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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 [ ]
The number of outstanding shares of the registrant's Common Stock as of
July 31, 2002 was 164,489,328.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Net revenues ................................... $ 409,884 $ 350,169 $ 759,525 $ 830,792
Cost of revenues -- including purchases from ASI 397,503 342,158 760,615 740,996
--------- --------- --------- ---------
Gross profit (loss) ............................ 12,381 8,011 (1,090) 89,796
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ......... 49,607 51,365 97,294 105,359
Research and development .................... 8,769 8,135 16,913 18,637
Loss on disposal of fixed assets ............ 1,438 398 3,112 1,522
Amortization of acquired intangibles ........ 1,743 1,181 2,995 2,339
Amortization of goodwill .................... -- 19,392 -- 40,146
Special charges ............................. 268,166 -- 268,166 --
--------- --------- --------- ---------
Total operating expenses ................. 329,723 80,471 388,480 168,003
--------- --------- --------- ---------
Operating loss ................................. (317,342) (72,460) (389,570) (78,207)
--------- --------- --------- ---------
Other expense (income):
Interest expense, net ....................... 37,434 40,411 73,619 85,206
Foreign currency loss ....................... 702 2,375 2,705 1,065
Other expense (income), net ................. (489) (455) (987) (1,411)
--------- --------- --------- ---------
Total other expense ...................... 37,647 42,331 75,337 84,860
--------- --------- --------- ---------
Loss before income taxes, equity in loss
of investees and minority interest .......... (354,989) (114,791) (464,907) (163,067)
Provision (benefit) for income taxes ........... (25,440) (25,673) (47,973) (30,983)
Equity in loss of investees .................... (10,111) (26,345) (12,205) (52,593)
Loss on impairment of equity investment ........ (42,960) -- (139,536) --
Minority interest .............................. (908) (828) (2,661) (828)
--------- --------- --------- ---------
Net loss ....................................... $(383,528) $(116,291) $(571,336) $(185,505)
========= ========= ========= =========
Per Share Data:
Basic net loss per common share ............. $ (2.33) $ (0.76) $ (3.49) $ (1.21)
========= ========= ========= =========
Diluted net loss per common share ........... $ (2.33) $ (0.76) $ (3.49) $ (1.21)
========= ========= ========= =========
Shares used in computing basic net loss
per common share .......................... 164,281 153,950 163,529 153,068
========= ========= ========= =========
Shares used in computing diluted net loss
per common share .......................... 164,281 153,950 163,529 153,068
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 161,938 $ 200,057
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,912 and $6,842 253,625 211,419
Due from affiliates .............................................. 711 871
Other ............................................................ 9,236 8,953
Inventories ......................................................... 80,158 73,784
Other current assets ................................................ 42,014 37,106
----------- -----------
Total current assets .......................................... 547,682 532,190
----------- -----------
Property, plant and equipment, net ..................................... 1,082,764 1,392,274
----------- -----------
Investments ............................................................ 231,336 382,951
----------- -----------
Other assets:
Due from affiliates ................................................. 21,775 20,518
Goodwill ............................................................ 624,047 659,130
Acquired intangibles, net ........................................... 49,121 37,050
Deferred taxes ...................................................... 154,013 108,064
Other ............................................................... 84,122 91,141
----------- -----------
933,078 915,903
----------- -----------
Total assets .................................................. $ 2,794,860 $ 3,223,318
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ...................................................... $ 10,189 $ 5,116
Short-term borrowings and current portion of long-term debt ......... 58,625 54,815
Trade accounts payable .............................................. 176,198 148,923
Due to affiliates ................................................... 37,166 16,936
Accrued expenses .................................................... 171,867 145,544
----------- -----------
Total current liabilities ..................................... 454,045 371,334
Long-term debt ......................................................... 1,761,582 1,771,453
Other noncurrent liabilities ........................................... 78,168 64,077
----------- -----------
Total liabilities ............................................. 2,293,795 2,206,864
----------- -----------
Commitments and contingencies
Minority interest ...................................................... 10,576 7,737
----------- -----------
Stockholders' equity:
Preferred stock ..................................................... -- --
Common stock ........................................................ 165 162
Additional paid-in capital .......................................... 1,168,221 1,123,541
Accumulated deficit ................................................. (678,311) (106,975)
Receivable from stockholder ......................................... (3,276) (3,276)
Accumulated other comprehensive income (loss) ....................... 3,690 (4,735)
----------- -----------
Total stockholders' equity .................................... 490,489 1,008,717
----------- -----------
Total liabilities and stockholders' equity .................... $ 2,794,860 $ 3,223,318
=========== ===========
The accompanying notes are an integral part of these statements.
3
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
OTHER
RETAINED RECEIVABLE COMPREHENSIVE COMPREHENSIVE
COMMON STOCK PAID-IN EARNINGS FROM INCOME INCOME
SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER (LOSS) TOTAL (LOSS)
------- ------ ---------- --------- ----------- ------------- ----------- -------------
Balance at December 31, 2000 ...... 152,118 $152 $ 975,026 $ 343,886 $(3,276) $ (954) $ 1,314,834
Net income (loss) ............... -- -- -- (185,505) -- -- (185,505) $(185,505)
Cumulative translation adjustment -- -- -- -- -- (760) (760) (760)
---------
Comprehensive loss .............. $(186,265)
=========
Issuance of stock through
employee stock purchase plan and
stock options 533 1 6,869 -- -- -- 6,870
Debt conversion ................. 3,716 3 48,962 -- -- -- 48,965
------- ---- ---------- --------- ------- ------- -----------
Balance at June 30, 2001 ......... 156,367 $156 $1,030,857 $ 158,381 $(3,276) $(1,714) $ 1,184,404
======= ==== ========== ========= ======= ======= ===========
Balance at December 31, 2001 ...... 161,782 $162 $1,123,541 $(106,975) $(3,276) $(4,735) $ 1,008,717
Net income (loss) ............... -- -- -- (571,336) -- -- (571,336) $(571,336)
Unrealized loss on investments,
net of tax ..................... -- -- -- -- -- (6) (6) (6)
Cumulative translation adjustment -- -- -- -- -- 8,431 8,431 8,431
---------
Comprehensive loss .............. $(562,911)
=========
Issuance of stock for
acquisitions ... 1,827 2 35,200 -- -- -- 35,202
Issuance of stock through
employee stock purchase plan and
stock options 880 1 9,480 -- -- -- 9,481
------- ---- ---------- --------- ------- ------- -----------
Balance at June 30, 2002 .......... 164,489 $165 $1,168,221 $(678,311) $(3,276) $ 3,690 $ 490,489
======= ==== ========== ========= ======= ======= ===========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) .................................................... $(571,336) $(185,505)
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ....................................... 189,139 216,586
Special charges ..................................................... 268,166 --
Deferred debt issuance costs ........................................ 4,115 14,124
Provision for accounts receivable ................................... 70 (588)
Provision for excess and obsolete inventory ......................... (2,245) 11,628
Deferred income taxes ............................................... (42,509) (155)
Equity in (income) loss of investees ................................ 12,205 52,593
Loss on impairment of equity investment ............................. 139,536 --
Loss on sale of fixed assets ........................................ 3,112 1,522
Minority interest ................................................... 2,661 828
Changes in assets and liabilities excluding effects of acquisitions --
Accounts receivable ................................................. (36,275) 73,369
Other receivables ................................................... (283) (1,433)
Inventories ......................................................... (3,215) 24,014
Due to/from affiliates, net ......................................... 19,133 (21,705)
Other current assets ................................................ (3,522) (6,054)
Other noncurrent assets ............................................. 2,800 2,875
Accounts payable .................................................... 22,860 9,300
Accrued expenses .................................................... 8,062 (60,913)
Other long-term liabilities ......................................... 5,449 3,722
--------- ---------
Net cash provided by operating activities ......................... 17,923 134,208
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ........................... (51,323) (112,664)
Acquisitions, net of cash acquired ................................... (10,797) (7,338)
Proceeds from the sale of property, plant and equipment .............. 1,243 793
Proceeds from the sale (purchase) of investments ..................... (132) (161)
--------- ---------
Net cash used in investing activities ............................. (61,009) (119,370)
--------- ---------
Cash flows from financing activities:
Net change in bank overdrafts and short-term borrowings .............. 2,767 764
Net proceeds from issuance of long-term debt ......................... -- 750,995
Payments of long-term debt ........................................... (9,740) (527,440)
Proceeds from issuance of stock through employee stock
purchase plan and stock options ..................................... 9,481 6,870
--------- ---------
Net cash provided by financing activities ......................... 2,508 231,189
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents ...... 2,459 (409)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................... (38,119) 245,618
Cash and cash equivalents, beginning of period ......................... 200,057 93,517
--------- ---------
Cash and cash equivalents, end of period ............................... $ 161,938 $ 339,135
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................ $ 71,516 $ 68,899
Income taxes ........................................................ $ 2,700 $ (158)
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 June 30, 2002 and for the three and six months ended June 30,
2002 and 2001 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, 2001 filed on Form 10-K, as amended, with the Securities and
Exchange Commission. The results of operations for the three and six months
ended June 30, 2002 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, the continuing negative impacts of the unprecedented
industry downturn in 2001, our high leverage and the restrictive covenants
contained in the agreements governing our indebtedness, uncertainty as to the
demand from our customers over both the long- and short-term, competitive
pricing and declines in average selling prices we experience, our dependence on
our relationship with Anam Semiconductor, Inc. (ASI) for all of our wafer
fabrication output, the timing and volume of orders relative to our production
capacity, the absence of significant backlog in our business, fluctuations in
manufacturing yields, the availability of financing, our competition, our
dependence on international operations and sales, our dependence on raw material
and equipment suppliers, exchange rate fluctuations, our dependence on key
personnel, difficulties integrating acquisitions, the enforcement of
intellectual property rights by or against us, our need to comply with existing
and future environmental regulations, the results of ASI as it impacts our
financial results and political and economic uncertainty resulting from
terrorist activities.
Recent Accounting Pronouncements. In June 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and supercedes Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity shall be recognized and measured initially at
its fair value in the period in which the liability is incurred rather than when
a company commits to such an activity. We will adopt SFAS No. 146 beginning with
exit or disposal activities that are initiated after December 31, 2002.
2. SPECIAL CHARGES
Special charges consist of the following:
JUNE 30,
2002
-------------
(IN THOUSANDS)
Impairment of long-lived assets (Note 4)......................... $ 190,266
Impairment of goodwill (Note 3).................................. 73,080
Lease termination and other exit costs (Note 5).................. 4,820
---------
$ 268,166
=========
3. SFAS NO. 141, BUSINESS COMBINATIONS AND SFAS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
prohibits the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and addresses the accounting for
purchase method business combinations completed after June 30, 2001. Also in
June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.
For existing acquisitions, the provisions of SFAS No. 142 were effective as of
January 1, 2002 and are generally effective for business combinations initiated
after June 30, 2001. SFAS No. 142 includes provisions regarding the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, the
cessation of amortization related to goodwill and indefinite-lived intangibles,
and the testing for impairment of goodwill and other intangibles annually or
more frequently if circumstances warrant. Additionally, SFAS No. 142 requires
that within six months of adoption of SFAS No. 142, goodwill be tested for
impairment at the reporting unit level as of the date of adoption.
