================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
(AMENDMENT NO. 1)
----------------
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of outstanding shares of the registrant's Common
Stock as of May 1, 2003 was 166,155,763.
EXPLANATORY NOTE: The purpose of this Form 10-Q/A is to amend the Form
10-Q filed May 9, 2003. We have made changes to Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 2), specifically
to the Liquidity and Capital Resources and Risk Factors That May Affect Future
Operating Performance sections. In order to preserve the nature and character of
the disclosures set forth in our 10-Q as originally filed, no attempt has been
made in this amendment to modify or update such disclosures. As a result, this
10-Q/A contains forward looking information which has not been updated for
events subsequent to May 9, 2003, and we direct you to our SEC filings filed
subsequent to May 9, 2003 for additional information.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(UNAUDITED)
Net revenues.......................................................................... $ 343,131 $ 288,955
Cost of revenues ..................................................................... 296,562 308,478
------------- -------------
Gross profit (loss)................................................................... 46,569 (19,523)
------------- -------------
Operating expenses:
Selling, general and administrative.............................................. 42,544 45,540
Research and development......................................................... 6,488 8,144
Loss on disposal of fixed assets, net............................................ 69 1,674
Amortization of acquired intangibles............................................. 2,030 1,252
------------- -------------
Total operating expenses..................................................... 51,131 56,610
------------- -------------
Operating loss........................................................................ (4,562) (76,133)
------------- -------------
Other expense (income):
Interest expense, net............................................................ 35,862 36,185
Foreign currency (gain) loss..................................................... (925) 1,998
Other expense (income), net...................................................... 1,229 (498)
------------- -------------
Total other expense.......................................................... 36,166 37,685
------------- -------------
Loss before income taxes, equity in loss of investees, loss on impairment
of equity investment, minority interest and discontinued operations.............. (40,728) (113,818)
Equity in loss of investees........................................................... (3,628) (2,094)
Loss on impairment of equity investment............................................... -- (96,576)
Minority interest gain (loss)......................................................... 149 (1,753)
------------- -------------
Loss from continuing operations before income taxes................................... (44,207) (214,241)
------------- -------------
Income tax benefit.................................................................... (4,177) (24,104)
------------- -------------
Loss from continuing operations....................................................... (40,030) (190,137)
------------- -------------
Discontinued operations (see Note 3):
Income from wafer fabrication services business, net of tax...................... 3,047 2,329
Gain on sale of wafer fabrication services business, net of tax.................. 51,519 --
------------- -------------
Income from discontinued operations.............................................. 54,566 2,329
------------- -------------
Net income (loss)..................................................................... $ 14,536 $ (187,808)
============= =============
Per Share Data:
Basic and diluted loss per common share from continuing operations............... $ (0.24) $ (1.17)
Basic and diluted income per common share from discontinued operations........... 0.33 0.02
------------- -------------
Net income (loss) per common share............................................... $ 0.09 $ (1.15)
============= =============
Shares used in computing basic and diluted net income (loss) per common share 165,156 162,766
============= =============
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 351,485 $ 311,249
Accounts receivable:
Trade, net of allowance of $6,938 in 2003 and $7,122 in 2002............ 213,573 234,056
Due from affiliates..................................................... 152 298
Other................................................................... 7,132 8,234
Inventories................................................................. 68,433 72,121
Other current assets........................................................ 69,194 48,661
------------- -------------
Total current assets............................................... 709,969 674,619
------------- -------------
Property, plant and equipment, net............................................... 926,581 966,338
------------- -------------
Investments...................................................................... 55,166 83,235
------------- -------------
Other assets:
Due from affiliates......................................................... 20,855 20,852
Goodwill ................................................................... 628,147 628,099
Acquired intangibles........................................................ 43,055 45,033
Other....................................................................... 89,815 114,178
Assets of discontinued operations (see Note 3)................................... 5,086 25,630
------------- -------------
786,958 833,792
------------- -------------
Total assets....................................................... $ 2,478,674 $ 2,557,984
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................................. $ 5,183 $ 4,633
Short-term borrowings and current portion of long-term debt................ 76,876 71,023
Trade accounts payable..................................................... 146,982 180,999
Due to affiliates.......................................................... 18,122 70,243
Accrued expenses........................................................... 188,131 184,223
------------- -------------
Total current liabilities......................................... 435,294 511,121
Long-term debt.................................................................. 1,723,370 1,737,690
Other noncurrent liabilities.................................................... 69,203 67,661
------------- -------------
Total liabilities................................................. 2,227,867 2,316,472
------------- -------------
Minority interest............................................................... 9,996 10,145
------------- -------------
Committments and contingencies
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 2003 and 2002..................... 166 166
Additional paid-in capital................................................. 1,170,227 1,170,227
Accumulated deficit........................................................ (919,198) (933,734)
Receivable from stockholder................................................ (2,887) (2,887)
Accumulated other comprehensive loss....................................... (7,497) (2,405)
------------- -------------
Total stockholders' equity........................................ 240,811 231,367
------------- -------------
Total liabilities and stockholders' equity........................ $ 2,478,674 $ 2,557,984
============= =============
The accompanying notes are an integral part of these statements.
3
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
RECEIVABLE OTHER
COMMON STOCK PAID-IN ACCUMULATED FROM COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER LOSS
------ ------ ------- ------- ----------- ----
Balance at December 31, 2001................. 161,782 $ 162 $1,123,541 $ (106,975) $ (3,276) $ (4,735)
Net loss.................................. -- -- -- (187,808) -- --
Unrealized gains on investments,
net of tax.............................. -- -- -- -- -- 31
Cumulative translation adjustment......... -- -- -- -- -- 1,913
Comprehensive loss........................
Issuance of stock for acquisitions........ 1,827 2 35,200 -- -- --
Issuance of stock through employee
stock purchase plan and stock options... 175 -- 1,759 -- -- --
------- --------- ---------- ----------- ----------- -------------
Balance at March 31, 2002.................... 163,784 $ 164 $1,160,500 $ (294,783) $ (3,276) $ (2,791)
======= ========= ========== =========== =========== =============
Balance at December 31, 2002................. 165,156 $ 166 $1,170,227 $ (933,734) $ (2,887) $ (2,405)
Net income................................ -- -- -- 14,536 -- --
Unrealized loss on investments,
net of tax.............................. -- -- -- -- -- (4,904)
Cumulative translation adjustment......... -- -- -- -- -- (188)
Comprehensive income......................
