Back to GetFilings.com
================================================================================
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 SEPTEMBER 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
October 31, 2002 was 165,154,229.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net revenues .................................................. $ 453,928 $ 334,716 $ 1,213,453 $ 1,165,508
Cost of revenues -- including purchases from ASI .............. 401,555 346,355 1,162,170 1,087,351
----------- ----------- ----------- -----------
Gross profit (loss) ........................................... 52,373 (11,639) 51,283 78,157
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ...................... 47,103 47,847 144,397 153,206
Research and development ................................. 7,622 9,784 24,535 28,421
(Gain) loss on disposal of fixed assets .................. (200) 3,132 2,912 4,654
Amortization of acquired intangibles ..................... 2,000 1,184 4,995 3,523
Amortization of goodwill ................................. -- 20,030 -- 60,176
Special charges .......................................... 13,819 -- 281,985 --
----------- ----------- ----------- -----------
Total operating expenses ............................. 70,344 81,977 458,824 249,980
----------- ----------- ----------- -----------
Operating loss ................................................ (17,971) (93,616) (407,541) (171,823)
----------- ----------- ----------- -----------
Other expense (income):
Interest expense, net .................................... 37,391 37,904 111,010 123,110
Foreign currency (gain) loss ............................. (813) (1,071) 1,892 (6)
Other expense (income), net .............................. 991 (1,513) 4 (2,924)
----------- ----------- ----------- -----------
Total other expense .................................. 37,569 35,320 112,906 120,180
----------- ----------- ----------- -----------
Loss before income taxes, equity in loss
of investees and minority interest ....................... (55,540) (128,936) (520,447) (292,003)
Provision (benefit) for income taxes .......................... (10,109) (24,498) (58,082) (55,481)
Equity in loss of investees ................................... (12,532) (23,661) (24,737) (76,254)
Loss on impairment of equity investment ....................... -- -- (139,536) --
Loss on disposition of equity investment ...................... (1,767) -- (1,767) --
Minority interest ............................................. 423 (645) (2,238) (1,473)
----------- ----------- ----------- -----------
Net loss ...................................................... $ (59,307) $ (128,744) $ (630,643) $ (314,249)
=========== =========== =========== ===========
Per Share Data:
Basic net loss per common share .......................... $ (0.36) $ (0.80) $ (3.85) $ (2.02)
=========== =========== =========== ===========
Diluted net loss per common share ........................ $ (0.36) $ (0.80) $ (3.85) $ (2.02)
=========== =========== =========== ===========
Shares used in computing basic net loss
per common share ....................................... 164,489 160,581 163,854 155,594
=========== =========== =========== ===========
Shares used in computing diluted net loss
per common share ....................................... 164,489 160,581 163,854 155,594
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 235,038 $ 200,057
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,893 and $6,842 ............ 255,135 211,419
Due from affiliates ........................................................... 725 871
Other ......................................................................... 9,154 8,953
Inventories ....................................................................... 79,275 73,784
Other current assets .............................................................. 74,120 37,106
----------- -----------
Total current assets ..................................................... 653,447 532,190
----------- -----------
Property, plant and equipment, net ..................................................... 1,022,454 1,392,274
----------- -----------
Investments ............................................................................ 125,973 382,951
----------- -----------
Other assets:
Due from affiliates ............................................................... 21,348 20,518
Goodwill .......................................................................... 623,713 659,130
Acquired intangibles, net ......................................................... 46,941 37,050
Deferred taxes .................................................................... 165,957 108,064
Other ............................................................................. 85,110 91,141
----------- -----------
943,069 915,903
----------- -----------
Total assets ............................................................. $ 2,744,943 $ 3,223,318
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft .................................................................... $ 6,252 $ 5,116
Short-term borrowings and current portion of long-term debt ....................... 50,849 54,815
Trade accounts payable ............................................................ 174,634 148,923
Due to affiliates ................................................................. 46,337 16,936
Accrued expenses .................................................................. 195,285 145,544
----------- -----------
Total current liabilities ................................................ 473,357 371,334
Long-term debt ......................................................................... 1,754,809 1,771,453
Other noncurrent liabilities ........................................................... 81,693 64,077
----------- -----------
Total liabilities ........................................................ 2,309,859 2,206,864
----------- -----------
Commitments and contingencies
Minority interest ...................................................................... 10,158 7,737
----------- -----------
Stockholders' equity:
Preferred stock ................................................................... -- --
Common stock ...................................................................... 165 162
Additional paid-in capital ........................................................ 1,168,221 1,123,541
Accumulated deficit ............................................................... (737,618) (106,975)
Receivable from stockholder ....................................................... (2,887) (3,276)
Accumulated other comprehensive income (loss) ..................................... (2,955) (4,735)
----------- -----------
Total stockholders' equity ............................................... 424,926 1,008,717
----------- -----------
Total liabilities and stockholders' equity ............................... $ 2,744,943 $ 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
COMMON STOCK PAID-IN EARNINGS FROM INCOME
SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER (LOSS)
------ ------ ------- --------- ----------- ------
Balance at December 31, 2000 ............. 152,118 $ 152 $ 975,026 $ 343,886 $ (3,276) $ (954)
Net loss .............................. -- -- -- (314,249) -- --
Cumulative translation adjustment ........ -- -- -- -- -- 146
Comprehensive loss ....................
Issuance of stock for acquisitions .... 4,948 5 87,869 -- -- --
Issuance of stock through employee
stock purchase plan and stock options 650 1 8,125 -- -- --
Debt conversion ....................... 3,716 4 48,948 -- -- --
------- ------ ----------- ----------- -------- ---------
Balance at September 30, 2001 ............ 161,432 $ 162 $ 1,119,968 $ 29,637 $ (3,276) $ (808)
======= ====== =========== =========== ======== =========
Balance at December 31, 2001 ............. 161,782 $ 162 $ 1,123,541 $ (106,975) $ (3,276) $ (4,735)
Net loss .............................. -- -- -- (630,643) -- --
Unrealized loss on investments,
net of tax .......................... -- -- -- -- -- (655)
Cumulative translation adjustment ..... -- -- -- -- -- 2,435
Comprehensive loss ....................