6
We adopted SFAS No. 142 as of January 1, 2002 and we reclassified $30.0
million of intangible assets previously identified as an assembled workforce
intangible to goodwill. Additionally at adoption of SFAS No. 142, we stopped
amortizing goodwill of $659.1 million, as well as goodwill of $118.6 million
associated with our investment in ASI accounted for under the equity method of
accounting. The unaudited as adjusted financial information below assumes that
the cessation of amortization occurred as of January 1, 2001.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------ ------------------------------------------
AS ADJUSTED AS ADJUSTED
2002 2001 2001 2002 2001 2001
--------- --------- ----------- --------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net revenues ................ $ 409,884 $ 350,169 $ 350,169 $ 759,525 $ 830,792 $ 830,792
Cost of revenues -- including
purchases from ASI ........ 397,503 342,158 342,158 760,615 740,996 740,996
--------- --------- --------- --------- --------- ---------
Gross profit (loss) ......... 12,381 8,011 8,011 (1,090) 89,796 89,796
Operating expenses .......... 329,723 80,471 61,079 388,480 168,003 127,857
--------- --------- --------- --------- --------- ---------
Operating loss .............. (317,342) (72,460) (53,068) (389,570) (78,207) (38,061)
Other expense, net .......... 37,647 42,331 42,331 75,337 84,860 84,860
--------- --------- --------- --------- --------- ---------
Loss before income taxes,
equity in loss of investees
and minority interest ..... (354,989) (114,791) (95,399) (464,907) (163,067) (122,921)
Provision (benefit) for
income taxes .............. (25,440) (25,673) (25,673) (47,973) (30,983) (30,983)
Equity in loss of investees . (53,071) (26,345) (17,392) (151,741) (52,593) (34,777)
Minority interest ........... (908) (828) (828) (2,661) (828) (828)
--------- --------- --------- --------- --------- ---------
Net loss .................... $(383,528) $(116,291) $ (87,946) $(571,336) $(185,505) $(127,543)
========= ========= ========= ========= ========= =========
Basic net loss per share .... $ (2.33) $ (0.76) $ (0.57) $ (3.49) $ (1.21) $ (0.83)
========= ========= ========= ========= ========= =========
Diluted net loss per share .. $ (2.33) $ (0.76) $ (0.57) $ (3.49) $ (1.21) $ (0.83)
========= ========= ========= ========= ========= =========
As of the adoption date of the standard, we have reassessed the useful lives of
our identified intangibles and they continue to be appropriate. Goodwill and
other intangible assets are attributable to two reporting units, packaging and
test services. We completed the initial impairment test during the second
quarter of 2002. Based on the comparison of the fair value of the reporting
units with their respective carrying values each as of January 1, 2002, we
concluded that goodwill associated with our packaging and test services
reporting units was not impaired as of adoption. An appraisal firm was engaged
to assist in the determination of the fair value of our reporting units. The
determination of fair value was based on projected cash flows.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Our test services assets and several
non-core packaging services assets remained at low utilization rates during the
second quarter of 2002 and are no longer expected to reach previously
anticipated utilization levels. As discussed in Note 4 we tested the
recoverability of such assets as of June 30, 2002 and concluded that a portion
of those assets was impaired. Accordingly we retested goodwill for impairment as
of June 30, 2002, and concluded that the carrying value of the assets and
liabilities associated with the test services reporting unit exceeded its fair
value. As of June 30, 2002, we recognized a $73.1 million goodwill impairment
charge. Such impairment charge was measured by comparing the implied fair value
of the goodwill associated with the test services reporting unit to its carrying
value. An appraisal firm was engaged to assist in the determination of the fair
value of our reporting units. The determination of fair value was based on
projected cash flows.
7
The changes in the carrying value of goodwill by reporting unit are as follows:
PACKAGING TEST
SERVICES SERVICES TOTAL
--------- -------- ---------
(IN THOUSANDS)
Balance as of January 1, 2002 $586,344 $ 72,786 $ 659,130
Goodwill acquired ........... 35,202 -- 35,202
Goodwill impairment ......... -- (73,080) (73,080)
Translation adjustments ..... 2,501 294 2,795
-------- -------- ---------
Balance as of June 30, 2002 . $624,047 $ -- $ 624,047
======== ======== =========
4. SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes Statement of
Financial Accounting Standards No. 121. This standard provides a single
accounting model for long-lived assets to be disposed of by sale and establishes
additional criteria that would have to be met to classify an asset as held for
sale. The carrying amount of an asset or asset group is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset or asset group. Estimates of future cash
flows used to test the recoverability of a long-lived asset or asset group must
incorporate the entity's own assumptions about its use of the asset or asset
group and must factor in all available evidence. SFAS No. 144 requires that
long-lived assets be tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. Such
events include significant under-performance relative to the expected historical
or projected future operating results; significant changes in the manner of use
of the assets; significant negative industry or economic trends and significant
changes in market capitalization.
Although significant recovery was noted in our company's core packaging
services during the second quarter of 2002, our test services assets and several
non-core 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 a $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 non-core packaging fixed assets that are held and
used. For the test and packaging assets that are held and used, we recognized 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.
5. RESTRUCTURING CHARGE
During the second quarter of 2002, we consolidated some of our U.S. office
locations and closed our San Jose test facility. Test development is now
centralized in our primary test development center in Wichita, Kansas. These
activities were designed to reduce expenses and enhance operational
efficiencies. In connection with these activities we recognized $4.8 million in
lease cancellation costs and other facility exit expenses.
6. ACQUISITIONS
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The business acquired
includes a manufacturing facility, over 80 employees and intellectual property.
The purchase price included a $7.8 million cash payment at closing. We are
required to make additional payments one year from closing for the amount of the
deferred purchased price as well as contingent payments, which together cannot
be less than 1.7 billion Japanese yen and cannot exceed 2.4 billion Japanese yen
($14.2 million to $20.0 million based on the spot exchange rate at June 30,
2002). If we make the additional contingent payments of 700 million Japanese yen
($5.8 million based on the spot exchange rate at June 30, 2002), we will record
them as additional amounts of purchase price effective as of the date the
contingency is resolved in January 2003. In accordance with the new accounting
standards related to purchase business combinations and goodwill, 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
8
minimum amount of the contingent payments. Such net assets principally relate to
our packaging services reporting unit.
Additionally, in April 2002, we signed a non-binding memorandum of
understanding with Fujitsu Limited to acquire Fujitsu's packaging and test
operation in Kagoshima, Japan. The formation and structure of the acquisition
are subject to the negotiation and execution of definitive agreements as well as
any necessary corporate and regulatory approvals. We currently anticipate that
the transaction will be completed in the fourth quarter of 2002.
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, 69% of Taiwan
Semiconductor Technology Corporation (TSTC) and 98% of Sampo Semiconductor
Corporation (SSC) in Taiwan. Including our prior ownership interest in TSTC, we
now own 94% of the outstanding shares of TSTC. The combined purchase price was
paid with the issuance of 4.9 million shares of our common stock valued at $87.9
million based on our closing share price two days prior to each acquisition, the
assumption of $34.8 million of debt and $3.7 million of cash consideration, net
of acquired cash. The carrying value of our prior investment in TSTC was $17.8
million. 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. The total purchase price of $77.1 million was financed by a short-term
note payable to Toshiba of $21.1 million, $47.0 million in other financing from
a Toshiba financing affiliate and cash on hand. Amkor Iwate provides packaging
and test services to Toshiba's Iwate factory under a long-term supply agreement
based on a cost plus calculation. 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 ($8.3
million to $33.3 million based on the spot exchange rate at June 30, 2002).
7. OUR INVESTMENT IN ANAM SEMICONDUCTOR, INC. (ASI)
Financial Information for ASI
The following summary of consolidated financial information was derived
from the consolidated financial statements of ASI.
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2001
-------- --------
(IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues ........................................................ $109,899 $ 70,449
Gross profit (loss) ................................................. (40,057) (49,662)
Net loss ............................................................ (29,172) (84,335)
JUNE 30, DECEMBER 31,
2002 2001
-------- --------
(IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits ................... $ 88,382 $ 84,721
Current assets ...................................................... 164,966 144,898
Property, plant and equipment, net .................................. 566,399 646,298
Noncurrent assets (including property, plant and equipment) ......... 686,323 770,932
Current liabilities ................................................. 106,156 134,727
Total debt and other long-term financing (including current portion) 192,882 238,970
Noncurrent liabilities (including debt and other long-term financing) 164,976 175,487
Total stockholders' equity .......................................... 580,157 605,616
We evaluate our investment in ASI for impairment due to declines in market
value that are considered other than temporary. Such evaluation includes an
assessment of general economic and company specific considerations such as
regular customer forecasts provided
9
by Texas Instruments, the largest customer for the output of ASI's foundry,
regularly updated projections of ASI operating results, and other indications of
value including valuations indicated by possible strategic transactions
involving ASI that Amkor and ASI have explored. In the event of a determination
that a decline in market value is other than temporary, a charge to earnings is
recorded for the unrealized loss, and a new cost basis in the investment is
established. The stock prices of semiconductor companies' stocks, including ASI
and its competitors, have experienced significant volatility beginning in 2000
and continuing into 2002. 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 the three months
ended March 31, 2002, we recorded a $96.6 million impairment charge 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. During the three months ended June 30,
2002, we recorded an additional impairment charge of $43.0 million to reduce the
carrying value of our investment in ASI to its fair value of $4.74 per share
based on negotiations with a third party to acquire a portion of our interest in
ASI. These negotiations culminated into the signing of an agreement on July 10,
2002. Additional information regarding the partial sale of our investment in ASI
is included in Note 17, Subsequent Events. At June 30, 2002 and July 31, 2002,
ASI's stock price was $3.80 per share and $4.21 per share, respectively.
8. INVENTORIES
Inventories consist of raw materials and purchased components that are used
in the semiconductor packaging process.
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Raw materials and purchased components........... $ 70,511 $ 64,752
Work-in-process.................................. 9,647 9,032
----------- -----------
$ 80,158 $ 73,784
=========== ===========
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Land ............................................ $ 89,042 $ 88,667
Buildings and improvements ...................... 516,469 495,104
Machinery and equipment ......................... 1,506,474 1,661,140
Furniture, fixtures and other equipment ......... 121,731 118,069
Construction in progress ........................ 47,050 63,782
----------- -----------
2,280,766 2,426,762
Less -- Accumulated depreciation and amortization (1,198,002) (1,034,488)
----------- -----------
$ 1,082,764 $ 1,392,274
=========== ===========
As described in Note 4, we recorded a $185.5 million impairment charge
associated with our test and packaging fixed assets. Such impairment charge
principally related to machinery and equipment.
10. ACQUIRED INTANGIBLES
Acquired intangibles consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Patents and technology rights.................... $ 61,950 $ 46,713
Less -- Accumulated amortization................. (12,829) (9,663)
----------- -----------
$ 49,121 $ 37,050
=========== ===========
The estimated annual amortization expense for each of the next five years
ending on December 31 is $7.7 million. The weighted average amortization period
for the patents and technology rights is 8 years. As described in Note 4, we
reduced the carrying value of our test services patents and technology rights by
a $4.8 million impairment charge.
10
11. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Equity investments under the equity method:
ASI (ownership of 42%) (see Note 3 and 17)..... $ 226,232 $ 377,947
Other equity investments (20% - 50% owned)..... 1,035 966
----------- -----------
Total equity investments.................... 227,267 378,913
Marketable securities classified as available for
sale 4,069 4,038
----------- -----------
$ 231,336 $ 382,951
=========== ===========
12. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Accrued income taxes............................. $ 46,861 $ 53,364
Accrued interest................................. 32,731 32,584
Accrued payroll.................................. 27,793 20,813
Other accrued expenses........................... 64,482 38,783
----------- -----------
$ 171,867 $ 145,544
=========== ===========
13. DEBT
Following is a summary of short-term borrowings and long-term debt:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Secured bank facility:
Term B loans, LIBOR plus 4% due September 2005. $ 97,618 $ 97,706
$100.0 million revolving line of credit, LIBOR
plus 2% - 2.75% due March 2005 -- --
9.25% Senior notes due May 2006.................. 425,000 425,000
9.25% Senior notes due February 2008............. 500,000 500,000
10.5% Senior subordinated notes due May 2009..... 200,000 200,000
5.75% Convertible subordinated notes due June
2006, convertible at $35.00 per share.......... 250,000 250,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share................ 258,750 258,750
Other debt....................................... 88,839 94,812
----------- -----------
1,820,207 1,826,268
Less -- Short-term borrowings and current portion
of long-term debt (58,625) (54,815)
----------- -----------
$ 1,761,582 $ 1,771,453
=========== ===========
Interest expense related to short-term borrowings and long-term debt is
presented net of interest income of $1.9 million and $5.4 million for the six
months ended June 30, 2002 and 2001, respectively, in the accompanying
consolidated statements of operations.
