACKLOG -- WE MAY NOT BE ABLE TO ADJUST COSTS QUICKLY IF OUR
CUSTOMERS' DEMAND FALLS SUDDENLY.
Our packaging and test business does not typically operate with any
material backlog. We expect that in the future our quarterly net revenues from
packaging and test will continue to be substantially dependent upon our
customers' demand in that quarter. None of our customers have committed to
purchase any significant amount of packaging or test services or to provide us
with binding forecasts of demand for packaging and test services for any future
period. In addition, our customers could reduce, cancel or delay their purchases
of packaging and test services. Because a large portion of our costs is fixed
and our expense levels are based in part on our expectations of future revenues,
we may be unable to adjust costs in a timely manner to compensate for any
revenue shortfall.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- WE DEPEND ON OUR FACTORIES IN
THE PHILIPPINES, KOREA, JAPAN, TAIWAN AND CHINA. MANY OF OUR CUSTOMERS' AND
VENDORS' OPERATIONS ARE ALSO LOCATED OUTSIDE OF THE U.S.
We provide packaging and test services through our factories located in the
Philippines, Korea, Japan, Taiwan and China. Moreover, many of our customers'
and vendors' operations are located outside the U.S. The following are some of
the risks inherent in doing business internationally:
- regulatory limitations imposed by foreign governments;
- fluctuations in currency exchange rates;
- political, military and terrorist risks;
- disruptions or delays in shipments caused by customs brokers or government
agencies;
- unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers;
- difficulties in staffing and managing foreign operations; and
- potentially adverse tax consequences resulting from changes in tax laws.
The impacts of major health concerns, such as Severe Acute Respiratory
Syndrome ("SARS"), could also adversely affect our business by disrupting
customer order patterns, reducing demand for our products in Asia, disrupting
the production and shipping capabilities of our manufacturing facilities, which
are located mostly in Asia, and disrupting the production and shipping
capabilities of our suppliers, which are also heavily concentrated in Asia,
which could result in increased supply chain costs.
DIFFICULTIES INTEGRATING ACQUISITIONS -- WE FACE CHALLENGES AS WE INTEGRATE NEW
AND DIVERSE OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR
GEOGRAPHIC EXPANSION.
As a result of our geographic expansion we have experienced, and may
continue to experience, growth in the scope and complexity of our operations.
For example, each business we have acquired had, at the time of acquisition,
multiple systems for managing its own manufacturing, sales, inventory and other
operations. Migrating these businesses to our systems typically is a slow,
expensive process requiring us to divert significant amounts of resources from
multiple aspects of our operations. This growth has strained our managerial,
financial, manufacturing and other resources. Future acquisitions and
46
expansions may result in inefficiencies as we integrate new operations and
manage geographically diverse operations.
Our success depends to a significant extent upon the continued service of
our key senior management and technical personnel, any of whom would be
difficult to replace. Competition for qualified employees is intense, and our
business could be adversely affected by the loss of the services of any of our
existing key personnel. We cannot assure you that we will continue to be
successful in hiring and properly training sufficient numbers of qualified
personnel and in effectively managing our growth. Our inability to attract,
retain, motivate and train qualified new personnel could have a material adverse
effect on our business.
DEPENDENCE ON MATERIALS AND EQUIPMENT SUPPLIERS -- OUR BUSINESS MAY SUFFER IF
THE COST OR SUPPLY OF MATERIALS OR EQUIPMENT CHANGES ADVERSELY.
We obtain from various vendors the materials and equipment required for the
packaging and test services performed by our factories. We source most of our
materials, including critical materials such as leadframes and laminate
substrates, from a limited group of suppliers. Furthermore, we purchase all of
our materials on a purchase order basis and have no long-term contracts with any
of our suppliers. Our business may be harmed if we cannot obtain materials and
other supplies from our vendors: (1) in a timely manner, (2) in sufficient
quantities, (3) in acceptable quality or (4) at competitive prices.
RAPID TECHNOLOGICAL CHANGE -- OUR BUSINESS WILL SUFFER IF WE CANNOT KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY.
The complexity and breadth of semiconductor packaging and test services are
rapidly changing. As a result, we expect that we will need to offer more
advanced package designs in order to respond to competitive industry conditions
and customer requirements. Our success depends upon the ability of our company
to develop and implement new manufacturing processes and package design
technologies. The need to develop and maintain advanced packaging capabilities
and equipment could require significant research and development and capital
expenditures in future years. In addition, converting to new package designs or
process methodologies could result in delays in producing new package types that
could adversely affect our ability to meet customer orders.
Technological advances also typically lead to rapid and significant price
erosion and may make our existing products less competitive or our existing
inventories obsolete. If we cannot achieve advances in package design or obtain
access to advanced package designs developed by others, our business could
suffer.
COMPETITION -- WE COMPETE AGAINST ESTABLISHED COMPETITORS IN THE PACKAGING AND
TEST BUSINESS.
The subcontracted semiconductor packaging and test market is very
competitive. We face substantial competition from established packaging and test
service providers primarily located in Asia, including companies with
significant manufacturing capacity, financial resources, research and
development operations, marketing and other capabilities. These companies also
have established relationships with many large semiconductor companies that are
current or potential customers of our company. On a larger scale, we also
compete with the internal semiconductor packaging and test capabilities of many
of our customers.
ENVIRONMENTAL REGULATIONS -- FUTURE ENVIRONMENTAL REGULATIONS COULD PLACE
ADDITIONAL BURDENS ON OUR MANUFACTURING OPERATIONS.
The semiconductor packaging process uses chemicals and gases and generates
byproducts that are subject to extensive governmental regulations. For example,
at our foreign manufacturing facilities, we produce liquid waste when silicon
wafers are diced into chips with the aid of diamond saws, then cooled with
running water. Federal, state and local regulations in the United States, as
well as international environmental regulations, impose various controls on the
storage, handling, discharge and disposal of chemicals used in our manufacturing
processes and on the factories we occupy.
Increasingly, public attention has focused on the environmental impact of
semiconductor manufacturing operations and the risk to neighbors of chemical
releases from such operations. In the future, applicable land use and
environmental regulations may: (1) impose upon us the need for additional
capital equipment or other process requirements, (2) restrict our ability to
expand our operations, (3) subject us to liability or (4) cause us to curtail
our operations.
47
PROTECTION OF INTELLECTUAL PROPERTY -- WE MAY BECOME INVOLVED IN INTELLECTUAL
PROPERTY LITIGATION.
As of March 20, 2003, we held 224 U.S. patents and had 209 pending patents.
In addition to the U.S. patents, we held 637 patents in foreign jurisdictions.
We expect to continue to file patent applications when appropriate to protect
our proprietary technologies, but we cannot assure you that we will receive
patents from pending or future applications. In addition, any patents we obtain
may be challenged, invalidated or circumvented and may not provide meaningful
protection or other commercial advantage to us.
We may need to enforce our patents or other intellectual property rights or
to defend our company against claimed infringement of the rights of others
through litigation, which could result in substantial cost and diversion of our
resources. The semiconductor industry is characterized by frequent claims
regarding patent and other intellectual property rights. If any third party
makes a valid claim against us, we could be required to:
- discontinue the use of certain processes;
- cease the manufacture, use, import and sale of infringing products;
- pay substantial damages;
- develop non-infringing technologies; or
- acquire licenses to the technology we had allegedly infringed.
If we fail to obtain necessary licenses or if we face litigation relating to
patent infringement or other intellectual property matters, our business could
suffer.
CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN SUBSTANTIALLY CONTROL THE OUTCOME OF ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL.
As of February 28, 2003, Mr. James Kim and members of his family
beneficially owned approximately 44.3% of our outstanding common stock. Mr.
James Kim's family, acting together, will substantially control all matters
submitted for approval by our stockholders. These matters could include:
- the election of all of the members of our board of directors;
- proxy contests;
- mergers involving our company;
- tender offers; and
- open market purchase programs or other purchases of our common stock.
STOCK PRICE VOLATILITY
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to
factors such as:
- actual or anticipated quarter-to-quarter variations in operating results;
- announcements of technological innovations or new products and services by
Amkor or our competitors;
- general conditions in the semiconductor industry;
48
- changes in earnings estimates or recommendations by analysts; and
- other events or factors, many of which are out of our control.
In addition, the stock market in general, and the Nasdaq National Market
and the markets for technology companies in particular, have experienced extreme
price and volume fluctuations. This volatility has affected the market prices of
securities of companies like ours for reasons that have often been unrelated or
disproportionate to such companies' operating performance. These broad market
fluctuations may adversely affect the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of information regarding quantitative and qualitative
disclosures about market risk, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Market Risk Sensitivity."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We present the information required by Item 8 of Form 10-K/A here in the
following order:
Report of Independent Accountants................................................................................... 47
Consolidated Statements of Operations -- Years ended December 31, 2002, 2001 and 2000............................... 48
Consolidated Balance Sheets -- December 31, 2002 and 2001........................................................... 49
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2002, 2001 and 2000..................... 50
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and 2000............................... 51
Notes to Consolidated Financial Statements.......................................................................... 52
Report of Independent Public Accountants............................................................................ 79
Schedule II -- Valuation and Qualifying Accounts.................................................................... 81
In addition, pursuant to General Instruction G(1) of Form 10-K and Rule
12b-23 promulgated under the Securities Exchange Act of 1934, as amended, the
following financial information of Anam Semiconductor, Inc. required to be
included in this Report by Rule 3-09 of Regulation S-X is incorporated by
reference from our Report on 8-K, as amended, filed on October 17, 2003.
Reports of Independent Accountants
Consolidated Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Operations -- Years ended December 31, 2002, 2001 and
2000
Consolidated Statements of Stockholders' Equity (Deficit) -- Years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and
2000
Notes to Consolidated Financial Statements
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Amkor Technology, Inc.:
In our opinion, based on our audits and the report of another auditor, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Amkor Technology,
Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Amkor Technology Philippines, Inc. (formerly Amkor
Technology Philippines (P1/P2), Inc. and Amkor Technology Philippines (P3/P4),
Inc.) a wholly owned subsidiary, referred to herein as ATP, which combined
financial statements reflect total assets of 14% and 17% and operating expenses
of 14%, 18% and 17% of the related consolidated totals as of December 31, 2002
and 2001 and for each of the three years in the period ended December 31, 2002.
The combined financial statements of ATP as of December 31, 2002 and for the
year ended December 31, 2002 were audited by another auditor whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for ATP, is based solely on the report of the
other auditor. The financial statements of ATP as of December 31, 2001 and for
each of the two years in the period ended December 31, 2001 were audited by
other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated March 19, 2002. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditor provide a reasonable basis for our
opinion.
As discussed in Note 4 and Note 5, the Company adopted Statements of Financial
Accounting Standards No. 142 "Goodwill and Other Intangibles" and No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets".
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 29, 2003, except for the information in Note 8 describing the sale of
the Company's investment in ASI for which the date is March 24, 2003 and the
information in Note 2 for which the date is May 9, 2003
50
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues..................................................... $ 1,406,178 $ 1,336,674 $ 2,009,701
Cost of revenues................................................. 1,310,563 1,284,423 1,442,320
------------- ------------- -------------
Gross profit..................................................... 95,615 52,251 567,381
------------- ------------- -------------
Operating expenses:
Selling, general and administrative......................... 179,888 191,136 179,143
Research and development.................................... 31,189 38,786 26,057
Loss on disposal of fixed assets, net....................... 2,496 14,515 1,355
Amortization of goodwill and other acquired intangibles..... 6,992 84,962 63,080
Special charges............................................. 291,970 -- --
------------- ------------- -------------
Total operating expenses................................ 512,535 329,399 269,635
------------- ------------- -------------
Operating income (loss).......................................... (416,920) (277,148) 297,746
------------- ------------- -------------
Other (income) expense:
Interest expense, net....................................... 147,497 164,064 119,840
Foreign currency loss....................................... 906 872 4,812
Other income, net........................................... (1,014) (3,586) (60)
------------- ------------- -------------
Total other expense..................................... 147,389 161,350 124,592
------------- ------------- -------------
Income (loss) before income taxes, equity investment losses,
minority interest and discontinued operations............... (564,309) (438,498) 173,154
Equity investment losses (see Note 8)............................ (208,165) (100,706) (20,991)
Minority interest expense........................................ (1,932) (1,896) --
------------- ------------- -------------
Income (loss) from continuing operations before income taxes..... (774,406) (541,100) 152,163
------------- ------------- -------------
Income tax expense (benefit)..................................... 60,683 (84,613) 14,362
------------- ------------- -------------
Income (loss) from continuing operations......................... (835,089) (456,487) 137,801
------------- ------------- -------------
Income from discontinued operations, net of tax (see Note 2)..... 8,330 5,626 16,352
------------- ------------- -------------
Net income (loss)................................................ $ (826,759) $ (450,861) $ 154,153
============= ============= =============
Per Share Data:
Basic income (loss) per common share:
from continuing operations.................................. $ (5.09) $ (2.91) $ 0.95
from discontinued operations................................ 0.05 0.04 0.11
------------- ------------- -------------
Net income (loss) per common share........................ $ (5.04) $ (2.87) $ 1.06
============= ============= =============
Diluted income (loss) per common share:
from continuing operations.................................. $ (5.09) $ (2.91) $ 0.91
from discontinued operations................................ 0.05 0.04 0.11
------------- ------------- -------------
Net income (loss) per common share........................ $ (5.04) $ (2.87) $ 1.02
============= ============= =============
Shares used in computing per share data:
Basic....................................................... 164,124 157,111 145,806
============= ============= =============
Diluted..................................................... 164,124 157,111 153,223
============= ============= =============
The accompanying notes are an integral part of these financial statements.
51
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2002 2001
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 311,249 $ 200,057
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,122 and $6,842...... 234,056 189,660
Due from affiliates..................................................... 298 871
Other................................................................... 8,234 8,953
Inventories................................................................. 72,121 73,784
Other current assets........................................................ 48,661 37,106
------------- -------------
Total current assets............................................... 674,619 510,431
------------- -------------
Property, plant and equipment, net............................................... 966,338 1,387,619
------------- -------------
Investments...................................................................... 83,235 382,951
------------- -------------
Other assets:
Due from affiliates......................................................... 20,852 20,518
Goodwill ................................................................... 628,099 659,130
Acquired intangibles........................................................ 45,033 37,050
Other....................................................................... 114,178 197,186
Assets of discontinued operations (see Note 2).............................. 25,630 28,433
------------- -------------
833,792 942,317
------------- -------------
Total assets...................................................... $ 2,557,984 $ 3,223,318
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................................. $ 4,633 $ 5,116
Short-term borrowings and current portion of long-term debt................ 71,023 54,815
Trade accounts payable..................................................... 180,999 148,923
Due to affiliates.......................................................... 70,243 16,936
Accrued expenses........................................................... 184,223 145,544
------------- -------------
Total current liabilities......................................... 511,121 371,334
Long-term debt.................................................................. 1,737,690 1,771,453
Other noncurrent liabilities.................................................... 67,661 64,077
------------- -------------
Total liabilities................................................. 2,316,472 2,206,864
------------- -------------
Commitments and contingencies
Minority interest............................................................... 10,145 7,737
------------- -------------
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized
designated Series A, none issued....................................... -- --
Common stock, $0.001 par value, 500,000 shares authorized,
issued and outstanding of 165,156 in 2002 and 161,782 in 2001.......... 166 162
Additional paid-in capital................................................. 1,170,227 1,123,541
Accumulated deficit........................................................ (933,734) (106,975)
Receivable from stockholder................................................ (2,887) (3,276)
Accumulated other comprehensive loss....................................... (2,405) (4,735)
------------- -------------
Total stockholders' equity........................................ 231,367 1,008,717
------------- -------------
Total liabilities and stockholders' equity........................ $ 2,557,984 $ 3,223,318
============= =============
The accompanying notes are an integral part of these financial statements.