Issuance of stock for acquisitions .... 1,827 2 35,200 -- -- --
Issuance of stock through employee
stock purchase plan and stock options 880 1 9,480 -- -- --
Payment received from stockholder ..... -- -- -- -- 389 --
------- ------ ----------- ----------- -------- ---------
Balance at September 30, 2002 ............ 164,489 $ 165 $ 1,168,221 $ (737,618) $ (2,887) $ (2,955)
======= ====== =========== =========== ======== =========
COMPREHENSIVE
INCOME
TOTAL (LOSS)
----- ------
Balance at December 31, 2000 ............. $1,314,834
Net loss .............................. (314,249) $ (314,249)
Cumulative translation adjustment ........ 146 146
----------
Comprehensive loss .................... $ (314,103)
==========
Issuance of stock for acquisitions .... 87,874
Issuance of stock through employee
stock purchase plan and stock options 8,126
Debt conversion ....................... 48,952
----------
Balance at September 30, 2001 ............ $1,145,683
==========
Balance at December 31, 2001 ............. $1,008,717
Net loss .............................. (630,643) $(630,643)
Unrealized loss on investments,
net of tax .......................... (655) (655)
Cumulative translation adjustment ..... 2,435 2,435
----------
Comprehensive loss .................... $(628,863)
==========
Issuance of stock for acquisitions .... 35,202
Issuance of stock through employee
stock purchase plan and stock options 9,481
Payment received from stockholder ..... 389
---------
Balance at September 30, 2002 ............ $ 424,926
=========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net loss ............................................................. $(630,643) $(314,249)
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ...................................... 265,687 328,920
Special charges .................................................... 274,340 --
Deferred debt issuance costs ....................................... 6,172 16,446
Provision for accounts receivable .................................. 256 (300)
Provision for excess and obsolete inventory ........................ 3,447 13,794
Deferred income taxes .............................................. (56,082) (69,656)
Equity in loss of investees ........................................ 24,737 76,254
Loss on impairment of equity investment ............................ 139,536 --
Loss on disposition of equity investment ........................... 1,767 --
Loss on sale of fixed assets ....................................... 2,912 6,254
Minority interest .................................................. 2,238 1,473
Changes in assets and liabilities excluding effects of acquisitions --
Accounts receivable ................................................ (39,636) 82,124
Other receivables .................................................. (201) (2,718)
Inventories ........................................................ (8,352) 30,353
Due to/from affiliates, net ........................................ 28,717 (7,810)
Other current assets ............................................... (16,014) (3,381)
Other noncurrent assets ............................................ 16,233 6,102
Accounts payable ................................................... 23,038 (21,080)
Accrued expenses ................................................... 37,172 2,046
Other long-term liabilities ........................................ 7,988 5,843
--------- ---------
Net cash provided by operating activities ........................ 83,312 150,415
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ........................... (82,298) (134,947)
Acquisitions, net of cash acquired ................................... (10,797) (11,057)
Proceeds from the sale of property, plant and equipment .............. 2,200 1,105
Proceeds from disposition of equity investment ....................... 58,139 --
Proceeds from the sale (purchase) of investments ..................... (2,011) (257)
--------- ---------
Net cash used in investing activities ............................ (34,767) (145,156)
--------- ---------
Cash flows from financing activities:
Net change in bank overdrafts and short-term borrowings .............. 1,136 3,746
Net proceeds from issuance of long-term debt ......................... -- 750,486
Payments of long-term debt ........................................... (25,475) (532,636)
Proceeds from issuance of stock through employee stock
purchase plan and stock options .................................... 9,481 8,126
Payment received from stockholder .................................... 389 --
--------- ---------
Net cash provided by financing activities ........................ (14,469) 229,722
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents ....... 905 (274)
--------- ---------
Net increase in cash and cash equivalents ............................... 34,981 234,707
Cash and cash equivalents, beginning of period .......................... 200,057 93,517
--------- ---------
Cash and cash equivalents, end of period ................................ $ 235,038 $ 328,224
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................................ $ 103,174 $ 102,805
Income taxes........................................................ $ 5,754 $ (195)
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 September 30, 2002 and for the three and nine months ended
September 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 nine months ended September 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 beginning in 2001, our high leverage and the restrictive
covenants contained in the agreements governing our indebtedness, uncertainty as
to the demand from our customers over both the long- and short-term, competitive
pricing and declines in average selling prices we experience, 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. SFAS No. 146 is required to be adopted
beginning with exit or disposal activities that are initiated after December 31,
2002; however, early adoption is permitted.
2. SPECIAL CHARGES
Special charges consist of the following:
THREE MONTHS ENDED NINE
------------------------ MONTHS ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2002 2002
-------- -------- --------
(IN THOUSANDS)
Impairment of long-lived assets (Note 4) ....................... $190,266 $ -- $190,266
Impairment of goodwill (Note 3) ................................ 73,080 -- 73,080
Lease termination and other exit costs (Note 5) ................ 4,820 13,819 18,639
-------- -------- --------
$268,166 13,819 281,985
======== ======== ========
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
6
circumstances warrant. Additionally, SFAS No. 142 requires that within six
months of adoption of SFAS No. 142, goodwill be tested for impairment at the
reporting unit level as of the date of adoption.
We adopted SFAS No. 142 as of January 1, 2002 and we reclassified $30.0
million of intangible assets previously identified as an assembled workforce
intangible to goodwill. Additionally at adoption of SFAS No. 142, we stopped
amortizing goodwill of $659.1 million, as well as goodwill of $118.6 million
associated with our investment in ASI accounted for under the equity method of
accounting. The 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------ -----------------------------------------
AS ADJUSTED AS ADJUSTED
2002 2001 2001 2002 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net revenues ....................... $ 453,928 $ 334,716 $ 334,716 $ 1,213,453 $ 1,165,508 $ 1,165,508
Cost of revenues -- including
purchases from ASI .............. 401,555 346,355 346,355 1,162,170 1,087,351 1,087,351
----------- ----------- ----------- ----------- ----------- -----------
Gross profit (loss) ................ 52,373 (11,639) (11,639) 51,283 78,157 78,157
Operating expenses ................. 70,344 81,977 61,947 458,824 249,980 189,804
----------- ----------- ----------- ----------- ----------- -----------
Operating loss ..................... (17,971) (93,616) (73,586) (407,541) (171,823) (111,647)
Other expense, net ................. 37,569 35,320 35,320 112,906 120,180 120,180
----------- ----------- ----------- ----------- ----------- -----------
Loss before income taxes,
equity in loss of investees
and minority interest ........... (55,540) (128,936) (108,906) (520,447) (292,003) (231,827)
Provision (benefit) for
income taxes .................... (10,109) (24,498) (24,498) (58,082) (55,481) (55,481)
Equity in loss of investees ........ (14,299) (23,661) (14,732) (166,040) (76,254) (49,509)
Minority interest .................. 423 (645) (645) (2,238) (1,473) (1,473)
----------- ----------- ----------- ----------- ----------- -----------
Net loss ........................... $ (59,307) $ (128,744) $ (99,785) $ (630,643) $ (314,249) $ (227,328)
=========== =========== =========== =========== =========== ===========
Basic net loss per share ........... $ (0.36) $ (0.80) $ (0.62) $ (3.85) $ (2.02) $ (1.46)
=========== =========== =========== =========== =========== ===========
Diluted net loss per share ......... $ (0.36) $ (0.80) $ (0.62) $ (3.85) $ (2.02) $ (1.46)
=========== =========== =========== =========== =========== ===========
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 using a discount
rate commensurate with the risk involved.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Our test services assets and several
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 using a discount rate commensurate with the risk involved.
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..................................... 35,845 -- 35,845
Goodwill impairment................................... -- (73,080) (73,080)
Translation adjustments............................... 1,524 294 1,818
------------- -------------- ------------
Balance as of September 30, 2002...................... $ 623,713 $ -- $ 623,713
============= ============== ============
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
that we expect to dispose by June 30, 2003. We recognized an $18.7 million
impairment charge to reduce the carrying value of the test and packaging fixed
assets to be disposed to their fair value less cost to sell. Fair value of the
assets to be disposed was determined with the assistance of an appraisal firm
and available information on the resale value of the equipment. Additionally, we
tested for impairment our long-lived test assets that are held and used,
including intangible assets that we are amortizing, and certain 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 using a
discount rate commensurate with the risk involved.
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.
During the third quarter of 2002, we recorded $13.8 million of special
charges principally related to the consolidation of our operations in Taiwan.
The charge was comprised of $10.8 million to write-off leasehold improvements
and other long-lived assets and $3.0 million for lease termination and other
exit costs.
Of the total $18.6 million restructuring charges recorded in the second and
third quarter of 2002, $7.2 million remains outstanding as of September 30,
2002. $11.4 million was charged against the restructuring accrual principally to
write-off leasehold improvements and other long-lived assets.
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
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 can not be less than 1.7 billion Japanese
yen and can not exceed 2.4 billion Japanese yen ($13.9 million to $19.7 million
based on the spot exchange rate at September 30, 2002). If we make the
additional contingent payments of 700 million Japanese yen ($5.7 million based
on the spot exchange rate at September 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
minimum amount of the contingent payments. Such net assets principally relate to
our packaging services reporting unit.
In October 2002, we terminated negotiations with Fujitsu Limited to acquire
Fujitsu's packaging and test operation in Kagoshima, Japan pursuant to the April
2002 memorandum of understanding between our company and Fujitsu.
In January 2002, we acquired Agilent Technologies, Inc.'s packaging
business related to semiconductor packages utilized in printers for $2.8 million
in cash. The acquired tangible assets were integrated into our existing
manufacturing facilities. The purchase price was principally allocated to the
tangible assets of our packaging services reporting unit. Our results of
operations were not significantly impacted by this acquisition.
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 can not be
less than 1 billion Japanese yen and can not exceed 4 billion Japanese yen ($8.2
million to $32.8 million based on the spot exchange rate at September 30, 2002).
