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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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 such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold as of the last business day of the registrant's most recently
completed second fiscal quarter, June 30, 2003, was approximately
$1,221,523,820.
The number of shares outstanding of each of the issuer's classes of common
equity, as of March 1, 2004, was as follows: 174,644,250 shares of Common Stock,
$0.001 par value.
Documents Incorporated by Reference: None.
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TABLE OF CONTENTS
Page
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PART I ................................................................................................ 3
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 14
Item 3. Legal Proceedings....................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................................... 18
PART II................................................................................................. 19
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 19
Item 6. Selected Financial Data................................................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 48
Item 8. Financial Statements and Supplementary Data............................................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................. 85
Item 9A. Controls and Procedures................................................................. 85
PART III................................................................................................ 86
Item 10. Directors and Executive Officers of the Registrant...................................... 86
Item 11. Executive Compensation.................................................................. 90
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..................................................................... 95
Item 13. Certain Relationships and Related Transactions.......................................... 97
Item 14. Principal Accountant Fees and Services.................................................. 99
PART IV................................................................................................. 100
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 100
All references in this annual report to "Amkor," "we," "us," "our" or the
"company" are to Amkor Technology, Inc. and its subsidiaries. We refer to the
Republic of Korea, which is also commonly known as South Korea, as "Korea." All
references in this annual report to "ASI" are to Anam Semiconductor, Inc. and
its subsidiaries. As of December 31, 2003, we owned 12% of ASI's outstanding
voting stock. PowerQuad, SuperBGA, FlexBGA, ChipArray, PowerSOP, MicroLeadFrame,
ETCSP, TapeArray, VisionPak and Amkor Technology are trademarks or registered
trademarks of Amkor Technology, Inc. All other trademarks appearing herein are
held by their respective owners.
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PART I
ITEM 1. BUSINESS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This business section contains forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors that May Affect Future Operating Performance" in Item
7 of this annual report. These factors may cause our actual results to differ
materially from any forward-looking statement.
OVERVIEW
Amkor is one of the world's largest subcontractors of semiconductor
packaging and test services. Amkor pioneered the outsourcing of semiconductor
assembly and test services in 1968, and over the years has built a leading
position by:
- Providing a broad portfolio of packaging and test technologies and
services;
- Maintaining a leading role in the design and development of new package and
test technologies;
- Cultivating long-standing relationships with customers, including many of
the world's leading semiconductor companies;
- Developing expertise in high-volume manufacturing; and
- Diversifying our operational scope by providing production capabilities in
China, Japan and Taiwan, in addition to long-standing capabilities in Korea
and the Philippines.
The semiconductors that we package and test for our customers ultimately
become components in electronic systems used in communications, computing,
consumer, industrial, automotive and military applications. Our customers
include, among others, Atmel Corporation, Infineon Technologies AG, Intel
Corporation, LSI Logic Corporation, Mediatek Inc., Philips Electronics N.V., ST
Microelectronics PTE, Sony Semiconductor Corporation, Toshiba Corporation and
Xilinx, Inc. The outsourced semiconductor packaging and test market is very
competitive. We also compete with the internal semiconductor packaging and test
capabilities of many of our customers, some of whom can use us as a source of
overflow capacity.
Packaging and test are an integral part of the semiconductor manufacturing
process. Semiconductor manufacturing begins with silicon wafers and involves the
fabrication of electronic circuitry into complex patterns, thus creating
individual chips on the wafers. The packaging process creates an electrical
interconnect between the semiconductor chip and the system board. In packaging,
the fabricated semiconductor wafers are cut into individual chips which are
attached to a substrate and then encased in a protective material to provide
optimal electrical and thermal performance. The packaged chips are then tested
using sophisticated equipment to ensure that each packaged chip meets its design
specifications. Increasingly, packages are custom designed for specific chips
and specific end-market applications.
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. (ASI). On February 28, 2003, we sold our wafer fabrication
services business to ASI. We have restated our historical results to reflect our
wafer fabrication services segment as a discontinued operation. Amkor was
incorporated in 1997 in the state of Delaware as the successor-in-interest to
various entities initially founded in 1970. References in this annual report to
Amkor shall mean Amkor and, as applicable, its predecessor entities.
WEBSITE ACCESS TO SEC REPORTS
We maintain an Internet website at www.amkor.com. Our periodic SEC reports
(including annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to
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Section 13(a) or 15(d) of the Exchange Act) are accessible through our website,
free of charge, as soon as reasonably practicable after such reports are filed
electronically with the SEC. To access these reports, go to our website at
www.amkor.com/ir.
INDUSTRY BACKGROUND
Semiconductor devices are the essential building blocks used in most
electronic products. As semiconductor devices have evolved, there have been
three important consequences: (1) an increase in demand for computers and
consumer electronics fostered by declining prices for such products; (2) the
proliferation of semiconductor devices into diverse end products such as
consumer electronics, communications equipment and automotive systems; and (3)
an increase in the semiconductor content in electronic products.