------- --------- ---------- ----------- ----------- -------------
Balance at March 31, 2003.................... 165,156 $ 166 $1,170,227 $ (919,198) $ (2,887) $ (7,497)
======= ========= ========== =========== =========== =============
COMPREHENSIVE
INCOME
TOTAL (LOSS)
----- ------
Balance at December 31, 2001................. $1,008,717
Net loss.................................. (187,808) $ (187,808)
Unrealized gains on investments,
net of tax.............................. 31 31
Cumulative translation adjustment......... 1,913 1,913
-------------
Comprehensive loss........................ $ (185,864)
=============
Issuance of stock for acquisitions........ 35,202
Issuance of stock through employee
stock purchase plan and stock options... 1,759
----------
Balance at March 31, 2002.................... $ 859,814
==========
Balance at December 31, 2002................. $ 231,367
Net income................................ 14,536 $ 14,536
Unrealized loss on investments,
net of tax.............................. (4,904) (4,904)
Cumulative translation adjustment......... (188) (188)
-------------
Comprehensive income...................... $ 9,444
---------- =============
Balance at March 31, 2003.................... $ 240,811
==========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(unaudited)
Cash flows from continuing operating activities:
Loss from continuing operations................................................... $ (40,030) $ (190,137)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities--
Depreciation and amortization................................................... 57,793 93,653
Amortization of deferred debt issuance costs.................................... 2,080 2,057
Provision for accounts receivable............................................... -- (285)
Provision for excess and obsolete inventory..................................... 869 (2,245)
Deferred income taxes........................................................... (884) (16,144)
Equity in loss of investees..................................................... 3,628 2,094
Loss on impairment of equity investment......................................... -- 96,576
Loss on disposal of fixed assets, net........................................... 69 1,674
Unrealized loss on derivative instruments....................................... 2,201 --
Minority interest............................................................... (149) 1,753
Changes in assets and liabilities excluding effects of acquisitions--
Accounts receivable............................................................. 20,427 (5,129)
Other receivables............................................................... 1,102 (843)
Inventories..................................................................... 2,811 2,461
Due to/from affiliates, net..................................................... (453) (1,618)
Other current assets............................................................ 710 (83)
Other non-current assets........................................................ 5,415 1,348
Accounts payable................................................................ (33,878) (3,258)
Accrued expenses................................................................ 5,386 (1,553)
Other long-term liabilities..................................................... 2,367 338
------------- -------------
Net cash provided by (used in) operating activities........................... 29,464 (19,341)
------------- -------------
Cash flows from continuing investing activities:
Purchases of property, plant and equipment........................................ (16,571) (19,684)
Acquisitions, net of cash acquired................................................ -- (2,830)
Proceeds from the sale of property, plant and equipment........................... 514 267
Proceeds from the sale (purchase) of investments, net............................. 12,764 (70)
------------- -------------
Net cash used in investing activities......................................... (3,293) (22,317)
------------- -------------
Cash flows from continuing financing activities:
Net change in bank overdrafts and short-term borrowings........................... 550 9,308
Payments of long-term debt........................................................ (8,417) (5,827)
Proceeds from issuance of stock through employee stock
purchase plan and stock options................................................. -- 1,759
------------- -------------
Net cash provided by (used in) financing activities........................... (7,867) 5,240
------------- -------------
Effect of exchange rate fluctuations on cash and cash equivalents related to
continuing operations (207) 1,783
------------- -------------
Cash flows from discontinued operations:
Net cash provided by operating activities......................................... 19,727 10,550
Net cash provided by (used in) investing activities............................... 2,412 (20)
Net cash used in financing activities............................................. -- (671)
------------- -------------
Net cash provided by discontinued operations.................................. 22,139 9,859
------------- -------------
Net increase (decrease) in cash and cash equivalents................................. 40,236 (24,776)
Cash and cash equivalents, beginning of period....................................... 311,249 200,057
------------- -------------
Cash and cash equivalents, end of period............................................. $ 351,485 $ 175,281
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................................ $ 31,390 $ 31,289
Income taxes.................................................................... $ 4,028 $ 4,331
The accompanying notes are an integral part of these statements.
5
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation. The consolidated financial statements and
related disclosures as of March 31, 2003 and for the three months ended March
31, 2003 and 2002 are unaudited, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In our opinion, these financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of the results for the interim periods. These financial
statements should be read in conjunction with our latest annual report as of
December 31, 2002 filed on Form 10-K, as amended, with the Securities and
Exchange Commission. The results of operations for the three months ended March
31, 2003 are not necessarily indicative of the results to be expected for the
full year. Certain previously reported amounts have been reclassified to conform
with the current presentation.
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, fluctuation in operating results, the decline in average
selling prices, our high leverage and the restrictive covenants contained in the
agreements governing our indebtedness, our investment in ASI, the absence of
significant backlog in our business, our dependence on international operations
and sales, difficulties integrating acquisitions, our dependence on materials
and equipment suppliers, the increased litigation incident to our business,
rapid technological change, competition, the enforcement of intellectual
property rights by or against us, our need to comply with existing and future
environmental regulations, continued control by existing stockholders, stock
price volatility and economic uncertainty resulting from terrorist activities.
Recent Accounting Pronouncements. 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. We have applied 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. The adoption of these provisions has
not had 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 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 became effective for all variable
interest entities created after January 31, 2003, and will be 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 March 31,
2003, the combined book value of the assets and liabilities associated with
these Philippine realty corporations were $22.8 million and $24.9 million. Our
maximum exposure related to these variable interest entities is limited by our
investments and loans to these entities of $21.3 million at March 31, 2003.
In addition to our interests in the Philippine realty corporations, we
are currently reviewing our interests in other entities, which existed prior to
February 1, 2003, to determine whether any of these entities would be variable
interest entities. The maximum exposure to loss as a result of our involvement
with any additional variable interest entities identified is not expected to be
an amount materially in excess of interests currently reflected in our
consolidated balance sheet.
6
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. STOCK COMPENSATION
We apply Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations, to our
stock based plans. No compensation expense has been recognized related to our
employee stock based plans. If compensation costs for our stock based 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 THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
Net income (loss), as reported.................................................... $ 14,536 $ (187,808)
Deduct: Total stock-based employee compensation determined
under fair value based method, net of related tax effects....................... 2,303 10,074
------------- -------------
Net income (loss), pro forma......................................................... $ 12,233 $ (197,882)
============= =============
Earnings (loss) per share:
Basic and diluted:
As reported................................................................... $ 0.09 $ (1.15)
Pro forma..................................................................... $ 0.07 $ (1.22)
For the pro forma net income (loss), 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 in 2002 and our recognition of a
valuation allowance against the associated net operating loss carryforwards.