14. 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. For
the three and six months ended June 30, 2002, 2.1 million shares and 2.3 million
shares, respectively, for outstanding options, convertible notes and warrants
for common stock were excluded from the computation of diluted earnings per
share as a result of the antidilutive effect. For the three and six months ended
June 30, 2001, 3.0 million shares and 2.5 million shares,
11
respectively, for outstanding options, convertible notes and warrants for common
stock were excluded from the computation of diluted earnings per share as a
result of the antidilutive effect.
15. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," we have two reportable segments, packaging
and test services and wafer fabrication services. These segments are managed
separately because the services provided by each segment require different
technology and marketing strategies.
Packaging and Test Services. Through our factories located in the
Philippines, Korea, Japan, Taiwan and China, we offer a complete and integrated
set of packaging and test services including integrated circuit (IC) packaging
design, leadframe and substrate design, IC package packaging, final testing,
burn-in, reliability testing and thermal and electrical characterization.
Wafer Fabrication Services. Through our wafer fabrication services
division, we provide marketing, engineering and support services for ASI's wafer
foundry, under a long-term supply agreement.
We derived 93.3% and 67.2% of our wafer fabrication revenues from Texas
Instruments (TI) for the six months ended June 30, 2002 and 2001, respectively.
Total net revenues derived from TI accounted for 15.5% and 7.5% of our
consolidated net revenues for the six months ended June 30, 2002 and 2001,
respectively. With the commencement of operations of Amkor Iwate and the
acquisition of a packaging and test facility from Toshiba, total net revenues
derived from Toshiba accounted for 11.8% and 14.6% of our consolidated net
revenues for the six months ended June 30, 2002 and 2001, respectively.
The accounting policies for segment reporting are the same as those for
our consolidated financial statements. We evaluate our operating segments based
on operating income. Summarized financial information concerning reportable
segments is shown in the following table. The "Other" column includes the
elimination of inter-segment balances and corporate assets which include cash
and cash equivalents, non-operating balances due from affiliates, investment in
equity affiliates and other investments.
PACKAGING WAFER
AND TEST FABRICATION OTHER TOTAL
----------- ----------- -------- -----------
Three Months Ended June 30, 2002
Net revenues ................. $ 350,471 $ 59,413 -- $ 409,884
Gross profit ................. 6,445 5,936 -- 12,381
Operating income (loss) ...... (320,652) 3,310 -- (317,342)
Three Months Ended June 30, 2001
Net revenues ................. $ 311,423 $ 38,746 $ -- $ 350,169
Gross profit ................. 4,089 3,922 -- 8,011
Operating income (loss) ...... (74,168) 1,708 -- (72,460)
Six Months Ended June 30, 2002
Net revenues ................. $ 639,426 $120,099 $ -- $ 759,525
Gross profit (loss) .......... (13,078) 11,988 -- (1,090)
Operating income (loss) ...... (396,786) 7,216 -- (389,570)
Six Months Ended June 30, 2001
Net revenues ................. $ 750,836 $ 79,956 $ -- $ 830,792
Gross profit ................. 82,061 7,735 -- 89,796
Operating income (loss) ...... (81,389) 3,182 -- (78,207)
Total Assets
June 30, 2002 ................ $ 2,262,260 $120,465 $412,135 $ 2,794,860
December 31, 2001 ............ 2,540,020 87,953 595,345 3,223,318
12
The following presents property, plant and equipment, net based on the
location of the asset.
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
(IN THOUSANDS)
Property, Plant and Equipment, net
United States ........................ $ 88,139 $ 87,776
Philippines .......................... 320,201 471,302
Korea ................................ 528,702 698,448
Taiwan ............................... 87,453 90,088
Japan ................................ 44,371 35,074
China ................................ 13,229 9,093
Other foreign countries .............. 669 493
---------- ----------
$1,082,764 $1,392,274
========== ==========
16. COMMITMENTS AND CONTINGENCIES
Amkor is involved in various claims incidental to the conduct of our
business. Based on consultation with legal counsel, we do not believe that any
claims, either individually or in the aggregate, to which the company is a party
will have a material adverse effect on our financial condition or results of
operations.
We are disputing certain amounts due under a technology license agreement
with a third party. To date, this dispute has not involved the judicial systems.
We remit to the third party our estimate of amounts due under this agreement.
Depending on the outcome of this dispute, the ultimate amount payable by us, as
of June 30, 2002, could be up to an additional $16.1 million. The third party is
not actively pursuing resolution to this dispute and we have not accrued the
potential additional amount.
17. SUBSEQUENT EVENTS
During July 2002, we entered into definitive agreements to sell 20 million
shares of common stock of Anam Semiconductor, Inc. (ASI) at a price of 5,700
Korean won per share ($4.74 per share based on the spot exchange rate at June
30, 2002) to the Dongbu Group. 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".
The transaction is currently scheduled to close on August 28, 2002. The proceeds
from the sale will used to repay all amounts outstanding under our bank debt.
Upon repayment of the bank debt, we will seek to simplify the financial
covenants associated with the revolving line of credit or seek a new line of
credit. If the transaction with Dongbu does not close as expected, we expect
that we will seek an amendment or waiver by March 31, 2003 of the financial
covenants associated with the bank debt. One of the conditions to closing of
this transaction is that Dongbu, ASI and Texas Instruments enter into a letter
of intent to consummate a Technology Transfer Agreement and a Manufacturing and
Purchase Agreement. As of the date of this filing we have received a 50% deposit
from Dongbu. The balance of the purchase price is payable within two weeks after
the closing date. Following the transaction, Amkor will own 27.7 million shares
of ASI. The carrying value of our remaining investment in ASI will be valued at
approximately $131.4 million, based on the June 30, 2002 investment balance.
Dongbu's recent purchase of 12.0 million newly issued shares of ASI together
with its purchase of Amkor's 20 million shares will reduce Amkor's ownership
interest in ASI to approximately 22%. We cannot assure you that Dongbu, ASI and
Texas Instruments will reach agreement on a letter of intent as required to
consummate these transactions. In order to reach agreement on the letter of
intent, the parties will need to reach agreement on a variety of complex and
difficult technical and business issues. In the event such a letter of intent
cannot be agreed upon, Amkor may be required to return to Dongbu any amounts
paid to Amkor by Dongbu.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than September 30, 2002 to terminate
Amkor's foundry agreement with ASI. In consideration of such termination, Dongbu
will pay Amkor at least $45.0 million and no more than $65.0 million. Under the
terms of the foundry agreement, Amkor has exclusive rights to sell all the
output of ASI's foundry until 2008. If an agreement can be reached by September
30, 2002, we will reflect our wafer fabrication services segment as a
discontinued operation. In addition, pursuant to the definitive agreements, (1)
Amkor and Dongbu agreed to use reasonable best efforts to cause Dongbu
Electronics and ASI to be merged together as soon as practicable, (2) Amkor and
Dongbu agreed to cause ASI to use the proceeds ASI received from its sale of
stock to Dongbu to purchase shares in Dongbu Electronics and (3) Amkor and
Dongbu agreed to use their best efforts to provide releases and indemnifications
to the chairman, directors and officers of ASI, either past or incumbent, from
any and all liabilities arising out of the performance of their duties at ASI
between January 1, 1995 and December 31, 2001. The last provision would provide
a release and indemnification for James Kim, our CEO and Chairman, and members
of his family. We are not aware of any claims or other liabilities which these
individuals would be released from or for which they would receive
indemnification.
13
In connection with the planned 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. Acqutek supplies materials to the semiconductor industry and is
a publicly traded company in Korea that had previously been owned 20% by ASI and
which an entity controlled by the family of James Kim, currently holds a 25%
ownership interest. We have historically purchased and continue to purchase lead
frames from Acqutek. Total purchases from Acqutek included in cost of revenue
for the six months ended June 30, 2002 and 2001 was $6.3 million and $8.7
million, respectively. We believe these transactions with Acqutek were conducted
on an arms-length basis in the ordinary course of business.
14
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 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 revenue and operating
performance, (4) statements regarding the future of our relationship with ASI
and utilization of the capacity of ASI's wafer fabrication facility and (5)
other statements that are not historical facts. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue," or the negative of these terms or other comparable
terminology. Because such statements include risks and uncertainties, actual
results may differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
following discussion as well as in "Risk Factors that May Affect Future
Operating Performance." The following discussion provides information and
analysis of our results of operations for the three and six months ended June
30, 2002 and our liquidity and capital resources. You should read the following
discussion in conjunction with our consolidated financial statements and the
related notes, included elsewhere in this quarterly report as well as the
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 through:
- one of the industry's broadest offerings of packaging and test services,
- expertise in the development and implementation of packaging and test
technology,
- long-standing relationships with customers, including many of the world's
leading semiconductor companies, and
- expertise in high-volume manufacturing.
We also market the output of fabricated semiconductor wafers provided by a
wafer fabrication foundry owned and operated by Anam Semiconductor, Inc. (ASI).
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, Agere Systems, Inc., Atmel Corporation, Intel Corporation, LSI Logic
Corporation, Motorola, Inc., Philips Electronics N.V., ST Microelectronics PTE,
Sony Semiconductor Corporation, Texas Instruments, Inc. and Toshiba Corporation.
The outsourced semiconductor packaging and test market is very competitive. We
also compete from time to time with many of our vertically integrated customers,
who may decide to outsource or not outsource certain of their packaging and test
requirements.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Based on industry estimates, from 1978 through 2001,
there were 11 years when semiconductor industry growth, measured by revenue
dollars, was 10% or less and 13 years when growth was 19% or greater. The
historical trends in the semiconductor industry are not necessarily indicative
of the results of any future period. The strength of the semiconductor industry
is dependent primarily upon the strength of the computer and communications
systems markets. Since 1970, the semiconductor industry declined in 1975, 1985,
1996, 1998 and most recently beginning in the fourth quarter of 2000 and
continued through 2001. The semiconductor industry declined an estimated 32% in
2001. Semiconductor industry analysts are forecasting little to no growth in
2002 on an annual basis as compared to 2001. However, because of the steep
decline in semiconductor sales on a quarterly basis during 2001, we have
experienced and expect to continue to experience significant quarter-to-quarter
growth during 2002. In addition, industry analysts are forecasting significant
growth in the semiconductor industry in each of 2003 and 2004. Although
significant recovery was noted in our company's core packaging services during
the second quarter of 2002, our test services assets and several non-core
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.
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
non-core 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.
15
We currently expect third quarter packaging and test revenue to be around
5% higher than second quarter packaging and test revenues. Wafer fabrication
services revenue should be down modestly in the third quarter. Our gross margin
should increase from 3% in the second quarter to around 9% in the third quarter,
reflecting the positive operating leverage in our business, reduced operating
expenses and lower levels of depreciation. We presently expect to incur
approximately $10 million to $15 million of charges during the third quarter in
connection with additional consolidation and cost reductions initiatives. 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 have a significant effect
on our profitability. Prices for packaging and test services and wafer
fabrication services have declined over time. Historically, we have been able to
partially offset the effect of price declines by successfully developing and
marketing new packages with higher prices, such as advanced leadframe and
laminate packages, by negotiating lower prices with our material vendors, and by
driving engineering and technological changes in our packaging and test
processes which resulted in reduced manufacturing costs. 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 and wafer fabrication services to offset a decline in average selling
prices, our future operating results will suffer. During the three and six
months ended June 30, 2002, as compared to the comparable period a year ago, the
decline in average selling prices was in excess of 20% and significantly
impacted our gross margins.