7. OUR INVESTMENT IN ANAM SEMICONDUCTOR, INC. (ASI)
During the third quarter of 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 ($4.66 per share based on the spot exchange
rate at September 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 closed on September 30, 2002. As of the
closing date, we received $58.1 million in net cash proceeds and promissory
notes totaling 42 billion Korean won ($34.2 million based on the spot exchange
rate at September 30, 2002) of which 21 billion Korean won is payable on
September 30, 2003 and the balance is payable on February 10, 2004. We divested
an additional 1 million shares of ASI stock as payment of transaction costs to
our financial advisors in connection this transaction. In a separate
transaction, Dongbu acquired 12.0 million newly issued shares of ASI in July
2002. Following these transactions, Amkor owns 26.7 million shares of ASI or
approximately 21% of ASI's outstanding voting stock. We recognized a capital
loss on the partial disposition of our investment in ASI of approximately $117.0
million for which we recorded a full valuation allowance to offset the tax
benefit that we do not expect to realize.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 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
existing terms of the foundry agreement, Amkor has exclusive rights to sell all
the output of ASI's foundry until 2008. As of the date of this report, the
negotiations with Dongbu to terminate the foundry agreement and to acquire the
net assets associated with our wafer fabrication services segment were ongoing.
The ultimate amount of net proceeds associated with these transactions is
uncertain and can not be reasonably estimated. Upon termination of the foundry
agreement, we will
9
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.
Financial Information for ASI
The following summary of consolidated financial information was derived
from the consolidated financial statements of ASI.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2002 2001
------------- -------------
(IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues............................................................. $ 166,024 $ 111,771
Gross profit (loss)...................................................... (68,501) (60,201)
Net loss................................................................. (60,831) (118,650)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits........................ $ 129,226 $ 84,721
Current assets........................................................... 208,790 144,898
Property, plant and equipment, net....................................... 527,998 646,298
Noncurrent assets (including property, plant and equipment).............. 641,571 770,932
Current liabilities...................................................... 109,857 134,727
Total debt and other long-term financing (including current portion)..... 169,824 238,970
Noncurrent liabilities (including debt and other long-term financing).... 141,998 175,487
Total stockholders' equity............................................... 598,506 605,616
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 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 as of June 30, 2002 based on negotiations with
Dongbu to acquire a portion of our interest in ASI. At September 30, 2002 and
October 31, 2002, ASI's stock price was $2.96 per share and $4.13 per share,
respectively. During the fourth quarter of 2002, if the market value of ASI's
stock remains below our carrying value, we will likely record an additional
impairment charge.
10
8. INVENTORIES
Inventories consist of raw materials and purchased components that are
used in the semiconductor packaging process.
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- ------------
(IN THOUSANDS)
Raw materials and purchased components.............. $ 70,084 $ 64,752
Work-in-process..................................... 9,191 9,032
-------------- ------------
$ 79,275 $ 73,784
============== ============
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Land ........................................................ $ 88,687 $ 88,667
Buildings and improvements.................................... 541,191 495,104
Machinery and equipment....................................... 1,507,897 1,661,140
Furniture, fixtures and other equipment....................... 129,584 118,069
Construction in progress...................................... 12,320 63,782
------------- ------------
2,279,679 2,426,762
Less -- Accumulated depreciation and amortization............. (1,257,225) (1,034,488)
------------- ------------
$ 1,022,454 $ 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:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Patents and technology rights........................ $ 61,835 $ 46,713
Less -- Accumulated amortization..................... (14,894) (9,663)
------------- ------------
$ 46,941 $ 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.
11. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Equity investments under the equity method:
ASI (ownership of 21% and 42% at September 30, 2002
and December 31, 2001, respectively) (see Note 7).......... $ 119,625 $ 377,947
Other equity investments (20% - 50% owned)....................... 1,106 966
------------- ------------
Total equity investments................................... 120,731 378,913
Marketable securities classified as available for sale.............. 5,242 4,038
------------- ------------
$ 125,973 $ 382,951
============= ============
11
In connection with the disposition of a portion of our interest in ASI, we
acquired a 10% interest in Acqutek from ASI for a total purchase price of $1.9
million. Our investment in Acqutek is classified as a marketable security that
is available for sale. Acqutek supplies materials to the semiconductor industry
and is a publicly traded company in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, holds a 25% ownership
interest in Acqutek. We have historically purchased and continue to purchase
leadframes from Acqutek. Total purchases from Acqutek included in cost of
revenue for the nine months ended September 30, 2002 and 2001 was $12.5 million
and $11.5 million, respectively. We believe these transactions with Acqutek were
conducted on an arms-length basis in the ordinary course of business.
12. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Accrued income taxes..................................... $ 51,883 $ 53,364
Accrued interest......................................... 36,572 32,584
Accrued payroll.......................................... 32,264 20,813
Other accrued expenses................................... 74,566 38,783
------------- ------------
$ 195,285 $ 145,544
============= ============
13. DEBT
Following is a summary of short-term borrowings and long-term debt:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Secured bank facility:
Term B loans, LIBOR plus 4% due September 2005................................. $ 97,368 $ 97,706
$100.0 million revolving line of credit, LIBOR plus 3.75% due March 2005....... -- --
9.25% Senior notes due May 2006................................................... 425,000 425,000
9.25% Senior notes due February 2008.............................................. 500,000 500,000
10.5% Senior subordinated notes due May 2009...................................... 200,000 200,000
5.75% Convertible subordinated notes due June 2006,
convertible at $35.00 per share................................................ 250,000 250,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share................................................ 258,750 258,750
Other debt........................................................................ 74,540 94,812
------------- ------------
1,805,658 1,826,268
Less -- Short-term borrowings and current portion of long-term debt............... (50,849) (54,815)
------------- ------------
$ 1,754,809 $ 1,771,453
============= ============
In June 2002 and September 2002 we amended our existing bank debt
covenants to provide further flexibility with respect to capital expenditures,
investment restrictions and other financial covenants measured in part by our
liquidity and earnings.
Interest expense related to short-term borrowings and long-term debt is
presented net of interest income of $2.9 million and $8.5 million for the nine
months ended September 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,
convertible debt and warrants. For the three and nine months ended September 30,
2002 and 2001, we excluded from the computation of diluted earnings per share
potentially dilutive securities which would have an antidilutive effect on EPS.
As of September 30, 2002, the total number of potentially dilutive securities
outstanding was 14.8 million, 11.7 million and 3.9 million for
12
outstanding options, convertible notes and warrants for common stock,
respectively. As of September 30, 2001, the total number of potentially dilutive
securities outstanding was 12.3 million, 11.7 million and 3.9 million for
outstanding options, convertible notes and warrants for common stock,
respectively.
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.
Total net revenues derived from Toshiba accounted for 12.6% and 14.7% of
our consolidated net revenues for the nine months ended September 30, 2002 and
2001, respectively. Total net revenues derived from TI accounted for 14.3% and
8.6% of our consolidated net revenues for the nine months ended September 30,
2002 and 2001, respectively. We derived 91.8% and 71.4% of our wafer fabrication
revenues from Texas Instruments (TI) for the nine months ended September 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
-------- ----------- ----- -----
(IN THOUSANDS)
Three Months Ended September 30, 2002
Net revenues ..................... $ 393,563 $ 60,365 $ -- $ 453,928
Gross profit ..................... 47,510 4,863 -- 52,373
Operating income (loss) .......... (20,849) 2,878 -- (17,971)
Three Months Ended September 30, 2001
Net revenues ..................... $ 288,529 $ 46,187 $ -- $ 334,716
Gross profit (loss) .............. (15,992) 4,353 -- (11,639)
Operating income (loss) .......... (95,586) 1,970 -- (93,616)
Nine Months Ended September 30, 2002
Net revenues ..................... $ 1,032,989 $ 180,464 $ -- $ 1,213,453
Gross profit ..................... 34,432 16,851 -- 51,283
Operating income (loss) .......... (417,635) 10,094 -- (407,541)
Nine Months Ended September 30, 2001
Net revenues ..................... $ 1,039,365 $ 126,143 $ -- $ 1,165,508
Gross profit ..................... 66,069 12,088 -- 78,157
Operating income (loss) .......... (176,975) 5,152 -- (171,823)
Total Assets
September 30, 2002 ............... $ 2,238,312 $ 124,590 $ 382,041 $ 2,744,943
December 31, 2001 ................ 2,540,020 87,953 595,345 3,223,318
13
The following presents property, plant and equipment, net based on the
location of the asset.