3. 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. Beginning with the
first quarter of 2003, we reflect our wafer fabrication services segment as a
discontinued operation and have restated our historical results. In connection
with the disposition of our wafer fabrication business, we have recorded $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), which is
reflected in income from discontinued operations. The carrying value of the sold
net assets associated with the business as of February 28, 2003 was $2.4
million.
7
A summary of the results from discontinued operations for the three months ended
March 31, 2003 and 2002 are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
Net sales............................................................................ $ 34,636 $ 60,686
Gross profit......................................................................... 3,451 6,052
Operating income..................................................................... 3,455 3,905
Gain on sale of wafer fabrication services business.................................. 58,600 --
Interest............................................................................. -- --
Other (income) expense............................................................... (11) 23
Tax expense ($7.1 million associated with gain on sale of the business in 2003)...... 7,500 1,553
Net income from discontinued operations.............................................. 54,566 2,329
A summary of the assets of our discontinued operations are as follows:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Accounts receivable.................................................................. $ 5,086 $ 23,025
Property, plant and equipment, net of accumulated depreciation of
$8,368 at December 31, 2002..................................................... -- 2,605
------------- -------------
$ 5,086 $ 25,630
============= =============
4. 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
were 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 was 1.7 billion Japanese yen ($14.4 million based on
the spot exchange rate at March 31, 2003). We are withholding payment of 1.4
billion yen of this amount pending resolution of a controversy relating to the
patents acquired in connection with the acquisition. 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 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.
In July 2001, we acquired, in separate transactions, Taiwan
Semiconductor Technology Corporation ("TSTC") and Sampo Semiconductor
Corporation ("SSC") in Taiwan. 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.
In January 2001, Amkor Iwate Corporation commenced operations and
acquired from Toshiba a packaging and test facility 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 joint
venture during the three-year period but cannot be less than 1 billion Japanese
yen and cannot exceed 4 billion Japanese yen ($8.5 million to $33.9 million
based on the spot exchange rate at March 31, 2003). Amkor Iwate provides
packaging and test services
8
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.
5. OUR INVESTMENT IN ANAM SEMICONDUCTOR, INC. (ASI)
At January 1, 2002, we owned 47.7 million shares, or 42%, of ASI voting
common stock. Accordingly, we accounted for this investment under the equity
method of accounting and evaluated our investments for impairment due to
declines in market value that were considered other than temporary. In the event
of a determination that a decline in market value was other than temporary, a
charge to earnings was recorded for the unrealized loss, and a new cost basis in
the investment was 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.
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business (see Note 3), 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 $58.1 million in net cash proceeds
and 42 billion Korean Won (approximately $33.5 million at a
spot exchange rate as of March 31, 2003) 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."
Associated with this transaction, we recorded a $1.8 million
loss. 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; (ii) we acquired the
Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million; 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. 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 (see
Note 3). 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.
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.
On March 24, 2003, we sold an additional 7 million shares of ASI common
stock to a financial institution for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximated
the carrying value of those shares. This sale reduced our ownership to 19.7
million shares, or 16% of ASI's voting stock and accordingly, 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 (see Note 9). We now adjust our investment in ASI to fair
value each period, with the resulting gain or loss recorded through other
comprehensive income. In the event of an other than temporary decline in ASI
stock price, we will reflect a charge in the Statement of Income. At March 31,
2003, we recorded an unrealized loss of $4.7 million on our investment in ASI
through other comprehensive income.
As part of the sale of 7 million shares of ASI common stock, 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 resulting in us losing our
9
entire investment in the option. The nondeliverable call option is adjusted to
its fair value each period, with the resulting gain or loss reflected in the
Statement of Income. Accordingly, for the period ended March 31, 2003, we
recorded a charge of $2.2 million in order to adjust the nondeliverable call
option to its fair value.
Financial Information for ASI
The following summary of consolidated financial information was derived
from the consolidated financial statements of ASI.
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues......................................................................... $ 48,019 $ 55,158
Gross profit (loss).................................................................. (15,155) (24,431)
Net loss............................................................................. (20,613) (4,838)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits.................................... $ 46,600 $ 65,891
Current assets....................................................................... 126,597 167,145
Property, plant and equipment, net................................................... 448,178 482,028
Noncurrent assets (including property, plant and equipment).......................... 638,070 622,487
Current liabilities.................................................................. 119,483 111,409
Total debt and other long-term financing (including current portion)................. 144,656 150,607
Noncurrent liabilities (including debt and other long-term financing)................ 105,963 119,493
Total stockholders' equity........................................................... 539,221 558,730
6. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory of $21.1
million and $20.2 million at March 31, 2003 and December 31, 2002, respectively,
consist of raw materials and purchased components that are used in the
semiconductor packaging process.
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Raw materials and purchased components............................................... $ 56,706 $ 61,806
Work-in-process...................................................................... 11,727 10,315
------------- -------------
$ 68,433 $ 72,121
============= =============
10
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Land ................................................................................ $ 87,666 $ 88,744
Buildings and improvements........................................................... 538,432 537,288
Machinery and equipment.............................................................. 1,513,733 1,512,191
Furniture, fixtures and other equipment.............................................. 123,204 121,727
Construction in progress............................................................. 2,890 1,707
------------- -------------
2,265,925 2,261,657
Less--Accumulated depreciation and amortization...................................... (1,339,344) (1,295,319)
------------- -------------
$ 926,581 $ 966,338
============= =============
8. ACQUIRED INTANGIBLES
Acquired intangibles consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Patents and technology rights........................................................ $ 62,051 $ 61,994
Less--Accumulated amortization....................................................... (18,996) (16,961)
------------- -------------
$ 43,055 $ 45,033
============= =============
Amortization expense was $2.0 million and $1.3 million for the three
months ended March 31, 2003 and 2002, respectively. The estimated annual
amortization expense for each of the next five years ending on December 31 is
$8.0 million. The weighted average amortization period for the patents and
technology rights is 8 years.
9. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Marketable securities classified as available for sale:
ASI (ownership of 16% and 21% at March 31, 2003
and December 31, 2002, respectively) (see Note 5)............................. $ 49,511 $ 77,450
Other marketable securities classified as available for sale.................... 4,373 4,590
------------- -------------
Total marketable securities................................................... 53,884 82,040
Equity investments (20% - 50% owned).............................................. 1,282 1,195
------------- -------------
$ 55,166 $ 83,235
============= =============
Our investment in ASI is classified as available for sale in the table
above. ASI was previously accounted for as an equity investment through March
24, 2003 (see Note 5).
11
In connection with the 2002 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 the three months ended March 31, 2003 and 2002 were $3.5 million and
$2.6 million, respectively, which we believe were conducted on an arms-length
basis in the ordinary course of business.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Accrued income taxes................................................................. $ 49,198 $ 48,787
Accrued interest..................................................................... 36,586 32,690
Accrued payroll...................................................................... 24,163 29,295
Other accrued expenses............................................................... 78,184 73,451
------------- -------------
$ 188,131 $ 184,223
============= =============
11. RESTRUCTURING RESERVES
During the second, third and fourth quarters of 2002, we recorded $4.8
million, $13.8 million and $10.0 million, respectively, 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 2002 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,
$5.5 and $6.1 million remains outstanding as of March 31, 2003 and December 31,
2002, respectively, and is reflected in accrued expenses. The outstanding
liability is principally future lease payments of which $4.3 million is expected
be paid during 2003. The remaining lease payments are expected to be paid
through 2007 unless the leases can be terminated earlier. During the first
quarter of 2003, the restructuring reserve was reduced by $0.6 million for cash
expenditures.
12. DEBT
Following is a summary of short-term borrowings and long-term debt:
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Secured credit facility:
Term B loans, LIBOR plus 4% due September 2005.................................... $ 96,868 $ 97,118
$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
12
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........................................................................... 69,628 77,845
------------- -------------
1,800,246 1,808,713
Less--Short-term borrowings and current portion of long-term debt (76,876) (71,023)
------------- -------------
$ 1,723,370 $ 1,737,690
============= =============
In June 2002 and September 2002 we amended our existing 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.
Interest expense related to short-term borrowings and long-term debt is
presented net of interest income of $1.8 million and $1.0 million for the three
months ended March 31, 2003 and 2002, respectively, in the accompanying
consolidated statements of operations.
On April 22, 2003, we entered into a new $200.0 million senior secured
credit facility consisting of a $170.0 million term loan maturing January 31,
2006 and a $30.0 million revolving line of credit that is available through
October 31, 2005. The term loan bears interest at LIBOR plus 4.00% and the
revolving line of credit bears interest at LIBOR plus 4.25%. The term loan
principal repayments are due $1.3 million, $1.7 million, $125.4 million and
$41.6 million in 2003, 2004, 2005 and 2006, respectively. In addition, the term
loan includes certain financial covenants including minimum EBITDA, as defined
by the credit facility, minimum daily liquidity and maximum annual capital
expenditures. This new credit facility replaces the existing $196.9 million
secured credit facility, which includes a $96.9 million term loan and a $100.0
million revolving credit facility that were scheduled to mature September 30,
2005 and March 31, 2005, respectively. The funds available under this new credit
facility were used to repay the $96.9 million term loan outstanding under the
existing credit facility and for general corporate purposes. In connection with
the redemption of our term loan, we expect to record a charge of $2.4 million
during the second quarter of 2003 related to the associated unamortized deferred
debt issuance costs.
Other debt as of March 31, 2003 and 2002 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 March 31, 2003 the foreign debt had
interest rates ranging from 1.0% to 6.4%. These debt instruments do not include
significant financial covenants.
In May 2003, we sold $425 million of senior notes due May 2013. We sold
these notes to qualified institutional investors and used the net proceeds of
the issuance to redeem our outstanding 9.25% Senior Notes due 2006. The notes
have a coupon rate of 7.75 % annually and interest payments are due
semi-annually. In connection with the redemption of our 9.25 Senior Notes, we
expect to record a charge of $6.2 million during the second quarter of 2003 for
the associated unamortized deferred debt issuance costs. In addition, we expect
to record a charge of $19.7 million during the second quarter of 2003 related to
the bond premium associated with the redemption.
13. 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 three months ended March 31,
2003 and 2002, we excluded from the computation of diluted earnings per share
potentially dilutive securities which would have an antidilutive effect on EPS.
As of March 31, 2003, the total number of potentially dilutive securities
outstanding was 6.1 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. As of
March 31, 2002, the total number of potentially dilutive securities outstanding
was 14.6 million, 11.7 million and 3.9 million for outstanding options,
convertible notes and warrants for common stock, respectively.
14. COMMITMENTS AND CONTINGENCIES
Indemnifications and Guarantees
13
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 March 31,
2003. 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,
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 March 31, 2003 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 March 31, 2003, 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
Litigation
We currently are a party to various legal proceedings, including those
noted below. While we currently believe 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.
Recently, we have become party to an increased number of litigation
matters, relative to historic levels. Much of the recent increase in litigation
relates to an allegedly defective epoxy mold compound formerly used in some of
our products. In 2002, we were served with a third party complaint in an action
between Fujitsu Limited and Cirrus Logic, Inc., in which Fujitsu alleged that
semiconductor devices it purchased from Cirrus Logic were 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. The complaint, as
amended to date, alleges damages in excess of $100 million, although, as of this
date, Fujitsu has not indicated how it will substantiate this amount of damages.
Cirrus Logic filed a third party complaint against us alleging that any
liability for chip defects should be assigned to us because we assembled the
subject semiconductor devices. Upon receipt of the third party complaint, we
filed an answer denying all liability, and our own third party complaint against
Sumitomo Bakelite Co., Ltd., the Japanese manufacturer of the allegedly
defective epoxy mold compound. More recently, we have been drawn into two
additional actions related to this epoxy mold compound. In March, 2003, we were
served with a cross-complaint in an action between Seagate Technology and Atmel
Corporation, and in April, 2003, we were served with a cross complaint in an
action between Maxtor Corporation and Koninklijke Philips Electronics. On May 1,
2003, we received a demand letter from another customer requesting
indemnification for damages resulting from allegedly defective epoxy mold
compound.
In the case of each of these matters, all of which are at an early
stage, we believe we have meritorious defenses and valid third party claims
against Sumitomo Bakelite, should the epoxy mold compound be found to be
defective. However, we cannot be certain that we will be able to recover any
amount from Sumitomo Bakelite if we are held liable in these matters, or that
any adverse result would not have a material impact upon us. Moreover, other
customers of ours have made inquiries about the epoxy mold compound, which was
widely used in the semiconductor industry, and no assurance can be given that
claims similar to these will not be made against us by other customers in the
future.