52
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- -----------
Balance at December 31, 1999 ............... 130,660 $ 131 $ 551,964 $ 189,733
Net income .............................. -- -- -- 154,153
Unrealized losses on investments,
net of tax ............................ -- -- -- --
Comprehensive income
Issuance of 20.5 million common
stock shares and 3.9 million
common stock warrants ................. 20,500 21 409,980 --
Issuance of stock through employee
stock purchase plan and stock options . 710 -- 9,622 --
Debt conversion ......................... 248 -- 3,460 --
----------- ----------- ----------- -----------
Balance at December 31, 2000 ............... 152,118 152 975,026 343,886
Net loss ................................ -- -- -- (450,861)
Unrealized losses on investments,
net of tax ............................ -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss
Issuance of stock for acquisitions ...... 4,948 5 87,869 --
Issuance of stock through employee
stock purchase plan and stock options . 1,000 1 11,698 --
Debt conversion ......................... 3,716 4 48,948 --
----------- ----------- ----------- -----------
Balance at December 31, 2001 ............... 161,782 162 1,123,541 (106,975)
Net loss ................................ -- -- -- (826,759)
Unrealized loss on investments,
net of tax ............................ -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss
Issuance of stock for acquisitions ...... 1,827 2 35,200 --
Issuance of stock through employee
stock purchase plan and stock options . 1,547 2 11,486 --
Payment received from stockholder ....... -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2002 ............... 165,156 $ 166 $ 1,170,227 $ (933,734)
=========== =========== =========== ===========
ACCUMULATED
RECEIVABLE OTHER COMPREHENSIVE
FROM COMPREHENSIVE INCOME
STOCKHOLDER LOSS TOTAL (LOSS)
----------- ----------- ----------- -----------
Balance at December 31, 1999 ............... $ (3,276) $ (811) $ 737,741
Net income .............................. -- -- 154,153 $ 154,153
Unrealized losses on investments,
net of tax ............................ -- (143) (143) (143)
-----------
Comprehensive income $ 154,010
===========
Issuance of 20.5 million common
stock shares and 3.9 million
common stock warrants ................. -- -- 410,001
Issuance of stock through employee
stock purchase plan and stock options . -- -- 9,622
Debt conversion ......................... -- -- 3,460
----------- ----------- -----------
Balance at December 31, 2000 ............... (3,276) (954) 1,314,834
Net loss ................................ -- -- (450,861) $ (450,861)
Unrealized losses on investments,
net of tax ............................ -- (103) (103) (103)
Cumulative translation adjustment ....... -- (3,678) (3,678) (3,678)
-----------
Comprehensive loss $ (454,642)
===========
Issuance of stock for acquisitions ...... -- -- 87,874
Issuance of stock through employee
stock purchase plan and stock options . -- -- 11,699
Debt conversion ......................... -- -- 48,952
----------- ----------- -----------
Balance at December 31, 2001 ............... (3,276) (4,735) 1,008,717
Net loss ................................ -- -- (826,759) $ (826,759)
Unrealized loss on investments,
net of tax ............................ -- (1,224) (1,224) (1,224)
Cumulative translation adjustment ....... -- 3,554 3,554 3,554
-----------
Comprehensive loss $ (824,429)
===========
Issuance of stock for acquisitions ...... -- -- 35,202
Issuance of stock through employee
stock purchase plan and stock options . -- -- 11,488
Payment received from stockholder ....... 389 -- 389
----------- ----------- -----------
Balance at December 31, 2002 ............... $ (2,887) $ (2,405) $ 231,367
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
53
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from continuing operating activities:
Income (loss) from continuing operations ..................... $ (835,089) $ (456,487) $ 137,801
Adjustments to reconcile income (loss) from continuing
operations to net cash by operating activities --
Depreciation and amortization .............................. 323,265 440,591 323,811
Amortization of deferred debt issuance costs ............... 8,251 22,321 7,013
Debt conversion expense .................................... -- -- 272
Provision for accounts receivable .......................... 500 4,000 (17)
Provision for excess and obsolete inventory ................ 5,841 17,869 10,000
Deferred income taxes ...................................... 72,719 (85,022) (8,255)
Equity in loss of investees ................................ 33,865 100,706 20,991
Loss on impairment of equity investment .................... 172,533 -- --
Loss on disposition of equity investment ................... 1,767 -- --
Loss on disposal of fixed assets, net ...................... 2,496 14,515 1,355
Asset impairment charges and facility closure costs ........ 284,602 3,600 --
Minority interest .......................................... 1,932 1,896 --
Changes in assets and liabilities excluding effects
of acquisitions --
Accounts receivable ........................................ (39,328) 84,641 (62,556)
Repurchase of accounts receivable and settlement of security
agreement ................................................. -- -- (71,500)
Other receivables .......................................... 719 (2,488) 2,884
Inventories ................................................ 218 31,372 (23,871)
Due to/from affiliates, net ................................ 529 (2,447) (17,616)
Other current assets ....................................... (2,210) 6,034 (18,047)
Other non-current assets ................................... 19,433 (214) (17,612)
Accounts payable ........................................... 28,313 (23,808) 15,682
Accrued expenses ........................................... 24,394 (24,126) 40,238
Other long-term liabilities ................................ 8,425 8,011 7,108
----------- ----------- -----------
Net cash provided by operating activities ................ 113,175 140,964 347,681
----------- ----------- -----------
Cash flows from continuing investing activities:
Purchases of property, plant and equipment ................... (95,104) (158,595) (478,950)
Acquisitions, net of cash acquired ........................... (18,459) (11,057) (17,602)
Acquisitions of K1, K2 and K3 and K4, net of cash acquired ... -- -- (927,290)
Investment in ASI ............................................ -- -- (459,000)
Proceeds from the sale of property, plant and equipment ...... 2,870 1,863 2,823
Proceeds from disposition of equity investment ............... 58,139 -- --
Proceeds from the sale (purchase) of investments ............. (2,011) (321) 136,879
----------- ----------- -----------
Net cash used in investing activities .................... (54,565) (168,110) (1,743,140)
----------- ----------- -----------
Cash flows from continuing financing activities:
Net change in bank overdrafts and short-term borrowings ...... 6,860 15,067 5,975
Net proceeds from issuance of long-term debt ................. -- 750,486 1,027,479
Payments of long-term debt ................................... (30,119) (662,565) (87,166)
Net proceeds from the issuance of 20.5 million common shares . -- -- 410,001
Proceeds from issuance of stock through employee stock
purchase plan and stock options ............................ 11,488 11,698 9,622
Payment received from stockholder ............................ 389 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities ...... (11,382) 114,686 1,365,911
----------- ----------- -----------
Effect of exchange rate fluctuations on cash and cash equivalents
Related to continuing operations ............................. 1,333 (397) --
----------- ----------- -----------
Cash flows from discontinued operations:
Net cash provided by operating activities .................... 63,302 19,502 26,144
Net cash used in investing activities ........................ -- (105) (1,124)
Net cash used in financing activities ........................ (671) -- --
----------- ----------- -----------
Net cash provided by discontinued operations ............. 62,631 19,397 25,020
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............ 111,192 106,540 (4,528)
Cash and cash equivalents, beginning of period .................. 200,057 93,517 98,045
----------- ----------- -----------
Cash and cash equivalents, end of period ........................ $ 311,249 $ 200,057 $ 93,517
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest ................................................... $ 142,299 $ 144,345 $ 111,429
Income taxes ............................................... $ (845) $ (642) $ 18,092
The accompanying notes are an integral part of these financial statements.
54
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Amkor
Technology, Inc. and its subsidiaries. The consolidated financial statements
reflect the elimination of all significant intercompany accounts and
transactions. The investments in and the operating results of 20% to 50% owned
companies are included in the consolidated financial statements using the equity
method of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Certain
previously reported amounts have been reclassified to conform with the current
presentation.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of the majority of our
subsidiaries in Korea and the Philippines, and the foreign currency asset and
liability amounts at these subsidiaries are remeasured into U.S. dollars at
end-of-period exchange rates, except for nonmonetary items which are remeasured
at historical rates. Foreign currency income and expenses are remeasured at
average exchange rates in effect during the year, except for expenses related to
balance sheet amounts remeasured at historical exchange rates. Exchange gains
and losses arising from remeasurement of foreign currency-denominated monetary
assets and liabilities are included in other income (expense) in the period in
which they occur.
The local currency is the functional currency of our subsidiaries in
Japan, Taiwan and China, and the asset and liability amounts of these
subsidiaries are translated into U.S. dollars at end-of-period exchange rates.
The resulting translation adjustments are reported as a component of accumulated
other comprehensive loss in the stockholders' equity section of the balance
sheets. Assets and liabilities denominated in currency other than the local
currency are remeasured into the local currency prior to translation into U.S.
dollars, and the resultant exchange gains or losses are included in other income
(expense) in the period in which they occur. Income and expenses are translated
into U.S. dollars at average exchange rates in effect during the period.
CONCENTRATIONS AND CREDIT RISK
Financial instruments, for which we are subject to credit risk, consist
principally of accounts receivable, cash and cash equivalents, short-term
investments and marketable securities. With respect to accounts receivable, we
mitigate our credit risk by selling primarily to well established companies,
performing ongoing credit evaluations and making frequent contact with
customers. We have historically mitigated our credit risk with respect to cash
and cash equivalents, as well as short-term investments, through diversification
of our holdings into various money market accounts, U.S. treasury bonds, federal
mortgage backed securities, high grade municipal bonds, commercial paper and
preferred stocks.
RISKS AND UNCERTAINTIES
Our future results of operations involve a number of risks and
uncertainties. Factors that could affect future operating results and cause
actual results to vary materially from historical results include, but are not
limited to, dependence on the highly cyclical nature of the semiconductor
industry, the continuing negative impacts of the unprecedented industry downturn
beginning in 2001, our high leverage and the restrictive covenants contained in
the agreements governing our indebtedness, uncertainty as to the demand from our
customers over both the long- and short-term, competitive pricing and declines
in average selling prices we experience, the timing and volume of orders
relative to our production capacity, the absence of significant backlog in our
business, fluctuations in manufacturing yields, the availability of financing,
our competition, our dependence on international operations and sales, our
dependence on raw material and equipment suppliers, exchange rate fluctuations,
our dependence on key personnel, difficulties integrating acquisitions, the
enforcement of intellectual property rights by or against us, our need to comply
with existing and future environmental regulations, the results of Anam
Semiconductor, Inc. (ASI) as it
55
impacts our financial results and political and economic uncertainty resulting
from terrorist activities.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by using a moving average method. In general, we order raw materials
based on the customers' forecasted demand and we do not maintain any finished
goods inventory. If our customers change their forecasted requirements and we
are unable to cancel our raw materials order or if our vendor requires that we
order a minimum quantity that exceeds the current forecasted demand, we will
experience a build-up in raw material inventory. We will either seek to recover
the cost of the materials from our customers or utilize the inventory in
production. However, we may not be successful in recovering the cost from our
customers or being able to use the inventory in production, which we would
consider as part of our reserve estimate. Our reserve for excess and obsolete
inventory is based on forecasted demand we receive from our customers. When a
determination is made that the inventory will not be utilized in production it
is written-off and disposed.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful lives of
depreciable assets. Accelerated methods are used for tax purposes. Depreciable
lives follow:
Buildings and improvements........................................................ 10 to 30 years
Machinery and equipment........................................................... 3 to 7 years
Furniture, fixtures and other equipment........................................... 3 to 10 years
Effective with the fourth quarter of 2002, we changed the estimated useful
lives of certain of our packaging equipment from four years to seven years for
depreciation purposes, which is in line with our historical usage. This change
decreased our 2002 net loss by approximately $16.7 million, or $0.10 per share.
There was no offsetting impact to our tax provision related to the change in
useful lives because of our consolidated net losses for 2002 and our recognition
of a valuation allowance against the associated net operating loss carryforwards
(see Note 18).
Cost and accumulated depreciation for property retired or disposed of are
removed from the accounts and any resulting gain or loss is included in
earnings. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense was $317.6 million, $356.7 million and $262.0
million for 2002, 2001 and 2000, respectively.
GOODWILL AND ACQUIRED INTANGIBLES
Goodwill is recorded when the cost of an acquisition exceeds the fair
market value of the net tangible and identifiable intangible assets acquired. On
January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(see Note 5). The standard requires that goodwill and indefinite-lived
intangible assets no longer be amortized. In addition, goodwill and
indefinite-lived intangible assets are tested for impairment at least annually.
These tests are performed more frequently if warranted. Impairment losses are
recorded when the carrying amount of goodwill exceeds its implied fair value.
Such impairment losses are recorded as a part of income from continuing
operations.
Definite-lived intangible assets include acquired patents and technology
rights and are amortized on a straight-line basis over their estimated useful
lives, generally for periods ranging from 5 to 10 years. We continually evaluate
the reasonableness of the useful lives of these assets. The unamortized balances
recorded for acquired intangibles are evaluated periodically for potential
impairment. An impairment loss, if any, would be measured as the excess of the
carrying value over the fair value. Such impairment losses are recorded as a
part of income from continuing operations.
56
OTHER NONCURRENT ASSETS
Other noncurrent assets consist principally of a note receivable which is
related to our sale of ASI stock to Dongbu (see Note 8), deferred debt issuance
costs, security deposits, the cash surrender value of life insurance policies,
deferred income taxes and tax credits. As discussed in Note 18, significant tax
valuation allowances related to our deferred tax assets were recorded during
2002.
DUE FROM AND TO AFFILIATES
Due from affiliates primarily relates to advances made to a Philippine
realty corporation in which we own 40%. Such investment is accounted for under
the equity method of accounting. Given the foreign ownership restrictions in the
Philippines, the affiliated entity owns the land on which our Philippine
factories are located. The affiliated entity has no long-term obligations other
than their obligations to us and we have not extended guarantees or other
commitments to the entity. Due to affiliates primarily relates to our
transactions with Anam Semiconductor, Inc. (see Note 8).
OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist primarily of Korean severance plan
obligations, Philippine and Taiwanese pension obligations and noncurrent income
taxes payable.
RECEIVABLE FROM STOCKHOLDER
Amkor Electronics, Inc. (AEI), which was merged into our company just
prior to the initial public offering of our company in May 1998, elected to be
taxed as an S Corporation under the provisions of the Internal Revenue Code of
1986 and comparable state tax provisions. As a result, AEI did not recognize
U.S. federal corporate income taxes. Instead, the stockholders of AEI were taxed
on their proportionate share of AEI's taxable income. Accordingly, no provision
for U.S. federal income taxes was recorded for AEI. Just prior to the initial
public offering, AEI terminated its S Corporation status at which point the
profits of AEI became subject to federal and state income taxes at the corporate
level. We consummated a tax indemnification agreement between us, our
predecessor and James Kim and his family (collectively, the "Kim Family"). James
Kim, is our founder and significant stockholder, and currently serves as our
Chairman and CEO. Under the terms of the tax indemnification agreement, Amkor
indemnified the former owners of AEI for the settlement of AEI's S Corporation
federal and state tax returns and any adjustments to the reported taxable
income.
At the time AEI was converted to a C Corporation, AEI and the Kim Family
identified certain federal and state tax overpayments associated with the
results of AEI during S Corporation status years, and AEI, in May 1998, paid
such amounts to the Kim Family. These amounts, which principally related to the
finalization of AEI's federal tax return, are reflected as a receivable from
stockholder in the stockholders' equity section of our balance sheets. As the
refunds are paid by the associated taxing authorities and received by the Kim
Family, the Kim Family, in turn, remits the funds to Amkor. During 2002, $0.4
million of tax refunds were received by the Kim Family and used to pay down the
stockholder loan. The loan balance will be further reduced as AEI's tax returns
are finalized and refunds remitted by the associated taxing authorities.
REVENUE RECOGNITION AND RISK OF LOSS
Our company does not take ownership of customer-supplied semiconductor
wafers. Title and risk of loss remains with the customer for these materials at
all times. Accordingly, the cost of the customer-supplied materials is not
included in the consolidated financial statements. Revenues from packaging
semiconductors and performing test services are recognized upon shipment or
completion of the services. We record wafer fabrication services revenues upon
shipment of completed wafers. Such policies are consistent with provisions in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements."
STOCK COMPENSATION
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related
57
Interpretations, to our stock option plans. These stock option plans are
discussed more fully in Note 20, "Stock Compensation Plans." No compensation
expense has been recognized for our employee stock options that have been
granted. If compensation costs for our stock option plans had been determined
using the fair value method of accounting as set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation," our reported net income (loss) and
earnings (loss) per share would have been reduced.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share as if the fair value based method had been applied to
all outstanding and unvested awards in each period.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Net income (loss), as reported ................................. $ (826,759) $ (450,861) $ 154,153
Deduct: Total stock-based employee compensation determined
under fair value based method, net of related tax effects (41,470) (29,619) (26,572)
----------- ----------- -----------
Net income, pro forma .......................................... $ (868,229) $ (480,480) $ 127,581
=========== =========== ===========
Earnings (loss) per share:
Basic:
As reported ................................................. (5.04) (2.87) 1.06
Pro forma ................................................... (5.29) (3.06) 0.88
Diluted:
As reported ................................................. (5.04) (2.87) 1.02
Pro forma ................................................... (5.29) (3.06) 0.85
For the 2002 pro forma net loss of $868.2 million, there was no offsetting
impact to our tax provision related to the pro forma Black-Scholes stock option
expense because of our consolidated net losses for 2002 and our recognition of a
valuation allowance against the associated net operating loss carryforwards (see
Note 18).
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses include costs directly attributable to
the conduct of research and development programs primarily related to the
development of new package designs and improving the efficiency and capabilities
of our existing production process. Such costs include salaries, payroll taxes,
employee benefit costs, materials, supplies, depreciation on and maintenance of
research equipment, fees under licensing agreements, services provided by
outside contractors, and the allocable portions of facility costs such as rent,
utilities, insurance, repairs and maintenance, depreciation and general support
services. All costs associated with research and development are expensed as
incurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The initial recognition and measurement provisions of FIN No. 45 apply
on a prospective basis to guarantees issued or modified after December 31, 2002.
As required, we have adopted the disclosure requirements of this interpretation
as of December 31, 2002 (see Note 22). We will apply the initial recognition and
measurement provisions on a prospective basis effective January 1, 2003. This
interpretation modifies existing disclosure requirements for most guarantees and
requires that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee. We are in the process of evaluating the recognition and
measurement provisions of the Interpretation and absent any unforeseen events,
we do not expect that the adoption of these provisions will have a significant
impact on our financial condition, liquidity or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." The primary objective of FIN No. 46 is to provide guidance
on the identification of, and financial reporting for, entities over which
control is achieved through means other than voting rights; such entities are
known as variable
58
interest entities. FIN No. 46 requires variable interest entities to be
consolidated by the primary beneficiary of the variable interest entities and
expands disclosure requirements for both variable interest entities that are
consolidated as well as those within which an enterprise holds a significant
variable interest. FIN No. 46 is effective immediately for all variable interest
entities created after January 31, 2003, and is effective no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003 for all variable interest entities created prior to February 1, 2003.
We have variable interests in certain Philippine realty corporations in
which we have a 40% ownership and from whom we lease land and buildings in the
Philippines. The assets and liabilities of these Philippine realty corporations
are not currently consolidated within our financial statements. As of December
31, 2002, the combined book value of the assets and liabilities associated with
these Philippine realty corporations were $21.7 million and $23.9 million. Our
maximum exposure related to these variable interest entities is limited by our
investments and loans to these entities of $21.2 million at December 31, 2002.
In addition to our interests in the Philippine realty corporations, we are
currently reviewing our interest in Acqutek Semiconductor & Technology, Ltd.
("Acqutek"), which existed prior to February 1, 2003, to determine whether this
entity would be a variable interest entity. Acqutek supplies materials to the
semiconductor industry and is a publicly traded company in Korea. Total revenues
and net loss of Acqutek for the year ended December 31, 2002, were $18.1 million
and $0.3 million, respectively. Acqutek's total assets and liabilities as of
December 31, 2002 were $39.2 million and $20.4 million, respectively. The
financial information of Acqutek is based on generally accepted accounting
principles in the Republic of Korea. Our maximum exposure is limited to our
investment in Acqutek of $1.9 million (see Note 8).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity shall
be recognized and measured initially at its fair value in the period in which
the liability is incurred rather than when a company commits to such an
activity. We will adopt this standard beginning with exit or disposal activities
that are initiated after December 31, 2002.
In January 2003, the Emerging Issues Task Force issued Issue No. 00-21
"Revenue Arrangements with Multiple Deliverables." Issue No. 00-21 primarily
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, it
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying Issue No.
00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That presumption
may be overcome if there is sufficient evidence to the contrary. Issue No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate units of accounting in the arrangement. The provisions of Issue No.
00-21 are effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. We are currently evaluating the impact this
statement will have on our financial position or results of operations.
2. DISCONTINUED OPERATIONS
On February 28, 2003, we sold our wafer fabrication services business to
ASI. Additionally, we obtained a release from Texas Instruments regarding our
contractual obligations with respect to wafer fabrication services to be
performed subsequent to the transfer of the business to ASI. We restated our
historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded, during the first quarter of 2003, $1.0
million in severance and other exit costs to close our wafer fabrication
services operations in Boise, Idaho and Lyon, France. Also in the first quarter
of 2003, we recognized a pre-tax gain on the disposition of our wafer
fabrication services business of $58.6 million ($51.5 million, net of tax). The
carrying value of the sold net assets associated with the business as of
February 28, 2003 was $2.4 million.