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
(IN THOUSANDS)
Property, Plant and Equipment, net
United States.................................. $ 81,814 $ 87,776
Philippines.................................... 293,797 471,302
Korea.......................................... 513,636 698,448
Taiwan......................................... 76,755 90,088
Japan.......................................... 41,848 35,074
China.......................................... 14,001 9,093
Other foreign countries........................ 603 493
----------- -----------
$ 1,022,454 $ 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. 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 September 30, 2002, could be up to an additional
$16.6 million. The third party is not actively pursuing resolution to this
dispute and we have not accrued the potential additional amount.
17. SUBSEQUENT EVENTS
Effective with the fourth quarter of 2002, we will change the estimated
useful lives of certain of our packaging equipment from four years to seven
years for depreciation purposes, which is in line with our historical usage and
consistent with other companies in our industry. We will not extend the useful
lives of the packaging equipment associated with the second quarter impairment
charge based on our expected use of that equipment and the associated cash
flows. This change is expected to reduce depreciation expense by approximately
$18 million per quarter.
On November 8, 2002, we initiated a voluntary stock option replacement
program such that employees and members of our Board of Directors can elect to
surrender their existing options and be granted new options six months and one
day after the tendered options are cancelled. We will issue new option grants
equal to the same number of shares surrendered by the employees. The exercise
price will equal the fair market value of common stock as of the new grant date
which is expected to be no earlier than June 12, 2003. As of October 31, 2002,
we had options outstanding of 14.8 million shares.
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 and growth of the industry in which we operate,
including trends toward increased outsourcing, reductions in inventory and
demand and selling prices for our services, (2) our anticipated capital
expenditures and financing needs, (3) our belief as to our future 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 nine months ended
September 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
other reports we file with the Securities and Exchange Commission.
Amkor is the world's largest subcontractor of semiconductor packaging and
test services. The company has built a leading position 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, Intel Corporation, LSI Logic Corporation, RF Micro Devices, 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, 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
during the second quarter of 2002. The nature of the impairment charges was as
follows: (1) $18.7 million impairment charge to reduce the carrying value of the
test and packaging assets to be disposed to their fair value less cost to sell;
(2) $171.6 million impairment charge to reduce the carrying value of test assets
and certain 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 packaging and test revenue for the fourth quarter of
2002 to be around 5% lower than packaging and test revenues for the third
quarter of 2002. Wafer fabrication services revenue should be around $50 million
for the fourth quarter of 2002.
15
Effective with the fourth quarter of 2002, we will change the estimated useful
lives of certain of our packaging equipment from four years to seven years for
depreciation purposes, which is in line with our historical usage and consistent
with other companies in our industry. We will not extend the useful lives of the
packaging equipment associated with the second quarter impairment charge based
on our expected use of that equipment and the associated cash flows. This change
is expected to reduce depreciation expense by approximately $18 million per
quarter. We expect that as a result of this change, together with ongoing cost
efficiency programs, fourth quarter gross margin will improve to around 13%. Our
profitability is dependent upon the utilization of our capacity, semiconductor
package mix and the average selling price of our services. Because a substantial
portion of our costs at our factories is fixed, relatively insignificant
increases or decreases in capacity utilization rates can have a significant
effect on our profitability. Prices for packaging and test services 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 can not 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 nine
months ended September 30, 2002, as compared to the comparable period a year
ago, the decline in average selling prices of 7% and 18%, respectively,
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
invested a total of $500.6 million in ASI including an equity investment of
$41.6 million made in October 1999.
During the third quarter of 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 ($4.66 per share based on the spot exchange
rate at September 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 closed on September 30, 2002. As of the
closing date, we received $58.1 million in net cash proceeds and promissory
notes totaling 42 billion Korean won ($34.2 million based on the spot exchange
rate at September 30, 2002) of which 21 billion Korean won is payable on
September 30, 2003 and the balance is payable on February 10, 2004. We divested
an additional 1 million shares of ASI stock as payment of transaction costs to
our financial advisors in connection this transaction. In a separate
transaction, Dongbu acquired 12.0 million newly issued shares of ASI in July
2002. Following these transactions, we own 26.7 million shares of ASI or
approximately 21% of ASI's outstanding voting stock. We report ASI's results in
our financial statements through the equity method of accounting.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 2002 to terminate Amkor's
foundry agreement with ASI. In consideration of such termination, Dongbu will
pay Amkor at least $45.0
16
million and no more than $65.0 million. Under the existing terms of the foundry
agreement, Amkor has exclusive rights to sell all the output of ASI's foundry
until 2008. As of the date of this report, the negotiations with Dongbu to
terminate the foundry agreement and to acquire the net assets associated with
our wafer fabrication services segment were ongoing. The ultimate amount of net
proceeds associated with these transactions is uncertain and can not be
reasonably estimated. Upon termination of the foundry agreement, we will reflect
our wafer fabrication services segment as a discontinued operation and we will
no longer benefit from the income from operations and cash flows of our wafer
fabrication services segment. 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 disposition of a portion of our interest in ASI, we
acquired a 10% interest in Acqutek from ASI for a total purchase price of $1.9
million. Our investment in Acqutek is classified as a marketable security that
is available for sale. Acqutek supplies materials to the semiconductor industry
and is a publicly traded company in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, holds a 25% ownership
interest in Acqutek. We have historically purchased and continue to purchase
leadframes from Acqutek. Total purchases from Acqutek included in cost of
revenue for the nine months ended September 30, 2002 and 2001 was $12.5 million
and $11.5 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 can not
be less than 1.7 billion Japanese yen and can not exceed 2.4 billion Japanese
yen ($13.9 million to $19.7 million based on the spot exchange rate at September
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.
In October 2002, we terminated negotiations with Fujitsu Limited to
acquire Fujitsu's packaging and test operation in Kagoshima, Japan pursuant to
the April 2002 memorandum of understanding between our company and Fujitsu.
Our Venture with Toshiba Corporation
As of January 1, 2001, Amkor Iwate Corporation commenced operations with
the acquisition of a packaging and test facility at a Toshiba factory located in
the Iwate prefecture in Japan. Amkor Iwate provides packaging and test services
principally to Toshiba's Iwate factory under a long-term supply agreement that
provides for services to be performed on a cost plus basis. The supply agreement
with Toshiba's Iwate factory terminates 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 can not be less than
1 billion Japanese yen and can not exceed 4 billion Japanese yen ($8.2 million
to $32.8 million based on the spot exchange rate at September 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 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.
17
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Net revenues..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit (loss).............................. 11.5 (3.5) 4.2 6.7
Operating loss................................... (4.0) (28.0) (33.6) (14.7)
Loss before income taxes, equity in
loss of investees and minority interest..... (12.2) (38.5) (42.9) (25.1)
Net loss ........................................ (13.1) (38.5) (52.0) (27.0)
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Net Revenues. Net revenues increased $119.3 million, or 35.6%, to $454.0
million in the three months ended September 30, 2002 from $334.7 million in the
three months ended September 30, 2001. Packaging and test net revenues increased
36.4% to $393.6 million in the three months ended September 30, 2002 from $288.5
million in the three months ended September 30, 2001. Wafer fabrication net
revenues increased 30.7% to $60.4 million in the three months ended September
30, 2002 from $46.2 million in the three months ended September 30, 2001.
The increase in packaging and test net revenues for the three months ended
September 30, 2002, excluding the impact of our acquisitions and expansion in
Japan, Taiwan and China, was principally attributed to a 42.8% increase in unit
volumes partially offset by a 7% 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 61.3% increase for advanced leadframe and
laminate packages and a 24.9% increase in our traditional leadframe business.