OUTSOURCING TRENDS
Historically, semiconductor companies packaged semiconductors primarily in
their own factories and relied on subcontract providers to handle overflow
volume. In recent years, semiconductor companies have increasingly outsourced
their packaging and testing to subcontract providers, such as us, for the
following reasons:
SUBCONTRACT PROVIDERS HAVE DEVELOPED EXPERTISE IN ADVANCED PACKAGING
TECHNOLOGIES.
Semiconductor companies are facing increasing demands for miniaturization
and improved thermal and electrical performance in semiconductor devices. This
trend, coupled with increasing complexity in the design of semiconductor
devices, has led many semiconductor companies to view packaging as an enabling
technology requiring sophisticated expertise and technological innovation. As
packaging and technology becomes more advanced, many semiconductor companies
have had difficulty developing adequate internal packaging capabilities and are
relying on subcontract providers of packaging and test services as a key source
of new package design and production.
SUBCONTRACT PROVIDERS CAN OFFER SHORTER TIME TO MARKET FOR NEW PRODUCTS
BECAUSE THEIR RESOURCES ARE DEDICATED TO PACKAGING AND TEST SOLUTIONS.
We believe that semiconductor companies are seeking to shorten the time to
market for their new products, and that having the right packaging technology
and capacity in place is a critical factor in facilitating product
introductions.
Semiconductor companies frequently do not have sufficient time to develop
their packaging and test capabilities or the equipment and expertise to
implement new packaging technology in volume. For this reason, semiconductor
companies are leveraging the resources and capabilities of subcontract packaging
and test companies to deliver their new products to market more quickly.
MANY SEMICONDUCTOR MANUFACTURERS DO NOT HAVE THE ECONOMIES OF SCALE TO OFFSET
THE SIGNIFICANT COSTS OF BUILDING PACKAGING AND TEST FACTORIES.
Semiconductor packaging is a complex process requiring substantial
investment in specialized equipment and factories. As a result of the large
capital investment required, this manufacturing equipment must operate at a high
capacity level for an extended period of time to be cost effective. Shorter
product life cycles, faster introductions of new products and the need to update
or replace packaging equipment to accommodate new package types have made it
more difficult for semiconductor companies to maintain cost effective
utilization of their packaging and test assets. Subcontract providers of
packaging and test services, on the other hand, can use their equipment to
support a broad range of customers, potentially generating greater manufacturing
economies of scale.
THE AVAILABILITY OF HIGH QUALITY PACKAGING AND TESTING FROM SUBCONTRACTORS
ALLOWS SEMICONDUCTOR MANUFACTURERS TO FOCUS THEIR RESOURCES ON SEMICONDUCTOR
DESIGN AND WAFER FABRICATION.
As semiconductor process technology migrates to larger wafers and smaller
feature size, the cost of a state-of-the-art wafer fabrication facility can
approach $3 billion or more. Subcontractors have demonstrated their ability to
deliver advanced packaging and test solutions at a competitive price, thus
allowing semiconductor companies to focus their capital resources on core wafer
fabrication activities rather than invest in advanced packaging and test
technology.
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THERE ARE A GROWING NUMBER OF SEMICONDUCTOR COMPANIES WITHOUT FACTORIES,
KNOWN AS "FABLESS" COMPANIES, WHICH DESIGN SEMICONDUCTOR CHIPS AND OUTSOURCE ALL
OF THE ASSOCIATED MANUFACTURING.
Fabless semiconductor companies focus exclusively on the semiconductor
design process and outsource virtually every step of the manufacturing process.
We believe that fabless semiconductor companies will continue to be a
significant driver of growth in the subcontract packaging and test industry.
These outsourcing trends, combined with the growth in the number of
semiconductor devices being produced and sold, are increasing demand for
subcontracted packaging and test services. Today, nearly all of the world's
major semiconductor companies use packaging and test service subcontractors for
at least a portion, if not all, of their packaging and test needs.
COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
BROAD OFFERING OF PACKAGE DESIGN, PACKAGING AND TEST SERVICES
Integrating advanced semiconductor technology into electronic end products
often poses unique thermal and electrical challenges, and Amkor employs a large
number of design engineers to create package formats that solve these
challenges. Amkor produces more than 1,000 package types, representing one of
the broadest package offerings in the semiconductor industry. We provide
customers with a wide array of packaging alternatives including traditional
leadframe, advanced leadframe and laminate packages, in both wirebond and flip
chip formats. We are also a leading assembler of complementary metal oxide
silicon ("CMOS") image sensor devices used in digital cameras and cellular
phones, and micro-electromechanical system ("MEMS") devices used in a variety of
end markets, including automotive, industrial and personal entertainment. We
also offer an extensive line of services to test digital, logic, analog and
mixed signal semiconductor devices. We believe that the breadth of our packaging
and test services is important to customers seeking to reduce the number of
their suppliers.