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. In the fourth quarter of
1998 ASI's business had been severely affected by the economic crisis in Korea.
ASI was part of the Korean financial restructuring program known as the
"Workout" program beginning in October 1998. The Workout program was the result
of an accord among Korean financial institutions to assist in the restructuring
of Korean business enterprises. The process involved negotiation between the
related 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 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, but we continue to market ASI's
wafer fabrication services. In May 2000 we committed to a $459.0 million equity
investment in ASI, and fulfilled this commitment in installments taking place
over the course of 2000. In connection with the May 2000 transactions with ASI,
we obtained independent appraisals to support the value and purchase price of
the each the packaging and test operations and the equity investment. We have
invested a total of $500.6 million in ASI including an equity investment of
$41.6 million made in October 1999. We own 42% of the outstanding voting stock
of ASI and report ASI's results in our financial statements through the equity
method of accounting.
During July 2002, we entered into definitive agreements to sell 20 million
shares of common stock of Anam Semiconductor, Inc. (ASI) at a price of 5,700
Korean won per share ($4.74 per share based on the spot exchange rate at June
30, 2002) to the Dongbu Group. 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".
The transaction is currently scheduled to close on August 28, 2002. The proceeds
from the sale will be applied to paying off our $97.6 million term loan under
the secured bank credit agreement. One of the conditions to closing of this
transaction is that Dongbu, ASI and Texas Instruments enter into a letter of
intent to consummate a Technology Transfer Agreement and a Manufacturing and
Purchase Agreement. As of the date of this filing we have received a 50% deposit
from Dongbu. The balance of the purchase price is payable within two weeks after
the closing date. Following the transaction, Amkor will own 27.7 million shares
of ASI. The carrying value of our remaining investment in ASI will be valued at
approximately $131.4 million, based on the June 30, 2002 investment balance.
Dongbu's recent purchase of 12.0 million newly issued shares of ASI together
with its purchase of Amkor's 20 million shares will reduce Amkor's ownership
interest in ASI to approximately 22%. We cannot assure you that Dongbu, ASI and
Texas Instruments will reach agreement on a letter of intent as required to
consummate these transactions. In order to reach agreement on the letter of
intent, the parties will need to reach agreement
16
on a variety of complex and difficult technical and business issues. In the
event such a letter of intent cannot be agreed upon, Amkor may be required to
return to Dongbu any amounts paid to Amkor by Dongbu.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than September 30, 2002 to terminate
Amkor's foundry agreement with ASI. In consideration of such termination, Dongbu
will pay Amkor at least $45.0 million and no more than $65.0 million. Under the
terms of the foundry agreement, Amkor has exclusive rights to sell all the
output of ASI's foundry until 2008. If an agreement can be reached by September
30, 2002, we will reflect our wafer fabrication services segment as a
discontinued operation. In addition, pursuant to the definitive agreements, (1)
Amkor and Dongbu agreed to use reasonable best efforts to cause Dongbu
Electronics and ASI to be merged together as soon as practicable, (2) Amkor and
Dongbu agreed to cause ASI to use the proceeds ASI received from its sale of
stock to Dongbu to purchase shares in Dongbu Electronics and (3) Amkor and
Dongbu agreed to use their best efforts to provide releases and indemnifications
to the chairman, directors and officers of ASI, either past or incumbent, from
any and all liabilities arising out of the performance of their duties at ASI
between January 1, 1995 and December 31, 2001. The last provision would provide
a release and indemnification for James Kim, our CEO and Chairman, and members
of his family. We are not aware of any claims or other liabilities which these
individuals would be released from or for which they would receive
indemnification.
In connection with the planned 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. Acqutek supplies materials to the semiconductor industry and is
a publicly traded company in Korea that had previously been owned 20% by ASI and
which an entity controlled by the family of James Kim, our founder, CEO and
Chairman, currently holds a 25% ownership interest. We have historically
purchased and continue to purchase lead frames from Acqutek. Total purchases
from Acqutek included in cost of revenue for the six months ended June 30, 2002
and 2001 was $6.3 million and $8.7 million, respectively. We believe these
transactions with Acqutek were conducted on an arms-length basis in the ordinary
course of business.
Our 2002 Acquisitions
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The business acquired
includes a manufacturing facility, over 80 employees and intellectual property.
The purchase price included a $7.8 million cash payment at closing. We are
required to make additional payments one year from closing for the amount of the
deferred purchased price as well as contingent payments, which together cannot
be less than 1.7 billion Japanese yen and cannot exceed 2.4 billion Japanese yen
($14.2 million to $20.0 million based on the spot exchange rate at June 30,
2002). In accordance with the new accounting standards related to purchase
business combinations and goodwill, 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.
Additionally, in April 2002, we signed a non-binding memorandum of
understanding with Fujitsu Limited to acquire Fujitsu's packaging and test
operation in Kagoshima, Japan. The formation and structure of this acquisition
are subject to the negotiation and execution of definitive agreements as well as
any necessary corporate and regulatory approvals. We currently anticipate that
the transaction with Fujitsu will be completed in the fourth quarter of 2002.
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. Amkor Iwate provides packaging and test services
principally to Toshiba's Iwate factory under a long-term supply agreement
terminating two years subsequent to our acquisition of Toshiba's ownership
interest in Amkor Iwate. We currently own 60% of Amkor Iwate and Toshiba owns
the balance of the outstanding shares. Within three years 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 ($8.3 million to $33.1
million based on the spot exchange rate at June 30, 2002).
Our Acquisitions of Taiwan Semiconductor Technology Corporation and Sampo
Semiconductor Corporation
In July 2001, we acquired, in separate transactions, Taiwan Semiconductor
Technology Corporation (TSTC) and Sampo Semiconductor Corporation (SSC) in
Taiwan. The results of TSTC and SSC have been included in the accompanying
consolidated financial statements since the acquisition dates. Our results of
operations were not significantly impacted by these acquisitions. In
17
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 OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2001 2002 2001
------------ ----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
Net revenues ......................... 100.0% 100.0% 100.0% 100.0%
Gross profit (loss) .................. 3.0 2.3 (0.1) 10.8
Operating loss ....................... (77.4) (20.7) (51.3) (9.4)
Loss before income taxes and equity in
loss of investees ................. (86.6) (32.8) (61.2) (19.6)
Net loss ............................. (93.6) (33.2) (75.2) (22.3)
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Revenues. Net revenues increased $59.8 million, or 17.1%, to $409.9
million in the three months ended June 30, 2002 from $350.1 million in the three
months ended June 30, 2001. Packaging and test net revenues increased 12.5% to
$350.5 million in the three months ended June 30, 2002 from $311.4 million in
the three months ended June 30, 2001. Wafer fabrication net revenues increased
53.3% to $59.4 million in the three months ended June 30, 2002 from $38.7
million in the three months ended June 30, 2001.
The increase in packaging and test net revenues for the three months ended
June 30, 2002, excluding the impact of our acquisitions and expansion in Japan,
Taiwan and China, was principally attributed to a 35.5% increase in unit volumes
partially offset by a 20% decline in average selling prices across our product
lines as compared to the comparable period a year ago. This overall unit volume
increase was driven by a 65.3% increase for advanced leadframe and laminate
packages and a 13.7% increase in our traditional leadframe business. The
revenues of our Japanese acquisition, Amkor Iwate, for the three months ended
June 30, 2002 declined $5.4 million compared to the three month ended June 30,
2001. Our acquisitions in Taiwan and expansion into China contributed $20.9
million in net revenues for the three months ended June 30, 2002.
Prices for packaging and test services and wafer fabrication services have
declined over time. Historically, we have been able to partially offset the
effect of price declines by successfully developing and marketing new packages
with higher prices, such as advanced leadframe and laminate packages, by
negotiating lower prices with our material vendors, and by driving engineering
and technological changes in our packaging and test processes which resulted in
reduced manufacturing costs. During the three months ended June 30, 2002, the
decline in average selling prices significantly impacted our gross margins as
compared to the comparable period a year ago.
The increase in wafer fabrication net revenues was primarily attributed to
a 87.2% increase in sales to Texas Instruments in the three months ended June
30, 2002 as compared with the three months ended June 30, 2001 partially offset
by a decrease in demand from our other wafer fabrication services customers. We
derived 91.2% and 74.6% of our wafer fabrication revenues from Texas Instruments
for the three months ended June 30, 2002 and 2001, respectively. If we are able
to consummate the contemplated transactions with Dongbu, we will discontinue the
operations associated with our wafer fabrication services.
Gross Profit (Loss). Gross profit increased $4.4 million, or 54.5%, to
$12.4 million in the three months ended June 30, 2002 from $8.0 million in the
three months ended June 30, 2001. Our cost of revenues consists principally of
costs of materials, labor and depreciation. Because a substantial portion of our
costs at our factories is fixed, relatively insignificant increases or decreases
in capacity utilization rates have a significant effect on our gross margin. As
a result of 2001 acquisitions in Japan and Taiwan as well as other geographic
expansions, we substantially increased our fixed costs.
Gross margins as a percentage of net revenues increased 32.0% to 3.0% in
the three months ended June 30, 2002 as compared to 2.3% in the three months
ended June 30, 2001 principally as a result of the following:
- Increasing unit volumes in the three months ended June 30, 2002 at our
factories in Korea and the Philippines that caused an approximate 411%
increase in gross margins as a result of the factories' substantial fixed
and labor costs being distributed over a larger revenue base and the
impact of our cost savings initiatives at these factories.
18
- Material cost savings that contributed approximately 295% to the increase
in gross margins.
- Increased gross profits with respect to our wafer fabrication services as
compared to the prior period as well as other factors that increased gross
margins by approximately 27%.
The positive impacts on gross margins were partially offset by:
- Average selling price erosion across our product lines caused an estimated
622% decline in gross margins.
- Our acquisitions in Taiwan and expansion into China contributed
approximately 79% to the decline in gross margin as a result of the costs
associated with these facilities ramping operations in anticipation of the
expected increase in demand.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.8 million, or 3.4%, to $49.6 million, or
12.1% of net revenues, in the three months ended June 30, 2002 from $51.4
million, or 14.7% of net revenues, in the three months ended June 30, 2001. The
decrease in these costs was principally due to:
- Decreased costs of $3.7 million principally related to our U.S. based
administrative overhead cost reduction initiatives; partially offset by
- Increased administrative overhead of $0.4 million in our facilities in
Korea, the Philippines and Japan as a result of additional indirect labor
associated with the additional production volumes; and
- Increased costs of $1.5 million related to the acquisitions in Taiwan and
the geographic expansion in China.
Research and Development. Research and development expenses increased $0.7
million to $8.8 million, or 2.1% of net revenues, in the three months ended June
30, 2002 from $8.1 million, or 2.3% of net revenues, in the three months ended
June 30, 2001. Our research and development efforts support our customers' needs
for smaller packages and increased functionality. We continue to invest our
research and development resources in the development of our Flip Chip
interconnection solutions, our System-in-Package technology, that uses both
advanced packaging and traditional surface mount techniques to enable the
combination of technologies in a single package, and our Chip Scale packages
that are nearly the size of the semiconductor die.