59
A summary of the results from discontinued operations for the years ended
December 31, 2002, 2001 and 2000 are as follows:
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Net sales ............................. $ 233,529 $ 181,188 $ 377,593
Gross profit .......................... 22,205 17,547 37,755
Operating income ...................... 13,526 8,465 24,275
Other (income) expense ................ 64 (83) --
Tax expense ........................... 5,132 2,922 7,923
Net income from discontinued operations 8,330 5,626 16,352
A summary of the assets of our discontinued operations are as follows:
DECEMBER 31,
-----------------
2002 2001
------- -------
(IN THOUSANDS)
Accounts receivable, net of allowance of $256 and $ - 0-, ........ $23,025 $21,759
Property, plant and equipment, net of accumulated depreciation of
$8,368 and $6,289 at December 31, 2002 and 2001, respectively 2,605 4,655
Other long term assets ........................................... -- 2,019
------- -------
$25,630 $28,433
======= =======
3. SPECIAL CHARGES
Special charges consist of the following:
YEAR ENDED
DECEMBER 31,
2002
--------
(IN THOUSANDS)
Impairment of long-lived assets (Note 4) ...... $190,266
Impairment of goodwill (Note 5) ............... 73,080
Lease termination and other exit costs (Note 6) 28,624
--------
$291,970
========
4. SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121.
This standard provides a single accounting model for long-lived assets to be
disposed of by sale and establishes additional criteria that would have to be
met to classify an asset as held for sale. The carrying amount of an asset or
asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the asset or
asset group. Estimates of future cash flows used to test the recoverability of a
long-lived asset or asset group must incorporate the entity's own assumptions
about its use of the asset or asset group and must factor in all available
evidence. SFAS No. 144 requires that long-lived assets be tested for
recoverability whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Such events include significant
under-performance relative to the expected historical or projected future
operating results; significant changes in the manner of use of the assets;
significant negative industry or economic trends and significant changes in
market capitalization.
During 2001, the semiconductor industry declined an unprecedented 32%,
which impacted the utilization rates of our
60
packaging and test assets. During the second quarter of 2002, total packaging
and test revenues grew over 21% as compared to the first quarter of 2002. We
experienced significant recovery in most of our company's packaging services.
However, our test services assets and several packaging services assets:
- did not contribute significantly to the growth experienced during
the second quarter of 2002,
- remained at low utilization rates relative to our projections and
- were no longer expected to reach previously anticipated utilization
levels.
In addition, as of June 30, 2002, we experienced a 72% decline in our
market capitalization as compared to March 31, 2002. These events triggered an
impairment review in accordance with SFAS No. 144. This review included a
company-wide evaluation of underutilized assets and a detailed update of our
operating and cash flow projections.
Based on our company-wide evaluation of underutilized assets, we
identified $19.8 million of test and packaging assets to be disposed. We
recognized an $18.7 million impairment charge to reduce the carrying value of
the test and packaging fixed assets to be disposed to their fair value less cost
to sell. Fair value of the assets to be disposed was determined with the
assistance of an appraisal firm and available information on the resale value of
the equipment. As of December 31, 2002, we disposed of $5.4 million of the $19.8
million identified assets, and intend to sell the remaining balance of these
items by December 31, 2003.
Upon the completion of the process to identify the packaging and test net
assets to be disposed, we reviewed our assets to be held and used for
impairment. Based on the June 30, 2002 operating and cash flow projections, we
determined that the carrying value of our test services assets and several
packaging services assets being held and used, including intangible assets that
we are amortizing, exceeded the anticipated cash flows attributable to those
assets. We grouped our long-lived assets with other assets and liabilities at
the lowest level for which identifiable cash flows were largely independent of
the cash flows of other assets and liabilities. For our company, the lowest
level of identifiable cash flows is at the test reporting unit level and for our
packaging services reporting unit at the package type level.
Our test reporting unit and the outsourced integrated circuit test
services industry were adversely impacted by excess capacity at the large
integrated device manufacturers. We expected that when the semiconductor
industry recovered the integrated device manufactures' demand for outsourced
test services would also recover. However, that anticipated recovery failed to
materialize in connection with the initial recovery we noted in the
semiconductor industry during the first half of 2002 due to continued excess
test capacity held by the large integrated device manufacturers. We no longer
expect that the demand for our test services on our existing technology
platforms will return to the previously anticipated rates. Several of our
package types based on more mature technologies and processes, including older
leadframe and laminate package types, were adversely impacted by a technology
shift to matrix and high density leadframes and the movement from multi-layer
laminate substrates to tape and chip arrays and stacked-die packages. We
expected that when the semiconductor industry recovered there would still be
sufficient demand for these more mature products. However, that anticipated
recovery failed to materialize in connection with the initial recovery we noted
in the semiconductor industry during the first half of 2002 due to these
technology shifts and the related significant excess capacity in the industry.
We no longer expect that the demand for these package types will return to the
previously anticipated rates. Additionally, we experienced insufficient demand
related to select investments in advanced package technologies principally as a
result of alternative advanced package technologies which became industry
standard.
As of June 30, 2002, we recognized a $171.6 million impairment charge to
reduce the carrying value of test and packaging assets to be held and used to
their fair value. The components of the this charge were as follows:
61
CARRYING FAIR IMPAIRMENT
VALUE VALUE CHARGE
------ ------ ------
(IN MILLIONS)
Test assets:
Property, plant and equipment and acquired intangibles $ 95.4 $ 21.9 $ 73.5
Packaging assets:
Property, plant and equipment 157.7 59.6 98.1
------ ------ ------
$253.1 $ 81.5 $171.6
====== ====== ======
An appraisal firm was engaged to assist in the determination of the fair
value of the assets held for use. The determination of fair value was based on
projected cash flows using a discount rate commensurate with the risk involved.
5. SFAS NO. 141, BUSINESS COMBINATIONS AND SFAS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
prohibits the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and addresses the accounting for
purchase method business combinations completed after June 30, 2001. Also in
June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.
For existing acquisitions, the provisions of SFAS No. 142 were effective as of
January 1, 2002 and are generally effective for business combinations initiated
after June 30, 2001. SFAS No. 142 includes provisions regarding the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, the
cessation of amortization related to goodwill and indefinite-lived intangibles,
and the testing for impairment of goodwill and other intangibles annually or
more frequently if circumstances warrant. Additionally, SFAS No. 142 requires
that within six months of adoption of SFAS No. 142, goodwill be tested for
impairment at the reporting unit level as of the date of adoption.
We adopted SFAS No. 142 as of January 1, 2002 and we reclassified $30.0
million of intangible assets previously identified as an assembled workforce
intangible to goodwill. Additionally at adoption of SFAS No. 142, we stopped
amortizing goodwill of $659.1 million, as well as goodwill of $118.6 million
associated with our investment in ASI accounted for under the equity method of
accounting. The as adjusted financial information below assumes that the
cessation of amortization occurred as of January 1, 2001.
62
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Income (loss) from continuing operations, as reported .. $ (835,089) $ (456,487) $ 137,801
----------- ----------- -----------
Goodwill and assembled workforce amortization .......... -- 80,232 60,003
Goodwill related to equity investments ................. -- 35,544 24,910
----------- ----------- -----------
-- 115,776 84,913
----------- ----------- -----------
Income (loss) from continuing operations, as adjusted .. (835,089) (340,711) 222,714
Income from discontinued operations, as reported ....... 8,330 5,626 16,352
----------- ----------- -----------
Net income (loss), as adjusted ......................... $ (826,759) $ (335,085) $ 239,066
=========== =========== ===========
Basic income (loss) from continuing operations
per share, as reported .............................. $ (5.09) $ (2.91) $ 0.95
----------- ----------- -----------
Goodwill and assembled workforce amortization .......... -- 0.51 0.41
Goodwill related to equity investments ................. -- 0.23 0.17
----------- ----------- -----------
-- 0.74 0.58
----------- ----------- -----------
Basic income (loss) from continuing operations
per share, as adjusted .............................. (5.09) (2.17) 1.53
Basic income from discontinued operations, as reported . 0.05 0.04 0.11
----------- ----------- -----------
Basic net income (loss), as adjusted ................... $ (5.04) $ (2.13) $ 1.64
=========== =========== ===========
Diluted income (loss) from continuing operations
per share, as reported .............................. $ (5.09) $ (2.91) $ 0.91
----------- ----------- -----------
Goodwill and assembled workforce amortization .......... -- 0.51 0.39
Goodwill related to equity investments ................. -- 0.23 0.16
----------- ----------- -----------
-- 0.74 0.55
----------- ----------- -----------
Diluted income (loss) from continuing operations
per share, as adjusted .............................. (5.09) (2.17)
1.46
Diluted income from discontinued operations, as reported 0.05 0.04 0.11
----------- ----------- -----------
Diluted net income (loss), as adjusted ................. $ (5.04) $ (2.13) $ 1.58
=========== =========== ===========
As of the adoption date of the standard, we reassessed the useful lives of
our identified intangibles and they continue to be appropriate. Goodwill and
other intangible assets are attributable to two reporting units, packaging and
test services. Goodwill is allocated to each reporting unit proportionate to the
fair values of the acquired packaging and test assets. We completed the initial
impairment test during the second quarter of 2002. Based on the comparison of
the fair value of the reporting units with their respective carrying values each
as of January 1, 2002, we concluded that goodwill associated with our packaging
and test services reporting units was not impaired as of adoption. An appraisal
firm was engaged to assist in the determination of the fair value of our
reporting units. The determination of fair value was based on projected cash
flows using a discount rate commensurate with the risk involved.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Our test services assets and several
packaging services assets remained at low utilization rates during the second
quarter of 2002 and were no longer expected to reach previously anticipated
utilization levels. As discussed in Note 4, we tested the recoverability of such
assets as of June 30, 2002 and concluded that a portion of those assets was
impaired. Accordingly, we retested goodwill for impairment as of June 30, 2002,
and concluded that the carrying value of the assets and liabilities associated
with the test services reporting unit exceeded its fair value. As of June 30,
2002, we recognized a $73.1 million goodwill impairment charge. Such impairment
charge was measured by comparing the implied fair value of the goodwill
associated with the test services reporting unit to its carrying value. An
appraisal firm was engaged to assist in the determination of the fair value of
our reporting units. The determination of fair value was based on projected cash
flows
63
using a discount rate commensurate with the risk involved.
The changes in the carrying value of goodwill by reporting unit are as
follows:
PACKAGING TEST
SERVICES SERVICES TOTAL
--------- --------- ---------
(IN THOUSANDS)
Balance as of January 1, 2002 . $ 586,344 $ 72,786 $ 659,130
Goodwill acquired ............. 40,890 -- 40,890
Goodwill impairment ........... -- (73,080) (73,080)
Translation adjustments ....... 865 294 1,159
--------- --------- ---------
Balance as of December 31, 2002 $ 628,099 $ -- $ 628,099
========= ========= =========
6. RESTRUCTURING CHARGES
During 2002, we recorded $28.6 million of charges related to the
consolidation of our worldwide facilities to increase operational efficiency and
reduce costs. The charges were comprised of $20.8 million to write-off leasehold
improvements and other long-lived assets and $7.8 million for lease termination
and other exit costs. Our consolidation efforts included:
- Transferring the packaging operations at our K2 site in Bucheon,
South Korea into our K4 factory in Kwangju, South Korea and closing
the K2 facility;
- Merging our factory operations in Taiwan into a single location; and
- Consolidating select U.S. office locations and closing our San Jose
test facility.
The charges associated with the consolidation initiatives in Korea, Taiwan
and the U.S. were $10.0 million, $13.8 million and $4.8 million, respectively.
We expect to complete the closing of the K2 facility during the second quarter
of 2003 and the other activities were substantially completed during 2002. Of
the total $28.6 million restructuring charges recorded in 2002, $6.1 million
remains outstanding as of December 31, 2002. The outstanding liability is
principally future lease payments of which $4.3 million is expected to be paid
during 2003. The remaining lease payments are expected to be paid through 2007
unless the leases can be terminated earlier.
7. ACQUISITIONS IN JAPAN AND TAIWAN
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The business acquired
includes a manufacturing facility, over 80 employees and intellectual property.
The purchase price included a $7.8 million cash payment at closing. We are
required to make additional payments one year from closing for the amount of the
deferred purchase price as well as contingent payments. Based on the resolution
of the contingency as of January 2003, the total amount of additional payments
due in April 2003 is 1.7 billion Japanese yen ($14.3 million based on the spot
exchange rate at December 31, 2002). We recorded $19.6 million of intangible
assets for patent rights that are amortizable over 7 years. The fair value of
the other assets acquired and liabilities assumed was approximately $2.5 million
for fixed assets, $0.1 million for inventory and other assets and $14.2 million
for the deferred purchase price payment and minimum amount of the contingent
payments. Such net assets principally relate to our packaging services reporting
unit.
In October 2002, we terminated negotiations with Fujitsu Limited to
acquire Fujitsu's packaging and test operation in Kagoshima, Japan pursuant to
the April 2002 memorandum of understanding between our company and Fujitsu.
In January 2002, we acquired Agilent Technologies, Inc.'s packaging
business related to semiconductor packages utilized in printers for $2.8 million
in cash. The acquired tangible assets were integrated into our existing
manufacturing facilities. The purchase price was principally allocated to the
tangible assets of our packaging services reporting unit. Our results of
operations were not significantly impacted by this acquisition.
64
In July 2001, we acquired, in separate transactions, 69% of Taiwan
Semiconductor Technology Corporation (TSTC) and 98% of Sampo Semiconductor
Corporation (SSC) in Taiwan. Including our prior ownership interest in TSTC, our
ownership increased to 94% of the outstanding shares of TSTC. The combined
purchase price was paid with the issuance of 4.9 million shares of our common
stock valued at $87.9 million based on our closing share price two days prior to
each acquisition, the assumption of $34.8 million of debt and $3.7 million of
cash consideration, net of acquired cash. The carrying value of our prior
investment in TSTC was $17.8 million. We recorded intangible assets, principally
goodwill, of $23.8 million as of the acquisition date that is nonamortizable. In
connection with earn-out provisions that provided for additional purchase price
based in part on the results of the acquisitions, we issued an additional 1.8
million shares in January 2002 and recorded an additional $35.2 million in
goodwill. The combined fair value of the assets acquired and liabilities assumed
was approximately $95.3 million for fixed assets, $39.5 million for accounts
receivable, inventory and other assets, $34.8 million of assumed debt and $10.1
million for other assumed liabilities. The minority interest as of the
acquisition date was $4.3 million. The results of TSTC and Sampo have been
included in the accompanying consolidated financial statements since the
acquisition dates.
In January 2001, Amkor Iwate Corporation commenced operations and acquired
from Toshiba a packaging and test facility located in the Iwate prefecture in
Japan. The total purchase price of $77.1 million was financed by a short-term
note payable to Toshiba of $21.1 million, $47.0 million in other financing from
a Toshiba financing affiliate and cash on hand. We currently own 60% of Amkor
Iwate and Toshiba owns the balance of the outstanding shares. By January 2004 we
are required to purchase the remaining 40% of the outstanding shares of Amkor
Iwate from Toshiba. The share purchase price will be determined based on the
performance of the joint venture during the three-year period but cannot be less
than 1 billion Japanese yen and cannot exceed 4 billion Japanese yen ($8.4
million to $33.7 million based on the spot exchange rate at December 31, 2002).
The results of Amkor Iwate have been included in the accompanying consolidated
financial statements since the date of acquisition. Acquired intangibles as of
the acquisition date, based on estimates of fair value, were $21.4 million and
are being amortized on a straight-line basis over 5 to 10 years. Acquired
intangibles include the value of acquired technology. The combined fair value of
the assets acquired and liabilities assumed was approximately $42.4 million for
fixed assets, $14.0 million for inventory and other assets, and $0.7 million for
assumed liabilities. Amkor Iwate provides packaging and test services
principally to Toshiba's Iwate factory under a long-term supply agreement that
provides for services to be performed on a cost plus basis during the term of
the joint venture and subsequently at market based rates. The supply agreement
with Toshiba's Iwate factory terminates two years subsequent to our acquisition
of Toshiba's ownership interest in Amkor Iwate.
8. ACQUISITIONS FROM ANAM SEMICONDUCTOR, INC. (ASI) AND OUR RELATIONSHIP WITH
ASI
ACQUISITIONS FROM AND INVESTMENT IN ANAM SEMICONDUCTOR, INC.
Historically we performed packaging and test services at our factories in
the Philippines and subcontracted for additional services with ASI, which
operated four packaging and test facilities in Korea. In the fourth quarter of
1998 ASI's business had been severely affected by the economic crisis in Korea.
ASI was part of the Korean financial restructuring program known as the
"Workout" program beginning in October 1998. The Workout program was the result
of an accord among Korean financial institutions to assist in the restructuring
of Korean business enterprises. The process involved negotiation between ASI's
banks and ASI, and did not involve the judicial system. The Workout process
restructured the terms of ASI's significant bank debt. Although ASI's operations
continued uninterrupted during the process, it caused concern among our
customers that we could potentially lose access to ASI's services. As a result,
we decided to acquire ASI's packaging and test operations to ensure continued
access to the manufacturing services previously provided by ASI. During the
course of negotiations for the purchase of the packaging and test operations,
both ASI management and the ASI bank group presented a counter-proposal whereby,
in addition to the purchase of the packaging and test operations, we would also
make an equity investment in ASI. The bank group and ASI management proposed
this structure because they believed the equity investment would reflect a level
of commitment from us to continue our ongoing business relationship with ASI
after the sale of its packaging and test operations to Amkor.
In May 1999, we acquired K4, one of ASI's packaging and test facilities,
and in May 2000 we acquired ASI's remaining packaging and test facilities, K1,
K2 and K3. With the completion of our acquisition of K1, K2 and K3, we no longer
depend upon ASI for packaging or test services. In May 2000 we committed to a
$459.0 million equity investment in ASI, and fulfilled this commitment in
installments taking place over the course of 2000. In connection with the May
2000 transactions
65
with ASI, we obtained independent appraisals to support the value and purchase
price of each the packaging and test operations and the equity investment. We
invested a total of $500.6 million in ASI including an equity investment of
$41.6 million made in October 1999.
The acquisition of K1, K2 and K3 was accounted for as a purchase.
Accordingly, the results of K1, K2 and K3 have been included in the accompanying
consolidated financial statements since the date of acquisition. Goodwill and
acquired intangibles as of the acquisition date were $555.8 million and prior to
the adoption of SFAS No. 142 (see Note 5) were being amortized on a
straight-line basis over a 10 year period. Acquired intangibles at the time of
the acquisition included the value of acquired patent rights and of a
workforce-in-place. The fair value of the assets acquired and liabilities
assumed was approximately $394 million for fixed assets, $9 million for
inventory and other assets, and $9 million for assumed liabilities.
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business, we entered into a series of transactions
beginning in the second half of 2002:
- In September 2002, we sold 20 million shares of ASI common stock to
Dongbu Group for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we
entered into the share sale agreement. We received $58.1 million in
net cash proceeds and 42 billion Korean Won (approximately $35.4
million at a spot exchange rate as of December 31, 2002) of interest
bearing notes from Dongbu Corporation payable in two equal principal
payments in September 2003 and February 2004. The Dongbu Group
comprises Dongbu Corporation, Dongbu Fire Insurance Co., Ltd. and
Dongbu Life Insurance Co., Ltd., all of which are Korean
corporations and are collectively referred herein as "Dongbu."