LEADING TECHNOLOGY INNOVATOR
We believe that we are one of the leading providers of advanced
semiconductor packaging and test solutions. We have designed and developed
several state-of-the-art leadframe and laminate package formats including our
MicroLeadFrame(R), VisionPak(TM), PowerQuad(R), SuperBGA(R), fleXBGA(R) and
ChipArray(R) BGA packages. To maintain our leading industry position, we have
more than 300 employees engaged in research and development focusing on the
design and development of new semiconductor packaging and test technology. We
work closely with customers and technology partners to develop new and
innovative package designs.
LONG-STANDING RELATIONSHIPS WITH PROMINENT SEMICONDUCTOR COMPANIES
Our customer base consists of more than 300 companies, including most of
the world's largest semiconductor companies. Over the last three decades Amkor
has developed long-standing relationships with many of our customers.
ADVANCED MANUFACTURING CAPABILITIES
We believe that our company's manufacturing excellence has been a key
factor in our success in attracting and retaining customers. We have worked with
our customers and our suppliers to develop proprietary process technologies to
enhance our existing manufacturing capabilities, reduce time to market, increase
quality and lower manufacturing costs. We believe our manufacturing cycle times
are among the fastest available from any subcontractor of packaging and test
services.
COMPETITIVE DISADVANTAGES
You should be aware that our competitive strengths may be diminished or
eliminated due to certain challenges faced by our company and which our
principal competitors may not face, including the following:
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- High Leverage and Restrictive Covenants -- Our substantial indebtedness and
the covenants contained in the agreements with our lenders could materially
restrict our operations and adversely affect our financial condition.
- Risks Associated with International Operations -- We depend on our
factories in Korea, the Philippines, Japan, Taiwan and China. Many of our
customers' operations are also located outside of the U.S. To the extent
political or economic instability or military actions occur in any of these
regions, our operations could be harmed.
- Difficulties Integrating Acquisitions -- We face challenges as we integrate
new and diverse operations and try to attract qualified employees to
support our expansion plans.
In addition, we and our competitors face a variety of operational and
industry risks inherent to the industry in which we operate. For a complete
discussion of risks associated with our business, please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors that May Affect Future Operating Performance" in Item 7 of this annual
report.
STRATEGY
To build upon our industry position and to remain a preferred subcontractor
of semiconductor packaging and test services, we are pursuing the following
strategies:
CAPITALIZE ON OUTSOURCING TREND
We believe that while the packaging and test outsourcing trend was impacted
during the recent industry downturn, there remains a long-term trend towards
more outsourcing on the part of semiconductor companies. We believe that many
vertically integrated semiconductor companies reduced their investments in
advanced packaging and test technology during the downturn and increased their
reliance on outsourced packaging and test suppliers for advanced package and
test requirements. We also believe that as the semiconductor content of
electronic end products increases in complexity, so will the need for the
advanced package and test solutions. Accordingly, we expect semiconductor
companies will expand their outsourcing of advanced semiconductor packaging and
test services and we intend to capitalize on this growth. We believe
semiconductor companies will increasingly outsource packaging and test services
to companies who can provide advanced technology and high-quality, high-volume
manufacturing expertise.
LEVERAGE SCALE AND SCOPE OF PACKAGING AND TEST CAPABILITIES
We are committed to expanding both the scale of our operations and the
scope of our packaging and test services. We believe that our scale and scope
allow us to provide cost-effective solutions to our customers in the following
ways:
- We have the capacity to absorb large orders and accommodate quick
turn-around times,
- We use our size and industry position to obtain low pricing on materials
and manufacturing equipment, and
- We offer an exceptionally broad range of packaging and test services and
can serve as a single source for many of our customers.
MAINTAIN OUR TECHNOLOGY LEADERSHIP
We intend to continue to develop leading-edge packaging technologies. We
believe that our focus on research and product development will enable us to
enter new markets early, capture market share and promote the adoption of our
new package designs as industry standards. We seek to enhance our in-house
research and development capabilities through the following activities:
- Collaborating with integrated device manufacturer customers, or IDM
customers, to gain access to technology roadmaps for next generation
semiconductor designs and to develop new packages that satisfy their future
requirements,
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- Collaborating with original equipment manufacturers, or OEMs, such as
Toshiba Corporation, Cisco Systems, Sony Ericsson Corporation and Nokia
Group, to design new packages that function with the next generation of
electronic products, and
- Collaborating with wafer foundry companies on future package needs for new
wafer technologies.
BROADEN THE GEOGRAPHICAL SCOPE OF OUR MANUFACTURING BASE
Prior to 2001, our company's manufacturing operations were centered in
Korea and the Philippines. In order to diversify our operational footprint and
better serve our customers, we adopted a strategy of expanding our operational
base to key microelectronic manufacturing areas of Asia. During 2001, we
commenced a joint venture with Toshiba Corporation in Japan and we established a
manufacturing presence in Taiwan and China. Our goal is to continue to build
operational scale in these new geographic locations and capitalize on growth
opportunities in their respective markets. In January 2004, we purchased the
remaining interest in our joint venture from Toshiba Corporation and now own
100% of the operation.
PROVIDE AN INTEGRATED, TURNKEY SOLUTION
We are able to provide a turnkey solution comprised of semiconductor
package design, packaging, test and drop shipment services. We believe that this
capability will enable customers to achieve faster time to market for new
products and improved cycle times.