On August 16, 2002, we filed a complaint against Motorola, Inc. in an
action captioned Amkor Technology, Inc. v.
14
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 was
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").
We 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.
We believe we 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 us, we believe we have
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.
ITEM 2. 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 and (4)
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 months ended March 31, 2003
and our liquidity and capital resources. You should read the following
discussion in conjunction with our consolidated financial statements and the
related notes, included elsewhere in this 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
15
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 reflect our wafer fabrication services segment as a
discontinued operation and restated our historical results.
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 second calendar quarter is typically a seasonally higher quarter
for Amkor as compared to the first quarter. On the basis of customers'
forecasts, we currently expect packaging and test revenue for the second quarter
of 2003 to be around 10% higher than packaging and test revenues for the first
quarter of 2003. We expect that second quarter of 2003 gross margin will be
around 19%. 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. Average selling price
declines did not significantly impact our gross margins in the first quarter of
2003.
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
16
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 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 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 $58.1 million in net cash proceeds
and 42 billion Korean Won (approximately $33.5 million at a
spot exchange rate as of March 31, 2003) 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."
Associated with this transaction, we recorded a $1.8 million
loss. 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; (ii) we acquired the
Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million; 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. 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.
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.
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.
On March 24, 2003, we sold an additional 7 million shares of ASI common
stock to a financial institution for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximated
the carrying value of those shares. This sale reduced our ownership to 19.7
million shares, or 16% of ASI's voting stock and accordingly, 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.
As part of the sale of 7 million shares of ASI common stock, 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 resulting in us losing our
17
entire investment in the option. The nondeliverable call option is adjusted to
its fair value each period, with the resulting gain or loss reflected in the
Statement of Income. Accordingly, for the period ended March 31, 2003, we
recorded a charge of $2.2 million in order to adjust the nondeliverable call
option to its fair value.
In consideration of the transactions discussed above, we reflect our
wafer fabrication services segment as a discontinued operation and have restated
our historical results. In connection with the disposition of our wafer
fabrication business, we have reflected $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), which is reflected in income from discontinued
operations. The carrying value of the sold net assets associated with the
business as of February 28, 2003 was $2.4 million.
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
were 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 was 1.7 billion Japanese yen ($14.4 million based on
the spot exchange rate at March 31, 2003). We are withholding payment of 1.4
billion yen of this amount pending resolution of a controversy relating to the
patents acquired in connection with the acquisition. We recorded $19.6 million
of intangible assets for patent 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.
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 ($8.5 million to
$33.9_______ million based on the spot exchange rate at March 31, 2003). 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. 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 continuing operating data as a
percentage of net revenues for the periods indicated:
18
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------- -------------
(UNAUDITED)
Net revenues........................................................................ 100.0% 100.0%
Gross profit (loss)................................................................. 13.6 (6.8)
Operating loss...................................................................... (1.3) (26.3)
Loss before income taxes, equity in loss of investees, minority interest and
discontinued operations.......................................................... (11.9) (39.4)
Loss from continuing operations..................................................... (11.7) (65.8)
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Revenues. Packaging and test net revenues increased 18.8% to $343.1
million in the three months ended March 31, 2003 from $289.0 million in the
three months ended March 31, 2002.
The increase in packaging and test net revenues for the three months
ended March 31, 2003, excluding the impact of our acquisitions in Japan, was
principally attributed to a 16.0% increase in unit volumes across all product
lines as compared to the comparable period a year ago. This overall unit volume
increase was driven by a 37.3% increase in advanced leadframe and laminate
packages as a result of a broad based increase in demand. The revenues of our
Japanese acquisition, Amkor Iwate, for the three months ended March 31, 2003
increased $11.1 million compared to the three months ended March 31, 2002,
driven by increased volumes and bonuses earned under the supply agreement with
Toshiba.
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, negotiating lower prices with our
material vendors, and driving engineering and technological changes in our
packaging and test processes which resulted in reduced manufacturing costs.
During the three months ended March 31, 2003 as compared to the comparable
period a year ago, the decline in average selling prices did not significantly
impact our gross margins.
Gross Profit. Gross profit increased $66.1 million, to a gross profit
of $46.6 million in the three months ended March 31, 2003 from a gross profit of
negative $19.5 million in the three months ended March 31, 2002. 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 have a
significant effect on our gross margin.
Gross margins, as a percentage of sales, increased to 13.6% in the
three months ended March 31, 2003 from negative 6.8% in the three months ended
March 31, 2002. The improvement of 20.4% is principally a result of the
following:
- Our factories in Korea and the Philippines caused an approximate 13.9%
increase in gross margins attributable to increased capacity
utilization as a result of increased unit volumes, cost savings
initiatives, and a reduction of $35.0 million in depreciation costs.
Approximately $19.0 million of the reduced depreciation costs was
attributable to the fixed asset impairment charge recorded during the
second quarter of 2002, and approximately $16.0 million was the result
of a change in the estimated useful lives of certain assembly equipment
effective in the fourth quarter of 2002.
- Material cost savings contributed approximately 4.5% to the increase in
gross margins.
- Our Taiwan operations caused an approximate 2.0% increase in
gross margins. Taiwan operation margin improvements were
primarily attributable to increased capacity utilization as a
result of unit volumes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $3.0 million, or 6.6%, to $42.5 million, or
12.4% of net revenues, in the three months ended March 31, 2003 from $45.5
million, or 15.8% of net revenues, in the three months ended March 31, 2002. The
decrease in these costs was primarily due to our corporate cost reduction
initiatives.
Research and Development. Research and development expenses decreased
$1.7 million to $6.5 million, or 1.9% of net revenues, in the three months ended
March 31, 2003 from $8.1 million, or 2.8% of net revenues, in the three months
ended March 31, 2002. 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 interconnection solutions, our System-in-Package technology, that
uses both advanced packaging and traditional surface
19
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.
Other Expense. Other expenses, net decreased $1.5 million, to $36.2
million, or 10.5% of net revenues, in the three months ended March 31, 2003 from
$37.7 million, or 13.0% of net revenues, in the three months ended March 31,
2002. The net decrease in other expenses was primarily the result of a
beneficial change related to foreign currency of $2.9 million offset by a $2.2
million loss recorded to reduce certain derivative instruments to their fair
market value at March 31, 2003.