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction.
- In separate transactions designed to facilitate a future merger
between ASI and Dongbu, (i) we acquired a 10% interest in Acqutek
from ASI for $1.9 million, the market value of the shares as
publicly traded in Korea; (ii) we acquired the Precision Machine
Division (PMD) of Anam Instruments, a related party to Amkor, for $8
million, its fair value; and (iii) Anam Instruments, which had been
partially owned by ASI, utilized the proceeds from the sale of PMD
to us to buy back all of the Anam Instruments shares owned by ASI.
Acqutek supplies materials to the semiconductor industry and is
publicly traded in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, held a 25%
ownership interest in Acqutek at the time of our acquisition of our
interest in Acqutek. We have historically purchased and continue to
purchase leadframes from Acqutek. PMD supplies sophisticated die
mold systems and tooling to the semiconductor industry and
historically over 90% of its sales were to Amkor. We determined the
fair value of PMD based on projected cash flows discounted at a rate
commensurate with the risk involved. At the time of our acquisition
of PMD, Anam Instruments was owned 20% by ASI and 20% by a family
member of James Kim.
- On February 28, 2003, we sold our wafer fabrication services
business to ASI for total consideration of $62 million. We
negotiated the fair value of our wafer fabrication services business
with ASI and Dongbu. The parties calculated fair value based on an
assessment of projected cash flows discounted at a rate commensurate
with the risk involved. We obtained a release from Texas Instruments
regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of
the business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different
66
conclusions as to fair value. It is likely that we would not have entered into
the Acqutek or PMD transactions absent the share sale to Dongbu and the sale of
the wafer fabrication services business to ASI. Had these transactions not been
interrelated, we may have utilized a different negotiation strategy for the
investment in Acqutek and the acquisition of PMD, which could have resulted in
us reaching a different conclusion of the fair value of both of these
transactions.
In addition, pursuant to the definitive agreements, (1) Amkor and Dongbu
agreed to use reasonable best efforts to cause Dongbu Electronics and ASI to be
merged together as soon as practicable, (2) Amkor and Dongbu agreed to cause ASI
to use the proceeds ASI received from its sale of stock to Dongbu to purchase
shares in Dongbu Electronics and (3) Amkor and Dongbu agreed to use their best
efforts to provide releases and indemnifications to the chairman, directors and
officers of ASI, either past or incumbent, from any and all liabilities arising
out of the performance of their duties at ASI between January 1, 1995 and
December 31, 2001. The last provision would provide a release and
indemnification for James Kim, our CEO and Chairman, and members of his family.
We are not aware of any claims or other liabilities which these individuals
would be released from or for which they would receive indemnification.
OUR INVESTMENT IN ASI
We evaluate our investments for impairment due to declines in market value
that are considered other than temporary. In the event of a determination that a
decline in market value is other than temporary, a charge to earnings is
recorded for the unrealized loss, and a new cost basis in the investment is
established. The stock prices of semiconductor companies' stocks, including ASI
and its competitors, have experienced significant volatility during the past
several years. The weakness in the semiconductor industry has affected the
demand for the wafer output from ASI's foundry and the market value of ASI's
stock as traded on the Korea Stock Exchange. During 2002, we recorded impairment
charges totaling $172.5 million to reduce the carrying value of our investment
in ASI to ASI's market value. Additionally during 2002, we recorded a loss of
$1.8 million on the disposition of a portion of our interest in ASI to Dongbu.
At January 1, 2002 Amkor owned 47.7 million shares or 42% of ASI's voting stock.
During 2002, we divested 21 million shares of ASI stock and at December 31, 2002
Amkor owned 26.7 million shares of ASI or 21%. The carrying value of our
remaining investment in ASI at December 31, 2002 was $77.5 million, or $2.90 per
share.
Subsequent to the sale of a portion of our investment in ASI to Dongbu in
2002, we were unable to identify another strategic buyer. ASI's common stock,
which is listed on the Korean Stock Exchange, is relatively thinly traded and
subject to volatile swings in daily trading volumes. In an effort to continue to
monetize our investment in ASI's common stock, we evaluated, in consultation
with a financial institution, the most efficient method to divest a large block
of shares into the market without destabilizing the share price of ASI's common
stock. As of March 24, 2003, we consummated a series of transactions proposed by
the financial institution. We irrevocably sold a block of 7 million shares of
ASI common stock to the financial institution for 24.4 billion Korean won ($19.5
million based on the spot exchange rate as of the transaction date, or $2.81 per
share). We also entered into a nondeliverable call option with the financial
institution for $6.8 million, the fair value of the option at that date plus the
transaction costs. The call option is scheduled to expire December 2003 and is
indexed to ASI's share price with a strike price of $1.97 per share, or
approximately 70% of the then market value of ASI's common stock. The value of
the option declined $2.2 million as of March 31, 2003 as a result of ASI's share
price declining from 3,511 Korean won per share, or $2.81 per share, at March
24, 2003 to 3,150 Korean won at March 31, 2003.
The call option allows us to continue to monetize our investment in ASI at
a fixed price with unlimited upside and limited downside economics. In addition,
it provides us with the economic benefits of selling shares through a dollar
averaging sales program without incurring the transaction costs associated with
multiple small quantity sales. The call premium provides the financial
institution some downward protection if the market for ASI's common stock
destabilized as it sells its investment in ASI's common stock into the market.
If ASI's share price declines below the market price of ASI's stock on the date
we purchased the call option, then the net proceeds from the exercise of the
option could be less than the $6.8 million we paid for the call option. All
ownership rights and privileges associated with the 7 million shares of ASI's
common stock sold were irrevocably transferred to the financial institution. In
no event can the financial institution put the shares back to Amkor nor can
Amkor reacquire the shares from the financial institution.
67
Beginning March 24, 2003, we ceased accounting for our investment in ASI
under the equity method of accounting and commenced accounting for our
investment as a marketable security that is available for sale.
PRO FORMA FINANCIAL INFORMATION RELATED TO AMKOR'S MAY 2000 ACQUISITION OF
K1, K2 AND K3 (UNAUDITED)
The unaudited pro forma information below assumes that the May 2000
acquisition of K1, K2 and K3 occurred at the beginning of 2000. The pro forma
adjustments include a provision for amortization of goodwill and other
identified intangibles, an adjustment of depreciation expense based on the fair
market value of the acquired assets, interest expense on debt issued to finance
the acquisitions and income taxes related to the pro forma adjustments. The pro
forma results are not necessarily indicative of the results we would actually
have achieved if the acquisition had been completed as of the beginning of the
period presented, nor are they necessarily indicative of future consolidated
results.
FOR THE
YEAR ENDED
DECEMBER 31,
2000
----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net revenues ........................................ $2,019,922
Gross profit ........................................ 637,417
Operating income .................................... 342,411
Income before income taxes, equity investment losses,
minority interest and discontinued operations .... 191,629
Income from continuing operations ................... 156,166
Net income .......................................... 172,518
Per share data:
Basic income per common share:
from continuing operations ..................... 1.03
from discontinued operations ................... 0.11
Net income per common share .................. 1.14
Diluted income per common share:
from continuing operations ..................... 1.00
from discontinued operations ................... 0.10
Net income per common share .................. 1.10
Depreciation expense ................................ 283,171
Amortization of goodwill and acquired intangibles ... 81,607
The pro forma adjustments exclude the effects of our investments in ASI.
Had we included pro forma adjustments for the year ended December 31, 2000
related to our investments in ASI, pro forma net income would have been $144.5
million and pro forma earnings per share on a diluted basis would have been
$0.90.
FINANCIAL INFORMATION FOR ASI
The following summary of consolidated financial information was derived
from the consolidated financial statements of ASI, reflecting ASI's packaging
and test operations prior to May 2000 as discontinued operations within their
results of operations. ASI's net income for the year ended December 31, 2000
includes a $434.2 million gain on sale of K1, K2 and K3, which was eliminated
for purposes of calculating our equity in income of ASI.
68
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues ............................... $ 213,813 $ 161,700 $ 344,792
Gross profit (loss) ........................ (99,417) (100,295) 41,682
Loss from continuing operations ............ (97,129) (162,173) (19,703)
Net income (loss) .......................... (97,129) (162,173) 450,641
DECEMBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits ................... $ 65,891 $ 84,721
Current assets ...................................................... 167,145 144,898
Property, plant and equipment, net .................................. 482,028 646,298
Noncurrent assets (including property, plant and equipment) ......... 622,487 770,932
Current liabilities ................................................. 111,409 134,727
Total debt and other long-term financing (including current portion) 150,607 238,970
Noncurrent liabilities (including debt and other long-term financing) 119,493 175,487
Total stockholders' equity .......................................... 558,730 605,616
OUR RELATIONSHIP WITH ASI
We have had a long-standing relationship with ASI. ASI was founded in 1956
by Mr. H. S. Kim, the father of Mr. James Kim, our Chairman and Chief Executive
Officer. Through our supply agreements with ASI, we historically have had a
first right to substantially all of the packaging and test services capacity of
ASI and the exclusive right to all of the wafer output of ASI's wafer
fabrication facility. Beginning in May 2000 with our acquisition of K1, K2 and
K3, we no longer receive packaging and test services from ASI. Under the former
wafer fabrication services supply agreement which was consummated in January
1998, we had the exclusive right but not the requirement to purchase all of the
wafer output of ASI's wafer fabrication facility on pricing terms negotiated
annually. Historically, we have had other relationships with ASI affiliated
companies for financial services, construction services, materials and
equipment. We believe each of these transactions was conducted on an arms-length
basis in the ordinary course of business. In addition, ASI's former construction
subsidiary is currently in reorganization and its affairs are managed by a
number of creditor banks; all transactions between Amkor and this entity are
subject to review and approval by these banks. Total purchases from ASI and its
affiliates included in cost of revenue for the years ended December 31, 2002,
2001 and 2000 were $212.6 million, $161.6 million and $499.8 million.
Additionally, financial services performed by ASI and its affiliates included in
interest expense for the year ended December 31, 2000 was $1.6 million.
Construction services and equipment purchases received from ASI and its
affiliates capitalized during the years ended December 31, 2002, 2001 and 2000
were $2.8 million, $14.7 million and $38.8 million, respectively.
9. ACCOUNTS RECEIVABLE SALE AGREEMENT
Effective July 1997 we entered into an agreement to sell receivables with
certain banks. The transaction qualified as a sale under the provisions of SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under the agreement, the participating banks
committed to purchase, with limited recourse, all right, title and interest in
selected accounts receivable, up to a maximum of $100.0 million. Losses on
receivables sold under the agreement were approximately $1.1 million in 2000 and
are included in other expense, net. In March 2000, we terminated the agreement
and repurchased approximately $71.5 million of accounts receivable.
69
10. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory of $25.0
million and $20.2 million for 2002 and 2001, respectively, consist of raw
materials and purchased components that are used in the semiconductor packaging
process.
DECEMBER 31,
-----------------
2002 2001
------- -------
(IN THOUSANDS)
Raw materials and purchased components $61,806 $64,752
Work-in-process ...................... 10,315 9,032
------- -------
$72,121 $73,784
======= =======
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
(IN THOUSANDS)
Land ............................................ $ 88,744 $ 88,667
Buildings and improvements ...................... 537,288 494,995
Machinery and equipment ......................... 1,512,191 1,650,427
Furniture, fixtures and other equipment ......... 121,727 117,947
Construction in progress ........................ 1,707 63,782
----------- -----------
2,261,657 2,415,818
Less -- Accumulated depreciation and amortization (1,295,319) (1,028,199)
----------- -----------
$ 966,338 $ 1,387,619
=========== ===========
As described in Note 4, we recorded in 2002 a $185.5 million impairment
charge associated with our test and packaging fixed assets. Such impairment
charge principally related to machinery and equipment.
12. ACQUIRED INTANGIBLES
Acquired intangibles consist of the following:
DECEMBER 31,
--------------------
2002 2001
-------- --------
(IN THOUSANDS)
Patents and technology rights .. $ 61,994 $ 46,713
Less -- Accumulated amortization (16,961) (9,663)
-------- --------
$ 45,033 $ 37,050
======== ========
Amortization expense was $7.3 million, $5.6 million and $3.1 million in
2002, 2001 and 2000, respectively. The estimated annual amortization expense for
each of the next five years ending on December 31 is $7.3 million. The weighted
average amortization period for the patents and technology rights is 8 years. As
described in Note 4, we reduced the carrying value of our test services patents
and technology rights in 2002 by a $4.8 million impairment charge.
13. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
70
DECEMBER 31,
--------------------
2002 2001
-------- --------
(IN THOUSANDS)
Equity investments under the equity method:
ASI (ownership of 21% and 42% at December 31, 2002
and 2001, respectively) (see Note 8) .......... $ 77,450 $377,947
Other equity investments (20% - 50% owned) ........ 1,195 966
-------- --------
Total equity investments ...................... 78,645 378,913
Marketable securities classified as available for sale 4,590 4,038
-------- --------
$ 83,235 $382,951
======== ========
In connection with the disposition of a portion of our interest in ASI, we
acquired a 10% interest in Acqutek from ASI for a total purchase price of $1.9
million. Our investment in Acqutek is classified as a marketable security that
is available for sale. Acqutek supplies materials to the semiconductor industry
and is a publicly traded company in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, held a 25% ownership
interest in Acqutek at the time of our acquisition of our interest in Acqutek.
We have historically purchased and continue to purchase leadframes from Acqutek.
Total purchases from Acqutek included in cost of revenue for 2002, 2001 and 2000
were $16.0 million, $14.0 million and $29.2 million, respectively. We believe
these transactions with Acqutek were conducted on an arms-length basis in the
ordinary course of business.
14. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Accrued income taxes . $ 48,787 $ 53,364
Accrued interest ..... 32,690 32,584
Accrued payroll ...... 29,295 20,813
Other accrued expenses 73,451 38,783
-------- --------
$184,223 $145,544
======== ========
15. DEBT
Following is a summary of short-term borrowings and long-term debt:
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
(IN THOUSANDS)
Secured bank facility:
Term B loans, LIBOR plus 4% due September 2005 ......................... $ 97,118 $ 97,706
$100.0 million revolving line of credit, LIBOR plus 3.75% due March 2005 -- --
9.25% Senior notes due May 2006 ........................................... 425,000 425,000
9.25% Senior notes due February 2008 ...................................... 500,000 500,000
10.5% Senior subordinated notes due May 2009 .............................. 200,000 200,000
5.75% Convertible subordinated notes due June 2006,
convertible at $35.00 per share ........................................ 250,000 250,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share ........................................ 258,750 258,750
Other debt ................................................................ 77,845 94,812
----------- -----------
1,808,713 1,826,268
Less -- Short-term borrowings and current portion of long-term debt ....... (71,023) (54,815)
----------- -----------
$ 1,737,690 $ 1,771,453
=========== ===========
71
In June 2002 and September 2002 we amended our existing bank debt
covenants with the secured bank lenders to provide further flexibility with
respect to capital expenditures, investment restrictions and other financial
covenants measured in part by our liquidity and earnings. As part of the
September 2002 amendment, lenders under our bank debt facility agreed to extend
the existing financial covenant framework through December 31, 2003.
In March 2001, June 2001 and September 2001, we amended the financial
covenants associated with the secured credit facilities. In connection with the
September 2001 amendment, the revolving line of credit was reduced from a $200
million commitment to $100 million, the interest rate on the Term B loans was
increased to LIBOR plus 4% and we prepaid $125 million of the Term B loans in
November 2001. We expensed, as interest expense, approximately $4.0 million of
deferred debt issuance costs as a result of the reduction of the revolving line
of credit commitment and the prepayment of the Term B loans.
In May 2001, we sold $250.0 million principal amount of our 5.75%
convertible subordinated notes due 2006 in a private placement. The notes are
convertible into Amkor common stock at a conversion price of $35.00 per share.
We used $122.0 million of the $243.0 million of the net proceeds of that
offering to repay amounts outstanding under the Term B loans of our secured
credit facility, and the balance of the net proceeds was available to be used
for general corporate and working capital purposes. In connection with the
repayment in May 2001 of the Term B loans, we expensed, as interest expense,
$2.3 million of unamortized deferred debt issuance costs.
In May 2001, we called for the redemption of all of the 5.75% convertible
subordinated notes due May 2003. In anticipation of the redemption,
substantially all of the holders of the convertible notes opted to convert their
notes into Amkor common stock and, accordingly, $50.2 million of the convertible
notes were converted to 3.7 million of our common stock. In connection with the
conversion of the 5.75% convertible subordinated notes due May 2003, $1.2
million of unamortized deferred debt issuance costs was charged to additional
paid-in capital.
In February 2001, we sold $500.0 million principal amount of our 9.25%
senior notes due 2008 in a private placement. We used $387.5 million of the
$490.0 million of the net proceeds of that offering to repay amounts outstanding
under the Term A loans and revolving line of credit of our senior secured credit
facility, and the balance of the net proceeds was available to be used for
general corporate and working capital purposes. In connection with the repayment
in February 2001 of the Term A loans, we expensed, as interest expense, $7.1
million of unamortized deferred debt issuance costs.
Other debt as of December 31, 2002 and 2001 included our foreign debt
principally related to the financing of Amkor Iwate's acquisition of a Toshiba
packaging and test facility and the debt assumed in connection with the
acquisition of Sampo Semiconductor Corporation in Taiwan. Our foreign debt
included fixed and variable debt maturing between 2003 and 2010, with the
substantial majority maturing by 2003. As of December 31, 2002 the foreign debt
had interest rates ranging from 1.0% to 6.6%. These debt instruments do not
include significant financial covenants.
In connection with our issuance of the 5.75% convertible subordinated
notes due 2006 in May 2001, we incurred debt issuance costs of $7.0 million. In
connection with our issuance of the 9.25% senior notes due 2008 and the
amendment to our secured bank facility in February 2001, we incurred debt
issuance costs of $11.0 million. The debt issuance costs have been deferred and
are being amortized over the life of the associated debt. Deferred debt issuance
costs are included, net of amortization, in other noncurrent assets in the
accompanying consolidated balance sheet and the related amortization expense is
included in interest expense in the accompanying consolidated statements of
operations.
During the fourth quarter of 1999 and continuing into 2000, we completed
an early conversion of the 5.75% convertible subordinated notes due May 2003.
During the year ended December 31, 2000, we exchanged approximately 248,000
shares of our common stock for $3.2 million of the convertible subordinated
notes. During the year ended December 31, 1999, we exchanged 12.1 million shares
of common stock for $153.6 million of convertible subordinated notes. The fair
value of the shares of common stock issued in excess of the shares required for
conversion of the notes was $0.3 million and $17.4 million for the year ended
December 31, 2000 and 1999, respectively, and such amounts were expensed and are
included in other expense in the accompanying consolidated statements of
operations.