STRENGTHEN CUSTOMER RELATIONSHIPS
We intend to further develop our long-standing customer relationships. We
believe that because of today's shortened technology life cycles, integrated
communications are crucial to speed time to market. We have customer support
personnel located near the facilities of major customers and in acknowledged
technology centers. These support personnel work closely with customers to plan
production for existing packages as well as to develop requirements for the next
generation of packaging technology. In addition, we implement direct electronic
links with our customers to enhance communication and facilitate the flow of
real-time engineering data and order information.
PURSUE STRATEGIC ACQUISITIONS
We evaluate candidates for strategic acquisitions and joint ventures to
strengthen our business and expand our geographic reach. We believe that there
are many opportunities to acquire the in-house packaging operations of our
customers and competitors. To the extent we acquire operations of our customers,
we intend to structure any such acquisition to include long-term supply
contracts with those customers. In addition, we intend to enter new markets near
clusters of wafer foundries, which are large sources of demand for packaging and
test services.
PACKAGING AND TEST SERVICES
PACKAGING SERVICES
We offer a broad range of package formats designed to provide our customers
with a full array of packaging solutions. Our packages are divided into two
families: traditional, which includes principally traditional leadframe
products, and advanced packages, which includes principally advanced leadframes
and laminate products.
In response to the increasing demands of today's high-performance
electronic products, semiconductor packages have evolved from traditional
leadframe packages and now include advanced leadframe and laminate formats. The
differentiating characteristics of these package formats include (1) the size of
the package, (2) the number of electrical connections the package can support,
(3) the thermal and electrical characteristics of the package, and (4) in the
case of our System-in-Package family of laminate packages, the integration of
multiple active and passive components in a single package.
As semiconductor devices increase in complexity, they often require a
larger number of electrical connections. Leadframe packages are so named because
they connect the electronic circuitry on the semiconductor device to the system
board through leads on the perimeter of the package. Our laminate products,
typically called ball grid array or BGA, use
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balls on the bottom of the package to create the electrical connections. This
array format can support larger numbers of electrical connections.
Evolving semiconductor technology has allowed designers to increase the
level of performance and functionality in portable and handheld electronics
products, and this has led to the development of smaller package sizes. In
leading-edge packages, the size of the package is reduced to approximately the
size of the individual chip itself in a process known as chip scale packaging.
The following table sets forth by product type, for the periods indicated,
the amount of our packaging and test net revenues in millions of dollars and the
percentage of such net revenues:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001
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(DOLLARS IN MILLIONS)
Traditional packages........................ $ 340 21.2% $ 391 27.8% $ 439 32.8%
Advanced packages........................... 1,124 70.1 915 65.1 790 59.1
Test........................................ 140 8.7 100 7.1 108 8.1
------ ------ ------ ------ ------ ------
Total packaging and test net revenues.... $1,604 100.0% $1,406 100.0% $1,337 100.0%
====== ====== ====== ====== ====== ======
TRADITIONAL PACKAGES
Traditional leadframe-based packages are the most widely used package
family in the semiconductor industry and are typically characterized by a chip
encapsulated in a plastic mold compound with metal leads on the perimeter. Two
of the most popular traditional leadframe package types are SOIC and QFP, which
support a wide variety of device types and applications. The traditional
leadframe package family has evolved from "through hole design", where the leads
are plugged into holes on the circuit board to "surface mount design", where the
leads are soldered to the surface of the circuit board. We offer a wide range of
lead counts and body sizes to satisfy variations in the size of customers'
semiconductor devices.
ADVANCED PACKAGES
ADVANCED LEADFRAME PACKAGES
Through a process of continuous engineering and customization, we have
designed several advanced leadframe package types that are thinner and smaller
than traditional leadframe packages, with the ability to accommodate more leads
on the perimeter of the package. These advanced leadframe packages typically
have superior thermal and electrical characteristics, which allow them to
dissipate heat generated by high-powered semiconductor devices while providing
enhanced electrical connectivity. We plan to continue to develop increasingly
smaller versions of these packages to keep pace with continually shrinking
semiconductor device sizes and demand for miniaturization of portable electronic
products.
One of our most successful advanced leadframe package offerings is the
MicroLeadFrame(R) family of QFN, or Quad Flat No-lead packages. This package
family is particularly well suited for radio frequency ("RF") and wireless
applications. Our smallest MicroLeadFrame(R) package design is less than 2mm
square and can fit on the head of a pin.
LAMINATE PACKAGES
The laminate family employs the ball grid array design, which utilizes a
plastic or tape laminate substrate rather than a leadframe substrate and places
the electrical connections on the bottom of the package rather than around the
perimeter.
The ball grid array format was developed to address the need for higher
lead counts required by advanced semiconductor devices. As the number of leads
on leadframe packages increased, leads were placed closer to one another in
order to maintain the size of the package. The increased lead density resulted
in electrical shorting problems, and required the development of increasingly
sophisticated and expensive techniques for producing circuit boards to
accommodate the high number of leads.