Amortization of Goodwill and Other Acquired Intangibles. As of January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets. We reclassified $30.0 million of intangible assets
previously identified as an assembled workforce intangible to goodwill.
Additionally, we stopped amortizing goodwill of $659.1 million. The cessation of
amortization reduced amortization expense by $19.4 million for the three months
ended June 30, 2002 as compared with the three months ended June 30, 2001.
Special Charges. During the second quarter of 2002, we recorded $268.2
million of special charges. Special charges were comprised of:
JUNE 30,
2002
--------------
(IN THOUSANDS)
Impairment of long-lived assets ................................. $ 190,266
Impairment of goodwill .......................................... 73,080
Lease termination and other exit costs .......................... 4,820
--------------
$ 268,166
==============
Although significant recovery was noted in our company's core packaging
services during the second quarter of 2002, our test services assets and several
non-core 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 a $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
19
intangible assets that we are amortizing, and certain non-core packaging fixed
assets that are held and used. For the test and packaging assets that are held
and used, we recognized 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.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances,
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Accordingly, we retested goodwill for
impairment as of June 30, 2002, and concluded that the carrying value of the
assets and liabilities associated with the test services reporting unit exceeded
its fair value. As of June 30, 2002, we recognized a $73.1 million goodwill
impairment charge. Such impairment charge was measured by comparing the implied
fair value of the goodwill associated with the test services reporting unit to
its carrying value. An appraisal firm was engaged to assist in the determination
of the fair value of our reporting units. The determination of fair value was
based on projected cash flows.
During the second quarter of 2002, we consolidated some of our U.S. office
locations and closed our San Jose test facility. Test development is now
centralized in our primary test development center in Wichita, Kansas. These
activities were designed to reduce expenses and enhance operational
efficiencies. In connection with these activities we recognized $4.8 million in
lease cancellation costs and other facility exit expenses.
Other (Income) Expense. Other expenses, net decreased $4.7 million, to
$37.6 million, or 9.2% of net revenues, in the three months ended June 30, 2002
from $42.3 million, or 12.1% of net revenues, in the three months ended June 30,
2001. The net decrease in other expenses was primarily a result of a decrease in
interest expense of $3.0 million. Net interest expense in the three months ended
June 30, 2001 included $2.3 million of unamortized deferred debt issuance costs
expensed in connection with the repayment in May 2001 of term loans outstanding
under our secured bank facility. Other expenses were positively impacted by a
change in foreign currency gains and losses of $1.7 million for the three months
ended June 30, 2002 as compared with the corresponding period in the prior year.
Provision (Benefit) for Income Taxes. Our effective tax rate in the three
months ended June 30, 2002 and 2001 was a benefit of (7.2%) and (22.4%),
respectively. The change in the effective tax rate in the three months ended
June 30, 2002 was due to impairment charges recorded in jurisdictions for which
there is limited offsetting tax benefits as a result of tax holidays. We project
the effective income tax rate to be approximately 18% for the remainder of 2002.
The tax returns for open years are subject to changes upon final examination.
Changes in the mix of income from our foreign subsidiaries, expiration of tax
holidays and changes in tax laws and regulations could result in increased
effective tax rates for us in the future.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the three months ended June 30, 2002
of $10.1 million compared to $26.3 million ($17.4 million excluding the
amortization of equity method goodwill) in the three months ended June 30, 2001.
As of January 1, 2002, we adopted Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets. We stopped amortizing equity method
goodwill of $118.6 million associated with our investment in ASI. The cessation
of amortization reduced equity in loss of investees by $9.0 million for the
three months ended June 30, 2002 as compared with the corresponding period.
During the three months ended June 30, 2002, we recorded an impairment
charge of $43.0 million to reduce the carrying value of our investment in ASI to
its fair value of $4.74 per share based on negotiations with a third party to
acquire a portion of our interest in ASI. These negotiations culminated into the
signing of an agreement on July 10, 2002. Dongbu's recent purchase of 12.0
million newly issued shares of ASI together with its contemplated transaction to
purchase 20 million shares from our company will reduce our ownership interest
in ASI to approximately 22%.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Revenues. Net revenues decreased $71.3 million, or 8.6%, to $759.5
million in the six months ended June 30, 2002 from $830.8 million in the six
months ended June 30, 2001. Packaging and test net revenues decreased 14.8% to
$639.4 million in the six months ended June 30, 2002 from $750.8 million in the
six months ended June 30, 2001. Wafer fabrication net revenues increased 50.2%
to $120.1 million in the six months ended June 30, 2002 from $80.0 million in
the six months ended June 30, 2001.
The decrease in packaging and test net revenues for the six months ended
June 30, 2002, excluding the impact of our acquisitions and expansion in Japan,
Taiwan and China, was principally attributed to a 23% decline in average selling
prices across our product lines as compared to the comparable period a year ago.
Partially offsetting the decline in average selling prices, overall unit volumes
increased 3.7% which was driven by a 26.3% increase for advanced leadframe and
laminate packages offset by a 12.3% decrease in our traditional
20
leadframe business. The revenues of our Japanese acquisition, Amkor Iwate, for
the six months ended June 30, 2002 declined $27.6 million compared to the six
month ended June 30, 2001. Our acquisitions in Taiwan and expansion into China
contributed $38.9 million in net revenues for the six months ended June 30,
2002.
Prices for packaging and test services and wafer fabrication services have
declined over time. Historically, we have been able to partially offset the
effect of price declines by successfully developing and marketing new packages
with higher prices, such as advanced leadframe and laminate packages, by
negotiating lower prices with our material vendors, and by driving engineering
and technological changes in our packaging and test processes which resulted in
reduced manufacturing costs. During the six months ended June 30, 2002, the
decline in average selling prices significantly impacted our gross margins as
compared to the comparable period a year ago.
The increase in wafer fabrication net revenues was primarily attributed to
a 108.8% increase in sales to Texas Instruments in the six months ended June 30,
2002 as compared with the six months ended June 30, 2001 partially offset by a
70.6% decrease in demand from our other wafer fabrication services customers. We
derived 93.3% and 67.2% of our wafer fabrication revenues from Texas Instruments
for the six months ended June 30, 2002 and 2001, respectively. If we are able to
consummate the contemplated transactions with Dongbu, we will discontinue the
operations associated with our wafer fabrication services.
Gross Profit (Loss). Gross profit decreased $90.9 million, or 101.2%, to a
gross loss of $1.1 million in the six months ended June 30, 2002 from a positive
$89.8 in the six months ended June 30, 2001. Our cost of revenues consists
principally of costs of materials, labor and depreciation. Because a substantial
portion of our costs at our factories is fixed, relatively insignificant
increases or decreases in capacity utilization rates have a significant effect
on our gross margin. As a result of 2001 acquisitions in Japan and Taiwan as
well as other geographic expansions, we substantially increased our fixed costs.
Gross margins as a percentage of net revenues decreased 101.3% to (0.1%)
in the six months ended June 30, 2002 as compared to 10.8% in the six months
ended June 30, 2001 principally as a result of the following:
- Average selling price erosion across our product lines caused an estimated
150% decline in gross margins.
- Our acquisitions in Taiwan and expansion into China contributed
approximately 20% to the decline in gross margin as a result of the costs
associated with these facilities ramping operations in anticipation of the
expected increase in demand.
The negative impacts on gross margins were partially offset by:
- Material cost savings that contributed approximately 42% to the increase
in gross margins.
- Increasing unit volumes in the six months ended June 30, 2002 at our
factories in Korea and the Philippines that caused an approximate 21%
increase in gross margins as a result of the factories' substantial fixed
and labor costs being distributed over a larger revenue base and the
impact of our cost savings initiatives at these factories.
- Increased gross profits with respect to our wafer fabrication services as
compared to the prior period as well as other factors that increased gross
margins by approximately 6%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $8.1 million, or 7.7%, to $97.3 million, or
12.8% of net revenues, in the six months ended June 30, 2002 from $105.4
million, or 12.7% of net revenues, in the six months ended June 30, 2001. The
decrease in these costs was principally due to:
- Decreased costs of $9.8 million principally related to our U.S. based
administrative overhead cost reduction initiatives; partially offset by,
- Decreased administrative overhead of $2.5 million in our facilities in
Korea, the Philippines and Japan as a result of our cost reduction
initiatives in the first and second quarters of 2001, and
- Increased costs of $4.2 million related to the acquisitions in Taiwan and
the geographic expansion in China.
Research and Development. Research and development expenses decreased $1.7
million to $16.9 million, or 2.2% of net revenues, in the six months ended June
30, 2002 from $18.6 million, or 2.2% of net revenues, in the six months ended
June 30, 2001. Our research and development efforts support our customers' needs
for smaller packages and increased functionality. We continue to invest our
research
21
and development resources in the development of our Flip Chip interconnection
solutions, our System-in-Package technology, that uses both advanced packaging
and traditional surface mount techniques to enable the combination of
technologies in a single package, and our Chip Scale packages that are nearly
the size of the semiconductor die.
Amortization of Goodwill and Other Acquired Intangibles. As of January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets. We reclassified $30.0 million of intangible assets
previously identified as an assembled workforce intangible to goodwill.
Additionally, we stopped amortizing goodwill of $659.1 million. The cessation of
amortization reduced amortization expense by $40.1 million for the six months
ended June 30, 2002 as compared with the six months ended June 30, 2001.
Special Charges. During the second quarter of 2002, we recorded $268.2
million of special charges. Special charges were comprised of:
JUNE 30,
2002
--------------
(IN THOUSANDS)
Impairment of long-lived assets ................................ $ 190,266
Impairment of goodwill ......................................... 73,080
Lease termination and other exit costs ......................... 4,820
--------------
$ 268,166
==============
Although significant recovery was noted in our company's core packaging
services during the second quarter of 2002, our test services assets and several
non-core 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 a $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 non-core packaging fixed assets that are held and
used. For the test and packaging assets that are held and used, we recognized 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.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Accordingly we retested goodwill for
impairment as of June 30, 2002, and concluded that the carrying value of the
assets and liabilities associated with the test services reporting unit exceeded
its fair value. As of June 30, 2002, we recognized a $73.1 million goodwill
impairment charge. Such impairment charge was measured by comparing the implied
fair value of the goodwill associated with the test services reporting unit to
its carrying value. An appraisal firm was engaged to assist in the determination
of the fair value of our reporting units. The determination of fair value was
based on projected cash flows.
During the second quarter of 2002, we consolidated some of our U.S. office
locations and closed our San Jose test facility. Test development is now
centralized in our primary test development center in Wichita, Kansas. These
activities were designed to reduce expenses and enhance operational
efficiencies. In connection with these activities we recognized $4.8 million in
lease cancellation costs and other facility exit expenses.
Other (Income) Expense. Other expenses, net decreased $9.6 million, to
$75.3 million, or 9.9% of net revenues, in the six months ended June 30, 2002
from $84.9 million, or 10.2% of net revenues, in the six months ended June 30,
2001. The net decrease in other expenses was primarily a result of a decrease in
interest expense of $11.6 million. Net interest expense in the six months ended
June 30, 2001 included $9.4 million of unamortized deferred debt issuance costs
expensed in connection with the repayment in February 2001 and May 2001 of term
loans outstanding under our secured bank facility. Other expenses were
negatively impacted by a change in foreign currency gains and losses of $1.6
million for the six months ended June 30, 2002 as compared with the
corresponding period in the prior year.