Interest expense related to short-term borrowings and long-term debt is
presented net of interest income of $4.2 million,
72
$10.3 million and $14.2 million in 2002, 2001 and 2000, respectively, in the
accompanying consolidated statements of operations. The principal payments
required under short-term and long-term debt borrowings at December 31, 2002 are
as follows: 2003 -- $71.0 million, 2004 -- $56.4 million, 2005 -- $42.4 million,
2006 -- $677.9 million, 2007 -- $259.6 million and thereafter -- $701.4 million.
16. STOCKHOLDERS' EQUITY
In connection with a $410.0 million private equity offering in May 2000,
we issued 20.5 million shares of our common stock and granted warrants that
expire four years from issuance to purchase 3.9 million additional shares of our
common stock at $27.50 per share. The estimated fair value of the stock warrants
of $35.0 million is included in additional paid-in capital on our consolidated
balance sheet.
17. EMPLOYEE BENEFIT PLANS
U.S. Defined Contribution Plan
Our company has a defined contribution benefit plan covering substantially
all U.S. employees. Employees can contribute up to 13% of salary to the plan and
the company matches in cash 75% of the employee's contributions up to a defined
maximum on an annual basis. The expense for this plan was $2.0 million, $2.1
million and $1.8 million in 2002, 2001 and 2000, respectively.
Philippine Pension Plan
Our Philippine subsidiary sponsors a defined benefit plan that covers
substantially all 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 the Philippine defined
benefit plan are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Service cost of current period .................... $ 2,339 $ 2,534 $ 1,862
Interest cost on projected benefit obligation ..... 1,681 1,919 1,468
Expected return on plan assets .................... (920) (1,482) (1,092)
Amortization of transition obligation and actuarial
gains/losses ................................... 62 64 66
------- ------- -------
Total pension expense .................... $ 3,162 $ 3,035 $ 2,304
======= ======= =======
It is our policy to make contributions sufficient to meet the minimum
contributions required by law and regulation. The following table sets forth the
funded status of our Philippine defined benefit pension plan and the related
changes in the projected benefit obligation and plan assets:
73
2002 2001
-------- --------
(IN THOUSANDS)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year ... $ 19,742 $ 16,585
Service cost ........................................ 2,339 2,534
Interest cost ....................................... 1,681 1,919
Effect of curtailment ............................... (2,148) --
Actuarial gain ...................................... (1,997) (401)
Foreign exchange gain ............................... (807) (378)
Benefits paid ....................................... (203) (517)
-------- --------
Projected benefit obligation at end of year ......... 18,607 19,742
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year ...... 10,003 11,585
Actual return on plan assets ........................ (283) (800)
Effect of curtailment ............................... (1,500) --
Foreign exchange gain ............................... (408) (265)
Benefits paid ....................................... (203) (517)
-------- --------
Fair value of plan assets at end of year ............ 7,609 10,003
-------- --------
Funded status:
Projected benefit obligation in excess of plan assets 10,996 9,739
Unrecognized actuarial loss ......................... (1,642) (3,218)
Unrecognized transition obligation .................. (440) (523)
-------- --------
Accrued pension costs .................................. $ 8,914 $ 5,998
======== ========
The discount rate used in determining the projected benefit obligation for
our Philippine defined benefit plan was 8%, 10% and 12% as of December 31, 2002,
2001 and 2000, respectively. The rate of increase in future compensation levels
was 7%, 9% and 11% as of December 31, 2002, 2001 and 2000, respectively. The
expected long-term rate of return on plan assets was 8%, 12% and 12% as of
December 31, 2002, 2001 and 2000, respectively. These rates reflect economic and
market conditions in the Philippines. The fair value of plan assets includes an
investment in our common stock of $0.5 million and $1.6 million at December 31,
2002 and 2001, respectively.
KOREAN SEVERANCE PLAN
Our Korean subsidiary participates in an accrued severance plan that
covers employees and directors with one year or more of service. Eligible plan
participants are entitled to receive a lump-sum payment upon termination of
their employment, based on their length of service 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. The
contributions to the national pension fund made under the National Pension Plan
of the Republic of Korea are deducted from accrued severance benefit
liabilities. Contributed amounts are:
DECEMBER 31,
2002 2001
-------- --------
(IN THOUSANDS)
Balance at the beginning of year ....................... $ 40,002 $ 31,446
Provision of severance benefits ........................ 16,805 13,430
Severance payments ..................................... (8,897) (3,132)
(Gain)/loss on foreign currency translation ............ 4,436 (1,742)
-------- --------
52,346 40,002
Payments remaining with the Korean National Pension Fund (1,632) (1,715)
-------- --------
Balance at the end of year ............................. $ 50,714 $ 38,287
======== ========
TAIWAN PENSION PLAN
74
Our Taiwan subsidiary sponsors a defined benefit plan that covers
substantially all full-time employees. Charges to expense are based upon costs
computed by independent actuaries. As of December 31, 2002 and 2001, the
projected benefit obligation was $2.1 million and $1.2 million, respectively.
Pension assets at fair market value as of December 31, 2002 and 2001 were $1.9
million and $1.4 million, respectively. Accrued pension cost at December 31,
2002 and 2001 was $0.5 million.
18. INCOME TAXES
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between
the financial statement and the tax bases of assets and liabilities. The
components of the provision for income taxes follow:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Current:
Federal ................................................ $(21,275) $ -- $ 2,149
State .................................................. -- -- (159)
Foreign ................................................ 14,371 3,331 28,550
-------- -------- --------
(6,904) 3,331 30,540
-------- -------- --------
Deferred:
Federal ................................................ 70,738 (87,077) (6,869)
Foreign ................................................ 1,981 2,055 (1,386)
-------- -------- --------
72,719 (85,022) (8,255)
-------- -------- --------
Total provision (benefit) ................................. 65,815 (81,691) 22,285
Less: Discontinued operations ......................... 5,132 2,922 7,923
-------- -------- --------
Total provision (benefit) from continuing operations $ 60,683 $(84,613) $ 14,362
======== ======== ========
The reconciliation between the taxes payable based upon the U.S. federal
statutory income tax rate and the recorded provision follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Federal statutory rate ..................................... $(192,771) $(150,419) $ 69,101
Income (loss) of foreign subsidiaries subject to tax holiday 63,337 33,762 (43,367)
Foreign exchange (losses) gains recognized for income taxes 14,855 13,221 (382)
Change in valuation allowance .............................. 138,228 3,656 5,898
Difference in rates on foreign subsidiaries ................ 24,140 20,415 (8,142)
Change in tax rate from prior year ......................... -- 5,796 --
State taxes, net of federal benefit ........................ (3,297) (8,480) (661)
Goodwill and other permanent differences ................... 21,323 358 (162)
--------- --------- ---------
Total ............................................. $ 65,815 $ (81,691) $ 22,285
========= ========= =========
The following is a summary of the significant components of the deferred
tax assets and liabilities:
75
DECEMBER 31,
2002 2001
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ................ $ 160,043 $ 103,340
Capital loss carryover .......................... 45,069 --
Inventories ..................................... 7,945 10,495
Corporate income tax credits .................... 5,447 9,990
Accounts receivable ............................. 3,605 3,248
Property, plant and equipment ................... 3,594 1,103
Goodwill ........................................ 4,023 5,331
Other accrued liabilities ....................... 2,790 542
Unrealized foreign exchange losses .............. 1,054 257
Loss on impairment/lease shutdown reserves ...... 11,890 --
Other ........................................... 6,666 6,309
--------- ---------
Total deferred tax assets .......................... 252,126 140,615
Valuation allowance ................................ (196,442) (13,722)
--------- ---------
Total deferred tax assets net of valuation allowance 55,684 126,893
--------- ---------
Deferred tax liabilities:
Property, plant and equipment ................... 8,714 6,291
Goodwill ........................................ 6,146 9,218
Unrealized foreign exchange gains ............... 2,203 88
Other ........................................... 1,424 1,380
--------- ---------
Total deferred tax liabilities ..................... 18,487 16,977
--------- ---------
Net deferred tax assets ............................ $ 37,197 $ 109,916
========= =========
During 2002, we recorded a $138.2 million charge to establish a valuation
allowance against our deferred tax assets consisting primarily of U.S. and
Taiwanese net operating loss carryforwards and tax credits. In connection with
our divestiture in 2002 of 21 million shares of ASI common stock, we realized a
capital loss of approximately $117.0 million and recognized a U.S. tax benefit
of $44.5 million for which we provided a full valuation allowance because we did
not have any offsetting capital gains. Generally accepted accounting principles
require companies to weigh both positive and negative evidence in determining
the need for a valuation allowance. In light of our three years of cumulative
losses, an unprecedented industry downturn and continued poor visibility of
customer demand, we have determined, during 2002, that a valuation allowance
representing substantially all of our deferred tax assets is appropriate. These
negative factors outweighed our forecasted future profitability and expectation
that we will be able to utilize our net operating loss carryforwards.
In connection with our 2001 acquisitions in Japan and Taiwan, we recorded
as of the acquisition date a net deferred tax assets of $13.3 million, which is
net of a $1.3 million valuation allowance.
As a result of certain capital investments, export commitments and
employment levels, income from operations in Korea, the Philippines and China is
subject to reduced tax rates, and in some cases is wholly exempt from taxes. As
a result of our 1999 and 2000 acquisitions of K1, K2, K3 and K4 in Korea, we
benefit from a tax holiday extending through 2012 that provides for a 100% tax
holiday for seven years and then 50% tax holiday for an additional 3 years. In
the Philippines, our operating locations operate in economic zones and in
exchange for tax holidays we have committed to certain export and employment
levels. One of our Philippine locations benefits from a full tax holiday through
2003, followed by perpetual reduced tax rate of 5%, while the other location
benefits from a perpetual reduced tax rate of 5%. As a result of our 2001
investment in China, we expect to benefit from a 100% tax holiday for five years
and then 50% tax holiday for an additional two years. As a result of the net
losses incurred by our foreign subsidiaries subject to tax holidays during 2002
and 2001, there is a forgone income tax benefit attributable to the tax status
of these subsidiaries of approximately $63.3 million or $0.385 per share and
$33.8 million or $0.21 per share, in 2002 and 2001, respectively. The income tax
benefit in 2000 attributable to the tax status of these subsidiaries was
approximately $43.4 million or $0.28 per share.
76
The deferred tax asset and liability for foreign exchange gains and losses
relate to U.S. dollar denominated monetary assets and liabilities for which
foreign exchange gains or losses were realized for book purposes and not for tax
purposes. During 2000 one of our Philippine subsidiaries realized net foreign
exchange gains and losses for book purposes which were deferred for tax and
established a valuation allowance for a portion of the related deferred tax
assets. Our ability to utilize these assets depends on the timing of the
settlement of the related assets or liabilities and the amount of taxable income
recognized within the Philippine statutory carryforward limit of three years.
During 2002 and 2001, such Philippine subsidiary realized the foreign exchange
gains and losses for tax causing a reduction to the valuation allowance
established in 2000.
In December 2002, we utilized $33.3 million of U.S. net operating losses
by carrying back such amounts to offset U.S. reported taxable income in prior
years. At December 31, 2002, our company has remaining U.S. net operating losses
available to be carried forward totaling $375.5 million expiring between 2021
and 2022. Additionally, at December 31, 2002, our company had non-U.S. net
operating losses available to be carried forward totaling $61.2 million expiring
between 2003 and 2012. The tax returns for open years are subject to changes
upon final examination. Non-U.S. loss before taxes and minority interest was
$395.3 million and 180.7 million in 2002 and 2001, respectively, and non-U.S.
income before taxes and minority interest was $201.0 million in 2000. At
December 31, 2002, net cumulative undistributed losses of non-U.S. subsidiaries
totaled approximately $61.4 million. No liabilities are recognized for our
cumulative earnings loss position and no U.S. income and foreign withholding
taxes would be due on the cumulative earnings loss. It is the company's
intention to reinvest any undistributed earnings outside the U.S.
At December 31, 2002 and 2001 current deferred tax assets of $5.5 million
and $16.3 million, respectively, are included in other current assets and
noncurrent deferred tax assets of $36.3 million and $108.1 million,
respectively, are included in other assets in the consolidated balance sheet.
The net deferred tax assets include amounts, which, in our opinion, are more
likely than not to be realizable through future taxable income. In addition, at
December 31, 2002 and 2001, noncurrent deferred tax liabilities of $4.6 million
and $14.5 million, respectively, are included in other noncurrent liabilities in
the consolidated balance sheet.
We operate in and file income tax returns in various U.S. and non-U.S.
jurisdictions which are subject to examination by tax authorities. Our tax
returns have been examined through 1998 in the Philippines and the U.S., through
1999 in Japan, through 2000 in Taiwan and through 2001 in China. The tax returns
for open years in all jurisdictions in which we do business are subject to
changes upon examination. We believe that we have estimated and provided
adequate accruals for the probable additional taxes and related interest expense
that may ultimately result from examinations related to our transfer pricing and
local attribution of income resulting from significant intercompany
transactions, including ownership and use of intellectual property, in various
U.S. and non-U.S. jurisdictions. Our estimated tax liability is subject to
change as examinations of specific tax years are completed 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 or
results of operations, nor do we expect that examinations to be completed in the
near term would have a material favorable impact. As of December 31, 2002 and
2001, the accrual for current taxes and estimated additional taxes was $48.8
million and $53.4 million, respectively. In addition, changes in the mix of
income from our foreign subsidiaries, expiration of tax holidays and changes in
tax laws or regulations could result in increased effective tax rates in the
future.
19. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic EPS is computed using only the weighted
average number of common shares outstanding for the period, while diluted EPS is
computed assuming conversion of all dilutive securities, such as options,
convertible debt and warrants. For the years ended December 31, 2002 and 2001,
we excluded from the computation of diluted earnings per share potentially
dilutive securities which would have an antidilutive effect on EPS. As of
December 31, 2002, the total number of potentially dilutive securities
outstanding was 6.6 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. As of
December 31, 2001, the total number of potentially dilutive securities
outstanding was 12.4 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. The
basic and diluted per share amounts are the same for the years 2002 and 2001,
due to net losses.
77
Year 2000 basic and diluted per share amounts from continuing operations
are calculated as follows:
WEIGHTED
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Earnings per Share -- Year Ended December 31, 2000
Basic earnings per share from continuing operations . $137,801 145,806 $ 0.95
Impact of convertible notes ......................... 2,414 3,744
Dilutive effect of options .......................... -- 3,673
-------- -------- --------
Diluted earnings per share from continuing operations $140,215 153,223 $ 0.91
======== ======== ========
20. STOCK COMPENSATION PLANS
1998 Director Option Plan. A total of 300,000 shares of common stock have
been reserved for issuance under the Director Plan. The option grants under the
Director Plan are automatic and non-discretionary. As of January 1, 2003, the
Director Plan provides for an initial grant of options to purchase 20,000 shares
of common stock to each new non-employee director of the company when such
individual first becomes an outside director. In addition, each non-employee
director will automatically be granted subsequent options to purchase 10,000
shares of common stock on each date on which such director is re-elected by the
stockholders of the company, provided that as of such date such director has
served on the board of directors for at least six months. The exercise price of
the options is 100% of the fair market value of the common stock on the grant
date. The term of each option is ten years and each option granted to an
non-employee director vests over a three year period. The Director Plan will
terminate in January 2008 unless sooner terminated by the board of directors.
1998 Stock Plan. The 1998 Stock Plan generally provides for the grant to
employees, directors and consultants of stock options and stock purchase rights.
Unless terminated sooner, the 1998 Plan will terminate automatically in January
2008. A total of 5,000,000 shares are reserved for issuance under the 1998 Stock
Plan, and there is a provision for an annual replenishment to bring the number
of shares of common stock reserved for issuance under the plan up to 5,000,000
as of each January 1.
Unless determined otherwise by the board of directors or a committee
appointed by the board of directors, options and stock purchase rights granted
under the 1998 Plan are not transferable by the optionee. Generally, the
exercise price of all stock options granted under the 1998 Plan must be at least
equal to the fair market value of the shares on the date of grant. In general,
the options granted will vest over a four year period and the term of the
options granted under the 1998 Plan may not exceed ten years.
1998 Stock Option Plan for French Employees. The 1998 French Plan will
terminate in April 2003. Amkor intends to implement a new French Plan, subject
to shareholder approval, in 2003. The 1998 French Plan provides for the granting
of options to employees of our French subsidiaries. A total of 250,000 shares of
common stock are reserved for issuance under the 1998 French Plan, and there is
a provision for an annual replenishment to bring the number of shares of common
stock reserved for issuance under the plan up to 250,000 as of each January 1.
In general, stock options granted under the 1998 French Plan vest over a four
year period, the exercise price for each option granted under the 1998 French
Plan shall be 100% of the fair market value of the shares of common stock on the
date the option is granted and the maximum term of the option must not exceed
ten years. Shares subject to the options granted under the 1998 French Plan may
not be transferred, assigned or hypothecated in any manner other than by will or
the laws of descent or distribution before the date which is five years after
the date of grant.
On November 8, 2002, we initiated a voluntary stock option replacement
program such that employees and members of our board of directors could elect to
surrender their existing options and be granted new options no earlier than six
months and one day after the tendered options were cancelled. We will issue new
option grants equal to the same number of shares surrendered by the employees.
Pursuant to the terms and conditions of the offer to exchange, a total of 1,633
eligible employees participated and our company has accepted for cancellation
options to purchase an aggregate of 7,115,891 shares of our company's common
stock under the 1998 Stock Plan, an aggregate of 35,000 shares of our company's
common stock under the 1998 Director Option Plan and an aggregate of 248,200
shares of our company's common stock under the 1998 French Plan. Subject to the
terms and conditions of the offer to exchange, our company intends to grant new
options to
78
purchase up to 7,399,091 shares of our common stock no earlier than June 12,
2003 in exchange for the options tendered by eligible employees and members of
our board of directors and accepted by our company. The exercise price will
equal the fair market value of common stock as of the new grant date. The
vesting term of the new options will be similar to the tendered options except
the new options contain an additional one year vesting period prior to any
options becoming exercisable.