The revenues of our Japanese acquisition, Amkor Iwate, for the three months
ended September 30, 2002 increased $9.2 million compared to the three month
ended September 30, 2001. Our acquisitions in Taiwan and expansion into China
contributed $10.2 million to the increase in net revenues for the three months
ended September 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 September 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 47.9% increase in sales to Texas Instruments in the three months ended
September 30, 2002 as compared with the three months ended September 30, 2001
partially offset by a decrease in demand from our other wafer fabrication
services customers. We derived 88.9% and 78.6% of our wafer fabrication revenues
from Texas Instruments for the three months ended September 30, 2002 and 2001,
respectively. The definitive agreements with Dongbu provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 2002 to terminate Amkor's
foundry agreement with ASI. Under the existing terms of the foundry agreement,
Amkor has exclusive rights to sell all the output of ASI's foundry until 2008.
As of the date of this report, the negotiations with Dongbu to terminate the
foundry agreement and to acquire the net assets associated with our wafer
fabrication services segment were ongoing. The ultimate amount of net proceeds
associated with these transactions is uncertain and can not be reasonably
estimated. Upon termination of the foundry agreement, we will reflect our wafer
fabrication services segment as a discontinued operation.
Gross Profit (Loss). Gross profit increased $64.0 million to $52.4 million
in the three months ended September 30, 2002 from a gross loss of $11.6 million
in the three months ended September 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 can have a significant
effect on our gross margin. As a result of acquisitions in Japan and Taiwan in
2001 as well as other geographic expansions, we substantially increased our
fixed costs.
18
Gross margins as a percentage of net revenues increased 15 percentage
points to 11.5% in the three months ended September 30, 2002 as compared to a
negative (3.5%) in the three months ended September 30, 2001 principally as a
result of the following:
- Our factories in Korea and the Philippines caused an approximate 16
percentage point increase in gross margins attributed to increased
capacity utilization as a result of increased unit volumes together with
the impact of our cost savings initiatives and an estimated reduction of
$19 million in depreciation expense as a result of the fixed asset
impairment charge recorded during the second quarter of 2002.
- Material cost savings that contributed approximately 3 percentage points
to the increase in gross margins.
The positive impacts on gross margins were partially offset by:
- Average selling price erosion across our product lines caused an estimated
2 percentage point decline in gross margins.
- Our acquisitions in Taiwan and expansion into China caused an approximate
2 percentage point decline in gross margin as a result of the costs
associated with ramping and reconfiguring operations at these facilities
as well as other factors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.7 million, or 1.6%, to $47.1 million, or
10.4% of net revenues, in the three months ended September 30, 2002 from $47.8
million, or 14.3% of net revenues, in the three months ended September 30, 2001.
The decrease in these costs was principally due to:
- Decreased costs of $1.8 million principally related to our U.S. based
administrative overhead cost reduction initiatives; and
- Decreased costs of $1.8 million related to the acquisitions in Taiwan and
the geographic expansion in China attributed to the significant start-up
expenses incurred during the three months ended September 30, 2001;
partially offset by
- Increased administrative overhead of $2.9 million in our facilities in
Korea, the Philippines and Japan as a result of additional indirect labor
associated with the additional production volumes.
Research and Development. Research and development expenses decreased $2.2
million to $7.6 million, or 1.7% of net revenues, in the three months ended
September 30, 2002 from $9.8 million, or 2.9% of net revenues, in the three
months ended September 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 $20.0 million for the three months
ended September 30, 2002 as compared with the three months ended September 30,
2001.
Special Charges. During the three months ended September 30, 2002, we
recorded $13.8 million of special charges principally related to the
consolidation of our operations in Taiwan. The charge was comprised of $10.8
million to write-off leasehold improvements and other long-lived assets and $3.0
million for lease termination and other exit costs.
Other (Income) Expense. Other expenses, net increased $2.3 million, to
$37.6 million, or 8.3% of net revenues, in the three months ended September 30,
2002 from $35.3 million, or 10.6% of net revenues, in the three months ended
September 30, 2001.
Provision (Benefit) for Income Taxes. Our effective tax rate in the three
months ended September 30, 2002 and 2001 was a benefit of (18.2%) and (19.0%),
respectively. 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. If we continue to incur
losses, a valuation allowance may be required for a portion or all of our
deferred tax assets related primarily to net operating loss carryforwards.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the three months ended September 30,
2002 of $12.5 million compared to $23.7 million ($14.7 million excluding the
amortization of equity method
19
goodwill) in the three months ended September 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 $8.9 million for the three months ended
September 30, 2002 as compared with the corresponding period.
During the three months ended September 30, 2002, we recorded a loss of
$1.8 million on the disposition of a portion of our interest in ASI to Dongbu.
With Dongbu's recent purchase of 12.0 million newly issued shares of ASI
together with its purchase of 20 million shares from our company and our
disposition of an additional 1 million shares of ASI stock as payment of
transaction costs to our financial advisors in connection with the transaction
with Dongbu, our ownership interest in ASI was reduced to approximately 21%.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Net Revenues. Net revenues increased $48.0 million, or 4.1%, to $1,213.5
million in the nine months ended September 30, 2002 from $1,165.5 million in the
nine months ended September 30, 2001. Packaging and test net revenues decreased
0.6% to $1,033.0 million in the nine months ended September 30, 2002 from
$1,039.4 million in the nine months ended September 30, 2001. Wafer fabrication
net revenues increased 43.1% to $180.5 million in the nine months ended
September 30, 2002 from $126.1 million in the nine months ended September 30,
2001.
The decrease in packaging and test net revenues for the nine months ended
September 30, 2002, excluding the impact of our acquisitions and expansion in
Japan, Taiwan and China, was principally attributed to a 18% 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 15.3% which was driven by a 38.0% increase for advanced
leadframe and laminate packages offset by a 2.4% decrease in our traditional
leadframe business. The revenues of our Japanese acquisition, Amkor Iwate, for
the nine months ended September 30, 2002 declined $18.4 million compared to the
nine month ended September 30, 2001. Our acquisitions in Taiwan and expansion
into China contributed $49.0 million to the increase in net revenues for the
nine months ended September 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 nine months ended September 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 84.2% increase in sales to Texas Instruments in the nine months ended
September 30, 2002 as compared with the nine months ended September 30, 2001
partially offset by a 59.3% decrease in demand from our other wafer fabrication
services customers. We derived 91.8% and 71.4% of our wafer fabrication revenues
from Texas Instruments for the nine months ended September 30, 2002 and 2001,
respectively. The definitive agreements with Dongbu provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 2002 to terminate Amkor's
foundry agreement with ASI. Under the existing terms of the foundry agreement,
Amkor has exclusive rights to sell all the output of ASI's foundry until 2008.
As of the date of this report, the negotiations with Dongbu to terminate the
foundry agreement and to acquire the net assets associated with our wafer
fabrication services segment were ongoing. The ultimate amount of net proceeds
associated with these transactions is uncertain and can not be reasonably
estimated. Upon termination of the foundry agreement, we will reflect our wafer
fabrication services segment as a discontinued operation.
Gross Profit (Loss). Gross profit decreased $26.9 million, or 34.4%, to
$51.3 million in the nine months ended September 30, 2002 from $78.2 million in
the nine months ended September 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 can have a significant
effect on our gross margin. As a result of acquisitions in Japan and Taiwan in
2001 as well as other geographic expansions, we substantially increased our
fixed costs.
Gross margins as a percentage of net revenues decreased 2.5 percentage
points to 4.2% in the nine months ended September 30, 2002 as compared to 6.7%
in the nine months ended September 30, 2001 principally as a result of the
following:
- Average selling price erosion across our product lines caused an estimated
12 percentage points decline in gross margins.
- Our acquisitions in Taiwan and expansion into China contributed
approximately 1 percentage point to the decline in gross margin as a
result of the costs associated with ramping and reconfiguring operations
at these facilities.
20
The negative impacts on gross margins were partially offset by:
- - Our factories in Korea and the Philippines caused an approximate 6.5
percentage point increase in gross margins attributed to increased
capacity utilization as a result of increased unit volumes together with
the impact of our cost savings initiatives and an estimated reduction of
$19 million in depreciation expense as a result of the fixed asset
impairment charge recorded during the second quarter of 2002.