Provision (Benefit) for Income Taxes. Our effective tax rate in the six
months ended June 30, 2002 and 2001 was a benefit of (10.3%) and (19.0%),
respectively. The change in the effective tax rate in the six months ended June
30, 2002 was due to impairment charges
22
recorded in jurisdictions for which there is limited offsetting tax benefits as
a result of tax holidays. We project the effective income tax rate to be
approximately 18% for the remainder of 2002. The tax returns for open years are
subject to changes upon final examination. Changes in the mix of income from our
foreign subsidiaries, expiration of tax holidays and changes in tax laws and
regulations could result in increased effective tax rates for us in the future.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the six months ended June 30, 2002 of
$12.2 million compared to $52.6 million ($34.8 million excluding the
amortization of equity method goodwill) in the six months ended June 30, 2001.
As of January 1, 2002, we adopted Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets. We stopped amortizing equity method
goodwill of $118.6 million associated with our investment in ASI. The cessation
of amortization reduced equity in loss of investees by $17.8 million for the six
months ended June 30, 2002 as compared with the corresponding period.
During the three months ended March 31, 2002, we recorded a $96.6 million
impairment charge 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. During the
three months ended June 30, 2002, we recorded an impairment charge of $43.0
million to reduce the carrying value of our investment in ASI to its fair value
of $4.74 per share based on negotiations with a third party to acquire a portion
of our interest in ASI. These negotiations culminated into the signing of an
agreement on July 10, 2002. Dongbu's recent purchase of 12.0 million newly
issued shares of ASI together with its contemplated transaction to purchase 20
million shares from our company will reduce our ownership interest in ASI to
approximately 22%.
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor industry analysts have forecasted little to no growth in
2002 on an annual basis as compared to 2001. However, because of the steep
decline in semiconductor sales on a quarterly basis during 2001, we have
experienced and expect to continue to experience significant quarter-to-quarter
growth during 2002. In addition, industry analysts have forecasted significant
growth in the semiconductor industry in each of 2003 and 2004. Although
significant recovery was noted in our company's core packaging services during
the second quarter of 2002, our test services assets and several non-core
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.
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
non-core 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. We currently expect third quarter packaging and test revenue to be around
5% higher than second quarter packaging and test revenues. Wafer fabrication
services revenue should be down modestly in the third quarter. Our gross margin
should increase from 3% in the second quarter to around 9% in the third quarter,
reflecting the positive operating leverage in our business, reduced operating
expenses and lower levels of depreciation. We presently expect to incur
approximately $10 million to $15 million of charges during the third quarter in
connection with additional consolidation and cost reductions initiatives.
Although, we expect our results will continue to be adversely impacted while the
semiconductor industry fully recovers, we expect demand for our services to
improve to profitable levels on a net income basis by the end of the fourth
quarter of 2002. We have undertaken, and may continue to undertake, a variety of
measures to reduce our operating costs including reducing our worldwide
headcount, reducing compensation levels, shortening work schedules, improving
factory efficiencies, negotiating cost reductions with our vendors and closing
non-critical manufacturing facilities. Our ongoing primary cash needs are for
debt service, principally interest, equipment purchases, and working capital.
Additionally, we may require cash to consummate business combinations to
diversify our geographic operations and expand our customer base.
Net cash used by operating activities for the three months ended March 31,
2002 was $8.8 million and net cash provided by operating activities for the
three months ended June 30, 2002 was $26.7 million. Comparatively, the net cash
provided by operating activities for the three months ended March 31, 2001, June
30, 2001, September 30, 2001 and December 31, 2001 were $73.2 million, $61.0
million, $16.2 million and $10.1 million, respectively. Net cash used in
investing activities during the six months ended June 30, 2002 and 2001 was
$61.0 million and $119.4 million, respectively. Net cash provided by financing
activities during the six months ended June 30, 2002 and 2001 was $2.5 million
and $231.2 million, respectively. Our cash and cash equivalents balance as of
June 30, 2002 was $161.9 million, and we have up to $100 million available from
our revolving line of credit.
In June 2002 we amended our existing bank debt covenants to provide
further flexibility with respect to capital expenditures and investment
restrictions. Additionally, the reduced levels of our operating cash flow in
2001 required us to renegotiate our existing bank debt covenants in March 2001,
June 2001 and September 2001. In connection with the September 2001 amendment,
our revolving line of credit was reduced from a $200 million commitment to $100
million, the interest rate on the Term B loans was increased from LIBOR plus 3%
to LIBOR plus 4% and we prepaid $125 million of the Term B loans in November
2001 from cash on
23
hand. We expect to repay all amounts outstanding under our bank debt with the
proceeds from the sale of a portion of our investment in ASI to Dongbu during
the third quarter of 2002. At that time, we will seek to simplify the financial
covenants associated with the revolving line of credit or seek a new line of
credit. If the transaction with Dongbu does not close as expected, we will need
to obtain an amendment or waiver by March 31, 2003 of the financial covenants
associated with the bank debt or repay amounts outstanding under the bank debt.
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. An
event of default under one or more of our debt instruments, if not cured or
waived, could have a material adverse effect on us. Our credit and debt ratings
were lowered in August 2002, and accordingly, it may be difficult for us to
secure additional financing if we need it on satisfactory terms or at all.
During this industry downturn, our business strategy has been in part to
enhance our financial flexibility. In February 2001and May 2001, we raised
$500.0 million through the sale of 9.25% senior notes due 2008 and $250.0
million through the sale of 5.75% convertible subordinated notes due 2006,
respectively. Of the combined net proceeds of $733.0 million, we used $509.5
million to repay amortizing term loans. The balance of the net proceeds supports
our expansion efforts and general corporate and working capital purposes. In May
2001 holders of the 5.75% convertible subordinated notes due May 2003, following
our announced plan to redeem these notes, converted $50.2 million of their notes
into 3.7 million shares of our common stock. We now have, and for the
foreseeable future will continue to have, a significant amount of indebtedness.
As of June 30, 2002, we had a total of $1,820.2 million debt and had available
to us a $100.0 million revolving line of credit under which no amounts were
drawn. Our indebtedness requires us to dedicate a substantial portion of our
cash flow from operations to service payments on our debt, with such payments
principally for interest. For the six months ended June 30, 2002, interest
expense payable in cash was $71.4 million.
As a result of the current business conditions, we have significantly
reduced our capital expenditure plans. We expect to spend up to $100.0 million
in total capital expenditures in 2002, primarily to support the development of
our Flip Chip, System-in-Package and high-end BGA capabilities. During the six
months ended June 30, 2002 and 2001, we made capital expenditures of $51.3
million and $112.7 million, respectively. During the year ended December 31,
2001 and 2000, we made capital expenditures of $158.7 million and $480.1
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 and an additional
payment one year from the closing that cannot be less than 1.7 billion Japanese
yen and cannot exceed 2.4 billion Japanese yen ($14.2 million to $20.0 million
based on the spot exchange rate at June 30, 2002). Additionally, in April 2002,
we signed a non-binding memorandum of understanding with Fujitsu Limited to
acquire Fujitsu's packaging and test operation in Kagoshima, Japan. The
formation and structure of the acquisition are subject to the negotiation and
execution of definitive agreements as well as any necessary corporate and
regulatory approvals. We currently anticipate that the transaction will be
completed in the fourth quarter of 2002. In July 2001, we acquired, in separate
transactions, Taiwan Semiconductor Technology Corporation (TSTC) and Sampo
Semiconductor Corporation (SSC) in Taiwan. The combined purchase price,
including the settlement of a January 2002 earn-out provision, was paid with the
issuance of 6.7 million shares of our common stock valued at $123.1 million, the
assumption of $34.8 million of debt and $3.7 million of cash consideration, net
of acquired cash. In January 2001, Amkor Iwate Corporation commenced operations
and acquired from Toshiba a packaging and test facility located in the Iwate
prefecture in Japan financed by a short-term note payable to Toshiba of $21.1
million and $47.0 million in other financing from a Toshiba affiliate. We
currently own 60% of Amkor Iwate and Toshiba owns 40% of the outstanding shares,
which shares we are required to purchase within three years. 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 ($8.3 million to $33.1 million based on the spot
exchange rate at June 30, 2002).
During July 2002, we entered into definitive agreements to sell 20 million
shares of common stock of Anam Semiconductor, Inc. (ASI) at a price of 5,700
Korean won per share ($4.74 per share based on the spot exchange rate at June
30, 2002) to the Dongbu Group. The transaction is currently scheduled to close
on August 28, 2002. The proceeds from the sale will be applied to paying off our
$97.6 million term loan under the secured bank credit agreement. As a condition
precedent to closing of this transaction, Dongbu and Texas Instruments are
negotiating a letter of intent to consummate a Technology Transfer Agreement and
a Manufacturing and Purchase Agreement. As of the date of this filing we have
received a 50% deposit from Dongbu. The balance of the purchase price is payable
within two weeks after the closing date. Following the transaction, Amkor will
own 27.7 million shares of ASI. The carrying
24
value of our remaining investment in ASI will be valued at approximately $131.4
million, based on the June 30, 2002 investment balance. Dongbu's recent purchase
of 12.0 million newly issued shares of ASI together with its purchase of Amkor's
20 million shares will reduce Amkor's ownership interest in ASI to approximately
22%. We cannot assure you that Dongbu, ASI and Texas Instruments will reach
agreement on a letter of intent as required to consummate these transactions. In
order to reach agreement on the letter of intent, the parties will need to reach
agreement on a variety of complex and difficult technical and business issues.
In the event such a letter of intent cannot be agreed upon, Amkor may be
required to return to Dongbu any amounts paid to Amkor by Dongbu.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than September 30, 2002 to terminate
Amkor's foundry agreement with ASI. In consideration of such termination, Dongbu
will pay Amkor at least $45.0 million and no more than $65.0 million. Under the
terms of the foundry agreement, Amkor has exclusive rights to sell all the
output of ASI's foundry until 2008. If an agreement can be reached by September
30, 2002, we will reflect our wafer fabrication services segment as a
discontinued operation. With the termination of the foundry agreement, we will
no longer benefit from the income from operations of our wafer fabrication
services segment.
In connection with the planned 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. Acqutek supplies materials to the semiconductor industry and is
a publicly traded company in Korea that had previously been owned 20% by ASI and
which an entity controlled by the family of James Kim, our founder, CEO and
Chairman, currently holds a 25% ownership interest. We have historically
purchased and continue to purchase lead frames from Acqutek. Total purchases
from Acqutek included in cost of revenue for the six months ended June 30, 2002
and 2001 $6.3 million and $8.7 million, respectively. We believe these
transactions with Acqutek were conducted on an arms-length basis in the ordinary
course of business.
We believe that our existing cash balances, available credit lines, cash
flow from operations and available equipment lease financing will be sufficient
to meet our projected capital expenditures, debt service, working capital and
other cash requirements for at least the next twelve months. We may require
capital sooner than currently expected. We cannot assure you that additional
financing will be available when we need it or, if available, that it will be
available on satisfactory terms. In addition, the terms of the secured bank
facility, senior notes and senior subordinated notes significantly reduce our
ability to incur additional debt. Failure to obtain any such required additional
financing could have a material adverse effect on our company.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, requires all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. We have identified the policies below as critical to our business
operations and the understanding of our results of operations. A summary of our
significant accounting policies used in the preparation of our consolidated
financial statements appears in Note 1 of the notes to the consolidated
financial statements in our annual report on Form 10-K. 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. We record wafer fabrication services revenues upon shipment of
completed wafers. Such policies are consistent with provisions in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
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 1994 in the Philippines
and through 1996 in the U.S. The tax returns for open years in all jurisdictions
in which we do business are subject to changes upon examination. We believe that
we have estimated and provided adequate accruals for the probable additional
taxes and related interest expense that may ultimately result from examinations
related to our transfer pricing and local attribution of income resulting from
significant intercompany transactions, including ownership and use of
intellectual property, in various U.S. and non-U.S. jurisdictions. Our estimated
tax liability is subject to change as examinations of specific tax years are
completed in the respective jurisdictions. We believe that any additional taxes
or related interest over the amounts accrued will not have a material effect on
our financial condition or results of operations, nor do we expect that
examinations to be completed in the near term would have a material favorable
impact. As of June 30, 2002 and December 31, 2001, the accrual for current taxes
and estimated additional taxes was $46.9 million and $53.4 million,
respectively. In addition, changes in the mix of income from our foreign
subsidiaries, expiration of tax holidays and changes in tax laws or regulations
could result in increased effective tax rates in the future.