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The ball grid array format solved this problem by effectively creating
leads on the bottom of the package in the form of small bumps or balls that can
be evenly distributed across the entire bottom surface of the package, allowing
greater distance between the individual leads.
Our first package format in this family was the plastic ball grid array
(PBGA). We have subsequently designed or licensed additional ball grid array
package formats that have superior performance characteristics and features that
enable low-cost, high-volume manufacturing. These laminate products include:
- SuperBGA(R), which includes a copper layer to dissipate heat and is
designed for low-profile, high-power applications, and
- TEPBGA-2, which is a standard PBGA with thicker copper layers plus an
integrated heat slug and is designed for enhanced thermal performance in
high power applications.
We have also designed a variety of packages, commonly referred to as chip
scale packages, or CSP, which are not much larger than the chip itself. Chip
scale packages are becoming widely adopted as designers and manufacturers of
consumer electronics seek to achieve higher levels of performance while
shrinking the product size. Some of our chip scale packages include:
- ChipArray(R)BGA and TapeArray(TM)BGA, in which the package is only 1.5 mm
larger than the chip itself, and
- Wafer Level Package, which further reduces package size and increases
manufacturing efficiency.
Advances in packaging technology now allow the placing of two or more chips
on top of each other within an individual package. This concept, known as
stacked packaging, permits a higher level of semiconductor density and more
functionality. In addition, advance wafer thinning technology has fostered the
creation of extremely thin packages that can be placed on top of each other
within standard height restrictions used in microelectronic system boards. Some
of our stacked packages include:
- Stacked CSP (S-CSP), which is similar to our ChipArray(R) BGA, except that
S-CSP contains two or more chips placed on top of each other, and
- ETCSP(R), which are extremely thin chip scale packages that can be stacked
on top of each other.
OTHER ADVANCED PACKAGES
To capitalize on an increasing customer demand for higher levels of system
integration, we created our "System-in-Package" (SiP) modules. SiP modules
integrate various system elements into a single-function block, thus enabling
space and power efficiency, high performance and lower production costs. Most of
our SiP packages are laminate based. Our SiP technology is being used to produce
a variety of devices including power amplifiers for cellular phones and other
portable communication devices, wireless local area network (WLAN) modules for
networking applications, memory cards and sensors, such as fingerprint
recognition devices.
In order to accommodate the emerging use of digital imaging in a variety of
consumer products, we developed VisionPak(TM), a family of CMOS image
sensor-based packages that can be incorporated in such products as cellular
phones, PDAs, digital cameras and PCs.
We are also a leading outsourced provider of packages based on MEMS that
are used in a broad range of industrial and consumer applications, including
automobiles and home entertainment.
TEST SERVICES
Amkor provides a complete range of test solutions including wafer probe,
final test, strip test, marking, bake, drypack, and tape and reel. The devices
we test encompass nearly all technologies produced in the industry today
including digital, linear, mixed signal, memory, RF and integrated combinations
of these technologies. In 2003, Amkor tested over 1.5 billion
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units making Amkor one of the highest volume testing companies in the
subcontract packaging and test business. We tested 28%, 21% and 16% of the units
that we packaged in 2003, 2002 and 2001, respectively. Our test operations are
geographically located with our packaging operations to improve cycle time and
facilitate information flow between the various manufacturing operations and
with our customers.
We are also an industry leader in providing innovative testing solutions
that help to lower the total cost of test for our customers. Two examples of
these innovative approaches are strip test and low cost RF test. Strip test
involves parallel testing, in which large numbers of packaged units can be
tested at one time, as compared to "singulated" testing in which individual
packaged units are tested. With strip test, electronically isolated packaged
units are tested in parallel, resulting in fast handler index times and high
throughput rates, thus reducing test cost and increasing test yield. In 2003 we
strip tested approximately 300 million units, bringing the total devices strip
tested by us to over 500 million units since inception of the program in 1999.
In the area of low cost RF test, we have developed one of the lowest cost
test solutions in the industry for testing simple RF devices that are pervasive
in today's cell phones and WLAN products. This test approach combines
inexpensive test hardware with integration software to achieve test costs that
are significantly less costly than industry standard test practices. We believe
that our low cost RF test technology provides a competitive advantage for us
and, when it is combined with our System in Package and MicroLeadFrame(R)
packaging technologies, offers our customers one of the industry's lowest total
cost solutions.
Amkor also provides value added engineering services in addition to basic
device testing. These services include test program development, test hardware
development, test program conversion to lower cost test systems, device
characterization and reliability qualification testing. In total, we can provide
all of the test engineering services needed by our customers to get their
products ready for high volume production. We believe that this service will
continue to become more valuable to our customers as they face resource
constraints not only in their production testing, but also in their test
engineering and development areas.
In 2003, we strengthened our test operations in Taiwan and mainland China
by entering into strategic alliances in each of these countries. We entered into
these alliances in order to enhance our ability to provide test support for our
growing packaging business and to provide our customers broader and more rapidly
scalable test capacity.