- - Material cost savings that contributed approximately 4 percentage points
to the increase in gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $8.8 million, or 5.7%, to $144.4 million, or
11.9% of net revenues, in the nine months ended September 30, 2002 from $153.2
million, or 13.1% of net revenues, in the nine months ended September 30, 2001.
The decrease in these costs was principally due to decreased costs of $9.4
million principally related to our U.S. based administrative overhead cost
reduction initiatives; partially offset by $0.6 million for increased
administrative costs in our factories.
Research and Development. Research and development expenses decreased $3.9
million to $24.5 million, or 2.0% of net revenues, in the nine months ended
September 30, 2002 from $28.4 million, or 2.4% of net revenues, in the nine
months ended September 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 $60.2 million for the nine months
ended September 30, 2002 as compared with the nine months ended September 30,
2001.
Special Charges. During the nine months ended September 30, 2002, we
recorded $282.0 million of special charges. Special charges were comprised of:
SEPTEMBER 30,
2002
--------------
(IN THOUSANDS)
Impairment of long-lived assets ................................ $ 190,266
Impairment of goodwill ......................................... 73,080
Lease termination and other exit costs ......................... 18,639
--------------
$ 281,985
==============
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 an $18.7 million impairment charge to reduce the
carrying value of the test and packaging fixed assets to be disposed to their
fair value less cost to sell. Fair value of the assets to be disposed was
determined with the assistance of an appraisal firm and available information on
the resale value of the equipment. Additionally, we tested for impairment our
long-lived test assets that are held and used, including intangible assets that
we are amortizing, and certain 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 using a discount rate commensurate with the risk
involved.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. 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
21
services reporting unit to its carrying value. An appraisal firm was engaged to
assist in the determination of the fair value of our reporting units. The
determination of fair value was based on projected cash flows using a discount
rate commensurate with the risk involved.
During the three months ended September 30, 2002, we recorded $13.8
million of special charges principally related to the consolidation of our
operations in Taiwan. The charge was comprised of $10.8 million to write-off
leasehold improvements and other long-lived assets and $3.0 million for lease
termination and other exit costs.
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 $7.3 million, to
$112.9 million, or 9.3% of net revenues, in the nine months ended September 30,
2002 from $120.2 million, or 10.3% of net revenues, in the nine months ended
September 30, 2001. The net decrease in other expenses was primarily a result of
a decrease in interest expense of $12.1 million. Net interest expense in the
nine months ended September 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 $1.9 million for the nine months ended September
30, 2002 as compared with the corresponding period in the prior year.
Provision (Benefit) for Income Taxes. Our effective tax rate in the nine
months ended September 30, 2002 and 2001 was a benefit of (11.2%) and (19.0%),
respectively. The change in the effective tax rate in the nine months ended
September 30, 2002 was due to impairment charges recorded in jurisdictions for
which there is limited offsetting tax benefits as a result of tax holidays. 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. If we continue to incur losses, a
valuation allowance may be required for a portion or all of our deferred tax
assets related primarily to net operating loss carryforwards.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the nine months ended September 30,
2002 of $24.7 million compared to $76.2 million ($49.5 million excluding the
amortization of equity method goodwill) in the nine months ended September 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 $26.7
million for the nine months ended September 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 as of June 30, 2002 based on the negotiations with Dongbu to
acquire a portion of our interest in ASI. During the three months ended
September 30, 2002, we recorded a loss of $1.8 million on the disposition of a
portion of our interest in ASI to Dongbu. With Dongbu's recent purchase of 12.0
million newly issued shares of ASI together with its purchase of 20 million
shares from our company and our disposition of an additional 1 million shares of
ASI stock as payment of transaction costs to our financial advisors in
connection with the transaction with Dongbu, our ownership interest in ASI was
reduced to approximately 21%.
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor industry analysts have forecasted little to no growth in
2002 on an annual basis as compared to 2001. In addition, industry analysts have
forecasted significant growth in the semiconductor industry in each of 2003 and
2004. Because of the steep decline in semiconductor sales on a quarterly basis
during 2001, we have experienced significant quarter-to-quarter growth during
2002, although we currently expect packaging and test revenue for the fourth
quarter of 2002 to be around 5% lower than packaging and test revenues for the
third quarter of 2002. Wafer fabrication services revenue should be around $50
million for the fourth quarter of 2002. Effective with the fourth quarter of
2002, we will change the estimated useful lives of certain of our packaging
equipment from four years to seven years for depreciation purposes, which is in
line with our historical usage and consistent with other companies in our
industry. We will not extend the useful lives of the packaging equipment
associated with the second quarter impairment charge based on our expected use
of that equipment and the associated cash flows. This change is expected to
reduce depreciation expense by approximately $18 million per quarter. We expect
that as a result of this change, together with ongoing cost
22
efficiency programs, fourth quarter gross margin will improve to around 13%.
During the third quarter of 2002, we recorded $13.8 million charge principally
related to the consolidation of our operations in Taiwan. The charge was
comprised of $10.8 million to write-off leasehold improvements and other
long-lived assets and $3.0 million for lease termination and other exit costs.
During the second quarter of 2002, we consolidated some of our U.S. office
locations and closed our San Jose test facility and recognized $4.8 million in
lease cancellation costs and other facility exit expenses. These activities were
designed to reduce expenses and enhance operational efficiencies. We have
undertaken, and may continue to undertake, a variety of measures to reduce our
operating costs including consolidating packaging lines, reducing our worldwide
headcount, reducing compensation levels, shortening work schedules, improving
factory efficiencies, negotiating cost reductions with our vendors and closing
non-critical manufacturing facilities.
As a result of the favorable impact on our cash flows caused by the
increase in demand for our services, net cash provided by operating activities
for the three months ended June 30, 2002 and September 30, 2002 was $26.7
million and $65.2 million, respectively. The net cash used by operating
activities for the three months ended March 31, 2002 was $8.8 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 nine months ended
September 30, 2002 and 2001 was $34.8 million and $145.2 million, respectively.
Net cash used by financing activities during the nine months ended September 30,
2002 was $14.5 million and net cash provided by financing activities during the
nine months ended September 30, 2001 was $229.7 million. Our cash and cash
equivalents balance as of September 30, 2002 was $235.0 million, and we have up
to $100 million available from our unused revolving line of credit. Our ongoing
primary cash needs are for debt service, principally interest, equipment
purchases, and working capital. Additionally, we may require cash to consummate
business combinations to diversify our geographic operations and expand our
customer base.
In June 2002 and September 2002 we amended our existing bank debt
covenants to provide further flexibility with respect to capital expenditures,
investment restrictions and other financial covenants measured in part by our
liquidity and earnings. As part of the September 2002 amendment, lenders under
our bank debt facility agreed to extend the existing financial covenant
framework through December 31, 2003. Our bank debt encompasses a $97.4 million
term loan and the unused revolving line of credit. The term loan maintained its
scheduled amortization of approximately $12 million per quarter beginning in
December 2003 through December 2005. The bank debt facility will revert to its
original covenant structure in January 2004. Additionally, the reduced levels of
our operating cash flow in 2001 required us to renegotiate our 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 hand. In general, covenants in
the agreements governing our existing debt, and debt we may incur in the future,
may materially restrict our operations, including our ability to incur debt, pay
dividends, make certain investments and payments and encumber or dispose of
assets. In addition, financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event our results of
operations do not meet our plans and we are unable to amend such financial
covenants prior to default. A default under one debt instrument may also trigger
cross-defaults under our other debt instruments. An event of default under one
or more of our debt instruments, if not cured or waived, could have a material
adverse effect on us. Our credit and debt ratings were lowered in August 2002,
and accordingly, it may be difficult for us to secure additional financing, if
we need it, on satisfactory terms or at all.