A summary of the status of the stock option plans follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE GRANT DATE
OF SHARES PER SHARE FAIR VALUES
---------- ---------- ----------
Balance at December 31, 1999 5,065,548 $ 10.15
Granted .................... 5,168,950 40.15 $ 22.46
==========
Exercised .................. 418,388 10.32
Cancelled .................. 545,909 33.87
---------- ----------
Balance at December 31, 2000 9,270,201 25.48
Granted .................... 4,313,850 15.14 $ 8.47
==========
Exercised .................. 517,822 9.88
Cancelled .................. 709,863 27.60
---------- ----------
Balance at December 31, 2001 12,356,366 22.40
Granted .................... 4,004,460 12.76 $ 7.94
==========
Exercised .................. 547,862 10.30
Cancelled .................. 9,239,701 24.88
---------- ----------
Balance at December 31, 2002 6,573,263 $ 14.15
========== ==========
Options exercisable at:
December 31, 2000 .......... 2,827,380 $ 10.23
December 31, 2001 .......... 4,508,557 22.35
December 31, 2002 .......... 3,436,469 13.95
Significant option groups outstanding at December 31, 2002 and the related
weighted average exercise price and remaining contractual life information are
as follows:
OUTSTANDING EXERCISABLE WEIGHTED
------------------------- -------------------------- ------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
SHARES PRICE SHARES PRICE LIFE (YEARS)
------------- -------- ------------- -------- ------------
Options with exercise price of:
$1.61 - $3.22............................... 75,000 $ 2.13 -- $ -- 9.7
$3.23 - $6.46............................... 476,876 $ 5.51 356,286 $ 5.66 5.1
$6.47 - $12.94............................... 2,124,872 $ 10.34 2,006,802 $ 10.36 4.4
$12.95 - $25.90.............................. 3,444,608 $ 14.24 720,965 $ 15.42 7.6
$25.91 - $51.82.............................. 451,907 $ 42.47 352,416 $ 42.64 2.8
------------- -------------
Options outstanding at December 31, 2002..... 6,573,263 3,436,469
============= =============
In order to calculate the fair value of stock options at date of grant, we
used the Black-Scholes option pricing model. The following assumptions were used
to calculate weighted average fair values of the options granted:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Expected life (in years) ............. 4 4 4
Risk-free interest rate .............. 2.5% 4.5% 6.8%
Volatility ........................... 85% 70% 66%
Dividend yield ....................... -- -- --
79
1998 Employee Stock Purchase Plan. A total of 1,000,000 shares of common
stock are available for sale under the Stock Purchase Plan and an annual
increase is to be added as of each January 1 to restore the maximum aggregate
number of shares of common stock available for sale under the plan up to
1,000,000. Employees (including officers and employee directors of the company
but excluding 5% or greater stockholders) are eligible to participate if they
are customarily employed for at least 20 hours per week. The Stock Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 15% of the compensation an employee receives on each
payday. Each participant will be granted an option on the first day of a two
year offering period, and shares of common stock will be purchased on four
purchase dates within the offering period. The purchase price of the common
stock under the Stock Purchase Plan will be equal to 85% of the lesser of the
fair market value per share of common stock on the start date of the offering
period or on the purchase date. Employees may end their participation in an
offering period at any time, and participation ends automatically on termination
of employment with the company. The Stock Purchase Plan will terminate in
January 2008, unless sooner terminated by the board of directors.
For the years ended December 31, 2002, 2001 and 2000, employees purchased
common stock shares under the stock purchase plan of 996,617, 482,937 and
263,498, respectively. The average estimated fair values of the purchase rights
granted during the years ended December 31 2002, 2001 and 2000 based on the
Black-Scholes option pricing model were $3.16, $6.53 and $12.17, respectively.
The following assumptions were used to calculate weighted average fair values of
the purchase rights granted:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
Expected life (in years) ................... 0.5 0.5 0.5
Risk-free interest rate .................... 2.5% 4.5% 6.8%
Volatility ................................. 85% 70% 66%
Dividend yield ............................. -- -- --
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined
using available market information and appropriate methodologies; however,
considerable judgment is required in interpreting market data to develop the
estimates for fair value. Accordingly, these estimates are not necessarily
indicative of the amounts that we could realize in a current market exchange.
Certain of these financial instruments are with major financial institutions and
expose us to market and credit risks and may at times be concentrated with
certain counterparties or groups of counterparties. The creditworthiness of
counterparties is continually reviewed, and full performance is anticipated.
The carrying amounts reported in the balance sheet for short-term
investments, due from affiliates, other accounts receivable, due to affiliates,
accrued expenses and accrued income taxes approximate fair value due to the
short-term nature of these instruments. The methods and assumptions used to
estimate the fair value of other significant classes of financial instruments is
set forth below:
Cash and Cash Equivalents. Cash and cash equivalents are due on demand or
carry a maturity date of less than three months when purchased. The carrying
amount of these financial instruments is a reasonable estimate of fair value.
Available for sale investments. The fair value of these financial
instruments was estimated based on market quotes, recent offerings of similar
securities, current and projected financial performance of the company and net
asset positions.
Long-term debt. The carrying amount of our total long-term debt as
December 31, 2002 was $1,737.7 million and the fair value based on available
market quotes is estimated to be $1,321.3 million.
22. COMMITMENTS AND CONTINGENCIES
Amkor is involved in various claims incidental to the conduct of our
business. Based on consultation with legal counsel, we do not believe that any
claims, either individually or in the aggregate, to which the company is a party
will have a material adverse effect on our financial condition or results of
operations.
80
Net future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are:
DECEMBER 31,
2002
-------------
(IN THOUSANDS)
2003 .................................................... $ 9,865
2004 .................................................... 7,757
2005 .................................................... 6,209
2006 .................................................... 7,036
2007 .................................................... 6,968
Thereafter .............................................. 63,341
--------
Total (net of minimum sublease income of $7,585) ... $101,176
========
Rent expense amounted to $15.0 million, $21.8 million and $13.7 million
for 2002, 2001 and 2000, respectively. We lease office space in West Chester,
Pennsylvania from certain of our stockholders. The lease expires in 2006. We
have the option to extend the lease for an additional 10 years through 2016.
Amounts paid for this lease in each of 2002, 2001 and 2000 were $1.2 million.
Indemnifications and Guarantees
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." We have adopted the disclosure requirements of the
Interpretation as of December 31, 2002. Disclosures about our indemnifications
and guarantees are provided below.
We have indemnified members of our board of directors and our corporate
officers (collectively, the "Indemnitees") against any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that the Indemnitee is or was a director or
officer of the company. The Indemnitees are indemnified, to the fullest extent
permitted by law, against related expenses, judgments, fines and any amounts
paid in settlement. The maximum amount of future payments is generally
unlimited. There is no amount recorded for this indemnification at December 31,
2002. Due to the nature of this indemnification, it is not possible to make a
reasonable estimate of the maximum potential loss or range of loss. No assets
are held as collateral and no specific recourse provisions exist related to this
indemnification.
In connection with the termination of AEI's status as an S Corporation
(see Note 1, Receivable from Stockholder), in 1998 we indemnified and agreed to
hold harmless the Kim family against any U.S. federal or state income tax
liability resulting from the Kim family being required to include in income
amounts in excess of the income shown to be reportable on the original tax
returns filed, as they relate to the previously existing S Corporation. The
carrying amount recorded for this indemnification as of December 31, 2002 is
$15.0 million. It is reasonably possible that future payments may exceed amounts
accrued. The maximum potential loss related to this indemnification is $23.3
million. No assets are held as collateral and no specific recourse provisions
exist.
As of December 31, 2002, we have outstanding $1.0 million of standby
letters of credit. Such standby letters of credit are used in our ordinary
course of business and are collateralized by our cash balances.
We generally provide a standard ninety-day warranty on our services. Our
warranty activity has historically been immaterial and is expected to continue
to be immaterial in the foreseeable future.
23. CUSTOMER CONCENTRATIONS AND GEOGRAPHIC INFORMATION
With the commencement of operations of Amkor Iwate and the acquisition of
a packaging and test facility from Toshiba in 2001, total net revenues derived
from Toshiba accounted for 14.7% and 16.3% of our consolidated net revenues for
2002 and 2001, respectively. Prior to the sale of our wafer fabrication services
business to ASI in February 2003, we derived 92.8%, 79.4% and 80.7% of our wafer
fabrication revenues from Texas Instruments (TI) for 2002, 2001 and 2000,
81
respectively. Effective as of February 28, 2003, we obtained a release from
Texas Instruments regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of the business
to ASI.
The following table presents net revenues by country based on the location
of the customer:
NET REVENUES
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
(IN THOUSANDS)
United States.................................................... $ 443,489 $ 449,766 $ 932,964
Ireland.......................................................... 71,197 76,882 110,199
Japan............................................................ 322,774 286,919 58,911
Singapore........................................................ 150,737 151,304 327,602
Taiwan........................................................... 108,620 72,930 74,023
Other foreign countries.......................................... 309,361 298,873 506,002
-------------- -------------- --------------
Consolidated..................................................... $ 1,406,178 $ 1,336,674 $ 2,009,701
============== ============== ==============
The following table presents property, plant and equipment based on the
location of the asset:
PROPERTY, PLANT AND EQUIPMENT
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
United States ............... $ 71,728 $ 83,466 $ 77,394
Philippines ................. 281,089 471,302 579,619
Korea ....................... 484,938 698,448 813,983
Taiwan ...................... 76,542 90,088 --
Japan ....................... 39,727 35,074 174
China ....................... 11,996 9,093 --
Other foreign countries ..... 318 148 383
---------- ---------- ----------
Consolidated ................ $ 966,338 $1,387,619 $1,471,553
========== ========== ==========
The following supplementary information presents net revenues allocated by
product family:
NET REVENUES
----------------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Traditional packages ..... $ 391,338 $ 438,557 $ 605,637
Advanced packages ........ 915,067 790,495 1,286,289
Test ..................... 99,773 107,622 117,775
---------- ---------- ----------
Consolidated ............. $1,406,178 $1,336,674 $2,009,701
========== ========== ==========
82
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
Amkor Technology Philippines, Inc.
We have audited the accompanying balance sheet of Amkor Technology
Philippines, Inc. (the Company, formerly Amkor Technology Philippines (P1/P2),
Inc., a company incorporated under the laws of the Republic of the Philippines)
as of December 31, 2002, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amkor Technology
Philippines, Inc. as of December 31, 2002, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ SYCIP GORRES VELAYO & CO.
Makati City, Philippines
January 15, 2003
83
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY SYCIP GORRES
VELAYO & CO., A MEMBER FIRM OF ARTHUR ANDERSEN, AND HAS NOT BEEN REISSUED BY
SYCIP GORRES VELAYO & CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Stockholders and the Board of Directors
Amkor Technology Philippines (P1/P2), Inc. and
Amkor Technology Philippines (P3/P4), Inc.
We have audited the combined balance sheet of Amkor Technology Philippines
(P1/P2), Inc. and Amkor Technology Philippines (P3/P4), Inc., (companies
incorporated under the laws of the Republic of the Philippines and collectively
referred to as the "Companies") as of December 31, 2001 and 2000, and the
related combined statements of income, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Amkor
Technology Philippines (P1/P2), Inc. and Amkor Technology Philippines (P3/P4),
Inc. as of December 31, 2001 and 2000, and the combined results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ SYCIP GORRES VELAYO & CO.
Makati City, Philippines
March 19, 2002
84
AMKOR TECHNOLOGY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO BALANCE AT
OF PERIOD EXPENSE WRITE-OFFS OTHER END OF PERIOD
---------- --------- ---------- ----- -------------
Year ended December 31, 2000:
Allowance for doubtful accounts $ 2,443 $ (17) $ -- -- $ 2,426
Year ended December 31, 2001:
Allowance for doubtful accounts $ 2,426 $ 4,000 $(1,037) 1,453 $ 6,842
Year ended December 31, 2002:
Allowance for doubtful accounts $ 6,842 $ 500 $ (220) -- $ 7,122
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names and the ages as of February 28,
2003 of our executive officers and our incumbent directors who are being
nominated for re-election to the board of directors:
NAME AGE POSITION
---- --- --------
James J. Kim.................. 67 Chief Executive Officer and Chairman
John N. Boruch................ 60 Chief Operating Officer, President and Director
Bruce J. Freyman.............. 42 Executive Vice President, Manufacturing
and Product Operations
Kenneth T. Joyce.............. 55 Executive Vice President and Chief Financial Officer
Eric R. Larson............... 47 Executive Vice President, Corporate Development
and Wafer Fab
Winston J. Churchill (1)(2)... 62 Director
Thomas D. George (1).......... 62 Director
Gregory K. Hinckley (2)....... 56 Director
Juergen Knorr................. 70 Director
John B. Neff (2).............. 71 Director
James W. Zug (2).............. 62 Director
----------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JAMES J. KIM. James J. Kim, 67, has served as our Chief Executive Officer
and Chairman since September 1997. Mr. Kim founded our predecessor in 1968 and
served as its Chairman from 1970 to April 1998. Mr. Kim is a director of
Electronics Boutique Holdings Corp., an electronics retail chain.
JOHN N. BORUCH. John N. Boruch, 60, has served as our President and a
director since September 1997 and our Chief Operating Officer since February
1999. Mr. Boruch has served as President of Amkor Electronics, Inc., our
predecessor, from February 1992 through April 1998. From 1991 to 1992, he served
as our predecessor's Corporate Vice President in charge of sales. Mr. Boruch
joined us in 1984. Prior to this he was with Motorola, a communications and
electronics company, for 18 years. Mr. Boruch earned a B.A. in Economics from
Cornell University. Mr. Boruch is also a director of the Fabless Semiconductor
Association.
BRUCE J. FREYMAN. Bruce J. Freyman, 42, has served as our Executive Vice
President of Manufacturing and Product Operations since January of 2002. Prior
to his appointment as Executive Vice President, Mr. Freyman has served in a
number of positions at Amkor, including Corporate Vice President of
Manufacturing and Product Operations (March 2001 to January 2002), Corporate
Vice President of Product Operations (September 1998 to March 2001), and
Corporate Vice President of Laminate Products (January 1997 to September 1998).
Before joining Amkor, Mr. Freyman spent several years with Motorola, last
serving as the Semiconductor Packaging Manager for Motorola's Communications
Sector. Mr. Freyman holds an M.B.A. from Florida Atlantic University, and a B.S.
in Chemical Engineering from the University of Massachusetts.
KENNETH T. JOYCE. Kenneth T. Joyce, 55, has served as our Executive Vice
President and Chief Financial Officer since July 1999. Prior to his election as
our Chief Financial Officer, Mr. Joyce served as our Vice President and
Operations Controller since 1997. Prior to joining our company, he was Chief
Financial Officer of Selas Fluid Processing Corporation, a subsidiary of Linde
AG. Mr. Joyce is also former Vice President, Finance and Chief Financial Officer
of Selas Corporation
86
of America (Amex: SLS) and was responsible for the sale of Selas' Fluid
Processing business to Linde AG. Mr. Joyce began his accounting career in 1971
at KPMG Peat Marwick. Mr. Joyce is a certified public accountant. Mr. Joyce
earned a B.S. in Accounting from Saint Joseph's University and an M.B.A. in
Finance from Drexel University.
ERIC R. LARSON. Eric R. Larson, 47, served as an Executive Vice President
until March 2003 and was responsible for Corporate Development since December
2000 and our wafer fabrication services segment since December 2001. Mr. Larson
resigned his executive position in March 2003 and continues to serve Amkor in an
advisory role. Prior to December 2000, Mr. Larson had previously served in a
number of roles in the company's wafer fabrication business including Executive
Vice President (1999 to 2000); Vice President (1997 to 1998); and President of
the wafer fabrication division of our predecessor (1996 to 1998). From 1979 to
1996, Mr. Larson worked for Hewlett-Packard Company in various senior management
capacities, most recently as Worldwide Marketing Manager for disk products. Mr.
Larson earned a B.A. in Political Science from Colorado State University and an
M.B.A. from the University of Denver.
WINSTON J. CHURCHILL. Winston J. Churchill, 62, has been a director of our
company since July 1998. Mr. Churchill is a managing general partner of SCP
Private Equity Management, L.P., which manages private equity funds for
institutional investors. Mr. Churchill is also Chairman of CIP Capital
management, Inc., an SBA licensed private equity fund. Previously, Mr. Churchill
was a managing partner of Bradford Associates, which managed private equity
funds on behalf of Bessemer Securities Corporation and Bessemer Trust Company.
From 1967 to 1983 he practiced law at the Philadelphia firm of Saul, Ewing,
Remick & Saul where he served as Chairman of the Banking and Financial
Institutions Department, Chairman of the Finance Committee and was a member of
the Executive Committee. Mr. Churchill is a director of Griffin Land and
Nurseries, Inc., MedStar Health and of various SCP portfolio companies. In
addition, he serves as a director of various charities and educational
institutions including American Friends of New College, Oxford, England and the
Gesu School and the Young Scholars Charter School. From 1989-1993 he served as
Chairman of the Finance Committee of the Pennsylvania Public School Employees'
Retirement System. Mr. Churchill is also a member of the Executive Committee of
the Council of Institutional Investors.
THOMAS D. GEORGE. Thomas D. George, 62, has been a director of our company
since November 1997. Mr. George was Executive Vice President, and President and
General Manager, Semiconductor Products Sector ("SPS") of Motorola, Inc., from
April 1993 to May 1997. Prior to that, he held several positions with Motorola,
Inc., including Executive Vice President and Assistant General Manager, SPS,
from November 1992 to April 1993 and Senior Vice President and Assistant General
Manager, SPS, from July 1986 to November 1992. Mr. George is currently retired,
and is a director of Ultratech Stepper.
GREGORY K. HINCKLEY. Gregory K. Hinckley, 56, has been a director of our
company since November 1997. Mr. Hinckley has served as Director, President and
Chief Operating Officer of Mentor Graphics Corporation, an electronics design
automation software company, since November 2000. From January 1997 until
November 2000, he held the position of Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Mentor Graphics Corporation. From
November 1995 until January 1997, he held the position of Senior Vice President
with VLSI Technology, Inc., a manufacturer of complex integrated circuits. From
August 1992 until December 1996, Mr. Hinckley held the position of Vice
President, Finance and Chief Financial Officer with VLSI Technology, Inc.
JUERGEN KNORR. Juergen Knorr, 70, has been a director of our company since
February 2001. Dr. Knorr is the former CEO and Group President of Siemens
Semiconductor Group, and a former Member of the Executive Board of Siemens AG.
Following his retirement from Siemens in 1996, Dr. Knorr has taken an active
role in advancing the European semiconductor industry as a member of the Joint
European Submicron Silicon Initiative, as past president of the European
Electronics Components Manufacturer Association, and as president and chairman
of Micro Electronics Development for European Applications (MEDEA).
JOHN B. NEFF. John B. Neff, 71, has been a director of our company since
January 1999. Mr. Neff was portfolio manager for Windsor Fund and Gemini II
mutual fund from 1964 until his retirement in 1995. He was also Senior Vice
President and Managing Partner of Wellington Management, one of the largest
investment management firms in the United States. From 1996 to 1998, Mr. Neff
was a director with Chrysler Corporation. He is a member of the board of
directors of Crown Holdings, Inc. and Greenwich Associates and on the executive
board of directors of Invemed Catalyst Fund, LLP.