WAFER FABRICATION SERVICES
In January 1998, we entered into a supply agreement with ASI to market
wafer fabrication services provided by ASI's semiconductor wafer fabrication
facility using 0.35 micron, 0.25 micron and 0.18 micron CMOS process technology
provided by Texas Instruments pursuant to technology assistance agreements with
ASI. On February 28, 2003, we sold our wafer fabrication services business to
ASI. Additionally, we obtained a release from Texas Instruments regarding our
contractual obligations with respect to wafer fabrication services to be
performed subsequent to the transfer of the business to ASI. We have restated
our historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded, in the first quarter of 2003, $1.0 million in
severance and other exit costs to close our wafer fabrication services
operations in Boise, Idaho and Lyon, France. Also in the first quarter of 2003,
we recognized a pre-tax gain on the disposition of our wafer fabrication
services business of $58.6 million ($51.5 million, net of tax). The carrying
value of the sold net assets associated with the business as of February 28,
2003 was $2.4 million.
RESEARCH AND DEVELOPMENT
Our research and development efforts focus on developing new package
products and improving the efficiency and capabilities of our existing
production processes. We believe that technology development is one of the key
success factors in the semiconductor packaging and test market and also believe
that we have a distinct advantage in this area. Our focus on research and
development efforts enable us to enter markets early, capture market share and
promote the adoption of our new package offerings as industry standards. These
efforts also support our customers' needs for smaller packages, increased
performance, and lower cost. In addition, we license our leading edge
technology, such as MicroLeadFrame(R), to customers and competitors. We continue
to invest our research and development resources to further the development of
flip chip interconnection solutions, chip scale packages, MEMS devices and
System-in-Package technology.
10
As of December 31, 2003, we had more than 300 employees in research and
development activities. In addition, we involve management and operations
personnel in research and development activities. In 2003, 2002 and 2001, we
spent $25.8 million, $31.2 million and $38.8 million, respectively, on research
and development. We currently expect to increase our investment in research and
development in 2004 by 40% over 2003 spending levels.
MARKETING AND SALES
Our marketing offices manage and promote our packaging and test services
while key customer and technical support is provided through our network of
international sales offices. To better serve our customers, our offices are
located near our largest customers or areas where there is customer
concentration. Our marketing and sales office locations include sites in the
U.S. (Chandler, Arizona; Irvine, Santa Clara and San Diego, California; Boston,
Massachusetts; Greensboro, North Carolina; West Chester, Pennsylvania, and
Austin and Dallas, Texas), Cayman Islands, China, France, Japan, Korea, the
Philippines, Singapore, Taiwan and the United Kingdom.
To provide comprehensive sales and customer service, we assign each of our
customers a direct support team consisting of an account manager, technical
program manager, test program manager and both field and factory customer
support representatives. We also support our largest multinational customers
from multiple office locations to ensure that we are aligned with their global
operational and business requirements.
Our direct support teams are further supported by an extended staff of
product, process, quality and reliability engineers, as well as marketing and
advertising specialists, information systems technicians and factory personnel.
Together, these direct and extended support teams deliver an array of services
to our customers. These services include:
- Managing and coordinating ongoing manufacturing activity,
- Providing information and expert advice on packaging and test solutions and
related trends,
- Managing the start-up of specific packaging and test programs thus
improving customers' time to market,
- Providing a continuous flow of information to our customers regarding
products and programs in process,
- Researching and assisting in the resolution of technical and logistical
issues,
- Aligning our technologies and research and development activities with the
needs of our customers and OEMs,
- Driving industry standards,
- Providing design and simulation services to insure package reliability, and
- Collaboration with our customers on continuous quality improvement
initiatives.
Further, we implement direct electronic links with our customers to:
- Achieve near real time and automated communications of order fulfillment
information, such as inventory control, production schedules and
engineering data, such as production yields, device specifications and
quality indices, and
- Connect our customers to our sales and marketing personnel worldwide and to
our factories.
Web-enabled tools provide our customers real time access to the status of
their products, the performance of our manufacturing lines, and technical data
they require to support their new product introductions.
11
CUSTOMERS
As of February 27, 2004, we had more than 300 customers, including many of
the largest semiconductor companies in the world. The table below lists our top
50 customers in 2003 based on revenues:
AMI Semiconductor, Inc. Motorola, Inc.
Adaptec, Inc. MTEKVISION Co., LTD
Agere Technologies, Inc. National Semiconductor Corporation
Agilent Technologies NEC Corporation Ltd.
Altera Corporation Nvidia Corporation
Analog Devices, Inc. Oki Electric Ind. Co., LTD.
Atmel Corporation Omachi Fuji Co., LTD
Austria Mikro Systeme ON Semiconductor
Conexant Systems Inc. PMC - Sierra Inc.
ESS Technology Inc. Philips Electronics
Fairchild Semiconductor Corporation Realtek Semiconductor Corporation
Fujitsu Limited R.F Micro Devices
Hitachi LTD. Ricoh Co., LTD
Infineon Technologies AG Robert Bosch GmbH
Integrated Device Technology, Inc. Samsung Electronics Corporation, LTD
Intel Corporation Sanyo Electric Co., LTD
International Business Machines Corporation Silicon Image, Inc.