During this industry downturn, our business strategy has been in part to
enhance our financial flexibility. In February 2001 and May 2001, we raised
$500.0 million through the sale of 9.25% senior notes due 2008 and $250.0
million through the sale of 5.75% convertible subordinated notes due 2006,
respectively. Of the combined net proceeds of $733.0 million, we used $509.5
million to repay amortizing term loans. 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 September 30, 2002, we had a total of $1,805.7 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 nine months ended September 30, 2002,
interest expense payable in cash was $107.7 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 each 2002 and 2003, primarily to support the
development of our Flip Chip, System-in-Package and high-end BGA capabilities.
During the nine months ended September 30, 2002 and 2001, we made capital
expenditures of $82.3 million and $134.9 million, respectively. During the year
ended December 31, 2001 and 2000, we made capital expenditures of $158.7 million
and $480.1 million, respectively.
23
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 can not be less than 1.7 billion Japanese
yen and can not exceed 2.4 billion Japanese yen ($13.9 million to $19.7 million
based on the spot exchange rate at September 30, 2002). In October 2002, we
terminated negotiations with Fujitsu Limited to acquire Fujitsu's packaging and
test operation in Kagoshima, Japan pursuant to the April 2002 memorandum of
understanding between our company and Fujitsu. In July 2001, we acquired, in
separate transactions, Taiwan Semiconductor Technology Corporation (TSTC) and
Sampo Semiconductor Corporation (SSC) in Taiwan. The combined purchase price,
including the settlement of a January 2002 earn-out provision, was paid with the
issuance of 6.7 million shares of our common stock valued at $123.1 million, the
assumption of $34.8 million of debt and $3.7 million of cash consideration, net
of acquired cash. In January 2001, Amkor Iwate Corporation commenced operations
and acquired from Toshiba a packaging and test facility located in the Iwate
prefecture in Japan financed by a short-term note payable to Toshiba of $21.1
million and $47.0 million in other financing from a Toshiba affiliate. We
currently own 60% of Amkor Iwate and Toshiba owns 40% of the outstanding shares,
which shares we are required to purchase within three years. The share purchase
price will be determined based on the performance of the joint venture during
the three-year period, but can not be less than 1 billion Japanese yen and can
not exceed 4 billion Japanese yen ($8.2 million to $32.8 million based on the
spot exchange rate at September 30, 2002).
During the third quarter of 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 ($4.66 per share based on the spot exchange
rate at September 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 closed on September 30, 2002. As of the
closing date, we received $58.1 million in net cash proceeds and promissory
notes totaling 42 billion Korean won ($34.2 million based on the spot exchange
rate at September 30, 2002) of which 21 billion Korean won is payable on
September 30, 2003 and the balance is payable on February 10, 2004. We divested
an additional 1 million shares of ASI stock as payment of transaction costs to
our financial advisors in connection this transaction. In a separate
transaction, Dongbu acquired 12.0 million newly issued shares of ASI in July
2002. Following these transactions, we own 26.7 million shares of ASI or
approximately 21% of ASI's outstanding voting stock.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 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
existing terms of the foundry agreement, Amkor has exclusive rights to sell all
the output of ASI's foundry until 2008. As of the date of this report, the
negotiations with Dongbu to terminate the foundry agreement and to acquire the
net assets associated with our wafer fabrication services segment were ongoing.
The ultimate amount of net proceeds associated with these transactions is
uncertain and can not be reasonably estimated. Upon termination of the foundry
agreement, we will reflect our wafer fabrication services segment as a
discontinued operation and we will no longer benefit from the income from
operations and cash flows of our wafer fabrication services segment.
In connection with the disposition of a portion of our interest in ASI, we
acquired a 10% interest in Acqutek from ASI for a total purchase price of $1.9
million. Our investment in Acqutek is classified as a marketable security that
is available for sale. Acqutek supplies materials to the semiconductor industry
and is a publicly traded company in Korea. An entity controlled by the family of
James Kim, our Chairman and Chief Executive Officer, holds a 25% ownership
interest in Acqutek. We have historically purchased and continue to purchase
leadframes from Acqutek. Total purchases from Acqutek included in cost of
revenue for the nine months ended September 30, 2002 and 2001 was $12.5 million
and $11.5 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 can not 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.
24
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, as amended. 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 September 30, 2002 and December 31, 2001, the accrual for current
taxes and estimated additional taxes was $51.9 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.
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. As of September 30, 2002, net deferred tax assets were
$165.4 million. 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. The year ending December 31,
2002, will be our second consecutive year of losses; however, we generated
during the years ended December 31, 2000, 1999, and 1998 cumulative income
before income taxes, equity in income of investees and minority interest of
$403.5 million. If we continue to incur losses, 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
25
longer expected to reach previously anticipated utilization levels. In addition,
during the second quarter of 2002, we experienced a significant decline in our
market capitalization. These events triggered an impairment review in accordance
with SFAS No. 144. This review included a company-wide evaluation of
underutilized assets that could be sold and a detailed update of our operating
and cash flow projections. As a result of this analysis, we identified $19.8
million of test and packaging fixed assets to be disposed. We recognized an
$18.7 million impairment charge to reduce the carrying value of the test and
packaging fixed assets to be disposed to their fair value less cost to sell.
Fair value of the assets to be disposed was determined with the assistance of an
appraisal firm and available information on the resale value of the equipment.
Additionally, we tested for impairment our long-lived test assets that are held
and used, including intangible assets that we are amortizing, and certain
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. Effective with the fourth quarter of 2002, we will
change the estimated useful lives of certain of our packaging equipment from
four years to seven years for depreciation purposes, which is in line with our
historical usage and consistent with other companies in our industry. We will
not extend the useful lives of the packaging equipment associated with the
second quarter impairment charge based on our expected use of that equipment and
the associated cash flows. This change is expected to reduce depreciation
expense by approximately $18 million per quarter. Our decision to change the
estimated useful lives of such packaging equipment was based on the following:
- - historical experience;
- - expected future cash flows;
- - prevailing industry practice;
- - consultations with an independent appraisal firm; and
- - consultations with equipment manufacturers.
We believe that our principal competitors depreciate their packaging
assets over periods six to eight years. The change of the estimated useful lives
is considered a change in estimate and will be accounted for prospectively
beginning with the fourth quarter of 2002.
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
26
per share as of June 30, 2002 based on negotiations with a Dongbu to acquire a
portion of our interest in ASI. At September 30, 2002 and October 31, 2002,
ASI's stock price was $2.96 per share and $4.13 per share, respectively. During
the fourth quarter of 2002, if the market value of ASI's stock remains below our
carrying value, we will likely record an additional impairment charge.
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
can not 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 and third quarter of 2002, there continues
to be significant uncertainty throughout the industry related to market demand
which is hindering visibility throughout the supply chain. That lack of
visibility makes it difficult to forecast whether the recovery we are
experiencing will be sustained. If industry conditions do not continue to
improve, we could continue to sustain significant losses which could materially
impact our business including our liquidity.
FLUCTUATIONS IN OPERATING RESULTS -- OUR OPERATING RESULTS MAY VARY
SIGNIFICANTLY AS A RESULT OF FACTORS THAT WE CAN NOT 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,
27
- - 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 nine months ended September
30, 2002, as compared to the comparable periods a year ago, the decline in
average selling prices of 7% and 18%, respectively, significantly impacted our
gross margins. We expect that average selling prices for our packaging and test
services will continue to decline in the future. If our semiconductor package
mix does not shift to new technologies with higher prices or we can not 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 September 30, 2002, total debt was $1,805.7
million. We have a $100.0 million revolving line of credit of which no amounts
were drawn as of September 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.
In June 2002 and September 2002 we amended our existing bank debt
covenants to provide further flexibility with respect to capital expenditures,
investment restrictions and other financial covenants measured in part by our
liquidity and earnings. As part of the September 2002 amendment, lenders under
our bank debt facility agreed to extend the existing financial covenant
framework through December 31, 2003. Our bank debt encompasses a $97.4 million
term loan and the unused revolving line of credit. The term loan maintained its
scheduled amortization of approximately $12 million per quarter beginning in
December 2003 through December 2005. The bank debt facility will revert to its
original covenant structure in January 2004. In general, covenants in the
agreements governing our existing debt, and debt we may incur in the future, may
materially restrict our operations, including our ability to incur debt, pay
dividends, make certain investments and payments and encumber or dispose of
assets. In addition, financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event our results of
operations do not meet our plans and we are unable to amend such financial
covenants prior to default. A 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.