87
JAMES W. ZUG. James W. Zug, 62, has been a director of our company since
January 2003. Mr. Zug retired from PricewaterhouseCoopers LLP in 2000 following
a 37-year career at PricewaterhouseCoopers and Coopers & Lybrand. From 1998
until his retirement Mr. Zug was Global Leader -- Global Deployment for
PricewaterhouseCoopers. From 1993 to 1998 he was Managing Director International
for Coopers & Lybrand. PricewaterhouseCoopers is Amkor's independent
accountants; however, Mr. Zug was not involved with servicing Amkor during his
tenure at PricewaterhouseCoopers. Mr. Zug serves on the boards of directors of
SPS Technologies, Inc., Stackpole Ltd, Brandywine Fund Inc, and Brandywine Blue
Fund Inc. He is also on the boards of directors of the Philadelphia Orchestra
Association, the Kimmel Center for the Performing Arts, the Episcopal Academy,
and the Merion Golf Club.
BOARD MEETINGS AND COMMITTEES
Our company's board of directors meets approximately three times a year in
regularly scheduled meetings, but will meet more often if necessary. The board
of directors held three meetings and acted by unanimous written consent on four
occasions during 2002 and all of the directors attended all of the board of
directors meetings and Committee meetings of which they were members.
The full board of directors considers all major decisions of our company.
However, the board of directors has established a compensation committee, an
audit committee and a nominating committee. Both the compensation committee and
audit committee are chaired by an outside director.
COMPENSATION COMMITTEE
The Compensation Committee is presently comprised of Messrs. George and
Churchill. The Compensation Committee: (1) reviews and approves annual salaries,
bonuses, and grants of stock options pursuant to our 1998 Stock Plan and (2)
reviews and approves the terms and conditions of all employee benefit plans or
changes to these plans. During 2002, the Compensation Committee met three times
apart from regular meetings with the entire board of directors.
THE AUDIT COMMITTEE
The Audit Committee is comprised of Messrs. Churchill, Hinckley and Neff
all of whom meet the independence and experience requirements as defined in Rule
4200(a)(15) of the National Association of Securities Dealers' listing
standards. The Audit Committee: (1) recommends to the board of directors the
annual appointment of our independent auditors, (2) discusses and reviews in
advance the scope and the fees of the annual audit, (3) reviews the results of
the audit with the independent auditors and discusses the foregoing with the
company's management, (4) reviews and approves non-audit services of the
independent auditors, (5) reviews the activities, organizational structure and
qualifications of the company's internal audit function, (6) reviews
management's procedures and policies relating to the adequacy of our internal
accounting controls and compliance with applicable laws relating to accounting
practices and (7) reviews and discusses with our independent auditors their
independence. The Audit Committee met ten times apart from regular meetings with
the entire board. In connection with the execution of the responsibilities of
the Audit Committee including the review of the company's quarterly earnings
prior to the public release of the information, the Audit Committee members
communicated throughout 2002 with the company's management and independent
accountants.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers, Inc. Such officers,
directors and ten-percent stockholders are also required by SEC rules to furnish
Amkor with copies of all forms that they file pursuant to Section 16(a). Based
solely on our review of the copies of such forms received by us, or written
representations from certain reporting persons that no other reports were
required for such persons, Amkor believes that all Section 16(a) filing
requirements applicable to our officers, directors and ten-percent stockholders
were complied with in a timely fashion.
88
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation earned
during each of the three years in the period ending 2002 by our Chief Executive
Officer and the four employees representing the company's other most
highly-compensated executive officers (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
---- ---- ---------- ---------- ------------ ---------------
James J. Kim (4) ..................... 2002 $ 790,000 $ -- 250,000 $ 8,454
Chief Executive Officer 2001 $ 790,000 $ 79,000 250,000 $ 8,173
and Chairman 2000 $ 783,800 $1,740,000 250,000 $ 8,200
John N. Boruch (5) ................... 2002 $ 580,000 $ -- 225,000 $ 9,326
Chief Operating Officer and 2001 $ 580,000 $ 58,000 175,000 $ 14,780
President 2000 $ 575,400 $ 633,625 150,000 $ 15,400
Bruce J. Freyman (7) ................. 2002 $ 385,000 $ -- 200,000 $ 9,807
Executive Vice President, 2001 $ 352,692 $ 35,000 150,000 $ 6,000
Manufacturing and Product 2000 $ 326,923 $ 301,813 150,000 $ 6,000
Operations
Kenneth T. Joyce (6)(7) .............. 2002 $ 235,000 $ -- 70,000 $ 8,286
Executive Vice President and Chief 2001 $ 235,000 $ 23,500 40,000 $ 106,000
Financial Officer 2000 $ 231,200 $ 218,500 40,000 $ 6,000
Eric R. Larson (7)(8) ................ 2002 $ 275,000 $ -- 70,000 $ 15,609
Executive Vice President, Corporate 2001 $ 275,000 $ 27,500 40,000 $ 6,000
Development and Wafer Fab 2000 $ 273,100 $ 219,600 40,000 $ 6,000
----------
(1) Bonus amounts include incentive compensation earned in the year indicated
but that were approved by our board of directors and paid in the following
year and payments under the Employee Profit Sharing Plan for the year
indicated for the prior year's results. No incentive compensation was
earned in 2002.
(2) Long-term compensation represents stock options issued under the 1998
Stock Plan.
(3) All other compensation for all of the named executives includes $6,000
paid to each executive's 401(k) plan.
(4) All other compensation for Mr. Kim includes a reimbursement for vehicle
expenses.
(5) All other compensation for Mr. Boruch includes a reimbursement for vehicle
expenses and in 2001 and 2000 imputed loan interest.
(6) All other compensation for Mr. Joyce in 2001 includes a reimbursement for
relocation costs.
(7) All other compensation for Messrs. Freyman, Joyce and Larson in 2002
includes a reimbursement for vehicle expenses.
(8) Mr. Larson ceased to be an executive officer of the Company in March 2003.
89
OPTION GRANTS IN FISCAL 2002
The following table provides information concerning each grant of options
to purchase our common stock made during 2002 to the Named Executive Officers.
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS MINUS EXERCISE PRICE AT
--------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS EXERCISE ----------------------------
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ----------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5% 10%
---- ---------- ------------ --------- ---------- ---------- ----------
James J. Kim ................ 250,000 (3) 6.3% $13.00 2/22/12 $2,043,908 $5,179,663
Chief Executive Officer and
Chairman
John N. Boruch .............. 225,000 (3) 5.6% $13.00 2/22/12 $1,839,517 $4,661,697
Chief Operating Officer and
President
Bruce J. Freyman ............ 200,000 (3) 5.0% $13.00 2/22/12 $1,635,126 $4,143,731
Executive Vice President,
Manufacturing and Product
Operations
Kenneth T. Joyce ............ 70,000 (3) 1.75% $13.00 2/22/12 $ 572,295 $1,450,306
Executive Vice President and
Chief Financial Officer
Eric R. Larson (4)........... 70,000 (3) 1.75% $13.00 2/22/12 $ 572,295 $1,450,306
Executive Vice President,
Corporate Development and
Wafer Fab
(1) All options shown granted in fiscal 2002 become exercisable as to 25% of
the share subject to the option exercisable starting one year after the
date of grant and an additional 1/48 of such shares subject to the option
becoming exercisable each month thereafter.
(2) Potential realizable value is based on the assumption that: (1) our common
stock will appreciate at the compound annual rate shown from the date of
grant until the expiration of the option term and (2) that the option is
exercised at the exercise price and sold on the last day of its term at
the appreciated price. We assume stock appreciation of 5% and 10% pursuant
to rules promulgated by the Securities and Exchange Commission, and these
percentages do not reflect our estimate of future stock price growth.
(3) Each of the Named Executive Officers surrendered these options pursuant to
a voluntary stock option replacement program initiated on November 8,
2002. This program allowed employees and members of our board of directors
to surrender their existing options and to receive new option grants six
months and one day after the tendered options were cancelled. We will
issue new option grants equal to the same number of shares surrendered by
the employees and members of our board of directors. The exercise price
will equal the fair market value of common stock as of the new grant date
which is expected to be no earlier than June 12, 2003.
(4) Mr. Larson ceased to be an executive officer of the Company in March 2003.
90
YEAR-END OPTION VALUES
The following table shows the number of shares covered by both exercisable
and non-exercisable stock options held by the named executive officers as of
December 31, 2002. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the year-end price of our common stock.
NUMBER OF SECURITIES DOLLAR VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2002 (1) DECEMBER 31, 2002 (2)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
James J. Kim .................. -- -- -- -- -- --
Chief Executive Officer and
Chairman
John N. Boruch ................ 50,000 $414,450 137,317 10,418 -- --
Chief Operating Officer and
President
Bruce Freyman ................. -- -- 150,207 3,647 -- --
Executive Vice President,
Operations
Kenneth T. Joyce .............. -- -- 22,166 834 -- --
Executive Vice President and
Chief Financial Officer
Eric R. Larson (3) ............ -- -- 103,874 3,126 -- --
Executive Vice President,
Corporate Development and
Wafer Fab
----------
(1) On November 8, 2002, we initiated a voluntary stock option replacement
program which allowed employees and members of our board of directors to
surrender their existing options and to receive new option grants six
months and one day after the tendered options are cancelled. We will issue
new option grants equal to the same number of shares surrendered by the
employees and members of our board of directors. The exercise price will
equal the fair market value of common stock as of the new grant date which
is expected to be no earlier than June 12, 2003. On December 11, 2002, the
following Named Executive Officers surrendered the following number of
stock options pursuant to the program:
SHARES
SURRENDERED
-----------
James J. Kim .......................................... 750,000
John N. Boruch ........................................ 900,000
Bruce J. Freyman ...................................... 500,000
Kenneth T. Joyce ...................................... 150,000
Eric Larson ........................................... 150,000
(2) None of the options held by the Named Executive Officers as of December
31, 2002 had an exercise price less than $4.76, the value of our common
stock as of December 31, 2002 as reported by the Nasdaq Stock Market.
(3) Mr. Larson ceased to be an executive officer of the Company in March 2003.
91
DIRECTOR COMPENSATION
We do not compensate directors who are also employees or officers of our
company for their services as directors. Non-employee directors, however, are
eligible to receive: (1) an annual retainer of $25,000 as of January 2003, (2)
$2,000 per meeting of the board of directors that they attend, (3) $2,000 per
meeting of a committee of the board of directors that they attend and (4) $500
per non-regularly scheduled telephonic meeting of the board of directors in
which they participate. We also reimburse non-employee directors for travel and
related expenses incurred by them in attending board and committee meetings.
1998 Director Option Plan: Our board of directors adopted the 1998
Director Option Plan (the "Director Plan") in January 1998. A total of 300,000
shares of common stock have been reserved for issuance under the Director Plan.
The option grants under the Director Plan are automatic and non-discretionary.
As of January 1, 2003, the Director Plan provides for an initial grant of
options to purchase 20,000 shares of common stock to each new non-employee
director of the company when such individual first becomes an outside director.
In addition, each non-employee director will automatically be granted subsequent
options to purchase 10,000 shares of common stock on each date on which such
director is re-elected by the stockholders of the company, provided that as of
such date such director has served on the board of directors for at least six
months. The exercise price of the options is 100% of the fair market value of
the common stock on the grant date. The term of each option is ten years and
each option granted to an non-employee director vests over a three year period.
The Director Plan will terminate in January 2008 unless sooner terminated by the
board of directors.
If all or substantially all of our assets are sold to another entity or we
merge with or into another corporation, that acquiring entity or corporation may
either assume all outstanding options under the Director Plan or may substitute
equivalent options. Following an assumption or substitution, if the director is
terminated other than upon a voluntary resignation, any assumed or substituted
options will vest and become exercisable in full. If the acquiring entity does
not either assume all of the outstanding options under the Director Plan or
substitute an equivalent option, each option issued under the Director Plan will
immediately vest and become exercisable in full. The Director Plan will
terminate in January 2008 unless sooner terminated by the board of directors.
COMPENSATION COMMITTEE INTERLOCKS
The Compensation Committee currently consists of Messrs. Churchill and
George. No member of the Compensation Committee was an officer or employee of
Amkor or any of Amkor's subsidiaries during fiscal 2002. None of Amkor's
Compensation Committee members or executive officers has served on the board of
directors or on the compensation committee of any other entity one of whose
executive officers served on our board of directors or on our Compensation
Committee.
92
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of our outstanding common stock as of February 28, 2003 by:
- each person or entity who is known by us to beneficially own 5% or
more of our outstanding common stock;
- each of our directors; and
- the Named Executive Officers.
BENEFICIAL OWNERSHIP(A)
----------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OWNERSHIP
---------------- ---------- ----------
James J. Kim Family Control Group (b)(m) ........... 73,238,641 44.3%
1345 Enterprise Drive
West Chester, PA 19380
J. & W. Seligman & Co. Incorporated (c) ............ 9,515,860 5.8%
100 Park Avenue
New York, New York 10017
Winston J. Churchill (d)(m) ........................ 30,000 *
Thomas D. George (e) ............................... 35,000 *
Gregory K. Hinckley (f) ............................ 33,000 *
Dr. Juergen Knorr (m) .............................. -- *
John B. Neff (g) ................................... 270,000 *
James W. Zug ....................................... 5,100 *
John N. Boruch (h)(m) .............................. 168,595 *
Eric R. Larson (i)(m) .............................. 113,369 *
Kenneth T. Joyce (j)(m) ............................ 38,184 *
Bruce J. Freyman (k)(m) ............................ 177,260 *
All directors and Named Executive Officers (l) ..... 74,109,149 44.9
* Represents less than 1%.
(a) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. The information is not necessarily indicative of beneficial
ownership for any other purpose. Under this rule, beneficial ownership
includes any share over which the individual or entity has voting power or
investment power. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of our common
stock subject to options held by that person that will be exercisable on
or before April 30, 2003 are deemed outstanding. Unless otherwise
indicated, each person or entity has sole voting and investment power with
respect to shares shown as beneficially owned.
(b) Represents 29,727,093 shares held by James J. and Agnes C. Kim; 139,516
shares issuable upon the conversion of convertible debt held by Mrs. Kim
that is convertible on or before April 30, 2003; 14,457,344 shares held by
the David D. Kim Trust of December 31, 1987, 14,457,344 shares held by the
John T. Kim Trust of December 31, 1987; 6,257,344 shares held by the Susan
Y. Kim Trust of December 31, 1987; and 8,200,000 shares held by the Trust
of Susan Y. Kim dated April 16, 1998 established for the benefit of Susan
Y. Kim's minor children, with Susan Y. Kim as the Trustee. James J. and
Agnes C. Kim are husband and wife and, accordingly, each may be deemed to
beneficially own shares of our common stock held in the name of the other.
David D. Kim, John T. Kim and Susan Y. Kim are children of James J. and
Agnes C. Kim. Each of the David D. Kim Trust of December 31, 1987, John T.
Kim Trust of December 31, 1987 and Susan Y. Kim Trust of December 31, 1987
has in common Susan Y. Kim and John F.A. Earley
93
as co-trustees, in addition to a third trustee (John T. Kim in the case of
the Susan Y. Kim Trust and the John T. Kim Trust, and David D. Kim in the
case of the David D. Kim Trust) (the trustees of each trust may be deemed
to be the beneficial owners of the shares held by such trust). All of the
above-referenced trusts, together with their respective trustees and James
J. and Agnes C. Kim may be considered a "group" under Section 13(d) of the
Exchange Act on the basis that the trust agreement for each of these
trusts encourages the trustees of the trusts to vote the shares of our
common stock held by them, in their discretion, in concert with James
Kim's extended family. This group may be deemed to have beneficial
ownership of 73,238,641 shares or approximately 44.3% of the outstanding
shares of our common stock. Each of the foregoing persons stated that the
filing of their beneficial ownership reporting statements shall not be
construed as an admission that such person is, for the purposes of Section
13(d) or 13(g) of the Exchange Act, the beneficial owner of the shares of
our common stock reported as beneficially owned by the other such persons.
(c) J. & W. Seligman & Co. Incorporated ("JWS") reported in a Schedule 13G/A
filed with the Commission on February 11, 2003 that it beneficially owned
these shares as of December 31, 2002. JWS also reported that William C.
Morris, as the owner of a majority of the outstanding voting securities of
JWS, may be deemed to beneficially own the shares beneficially owned by
JWS. JWS is the investment adviser for Seligman Communications and
Information Fund, Inc. (the "Fund"). Of the 9,515,860 shares that JWS
beneficially owns, the Fund beneficially owns 9,060,000 shares.
(d) Includes 20,000 shares issuable upon the exercise of stock options that
are exercisable by Mr. Churchill on or before April 30, 2003.
(e) Includes 25,000 shares issuable upon the exercise of stock options that
are exercisable by Mr. George on or before April 30, 2003.
(f) Includes 25,000 shares issuable upon the exercise of stock options that
are exercisable by Mr. Hinckley on or before April 30, 2003.
(g) Includes 20,000 shares issuable upon the exercise of stock options that
are exercisable by Mr. Neff on or before April 30, 2003.
(h) Includes 156,140 shares issuable upon the exercise of stock options that
are exercisable by Mr. Boruch on or before April 30, 2003.
(i) Includes 106,374 shares issuable upon the exercise of stock options that
are exercisable by Mr. Larson on or before April 30, 2003. Mr. Larson
ceased to be an executive officer of the Company in March 2003.
(j) Includes 22,833 shares issuable upon the exercise of stock options that
are exercisable by Mr. Joyce on or before April 30, 2003.
(k) Includes 153,124 shares issuable upon the exercise of stock options that
are exercisable by Mr. Freyman on or before April 30, 2003.
(l) Includes 682,134 shares issuable upon the exercise of stock options that
are exercisable on or before April 30, 2003.
(m) On November 8, 2002, we initiated a voluntary stock option replacement
program which allowed employees and members of our board of directors to
surrender their existing options and to receive new option grants six
months and one day after the tendered options are cancelled. We will issue
new option grants equal to the same number of shares surrendered by the
employees and members of our board of directors. The exercise price will
equal the fair market value of common stock as of the new grant date which
is expected to be no earlier than June 12, 2003. The vesting term of the
new options will be similar to the tendered options except the new options
contain an additional one year vesting period prior to any options
becoming exercisable. On December 11, 2002, the following Named Executive
Officers and Directors surrendered the following number of stock options
pursuant to the program:
SHARES
SURRENDERED
-----------
James J. Kim ........................................... 750,000
John N. Boruch ......................................... 900,000
Bruce J. Freyman ....................................... 500,000
Kenneth T. Joyce ....................................... 150,000
Eric Larson ............................................ 150,000
Winston J. Churchill ................................... 15,000
Juergen Knorr .......................................... 20,000
The calculation of beneficial ownership does not include any shares that
were surrendered pursuant to the voluntary stock option replacement
program.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have had a long-standing relationship with Anam Semiconductor, Inc.