Equity in Loss of Investees. Our earnings included our share of losses
in our equity affiliates, principally ASI through March 24, 2003, in the three
months ended March 31, 2003 of $3.6 million compared to $2.1 million in the
three months ended March 31, 2002. On March 24, 2003, we divested an additional
7 million shares of ASI, bringing our total voting share holdings to 16% of ASI,
and on this date we ceased the equity method of accounting for our ASI
investment.
Loss on Impairment of Equity Investment. During the three months ended
March 31, 2003, we recorded a $4.7 million impairment charge to other
comprehensive income to reduce the carrying value of our investment in ASI to
ASI's market value based on its closing share price on March 31, 2003. During
the three months ended March 31, 2002, we recorded a $96.6 million impairment
charge to our consolidated statement of income to reduce the carrying value of
our investment in ASI to ASI's market value based on its closing share price on
March 31, 2002.
Income Taxes. During the first quarter of 2003, we recorded a $4.2
million tax benefit from continuing operations. This reflects foreign tax
expense of $3.3 million, net of a $7.5 million current tax benefit related to
the loss from continuing operations. This $7.5 million tax benefit is offset by
$7.5 million of current tax expense in discontinued operations.
We will resume the recognition of deferred tax assets when we return to
profitability. We anticipate recognizing approximately $4.0 million per quarter
in foreign tax expense for the remainder of 2003. As of March 31, 2003, we had
U.S. net operating losses totaling $335.0 million expiring between 2021 and
2022. Additionally, as of March 31, 2003, we had $50 million of non-U.S. net
operating losses available for carryforward, expiring between 2003 and 2012.
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 reflect our
wafer fabrication services segment as a discontinued operation and restated our
historical results. In connection with the disposition of our wafer fabrication
business, we have reflected $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), which is reflected in income from discontinued operations.
The carrying value of the sold net assets associated with the business as of
February 28, 2003 was $2.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor industry analysts have forecasted significant growth in
the semiconductor industry in 2003 and 2004. The second calendar quarter is
typically a seasonally higher quarter for Amkor as compared to the first
quarter. On the basis of customers' forecasts, we currently expect packaging and
test revenue for the second quarter of 2003 to be around 10% higher than
packaging and test revenues for the first quarter of 2003. We expect that gross
margin will be around 19% in the second quarter of 2003.
As a result of the favorable impact on our cash flows caused by the
increase in demand for our services, net cash provided by continuing operating
activities for the three months ended March 31, 2003 was $29.5 million.
Comparatively, the net cash used by continuing operating activities for the
three months ended March 31, 2002 was $19.3 million. Net cash used in investing
activities from continuing operations during the three months ended March 2003
and 2002 was $3.3 million and $22.3 million, respectively. Net cash used by
financing activities from continuing operations during the three months ended
March 2003 was $7.9 million. In addition, cash provided by discontinued
operations during the three months ended March 31, 2003 and 2002 were $22.1
million and $9.9 million, respectively. Comparatively, the net cash provided by
financing activities from continuing operations for the three months ended March
31, 2002 was $5.2 million. Our cash and cash equivalents balance as of March 31,
2003 was $351.5 million. Our ongoing primary cash needs are for debt service,
20
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 addition to the cash and cash equivalents available, we entered into
a new $200.0 million senior secured credit facility, in April 2003, consisting
of a $170.0 million term loan maturing January 31, 2006 and a $30.0 million
revolving line of credit that is available through October 31, 2005. The term
loan bears interest at LIBOR plus 4.00% and the revolving line of credit bears
interest at LIBOR plus 4.25%. The term loan principal repayments are due $1.3
million, $1.7 million and $125.4 million and $41.6 million in 2003, 2004, 2005
and 2006, respectively. In addition, the term loan includes certain financial
covenants including minimum EBITDA, as defined by the credit facility, minimum
daily liquidity and maximum annual capital expenditures. This new credit
facility replaces the existing $196.9 million senior secured credit facility,
which includes a $96.9 million term loan and a $100.0 million revolving credit
facility that were scheduled to mature September 30, 2005 and March 31, 2005,
respectively. The funds available under this new credit facility were used to
repay the $96.9 million term loan outstanding under the existing credit facility
and for general corporate purposes.
In May 2003, we sold $425 million of senior notes due May 2013. We sold
these notes to qualified institutional investors and used the net proceeds of
the issuance to redeem our outstanding 9.25% Senior Notes due 2006. The notes
have a coupon rate of 7.75% annually and interest payments are due
semi-annually. In connection with the redemption of our 9.25% Senior Notes, we
expect to record a charge of $6.2 million during the second quarter of 2003 for
the associated unamortized deferred debt issuance costs. In addition, we expect
to record a charge of $19.7 million related to the bond premium associated with
the redemption during the second quarter of 2003.
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 March 31, 2003 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.
We now have, and for the foreseeable future will continue to have, a
significant amount of indebtedness. As of March 31, 2003, we had total debt of
$1,800.2 million debt. 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 the three months ended March 31,
2003, interest expense payable in cash was $35.6 million.
We expect to spend up to $150.0 million in capital expenditures in
2003, focused on fine pitch wirebonders, testers and related equipment in
response to strengthening demand for advanced assembly and test solutions.
During the three months ended 2003 and 2002, we made capital expenditures of
$16.6 million and $19.7 million, respectively.
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. We were 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 was 1.7 billion Japanese yen ($14.4 million based on the spot
exchange rate at March 31, 2003). We are withholding payment of 1.4 billion yen
of this amount pending resolution of a controversy relating to the patents
acquired in connection with the acquisition. In July 2001, we acquired, in
separate transactions, Taiwan Semiconductor Technology Corporation ("TSTC") and
Sampo Semiconductor Corporation ("SSC") in Taiwan. 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. 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
21
joint venture, but cannot be less than 1 billion Japanese yen and cannot exceed
4 billion Japanese yen ($8.5 million to $33.9 million based on the spot exchange
rate at March 31, 2003). 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.
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 $58.1 million in net cash proceeds
and 42 billion Korean Won (approximately $33.5 million at a
spot exchange rate as of March 31, 2003) 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."
Associated with this transaction, we recorded a $1.8 million
loss. 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; (ii) we acquired the
Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million; 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. 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.
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.
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.
On March 24, 2003, we sold an additional 7 million shares of ASI common
stock to a financial institution for 24.4 billion Korean won ($19.5 million
based on the spot exchange rate as of the transaction date) which approximated
the carrying value of those shares. This sale reduced our ownership to 19.7
million shares, or 16% of ASI's voting stock, and accordingly, 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.