28
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 September 30, 2002 we owned approximately 21% 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 were to significantly reduce or curtail its
operations for any reason, or if our relationship with ASI were 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 nine months ended September 30, 2002. Wafer fabrication services
revenue should be around $50 million for the fourth quarter of 2002. 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 the third quarter of 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 ($4.66 per share based on the spot exchange
rate at September 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 closed on September 30, 2002. As of the
closing date, we received $58.1 million in net cash proceeds and promissory
notes totaling 42 billion Korean won ($34.2 million based on the spot exchange
rate at September 30, 2002) of which 21 billion Korean won is payable on
September 30, 2003 and the balance is payable on February 10, 2004. We divested
an additional 1 million shares of ASI stock as payment of transaction costs to
our financial advisors in connection this transaction. In a separate
transaction, Dongbu acquired 12.0 million newly issued shares of ASI in July
2002. Following these transactions, we own 26.7 million shares of ASI or
approximately 21% of ASI's outstanding voting stock.
The definitive agreements with Dongbu also provide that Amkor, ASI and
Dongbu will reach agreement no later than December 31, 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
existing terms of the foundry agreement, Amkor has exclusive rights to sell all
the output of ASI's foundry until 2008. As of the date of this report, the
negotiations with Dongbu to terminate the foundry agreement and to acquire the
net assets associated with our wafer fabrication services segment were ongoing.
The ultimate amount of net proceeds associated with these transactions is
uncertain and can not be reasonably estimated. Upon termination of the foundry
agreement, we will reflect our wafer fabrication services segment as a
discontinued operation and we will no longer benefit from the income from
operations of our wafer fabrication services segment.
ABSENCE OF BACKLOG -- WE MAY NOT BE ABLE TO ADJUST COSTS QUICKLY IF OUR
CUSTOMERS' DEMAND FALLS SUDDENLY.
Our packaging and test business does not typically operate with any
material backlog. We expect that in the future our quarterly net revenues from
packaging and test will continue to be substantially dependent upon our
customers' demand in that quarter. None of our customers have committed to
purchase any significant amount of packaging or test services or to provide us
with binding forecasts of demand for packaging and test services for any future
period. In addition, our customers could reduce, cancel or delay their purchases
of packaging and test services. Because a large portion of our costs is fixed
and our expense levels are based in part on our expectations of future revenues,
we may be unable to adjust costs in a timely manner to compensate for any
revenue shortfall.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- WE DEPEND ON OUR FACTORIES IN
THE PHILIPPINES, KOREA, JAPAN, TAIWAN AND CHINA. MANY OF OUR CUSTOMERS' AND
VENDORS' OPERATIONS ARE ALSO LOCATED OUTSIDE OF THE U.S.
We provide packaging and test services through our factories located in
the Philippines, Korea, Japan, Taiwan and China. We also source wafer
fabrication services from ASI's wafer fabrication facility in Korea. Moreover,
many of our customers' and vendors'
29
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 can not 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 20% of ASI's
wafer fabrication facility's capacity per 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 can not 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 if ASI can not 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 can not 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 can not 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
30
significantly reduce or terminate its purchase of ASI's wafer fabrication
services, our wafer fabrication business would be seriously harmed.
The definitive agreements we consummated with Dongbu provide that Amkor,
ASI and Dongbu will reach agreement no later than December 31, 2002 to terminate
Amkor's foundry agreement with ASI. Under the existing terms of the foundry
agreement, Amkor has exclusive rights to sell all the output of ASI's foundry
until 2008. As of the date of this report, the negotiations with Dongbu to
terminate the foundry agreement and to acquire the net assets associated with
our wafer fabrication services segment were ongoing. In addition, pursuant to
the definitive agreements, Amkor and Dongbu agreed to use reasonable best
efforts to cause Dongbu Electronics and ASI to be merged together as soon as
practicable. As of the date of this report, Texas Instruments, Dongbu and ASI
are negotiating revisions to the technology transfer assistance agreement and
the manufacturing and purchase agreements.
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.
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 can not 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 CAN NOT 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 can not 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.
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 have been operating for some
time. Many of these companies have also established relationships with many
large semiconductor companies that
31
are current or potential customers of our company. If we can not 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 October 31, 2002, we held 187 U.S. patents and had 259 pending
patents. In addition to the U.S. patents, we held 531 patents in foreign
jurisdictions. We expect to continue to file patent applications when
appropriate to protect our proprietary technologies, but we can not 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.
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.
CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN SUBSTANTIALLY CONTROL THE OUTCOME OF ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL.
As of October 31, 2002, Mr. James Kim and members of his family
beneficially owned approximately 44.3% of our outstanding common stock. Mr.
James Kim's family, acting together, will substantially control all matters
submitted for approval by our stockholders. These matters could include:
- - the election of all of the members of our Board of Directors;
- - proxy contests;
- - 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.
32
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 September 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 $2.0 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 and
include the cash and promissory notes received by us from Dongbu in connection
with the September 2002 transaction to divest a portion of our investment in
ASI. Based on the portfolio of won-based assets and liabilities at September 30,
2002 and December 31, 2001, a 20% increase in the Korean won to U.S. dollar spot
exchange rate as of the balance sheet dates would result in a decrease of
approximately $4.3 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
and our 2002 acquisition of a semiconductor packaging business of Citizen Watch
Co., Ltd . Based on the portfolio of yen-based assets and liabilities at
September 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 $16.4 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 September 30, 2002, we had a total of $1,805.7 million of debt of which 92%
was fixed rate debt and 8% was variable rate debt. Our variable rate debt
principally consisted of short-term borrowings and amounts outstanding under our
secured bank facilities that included term loans and a $100.0 million revolving
line of credit of which no amounts were drawn as of September 30, 2002. The
fixed rate debt consisted of senior notes, senior subordinated
33
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, in
thousands, of our fixed and variable rate debt as of September 30, 2002.
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt:
Fixed rate debt $ 3,628 $ 14,879 $ 767 $ 62 $ 675,000 $ 958,750 $1,653,086 $ 507,211
Average interest rate 4.0% 4.0% 4.0% 4.0% 8.0% 8.4% 8.1%
Variable rate debt $ 36,118 $ 38,281 $ 55,268 $ 17,860 $ 2,858 $ 2,187 $ 152,572 $ 152,572
Average interest rate 2.0% 5.8% 5.8% 5.7% 4.3% 3.4% 4.8%
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90-day period prior to the date of this report, we
carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in our Exchange
Act filings.
(b) There were no significant changes in the our company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there
were no corrective actions taken.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
34
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
- ------ ----------------------
4.15 Amendment No. 4 to the Amended and restated credit agreement dated
as of September 26, 2002 between the Registrant and the Issuing
Banks and Salomon Smith Barney, Inc., Citicorp USA, Inc. and
Deutsche Banc Alex. Brown, Inc.
10.20 Amendment to share sale and purchase agreement and shareholders
agreement the Registrant and Dongbu Corporation dated as of
September 27, 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
(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 September 30, 2002:
Current Report on Form 8-K dated August 21, 2002 (filed August 22, 2002)
related to a press release dated August 21, 2002 announcing the status of
negotiations between Texas Instruments, Dongbu and Anam Semiconductor, Inc.
Current Report on Form 8-K dated July 30, 2002 (filed August 1, 2002)
related to press releases dated July 30, 2002 and July 31, 2002 announcing our
financial results for the second quarter ended June 30, 2002.
35
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: November 14, 2002
36
SECTION 302(A) CERTIFICATION
I, James J. Kim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Amkor Technology,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ JAMES J. KIM
------------------------------
By: James J. Kim
Title: Chief Executive Officer
37
SECTION 302(A) CERTIFICATION
I, Kenneth T. Joyce, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Amkor Technology,
Inc.;
8. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
12. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ KENNETH T. JOYCE
------------------------------
By: Kenneth T. Joyce
Title: Chief Financial Officer
38