Intersil Corporation Silicon Laboratories Inc.
Lattice Semiconductor Corporation Skyworks Solutions, Inc.
LSI Logic Corporation Sony Semiconductor Corporation
Maxim Integrated Circuits ST Microelectronics PTE
Mediatek Inc. Standard Microsystems
Microchip Technology Inc. Texas Instruments, Inc.
Micronas Semiconductor Holding AG Toshiba Corporation
Mitsubishi Electric Semiconductor Xilinx, Inc.
Our services are available internationally. A summary of our domestic and
international net revenue and net property, plant and equipment is set forth in
Note 22 to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference. More than half of our overall net revenue
comes from outside of the United States.
For a discussion of risks attendant to our foreign operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors That May Affect Future Operating Performance -- 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."
With the commencement of operations of Amkor Iwate and the acquisition of a
packaging and test facility from Toshiba in 2001, total net revenues derived
from Toshiba accounted for 11.6%, 14.7% and 16.3% of our consolidated net
revenues for 2003, 2002 and 2001, respectively. Prior to the sale of our wafer
fabrication services business to ASI in February 2003, we derived substantially
all of our wafer fabrication revenues from Texas Instruments (TI), which due to
our restatement, are no longer included in net revenues, but rather, as part of
discontinued operations in the restated Consolidated Statements of Operations.
MATERIALS AND EQUIPMENT
Our packaging operations depend upon obtaining adequate supplies of
materials and equipment on a timely basis. The principal materials used in our
packaging process are leadframes or laminate substrates, gold wire and mold
compound. We purchase materials based on customer forecasts, and our customers
are generally responsible for any unused materials which we purchased based on
such forecasts.
12
We work closely with our primary material suppliers to insure that
materials are available and delivered on time. Moreover, we also negotiate
worldwide pricing agreements with our major suppliers to take advantage of the
scale of our operations. We are not dependent on any one supplier for a
substantial portion of our material requirements.
Our packaging operations depend on obtaining adequate supplies of
manufacturing equipment on a timely basis. We work closely with major equipment
suppliers to insure that equipment is delivered on time and that the equipment
meets our stringent performance specifications.
For a discussion of additional risks associated with our materials and
equipment suppliers, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors that May Affect Future
Operating Performance" in Item 7 of this annual report.
ENVIRONMENTAL MATTERS
The semiconductor packaging process uses chemicals and gases and generates
byproducts that are subject to extensive governmental regulations. For example,
at our foreign manufacturing facilities, we produce liquid waste when silicon
wafers are diced into chips with the aid of diamond saws, then cooled with
running water. Federal, state and local regulations in the United States, as
well as environmental regulations internationally, impose various controls on
the storage, handling, discharge and disposal of chemicals used in our
manufacturing processes and on the factories we occupy.
We have been engaged in a continuing program to assure compliance with
federal, state and local environmental laws and regulations. We do not expect
capital expenditures or other costs attributable to compliance with
environmental laws and regulations to have a material adverse effect on our
business, results of operations or financial condition.
For a discussion of additional risks associated with the environmental
issues, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors that May Affect Future Operating
Performance -- Environmental Regulations" in Item 7 of this annual report.
COMPETITION
The subcontracted semiconductor packaging and test market is very
competitive. We face substantial competition from established packaging and test
service providers primarily located in Asia, including companies with
significant manufacturing capacity, financial resources, research and
development operations, marketing and other capabilities. These companies
include Advanced Semiconductor Engineering, Inc., ASE Test Limited, ASAT Ltd.,
ChipPAC Incorporated, Orient Semiconductor Engineering, ST Assembly and Test
Services and Siliconware Precision Industries Co., Ltd. Such companies have also
established relationships with many large semiconductor companies that are
current or potential customers of our company. We also compete with the internal
semiconductor packaging and test capabilities of many of our customers.
The principal elements of competition in the subcontracted semiconductor
packaging market include: (1) breadth of package offering, (2) technical
competence, (3) new package design and implementation, (4) quality, (5)
manufacturing cycle times, (6) customer service and (7) price. We believe that
we generally compete favorably with respect to each of these factors.
INTELLECTUAL PROPERTY
ACQUISITION OF INTELLECTUAL PROPERTY RIGHTS
We maintain an active program to protect our investment in technology by
acquiring intellectual property protection and enforcing our intellectual
property rights. Intellectual property rights that apply to our various products
and services include patents, copyrights, trade secrets and trademarks. We have
filed and obtained a number of patents in the United States and abroad. While
our patents are an important element of our intellectual property strategy and
our success, as a whole we are not materially dependent on any one patent or any
one technology. We expect to continue to file patent applications when
appropriate to protect our proprietary technologies, but we cannot assure you
that we will receive patents from pending or future applications. In addition,
any patents we obtain may be challenged, invalidated or circumvented and may not
provide meaningful protection or other commercial advantage to us.