25
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. The carrying value of our net deferred tax assets
assumes that we will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions. If these
estimates and related assumptions change in the future, we may be required to
increase our valuation allowance.
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 our company's core packaging
services during the second quarter of 2002, our test services assets and several
non-core 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 a $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 non-core packaging fixed assets that are held and
used. For the test and packaging assets that are held and used, we recognized 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. We are evaluating the estimated useful lives of our
lower technology packaging assets that are not subject to rapid obsolescence to
assess whether a longer life is more appropriate. Our evaluation of the
estimated useful lives of such packaging equipment will consider the following:
- expected future cash flows;
- prevailing industry practice;
26
- consultations with an independent appraisal firm;
- consultations with equipment manufacturers; and
- historical experience.
We believe that our principal competitors depreciate their packaging
assets over periods six to eight years. If we were to change the estimated
useful lives such a change would be considered a change in estimate and would be
accounted for prospectively in the period of change and future periods.
Evaluation of Equity Investments. We evaluate our investments for impairment due
to declines in market value that are considered other than temporary. Such
evaluation includes an assessment of general economic and company specific
considerations such as regular customer forecasts provided by Texas Instruments,
regularly updated projections of ASI operating results, and other indications of
value including valuations indicated by possible strategic transactions
involving ASI that Amkor and ASI have explored. In the event of a determination
that a decline in market value is other than temporary, a charge to earnings is
recorded for the unrealized loss, and a new cost basis in the investment is
established. The stock prices of semiconductor companies' stocks, including ASI
and its competitors, have experienced significant volatility beginning in 2000
and continuing into 2002. 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 the three months
ended March 31, 2002, we recorded a $96.6 million impairment charge 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. During the three months ended June 30,
2002, we recorded an additional impairment charge of $43.0 million to reduce the
carrying value of our investment in ASI to its fair value of $4.74 per share
based on negotiations with a third party to acquire a portion of our interest in
ASI. These negotiations culminated into the signing of an agreement on July 10,
2002. At June 30, 2002 and July 31, 2002, ASI's stock price was $3.80 per share
and $4.21 per share, respectively.
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 that are presently unknown to us or
that we currently deem immaterial may also impair our business operations. We
cannot assure you that any of the events discussed in the risk factors below
will not occur. If they do, our business, financial condition or results of
operations could be materially adversely affected.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND ELECTRONIC PRODUCTS
INDUSTRIES -- WE OPERATE IN VOLATILE INDUSTRIES, AND INDUSTRY DOWNTURNS HARM OUR
PERFORMANCE.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Because our business is, and will continue to be,
dependent on the requirements of semiconductor companies for subcontracted
packaging, test and wafer fabrication 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.
THE SEMICONDUCTOR INDUSTRY MAY NOT RECOVER AS EXPECTED -- WE MAY RECOGNIZE LOWER
THAN EXPECTED REVENUES.
Although we experienced significant recovery in our company's core
packaging services during the second quarter of 2002 and expect growth in our
revenues during the balance of 2002 and into 2003, 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. There can be no assurance that overall industry conditions will
continue to recover in 2002. If industry conditions do not continue to improve,
it is unlikely we will be able to meet our expectations
27
of increased revenues in 2002. If our revenues do not increase as expected, we
expect to continue to sustain significant losses which could materially impact
our business including our liquidity.
FLUCTUATIONS IN OPERATING RESULTS -- OUR OPERATING RESULTS MAY VARY
SIGNIFICANTLY AS A RESULT OF FACTORS THAT WE CANNOT CONTROL.
Our operating results have varied significantly from period to period.
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. These factors include, among others:
- evolutions in the life cycles of our customers' products,
- changes in our capacity utilization,
- the cyclical nature of both the semiconductor industry and the markets
addressed by end-users of semiconductors,
- the short-term nature of our customers' commitments, timing and volume of
orders relative to our production capacity,
- rescheduling and cancellation of large orders,
- erosion of packaging selling prices,
- fluctuations in wafer fabrication service charges paid to ASI,
- changes in costs, availability and delivery times of raw materials and
components and changes in costs and availability of labor,
- fluctuations in manufacturing yields,
- changes in semiconductor package mix,
- timing of expenditures in anticipation of future orders,
- availability and cost of financing for expansion,
- ability to develop and implement new technologies on a timely basis,
- competitive factors,
- changes in effective tax rates,
- loss of key personnel or the shortage of available skilled workers,
- international political, economic or terrorist events,
- currency and interest rate fluctuations,
- environmental events, and
- intellectual property transactions and disputes.
DECLINING AVERAGE SELLING PRICES -- THE SEMICONDUCTOR INDUSTRY PLACES DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS.
Prices for packaging and test services and wafer fabrication services have
declined over time. Historically, we have been able to partially offset the
effect of price declines by successfully developing and marketing new packages
with higher prices, such as advanced leadframe and laminate packages, by
negotiating lower prices with our material vendors, and by driving engineering
and technological changes in our packaging and test processes which resulted in
reduced manufacturing costs. During the three and six months ended June 30,
2002, the decline in average selling prices were in excess of 20% and
significantly impacted our gross margins as compared to the comparable period a
year ago. 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 and wafer fabrication 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 June 30, 2002, total debt was $1,820.2 million. We
have a $100.0 million revolving line of credit of which no amounts were drawn as
of June 30, 2002. In addition, despite current debt levels, the terms of the
indentures governing our indebtedness may limit our ability to increase our
indebtedness, but they do not prohibit us or our subsidiaries from incurring
substantially more debt. If new debt is added to our consolidated debt level,
the related risks that we now face could intensify.
We expect to repay all amounts outstanding under our bank debt with the
proceeds from the sale of a portion of our investment in ASI to Dongbu during
the third quarter of 2002. At that time, we will seek to simplify the financial
covenants associated with the revolving line of credit or seek a new line of
credit. If the transaction with Dongbu does not close as expected, we will need
to obtain an amendment or waiver by March 31, 2003 of the financial covenants
associated with the bank debt or repay amounts outstanding
28
under the bank debt. 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. An event of default under one or more of our debt
instruments, if not cured or waived, could have a material adverse effect on us.
Our credit and debt ratings were lowered in August 2002, and accordingly, it may
be difficult for us to secure additional financing if we need it on satisfactory
terms or at all. Our substantial indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures,
research and development and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to service interest and principal payments on our debt;
- limit our flexibility to react to changes in our business and the industry
in which we operate;
- place us at a competitive disadvantage to any of our competitors that have
less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
RELATIONSHIP WITH ASI -- OUR BUSINESS PERFORMANCE CAN BE ADVERSELY AFFECTED BY
ASI'S FINANCIAL PERFORMANCE OR A DISRUPTION IN THE WAFER FABRICATION SERVICES
ASI PROVIDES TO US.
As of June 30, 2002 we owned approximately 42% of ASI's outstanding voting
stock. Accordingly, we report ASI's financial results in our financial
statements through the equity method of accounting. If ASI's results of
operations are adversely affected for any reason (including as a result of
losses at its consolidated subsidiaries and equity investees), our results of
operations will suffer as well. Financial or other problems affecting ASI could
also lead to a complete loss of our investment in ASI. Our wafer fabrication
business may suffer if ASI reduces its operations or if our relationship with
ASI is disrupted.
Our wafer fabrication business depends on ASI providing wafer fabrication
services on a timely basis. If ASI was to significantly reduce or curtail its
operations for any reason, or if our relationship with ASI was to be disrupted
for any reason, our wafer fabrication business would be harmed. We may not be
able to identify and qualify alternate suppliers of wafer fabrication services
quickly, if at all. In addition, we currently have no other qualified third
party suppliers of wafer fabrication services and do not have any plans to
qualify additional third party suppliers.
The weakness in the semiconductor industry in 2001 adversely affected the
demand for the wafer output from ASI's foundry, our wafer fabrication services
results and ASI's operating results. Demand for our wafer fabrication services
and the wafer output from ASI's foundry have improved significantly for the
three and six months ended June 30, 2002. However, there can be no assurance
that industry conditions will continue to improve as expected. If industry
conditions do not recover as expected, our and ASI's operating results could be
adversely affected.
During July 2002, we entered into definitive agreements to sell 20 million
shares of common stock of Anam Semiconductor, Inc. (ASI) at a price of 5,700
Korean won per share ($4.74 per share based on the spot exchange rate at June
30, 2002) to the Dongbu Group. The transaction is currently scheduled to close
on August 28, 2002. The proceeds from the sale will be applied to paying off our
$97.6 million term loan under the secured bank credit agreement. One of the
conditions to closing of this transaction is that Dongbu, ASI and Texas
Instruments enter into a letter of intent to consummate a Technology Transfer
Agreement and a Manufacturing and Purchase Agreement. As of the date of this
filing we have received a 50% deposit from Dongbu. The balance of the purchase
price is payable within two weeks after the closing date. Following the
transaction, Amkor will own 27.7 million shares of ASI. Dongbu's recent purchase
of 12.0 million newly issued shares of ASI together with its purchase of Amkor's
20 million shares will reduce Amkor's ownership interest in ASI to approximately
22%. We cannot assure you that Dongbu, ASI and Texas Instruments will reach
agreement on a letter of intent as required to consummate these transactions. In
order to reach agreement on the letter of intent, the parties will need to reach
agreement on a variety of complex and difficult technical and business issues.
In the event such a letter of intent cannot be agreed upon, Amkor may be
required to return to Dongbu any amounts paid to Amkor by Dongbu.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than September 30, 2002 to terminate
Amkor's foundry agreement with ASI. In consideration of such termination, Dongbu
will pay Amkor at least $45.0 million and no more than $65.0 million. Under the
terms of the foundry agreement, Amkor has exclusive rights to sell all the
output of ASI's foundry until 2008. If an agreement can be reached by September
30, 2002, we will reflect our wafer fabrication services segment as a
discontinued operation. If we fail to consummate these transactions, we will
still hold 47.7 million shares of ASI's common stock and we will maintain our
rights under the foundry agreement.
29
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 has 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. We also source wafer
fabrication services from ASI's wafer fabrication facility in Korea. 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 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.
DIFFICULTIES INTEGRATING ACQUISITIONS -- WE FACE CHALLENGES AS WE INTEGRATE NEW
AND DIVERSE OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR
GROWTH.
We have experienced, and may continue to experience, growth in the scope
and complexity of our operations and in the number of our employees. This growth
has strained our managerial, financial, manufacturing and other resources.
Future acquisitions 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.
RISKS ASSOCIATED WITH OUR WAFER FABRICATION BUSINESS -- OUR WAFER FABRICATION
BUSINESS IS SUBSTANTIALLY DEPENDENT ON TEXAS INSTRUMENTS.
Our wafer fabrication business depends significantly upon Texas
Instruments. The amended Manufacturing and Purchasing Agreement with Texas
instruments requires Texas Instruments to purchase from us at least 40% of ASI's
wafer fabrication facility's capacity in the quarter ending March 31, 2002, 30%
of such capacity in the quarter ending June 30, 2002, and 20% of such capacity
in each subsequent quarter, and, under certain circumstances, Texas Instruments
has the right to purchase from us up to 70% of this capacity. From time to time,
Texas Instruments has failed to meet its minimum purchase obligations, and we
cannot assure you that Texas Instruments will meet its purchase obligations in
the future. As a result of the weakness in the semiconductor industry, Texas
Instruments and our other customers' demand for the output of ASI's wafer
foundry decreased significantly in 2001. Texas Instruments did not meet the
minimum purchase commitment throughout the twelve months ended December 31,
2001. Texas Instruments has made certain concessions to us to partially mitigate
the shortfall in its purchases. If Texas Instruments fails to meet its purchase
obligations, our company and ASI's businesses could be harmed.