As part of the sale of 7 million shares of ASI common stock, 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 resulting in us losing our entire
investment in the option. The nondeliverable call option is adjusted to its fair
value each period, with the resulting gain or loss reflected in the Statement of
Income. Accordingly, for the period ended March 31, 2003, we recorded a charge
of $2.2 million in order to adjust the nondeliverable call option to its fair
value.
In consideration of the transactions discussed above, we reflect our
wafer fabrication services segment as a discontinued operation and have restated
our historical results. In connection with the disposition of our wafer
fabrication business, we have reflected $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), which is reflected in income from discontinued
operations. The carrying value of the sold net assets associated with the
business as of February 28, 2003 was $2.4 million.
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
22
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.
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. Our preparation of this
quarterly report on Form 10-Q 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 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 March 31, 2003 and 2002, the accrual for current taxes and estimated
additional taxes was $49.2 million and $42.2 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. In
connection with our divestiture in 2003 of 7 million shares of ASI common stock,
we realized a capital loss of approximately $53.4 million and recognized a U.S.
tax benefit of $20.3 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
determined in the fourth quarter of 2002 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. As of March 31,
2003, we had U.S. net operating losses totaling $335.0 million expiring between
2021 and 2022. Additionally, as of March 31, 2003, we had $50
23
million of non-U.S. net operating losses available for carryforward, 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 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.
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. In addition, during the second quarter of 2002, we
experienced a significant decline in our market capitalization. These events
triggered an impairment review in accordance with SFAS No. 144. This review
included a company-wide evaluation of underutilized assets that could be sold
and a detailed update of our operating and cash flow projections. As a result of
this analysis, we identified $19.8 million of test and packaging fixed 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. Additionally, we tested for impairment our
long-lived test assets that are held and used, including intangible assets that
we are amortizing, and certain packaging fixed assets that are held and used.
For the test and packaging assets that are held and used, we recognized, in
2002, a $171.6 million impairment charge to reduce the carrying value of those
assets to fair value. 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 discounted at a rate commensurate
with the risk involved.
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
24
by approximately $17 million in 2002. 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.
Evaluation of 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. 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 resulting in us 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.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The following section discloses the known material risks facing our
company. Additional risks and uncertainties not presently known 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.
25
These risk factors contain forward-looking statements regarding our
expected performance that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced by us
described below.
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 and the three month period ended March 31, 2003, 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,
- 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:
26
- 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 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 the three months ended March 31, 2003, as compared to the comparable
prior year period, the decline in average selling prices did not significantly
impact our gross margins. 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 March 31, 2003, total debt was $1,800.2 million.
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.
On April 22, 2003, we entered into a new $200 million senior secured
credit facility consisting of a $170 million term loan which matures on January
31, 2006 and a $30 million revolving line of credit (under which no amounts are
currently outstanding) which is available through October 31, 2005. The new
credit facility replaces our previous $197 million senior secured credit
facility, which included a $97 million term loan that was to mature September
30, 2005 and a $100 million revolving credit facility that was to be available
through March 31, 2005. A portion of the proceeds from the term loan was used to
repay the $97 million term loan then outstanding under the previous credit
facility and the remainder of the proceeds will be used for general corporate
purposes.
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 March 31, 2003 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;
27
- 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.
INVESTMENT IN ASI -- OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY
AFFECTED BY DECREASES IN THE PRICE OF ASI'S COMMON STOCK.
At January 1, 2002 we owned 47.7 million shares, or 42%, of ASI's
voting stock. During 2002, we sold 21 million shares of ASI stock and at
December 31, 2002 we 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 resulting
in us losing our entire investment in the option. We currently account for our
investment in ASI 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. In addition, in the event of a decline in the market value of the ASI
stock that is not temporary, we will be required to record a charge to earnings
for the unrealized loss, and a new cost basis for the stock will be established.
In connection with our sale of ASI shares to Dongbu in September 2002,
Amkor and Dongbu agreed to use their best efforts to provide releases and
indemnifications to the past and incumbent chairman, directors and officers of
ASI, including James Kim, our CEO and chairman, and members of his family, from
any and all liabilities arising out of the performance of their duties at ASI
between January 1, 1995 and December 31, 2001. We are not aware of any claims or
other liabilities which these individuals would be released from or for which
they would receive indemnification.
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.
28
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 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, QUALITY 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.
INCREASED LITIGATION INCIDENT TO OUR BUSINESS -- OUR BUSINESS MAY SUFFER AS A
RESULT OF OUR INVOLVEMENT IN VARIOUS LAWSUITS.
We may from time to time become involved in various lawsuits and legal
proceedings which are incidental to the conduct of our business. Recently, we
have become party to an increased number of litigation matters, relative to
historic levels. Much of the recent increase in litigation relates to an
allegedly defective epoxy mold compound formerly used in some of our products.
In 2002, we were served with a third party complaint in an action between
Fujitsu Limited and Cirrus Logic, Inc., in which Fujitsu alleged that
semiconductor devices it purchased from Cirrus Logic were 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. The complaint, as
amended to date, alleges damages in excess of $100.0 million, although, as of
this date, Fujitsu has not indicated how it will substantiate this amount of
damages. Cirrus Logic filed a third party complaint against us alleging that any
liability for chip defects should be assigned to us because we assembled the
subject semiconductor devices. Upon receipt of the third party complaint, we
filed an answer denying all liability, and our own third party complaint against
Sumitomo Bakelite Co., Ltd., the Japanese manufacturer of the allegedly
defective epoxy mold compound. More recently, we have been drawn into two
additional actions related to this epoxy mold compound. In March, 2003, we were
served with a cross-complaint in an action between Seagate Technology and Atmel
Corporation, and in April, 2003, we were served with a cross complaint in an
action between Maxtor Corporation and Koninklijke Philips Electronics. On May 1,
2003, we received a demand letter from another customer requesting
indemnification for damages resulting from allegedly defective epoxy mold
compound.
In the case of each of these matters, all of which are at an early
stage, we believe we have meritorious defenses and valid third party claims
against Sumitomo Bakelite, should the epoxy mold compound be found to be
defective. However, we cannot be certain that we will be able to recover any
amount from Sumitomo Bakelite if we are held liable in these matters, or that
any adverse result would not have a material impact upon us. Moreover, other
customers of ours have made inquiries about the epoxy mold compound, which was
widely used in the semiconductor industry, and no assurance can be given that
claims similar to these will not be made against us by other customers in the
future.