("ASI"). ASI was founded in 1956 by Mr. H. S. Kim, the father of Mr. James Kim,
our Chairman and Chief Executive Officer. Through our supply agreements with
ASI, we historically had a first right to substantially all of the packaging and
test services capacity of ASI and the exclusive right to all of the wafer output
of ASI's wafer fabrication facility. With our acquisition of K1, K2 and K3 in
May 2000, we no longer received packaging and test services from ASI. Under the
wafer fabrication services supply agreement which was consummated in January
1998 and terminated as of February 28, 2003, we had the exclusive right but not
the requirement to purchase all of the wafer output of ASI's wafer fabrication
facility on pricing terms negotiated annually. As part of our strategy to sell
our investment in ASI and to divest our wafer fabrication services business, we
entered into a series of transactions beginning in the second half of 2002:
- In September 2002, we sold 20 million shares of ASI common stock to
Dongbu Group for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we
entered into the share sale agreement. We received $58.1 million in
net cash proceeds and 42 billion Korean Won (approximately $35.4
million at a spot exchange rate as of December 31, 2002) of interest
bearing notes from Dongbu Corporation payable in two equal principal
payments in September 2003 and February 2004. The Dongbu Group
comprises Dongbu Corporation, Dongbu Fire Insurance Co., Ltd. and
Dongbu Life Insurance Co., Ltd., all of which are Korean
corporations and are collectively referred herein as "Dongbu."
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction.
- In separate transactions designed to facilitate a future merger
between ASI and Dongbu, (i) we acquired a 10% interest in Acqutek
from ASI for $1.9 million, the market value of the shares as
publicly traded in Korea; (ii) we acquired the Precision Machine
Division (PMD) of Anam Instruments, a related party to Amkor, for $8
million, its fair value; and (iii) Anam Instruments, which had been
partially owned by ASI, utilized the proceeds from the sale of PMD
to us to buy back all of the Anam Instruments shares owned by ASI.
Acqutek supplies materials to the semiconductor industry and is
publicly traded in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, held a 25%
ownership interest in Acqutek at the time of our acquisition of our
interest in Acqutek. We have historically purchased and continue to
purchase leadframes from Acqutek. PMD supplies sophisticated die
mold systems and tooling to the semiconductor industry and
historically over 90% of its sales were to Amkor. We determined the
fair value of PMD based on projected cash flows discounted at a rate
commensurate with the risk involved. At the time of our acquisition
of PMD, Anam Instruments was owned 20% by ASI and 20% by a family
member of James Kim.
- On February 28, 2003, we sold our wafer fabrication services
business to ASI for total consideration of $62 million. We
negotiated the fair value of our wafer fabrication services business
with ASI and Dongbu. The parties calculated fair value based on an
assessment of projected cash flows discounted at a rate commensurate
with the risk involved. We obtained a release from Texas Instruments
regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of
the business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different
95
conclusions as to fair value. It is likely that we would not have entered into
the Acqutek or PMD transactions absent the share sale to Dongbu and the sale of
the wafer fabrication services business to ASI. Had these transactions not been
interrelated, we may have utilized a different negotiation strategy for the
investment in Acqutek and the acquisition of PMD, which could have resulted in
us reaching a different conclusion of the fair value of both of these
transactions.
In addition, pursuant to the definitive agreements, (1) Amkor and Dongbu
agreed to use reasonable best efforts to cause Dongbu Electronics and ASI to be
merged together as soon as practicable, (2) Amkor and Dongbu agreed to cause ASI
to use the proceeds ASI received from its sale of stock to Dongbu to purchase
shares in Dongbu Electronics and (3) Amkor and Dongbu agreed to use their best
efforts to provide releases and indemnifications to the chairman, directors and
officers of ASI, either past or incumbent, from any and all liabilities arising
out of the performance of their duties at ASI between January 1, 1995 and
December 31, 2001. The last provision would provide a release and
indemnification for James Kim, our CEO and Chairman, and members of his family.
We are not aware of any claims or other liabilities which these individuals
would be released from or for which they would receive indemnification.
At January 1, 2002 Amkor owned 47.7 million shares or 42% of ASI's voting
stock. During 2002, we divested 21 million shares of ASI stock and at December
31, 2002 Amkor owned 26.7 million shares of ASI or 21%. The carrying value of
our remaining investment in ASI at December 31, 2002 was $77.5 million, or $2.90
per share. On March 24, 2003, we sold an additional 7 million shares of ASI
common stock to an investment bank for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximates
the carrying value of those shares. As part of that sale, we purchased a
nondeliverable call option for $6.7 million that expires December 2003 and is
indexed to ASI's share price with a strike price of $1.97 per share. The net
proceeds from the exercise of the option could be less than the current carrying
value and could expire unexercised losing our entire investment in the option.
As of March 24, 2003, we owned 19.7 million shares of ASI, or 16% of ASI's
voting stock. Beginning March 24, 2003, we ceased accounting for our investment
in ASI under the equity method of accounting and commenced accounting for our
investment as a marketable security that is available for sale.
Historically, we have had other relationships with ASI affiliated
companies for financial services, construction services, materials and
equipment. Each of these transactions was conducted on an arms-length basis in
the ordinary course of business. In addition, ASI's former construction
subsidiary is currently in reorganization and its affairs are managed by a
number of creditor banks; all transactions between Amkor and this entity are
subject to review and approval by these banks. Total purchases from ASI and its
affiliates included in cost of revenue for the years ended December 31, 2002,
2001 and 2000 were $212.6 million, $161.6 million and $499.8 million.
Additionally, financial services performed by ASI and its affiliates included in
interest expense for the year ended December 31, 2000 was $1.6 million.
Construction services and equipment purchases received from ASI and its
affiliates capitalized during the years ended December 31, 2002, 2001 and 2000
were $2.8 million, $14.7 million and $38.8 million, respectively.
Total purchases from Acqutek included in cost of revenue for 2002, 2001
and 2000 were $16.0 million, $14.0 million and $29.2 million, respectively. We
believe these transactions with Acqutek were conducted on an arms-length basis
in the ordinary course of business.
We entered into indemnification agreements with our officers and
directors. These agreements contain provisions which may require us, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature). We also
agreed to advance them any expenses for proceedings against them that we agreed
to indemnify them from.
As of December 31, 2002, Mr. James Kim and members of his immediate family
beneficially owned approximately 44% of our outstanding common stock.
Amkor Electronics, Inc. (AEI), which was merged into our company just
prior to the initial public offering of our company in May 1998, elected to be
taxed as an S Corporation under the provisions of the Internal Revenue Code of
1986 and comparable state tax provisions. As a result, AEI did not recognize
U.S. federal corporate income taxes. Instead, the stockholders of AEI were taxed
on their proportionate share of AEI's taxable income. Accordingly, no provision
for U.S. federal income taxes was recorded for AEI. Just prior to the initial
public offering, AEI terminated its S Corporation status at
96
which point the profits of AEI became subject to federal and state income taxes
at the corporate level. We consummated a tax indemnification agreement between
us, our predecessor and James Kim and his family (collectively, the "Kim
Family"). James Kim, is our founder and significant stockholder, and currently
serves as our Chairman and CEO. Under the terms of the tax indemnification
agreement, Amkor indemnifies the former owners of AEI for the settlement of
AEI's S Corporation federal and state tax returns and any adjustments to the
reported taxable income. At the time AEI was converted to a C Corporation, AEI
and the Kim Family identified certain federal and state tax overpayments
associated with the results of AEI during S Corporation status years and AEI, in
May 1998, paid such amounts to the Kim Family. These amounts, which principally
related to the finalization of AEI's federal tax return, are reflected as a
receivable from stockholder in the stockholders' equity section of our balance
sheets. As the refunds are paid by the associated taxing authorities and
received by the Kim Family, the Kim Family, in turn, remits the funds to Amkor.
During 2002, $0.4 million of tax refunds were received by the Kim Family and
used to pay down the stockholder loan. The loan balance will be further reduced
as AEI's tax returns are finalized and refunds remitted by the associated taxing
authorities.
We lease office space in West Chester, Pennsylvania from certain of our
stockholders. The lease expires in 2006. We have the option to extend the lease
for an additional 10 years through 2016. Amounts paid for this lease in 2002
were $1.2 million.
We have historically maintained split-value life insurance policies on the
joint lives of James J. Kim and Agnes C. Kim for the benefit of the Trust of
James J. Kim dated September 30, 1992 (the "1992 Trust"). No premium payments
were made by Amkor in 2002. In the event of the death of James J. Kim or Agnes
C. Kim we will receive in death benefits an amount equal to the lesser of the
total net premiums paid in cash by us or the net cash surrender value of the
policy as of the date of such death.
In January 1998, we loaned $120,000 to Mr. Boruch, our President and Chief
Operating Officer, of which $99,000 was outstanding as of December 31, 2002 and
repaid in 2003. This loan was interest bearing at a rate of 7% per year.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90-day period prior to the date of this report, Amkor
carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to our company (including its
consolidated subsidiaries) required to be included in our Exchange
Act filings.
(b) There were no significant changes in our company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there
were no corrective actions taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and schedule filed as part of this Annual Report
on Form 10-K/A are listed in the index under Item 8.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K with the Securities and
Exchange Commission during the quarterly period ended December 31, 2002:
97
Current Report on Form 8-K dated and filed October 18, 2002 related to a
press release dated October 18, 2002 announcing the termination of negotiations
with Fujitsu Limited to acquire a business located in Kagoshima, Japan.
Current Report on Form 8-K/A filed October 29, 2002 amending the Current
Report on Form 8-K dated and filed on March 29, 2002 filing the amended
consolidated financial statements of Anam Semiconductor, Inc. for each of the
three years ended December 31, 2001.
Current Report on Form 8-K dated October 29, 2002 (filed October 30, 2002)
related to press releases dated October 29, 2002 announcing our financial
results for the third quarter ended September 30, 2002.
(c) Exhibits
3.1 Certificate of Incorporation. (1)
3.2 Certificate of Correction to Certificate of Incorporation. (4)
3.3 Restated Bylaws. (4)
4.1 Specimen Common Stock Certificate. (3)
4.2 Convertible Subordinated Notes Indenture dated as of May 13, 1998
between the Registrant and State Street Bank and Trust Company,
including form of 5 3/4% Convertible Subordinated Notes due 2003. (3)
4.3 Senior Notes Indenture dated as of May 13, 1999 between the Registrant
and State Street Bank and Trust Company, including form of 9 1/4% Senior
Note Due 2006. (5)
4.4 Senior Subordinated Notes Indenture dated as of May 6, 1999 between the
Registrant and State Street Bank and Trust Company, including form of 10
1/2% Senior Subordinated Note Due 2009. (5)
4.5 Convertible Subordinated Notes Indenture dated as of March 22, 2000
between the Registrant and State Street Bank and Trust Company,
including form of 5% Convertible Subordinated Notes due 2007. (6)
4.6 Registration Agreement between the Registrant and the Initial Purchasers
named therein dated as of March 22, 2000. (6)
4.7 Indenture dated as of February 20, 2001 for 9-1/4% Senior Notes due
February 15, 2008. (7)
4.8 Registration Rights Agreement dated as of February 20, 2001 by and among
Amkor Technology, Inc., Salomon Smith Barney Inc. and Deutsche Banc
Alex. Brown Inc. (7)
4.9 Convertible Subordinated Notes Indenture dated as of May 25, 2001
between the Registrant and State Street Bank and Trust Company, as
Trustee, including the form of the 5.75% Convertible Subordinated Notes
due 2006. (8)
4.10 Registration Rights Agreement between the Registrant and Initial
Purchasers named therein dated as of May 25, 2001. (8)
4.11 Amended and restated credit agreement dated as of March 30, 2001 between
the Registrant and the Initial Lenders and Initial Issuing Banks and
Salomon Smith Barney Inc., Citicorp USA, Inc. and Deutsche Banc Alex.
Brown, Inc. (8)
4.12 Amendment No. 1 to the Amended and restated credit agreement dated as of
March 30, 2001 between the Registrant and the Initial Lenders and
Initial Issuing Banks and Salomon Smith Barney Inc., Citicorp USA, Inc.
and Deutsche Banc Alex. Brown, Inc. (8)
4.13 Amendment No. 2 to the Amended and restated credit agreement dated as of
March 30, 2001 between the Registrant and the Initial Lenders and
Initial Issuing Banks and Salomon Smith Barney, Inc., Citicorp USA, Inc.
and Deutsche Banc Alex. Brown, Inc. (9)
4.14 Amendment No. 3 to the Amended and restated credit agreement dated as of
June 24, 2002 between the Registrant and the Issuing Banks and Salomon
Smith Barney, Inc., Citicorp USA, Inc. and Deutsche Banc Alex. Brown,
Inc. (10)
4.15 Amendment No. 4 to the Amended and restated credit agreement dated as of
September 26, 2002 between the Registrant and the Issuing Banks and
Salomon Smith Barney, Inc., Citicorp USA, Inc. and Deutsche Banc Alex.
Brown, Inc. (11)
10.1 Form of Indemnification Agreement for directors and officers. (3)
10.2 1998 Stock Plan and form of agreement thereunder. (3)
10.3 Form of Tax Indemnification Agreement between Amkor Technology, Inc.,
Amkor Electronics, Inc. and certain stockholders of Amkor Technology,
Inc. (3)
10.4 Commercial Office Lease between the 12/31/87 Trusts of Susan Y., David
D. and John T. Kim and Amkor Electronics, Inc., dated October 1, 1996.
(1)
10.5 Commercial Office Lease between the 12/31/87 Trusts of Susan Y., David
D., and John T. Kim and Amkor Electronics, Inc., dated June 14, 1996.
(1)
98
10.6 Contract of Lease between Corinthian Commercial Corporation and
Amkor/Anam Pilipinas Inc., dated October 1, 1990. (1)
10.7 Contract of Lease between Salcedo Sunvar Realty Corporation and
Automated Microelectronics, Inc., dated May 6, 1994. (1)
10.8 Lease Contract between AAP Realty Corporation and Amkor/Anam Advanced
Packaging, Inc., dated November 6, 1996. (1)
10.9 Immunity Agreement between Amkor Electronics, Inc. and Motorola, Inc.,
dated June 30, 1993. (1)
10.10 1998 Director Option Plan and form of agreement thereunder. (1)
10.11 1998 Employee Stock Purchase Plan. (3)
10.12 1998 Stock Option Plan for French Employees. (1)
10.13 Loan Agreement between Amkor Electronics, Inc. and John Boruch dated
January 30, 1998. (2)
10.14 Share Sale and Purchase Agreement between the Registrant and Dongbu
Corporation dated as of July 10, 2002 (10)
10.15 Shareholders Agreement between the Registrant, Dongbu Corporation,
Dongbu Fire Insurance Co., Ltd., and Dongbu Life Insurance Co., Ltd.
dated as of July 29, 2002 (10)
10.16 Amendment to share sale and purchase agreement and shareholders
agreement the Registrant and Dongbu Corporation dated as of September
27, 2002 (11)
10.17 Business Transfer Agreement between Amkor Technology Limited, Anam
Semiconductor, Inc., Anam USA, Inc. and the Registrant dated as of
January 27, 2003 (12)
10.18 Assignment and Assumption Agreement between the Registrant, Anam
Semiconductor, Inc. and Texas Instruments Incorporated dated as of
February 28, 2003 (12)
12.1 Computation of Ratio of Earnings to Fixed Charges. (13)
21.1 List of Subsidiaries of the Registrant. (12)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sycip Gorres Velayo & Co., a member practice of Ernst & Young
Global
23.3 Consent of Sycip Gorres Velayo & Co., a member firm of Arthur Andersen
(14)
23.4 Consent of Samil Accounting Corporation
31.1 Certification of James J. Kim, Chief Executive Officer of Amkor
Technology, Inc., Pursuant to Rule 13a - 14(a) under the Securities
Exchange Act of 1934
31.2 Certification of Kenneth T. Joyce, Chief Financial Officer of Amkor
Technology, Inc., Pursuant to Rule 13a - 14(a) under the Securities
Exchange Act of 1934.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed October 6, 1997 (File No. 333-37235).
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 6, 1997, as amended on December 31, 1997 (File No.
333-37235).
(3) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 6, 1997, as amended on March 31, 1998 (File No.
333-37235).
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on April 8, 1998, as amended on August 26, 1998 (File No.
333-49645).
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 17, 1999.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 30, 2000.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2001.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 14, 2001.
99
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 14, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 14, 2002.
(11) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 14, 2002.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 27, 2003.
(13) Incorporated by reference to the Company's amended Annual Report on
Form 10-K/A filed June 25, 2003.
(14) The financial statements of Amkor Technology Philippines (P1/P2),
Inc. and Amkor Technology Philippines (P3/P4), Inc., consolidated subsidiaries
of the Registrant, for each of the two years in the period ended December 31,
2001, have been audited by the independent public accountants Sycip Gorres
Velayo & Co., a member firm of Arthur Andersen, (referred to herein as Arthur
Andersen). However, the Registrant has been unable to obtain the written consent
of Arthur Andersen with respect to the incorporation by reference of such
financial statements in the Registrant's Registration Statements on Form S-3
(File Nos. 333-39642 and 333-81334) and Form S-8 filings (File Nos. 333-62891,
333-63430, 333-76254, 333-86161, 333-100814 and 333-104601) (collectively, the
"Registration Statements". Therefore, the Registrant has dispensed with the
requirement to file the written consent of Arthur Andersen in reliance upon Rule
437a of the Securities Act of 1933, as amended. As a result, you may not be able
to recover damages from Arthur Andersen under Section 11 of the Securities Act
of 1933, as amended, for any untrue statements of material fact or any omissions
to state a material fact, if any, contained in the financial statements of the
registrant for the aforementioned financial statements which are incorporated by
reference in the Registration Statements.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended Annual Report
on Form 10-K/A to be signed, on its behalf by the undersigned, thereunto duly
authorized.
AMKOR TECHNOLOGY, INC.
By: /s/ JAMES J. KIM
----------------------------------------
James J. Kim
Chairman and Chief Executive Officer
Date: October 17, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James J. Kim and Kenneth Joyce, and each
of them, his attorneys-in-fact, and agents, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Report on Form 10-K/A, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents of any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
* Chief Executive Officer and Chairman October 17, 2003
-------------------------------------------
James J. Kim
* President and Director October 17, 2003
-------------------------------------------
John N. Boruch
/s/ KENNETH JOYCE Chief Financial Officer October 17, 2003
------------------------------------------- (Principal Financial and Accounting Officer)
Kenneth Joyce
* Director October 17, 2003
-------------------------------------------
Winston J. Churchill
* Director October 17, 2003
-------------------------------------------
Thomas D. George
* Director October 17, 2003
-------------------------------------------
Gregory K. Hinckley
* Director October 17, 2003
-------------------------------------------
John B. Neff
101
NAME TITLE DATE
---- ----- ----
* Director October 17, 2003
-------------------------------------------
Juergen Knorr
* Director October 17, 2003
-------------------------------------------
James W. Zug
* By: Kenneth Joyce
Attorney - in - fact
102