Texas Instruments has transferred certain of its complementary metal oxide
silicon (CMOS) process technologies to ASI, and ASI is dependent upon Texas
Instruments' assistance for developing certain other state-of-the-art wafer
manufacturing processes. In addition, ASI's technology agreements with Texas
Instruments only cover 0.35 micron, 0.25 micron, and 0.18 micron CMOS process
technology. Texas Instruments has provided ASI a license to use wafer
fabrication-related trade secrets for non-Texas Instruments products. Texas
Instruments has not granted ASI a license to Texas Instruments patents,
copyrights, or maskworks. Moreover, Texas Instruments has no obligation to
transfer any next-generation technology to ASI. Our company and ASI's businesses
could be harmed
30
if ASI cannot obtain new technology on commercially reasonable terms or ASI's
relationship with Texas Instruments is disrupted for any reason.
In order for the Manufacturing and Purchasing Agreement and the technology
assistance agreements we and ASI have entered into with Texas Instruments to
continue until December 31, 2007, Amkor, ASI and Texas Instruments would have to
enter into a new technology assistance agreement by December 31, 2002. However,
the advanced wafer fabrication technology that would be licensed under this
agreement would require ASI either to (i) invest in excess of $400 million to
refurbish its existing manufacturing facility, requiring the shutdown of part or
all of its existing facility during the period of refurbishment, (ii) obtain
access to a new or existing manufacturing facility owned by a third party that
could support the advanced technology, or (iii) build and equip a new
manufacturing facility, which would require substantially greater capital
investment by ASI than the other options. We cannot be certain that Amkor and
ASI will be able to negotiate successfully a new technical assistance agreement
with Texas Instruments. Moreover, we believe that it will be extremely difficult
for ASI to finance, acquire and equip the necessary manufacturing facility to
deploy the advanced wafer fabrication technology that would be transferred by
Texas Instruments. If the Manufacturing and Purchasing Agreement and the
technology assistance agreements with Texas Instruments were to be terminated,
we cannot be certain what the nature of Amkor's and ASI's business relationship,
if any, would be with Texas Instruments. If Texas Instruments was to
significantly reduce or terminate its purchase of ASI's wafer fabrication
services, our wafer fabrication business would be seriously harmed.
Under the existing technical assistance agreements between Texas
Instruments and ASI, ASI has a license to use wafer fabrication-related trade
secrets of Texas Instruments for non-Texas Instruments' products. In the event
that the Manufacturing and Purchase Agreement is terminated, this license will
also terminate. At such time, it would be necessary for ASI to negotiate a new
license agreement with Texas Instruments relating to its trade secrets, or ASI
would not be able to continue its wafer fabrication operations as currently
practiced. This would have the result of shutting down the wafer fabrications
business of ASI and Amkor unless and until alternative technology arrangements
could be made and implemented at ASI's wafer manufacturing facility.
In the event we are able to successfully close the contemplated sale of
ASI stock to Dongbu, we expect to terminate our foundry agreement with ASI and
our wafer fabrication services agreements with Texas Instruments. Accordingly,
we will then no longer benefit from the revenues or income from operations of
our wafer fabrication segment.
DEPENDENCE ON MATERIALS AND EQUIPMENT SUPPLIERS -- OUR BUSINESS MAY SUFFER IF
THE COST OR SUPPLY OF MATERIALS OR EQUIPMENT CHANGES ADVERSELY.
We obtain from various vendors the materials and equipment required for
the packaging and test services performed by our factories. We source most of
our materials, including critical materials such as leadframes and laminate
substrates, from a limited group of suppliers. Furthermore, we purchase all of
our materials on a purchase order basis and have no long-term contracts with any
of our suppliers. Our business may be harmed if we cannot obtain materials and
other supplies from our vendors: (1) in a timely manner, (2) in sufficient
quantities, (3) in acceptable quality and (4) at competitive prices.
RAPID TECHNOLOGICAL CHANGE -- OUR BUSINESS WILL SUFFER IF WE CANNOT KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY.
The complexity and breadth of both semiconductor packaging and test
services and wafer fabrication are rapidly changing. As a result, we expect that
we will need to offer more advanced package designs and new wafer fabrication
technology in order to respond to competitive industry conditions and customer
requirements. Our success depends upon the ability of our company and ASI to
develop and implement new manufacturing processes and package design
technologies. The need to develop and maintain advanced packaging and wafer
fabrication 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 or advanced wafer designs 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 and wafer
fabrication technology or obtain access to advanced package designs and wafer
fabrication technology developed by others, our business could suffer.
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COMPETITION -- WE COMPETE AGAINST ESTABLISHED COMPETITORS IN BOTH THE PACKAGING
AND TEST BUSINESS AND THE WAFER FABRICATION BUSINESS.
The subcontracted semiconductor packaging and test market is very
competitive. This sector is comprised of 12 principal companies. 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.
The subcontracted wafer fabrication business is also highly competitive.
Our wafer fabrication services compete primarily with other subcontractors of
semiconductor wafers, including those of Chartered Semiconductor Manufacturing,
Inc., Taiwan Semiconductor Manufacturing Company, Ltd. and United
Microelectronics Corporation. Each of these companies has significant
manufacturing capacity, financial resources, research and development
operations, marketing and other capabilities and has been operating for some
time. Many of these companies have also established relationships with many
large semiconductor companies that are current or potential customers of our
company. If we cannot compete successfully in the future against existing or
potential competitors, our operating results will suffer.
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 July 31, 2002, we held 161 U.S. patents, had 268 pending patents and
were preparing an additional 7 patent applications for filing. In addition to
the U.S. patents, we held 454 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. 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.
Although we are not currently a party to any material litigation, 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.
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CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN DETERMINE THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
As of July 31, 2002, Mr. James Kim and members of his family beneficially
owned approximately 44.4% 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;
- approvals of transactions between our company and ASI or other entities in
which Mr. James Kim and members of his family have an interest, including
transactions which may involve a conflict of interest;
- 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;
- developments affecting ASI; 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 and Japanese yen. The objective in managing these
foreign currency exposures is to minimize the risk through minimizing the level
of activity and financial instruments denominated in pesos, won and yen. Our use
of derivatives instruments including forward exchange contracts has been
insignificant throughout 2002 and 2001 and we expect our use of derivative
instruments to 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 June 30, 2002 and December 31, 2001, a 20% increase in the
Philippine peso to U.S. dollar spot exchange rate as of the balance sheet dates
would result in a decrease of approximately $2.8 million and $3.9 million,
respectively, in peso-based net assets.
The won-based financial instruments primarily consist of cash, non-trade
receivables, non-trade payables, accrued payroll, taxes and other expenses.
Based on the portfolio of won-based assets and liabilities at June 30, 2002 and
December 31, 2001, a 20% increase in the
33
Korean won to U.S. dollar spot exchange rate as of the balance sheet dates would
result in a decrease of approximately $2.7 million and $3.8 million,
respectively, in won-based net assets.
The yen-based financial instruments primarily consist of cash, non-trade
receivables, accrued payroll taxes, debt and other expenses. Our exposure to the
yen is principally a result of our 2001 acquisition of Amkor Iwate Corporation.
Based on the portfolio of yen-based assets and liabilities at June 30, 2002 and
December 31, 2001, a 20% decrease in the Japanese yen to U.S. dollar spot
exchange rate as of the balance sheet date would result in an increase of
approximately $16.0 million and $15.6 million, respectively, in yen-based net
liabilities.
Interest Rate Risks
Our company has interest rate risk with respect to our long-term debt. As
of June 30, 2002, we had a total of $1,820.2 million of debt of which 91% was
fixed rate debt and 9% was variable rate debt. Our variable rate debt
principally consisted of short-term borrowings and amounts outstanding under our
secured bank facilities that included term loans and a $100.0 million revolving
line of credit of which no amounts were drawn as of June 30, 2002. The fixed
rate debt consisted of senior notes, senior subordinated notes, convertible
subordinated notes and foreign debt. As of December 31, 2001, we had a total of
$1,826.3 million 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 June 30, 2002.
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt:
Fixed rate debt ..... $ 7,291 $ 15,023 671 -- $ 675,000 $ 958,750 $1,656,735 $1,174,585
Average interest rate 4.0% 4.0% 4.0% 8.0% 8.4% 8.1%
Variable rate debt .. $ 43,397 $ 16,947 $ 55,569 $ 42,307 $ 2,974 $ 2,277 $ 163,471 $ 163,471
Average interest rate 1.8% 5.8% 5.8% 5.8% 4.6% 3.7% 4.7%
Equity Price Risks
Our outstanding 5.75% convertible subordinated notes due 2006 and 5%
convertible subordinated notes due 2007 are convertible into common stock at
$35.00 per share and $57.34 per share, respectively. We intend to repay our
convertible subordinated notes upon maturity, unless converted. If investors
were to decide to convert their notes to common stock, our future earnings would
benefit from a reduction in interest expense and our common stock outstanding
would be increased. If we induced such conversion, our earnings could include an
additional charge.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
At Amkor Technology, Inc.'s Annual Meeting of Stockholders held on June
25, 2002 the following proposals were adopted by the margins indicated.
1. To elect a Board of Directors to hold office until the next Annual Meeting
of Stockholders or until their respective successors have been elected or
appointed.
NUMBER OF SHARES
VOTED FOR WITHHELD
----------- ---------
James J. Kim ..................... 132,286,558 7,411,958
John N. Boruch ................... 132,398,133 7,300,383
Winston J. Churchill ............. 139,614,680 83,836
Thomas D. George ................. 139,637,142 61,374
George K. Hinckley ............... 139,639,065 59,451
Juergen Knorr .................... 139,618,618 79,898
John B. Neff ..................... 139,614,601 83,915
2. To ratify the appointment of the accounting firm of PricewaterhouseCoopers
LLP as independent auditors for the company for the current year. Votes
totaled 138,629,591 for, 1,062,207 against and 6,718 abstain.
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
- ------- ----------------------
4.14 Amendment No. 3 to the Amended and restated credit agreement dated as
of June 24, 2002 between the Registrant and the Issuing Banks and
Salomon Smith Barney, Inc., Citicorp USA, Inc. and Deutsche Banc Alex.
Brown, Inc.
10.18 Share Sale and Purchase Agreement between the Registrant and Dongbu
Corporation dated as of July 10, 2002
10.19 Shareholders Agreement between the Registrant, Dongbu Corporation,
Dongbu Fire Insurance Co., Ltd., and Dongbu Life Insurance Co., Ltd.
dated as of July 29, 2002
12.1 Computation of Ratio of Earnings to Fixed Charges
99.1 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
99.2 Sworn Statements Pursuant to Section 21(a)(1) of the Securities
Exchange Act of 1934
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K with the Securities and
Exchange Commission during the quarterly period ended June 30, 2002:
Current Report on Form 8-K dated March 29, 2002 (filed April 1, 2002)
related to the consolidated financial statements of Anam Semiconductor, Inc. and
its subsidiaries as of and for each of the three years ended December 31, 2001
filed pursuant to rule 3-09 of Regulation S-X.
Current Report on Form 8-K dated April 23, 2002 (filed April 25, 2002)
related to a press release dated April 23, 2002 announcing the signing of a
non-binding memorandum of understanding to purchase an packaging and test
facility in Japan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this 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: August 14, 2002
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