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
29
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.
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.
30
As of May 1, 2003, Mr. James Kim and members of his family beneficially
owned approximately 44.0% 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;
- 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 derivatives instruments including
forward exchange contracts has been insignificant in the first quarter of 2003
and 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 March 31, 2003, a 20% decrease in the Philippine peso
to U.S. dollar spot exchange rate as of the balance sheet dates would result in
a increase of approximately $0.7 million in peso-based net liabilities. Based on
the portfolio of peso-based assets and liabilities at December 31, 2002, 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, 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 March
31, 2003 and December 31 2002, 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 $11.5 million and $10.3 million, respectively, in won-based net
assets.
31
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 March 31, 2003, a 20%
decrease in the Taiwanese dollar to U.S. dollar spot exchange rate as of the
balance sheet date would result in an increase of approximately $5.0 million in
Taiwanese dollar-based net liabilities. Based on the portfolio of Taiwanese
dollar-based assets and liabilities at December 31, 2002, a 20% increase in the
Taiwanese dollar to U.S. dollar spot exchange rate as of the balance sheet date
would result in a decrease of approximately $1.8 million 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 March 31, 2003 and December 31, 2002, 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 $1.4 million and $1.0 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 March 31,
2003 and December 31, 2002, 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 $13.5___ million and $15.5 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 March 31, 2003, we had a total of $1,800.2 million of debt of which 92%
was fixed rate debt and 8% 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 March 31, 2003. The fixed
rate debt consisted of senior notes, senior subordinated notes, convertible
subordinated notes and foreign debt. As of December 31, 2002 we had a total of
$1,808.9 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 March 31, 2003.
YEAR ENDING DECEMBER 31,
-------------------------------------------------- FAIR
2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
-------- ------- -------- -------- ------- ------------ ---------- -----------
Long-term debt:
Fixed rate debt $ 11,593 $ 1,072 $ 310 $675,000 $258,750 $ 700,000 $1,646,725 $ 1,469,469
Average interest rate 4.0% 4.0% 4.0% 8.0% 5.0% 9.6% 8.2%
Variable rate debt $ 64,957 $53,366 $ 30,126 $ 2,874 $ 799 $ 1,399 $ 153,521 $ 153,531
Average interest rate 3.1% 5.3% 5.2% 3.8% 2.8% 2.9% 4.3%
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. 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.
32
ITEM 4. CONTROLS AND PROCEDURES
(a) 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 (as such term is
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act")) as of the end of the fiscal quarter covered by this
report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the quarter,
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 control
over financial reporting during the quarter covered by this report that
have materially affected, or are reasonable likely to materially
affect, Amkor's control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those
noted below. While we currently believe 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.
Recently, we have become party to an increased number of litigation
matters, relative to historic levels. Much of the recent increase in litigation
relates to an allegedly defective epoxy mold compound formerly used in some of
our products. In 2002, we were served with a third party complaint in an action
between Fujitsu Limited and Cirrus Logic, Inc., in which Fujitsu alleged that
semiconductor devices it purchased from Cirrus Logic were 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. The complaint, as
amended to date, alleges damages in excess of $100 million, although, as of this
date, Fujitsu has not indicated how it will substantiate this amount of damages.
Cirrus Logic filed a third party complaint against us alleging that any
liability for chip defects should be assigned to us because we assembled the
subject semiconductor devices. Upon receipt of the third party complaint, we
filed an answer denying all liability, and our own third party complaint against
Sumitomo Bakelite Co., Ltd., the Japanese manufacturer of the allegedly
defective epoxy mold compound. More recently, we have been drawn into two
additional actions related to this epoxy mold compound. In March, 2003, we were
served with a cross-complaint in an action between Seagate Technology and Atmel
Corporation, and in April, 2003, we were served with a cross complaint in an
action between Maxtor Corporation and Koninklijke Philips Electronics. On May 1,
2003, we received a demand letter from another customer requesting
indemnification for damages resulting from allegedly defective epoxy mold
compound.
In the case of each of these matters, all of which are at an early
stage, we believe we have meritorious defenses and valid third party claims
against Sumitomo Bakelite, should the epoxy mold compound be found to be
defective. However, we cannot be certain that we will be able to recover any
amount from Sumitomo Bakelite if we are held liable in these matters, or that
any adverse result would not have a material impact upon us. Moreover, other
customers of ours have made inquiries about the epoxy mold compound, which was
widely used in the semiconductor industry, and no assurance can be given that
claims similar to these will not be made against us by other customers in the
future.
On August 16, 2002, we 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 was seeking declaratory judgment relating
to a controversy between Amkor and Motorola concerning: (i) the assignment by
Citizen Watch Co., Ltd. ("Citizen") to Amkor of
33
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").
We 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.
We believe we 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 us, we believe we have
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.1 Indenture, Amkor Technology, Inc. 7.75% Senior Notes due May
15, 2013, dated May 8, 2003 (1)
10.1 Business Transfer Agreement by and between Amkor Technology
Limited, Anam Semiconductor, Inc., Anam USA, Inc. and Amkor
Technology, Inc. dated January 27, 2003 (1)
10.2 Purchase Agreement, Amkor Technology, Inc. $425 million 7.75%
Senior Notes Due May 15, 2013, dated May 1, 2003 (1)
12.1 Computation of Ratio of Earnings to Fixed Charges (1)
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 Quarterly report on Form 10-Q
filed May 9, 2003.
(b) REPORTS ON FORM 8-K
34
We filed the following reports on Form 8-K with the Securities and
Exchange Commission during the quarterly period ended March 31, 2003:
Current Report on Form 8-K dated January 29, 2003 (filed January 31,
2003) related to a press release dated January 29, 2003 announcing our financial
results for the quarter ended December 31, 2002 and that we entered into
agreement to sell our Wafer Fabrication Services business.
Current Report on Form 8-K dated March 27, 2003 (filed March 27, 2003)
related to the consolidated financial statements of Anam Semiconductor, Inc. and
it's subsidiaries as of and for each of the 3 years ended December 31, 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereto duly authorized.
AMKOR TECHNOLOGY, INC.
By:/s/ KENNETH T. JOYCE
----------------------------------
Kenneth T. Joyce
Chief Financial Officer
(Principal Financial, Chief Accounting
Officer and Duly Authorized Officer)
Date: October 17, 2003
36