13
We also protect certain details about our processes, products and
strategies as trade secrets, keeping confidential the information that we
believe provides us with a competitive advantage. We have ongoing programs
designed to maintain the confidentiality of such information. Further, to
distinguish our products from our competitors' products, we have obtained
certain trademarks and trade names. We have promoted and will continue to
promote our particular product brands through advertising and other marketing
techniques.
ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
We may need to enforce our patents or other intellectual property rights or
defend ourselves against claimed infringement of the rights of others through
litigation, which could result in substantial cost and diversion of our
resources. We intend to license our intellectual property when it makes economic
sense for us to do so, consistent with the licensing policies of the various
domestic and international standards setting organizations of which we are a
member. The semiconductor industry is characterized by frequent claims regarding
patent and other intellectual property rights. If any third party makes an
enforceable infringement claim against us, we could be required to:
- discontinue the use of certain processes,
- cease the manufacture, use, import and sale of infringing products,
- pay substantial damages,
- develop non-infringing technologies, or
- acquire licenses to the technology we had allegedly infringed.
If we fail to obtain necessary licenses or if we are subjected to litigation
relating to patent infringement or other intellectual property matters, our
business could suffer.
EMPLOYEES
As of December 31, 2003, we had 20,261 full-time employees including 742
employees seconded from Toshiba whose employment was transferred to Amkor as of
January 1, 2004. Of the total employee population, 15,349 were engaged in
manufacturing, 3,172 were engaged in manufacturing support, 344 were engaged in
research and development, 427 were engaged in marketing and sales and 969 were
engaged in finance, business management and administration. We believe that our
relations with our employees are good. We have never experienced a work stoppage
in any of our factories. Our employees in the U.S., the Philippines, Taiwan and
China are not represented by a collective bargaining unit. Certain members of
our factories in Korea and Japan are members of a union, and all employees at
these factories are subject to collective bargaining agreements.
ITEM 2. PROPERTIES
We provide packaging and test services through our factories in Korea,
Philippines, Japan, Taiwan and China. We believe that total quality management
is a vital component of our advanced manufacturing capabilities. We have
established a comprehensive quality operating system designed to: (1) promote
continuous improvements in our products and (2) maximize manufacturing yields at
high volume production without sacrificing the highest quality standards. The
majority of our factories are ISO9001, ISO9002, ISO14001, QS9000 and SAC Level I
certified. Additionally, as we acquire or construct additional factories, we
commence the quality certification process to meet the certification standards
of our existing facilities. We believe that many of our customers prefer to
purchase from quality certified suppliers. In addition to providing world-class
manufacturing services, our factories in the Philippines and Korea provide
purchasing, engineering and customer service support. The size, location, and
manufacturing services provided by each of our company's factories are set forth
in the table below as of February 27, 2004.
14
APPROXIMATE
FACTORY SIZE
LOCATION (SQUARE FEET) SERVICES
- -------- ------------- --------
Our Factories
Korea
Seoul, Korea (K1) .................................... 670,000 Packaging services
Package and process development
Pupyong, Korea (K3) .................................. 428,000 Packaging and test services
Kwangju, Korea (K4) .................................. 885,000 Packaging and test services
Philippines
Muntinlupa, Philippines (P1) (1) ..................... 602,000 Packaging and test services
Packaging and process development
Muntinlupa, Philippines (P2) (1) ..................... 112,000 Packaging services
Province of Laguna, Philippines (P3) (1) ............. 406,000 Packaging services
Province of Laguna, Philippines (P4)(1) .............. 200,000 Test services
Taiwan
Lung Tan, Taiwan ..................................... 246,000 Packaging and test services
Hsinchu, Taiwan (2) .................................. 354,000 Packaging and test services
China
Shanghai, China (3) .................................. 145,000 Packaging and test services
Japan
Kitakami, Japan (3) .................................. 147,000 Packaging and test services
United States
Wichita, Kansas (3) .................................. 30,000 Test services
(1) As a result of foreign ownership restrictions in the Philippines, the land
associated with our Philippine factories is leased from realty companies in
which we own a 40% interest. Beginning July 1, 2003, these entities have
been consolidated within the financial statements of Amkor, in accordance
with FASB Interpretation No. 46. We own the buildings at our P1, P3 and P4
facilities and lease the buildings at our P2 facility from one of the
aforementioned realty companies.
(2) Property acquired in February 2004 (subject to pending regulatory
approvals).
(3) Leased facility.
We believe that our existing properties are in good condition and suitable
for the conduct of our business. At the end of fiscal 2003, we were productively
utilizing the majority of the space in our facilities. We intend to expand our
production capacity in 2004 and beyond as necessary to meet customer demand.
We completed the closing of the K2 facility in Bucheon, South Korea during
2003. We transferred most of its packaging operations into our K4 factory in
Kwangju, South Korea. Our operational headquarters is located in Chandler,
Arizona, and our administrative headquarters, which is leased, is located in
West Chester, Pennsylvania. In addition to executive staff, the Chandler,
Arizona campus houses sales and customer service for the southwest region and
product management, planning and marketing. The West Chester location houses
finance and accounting, legal, and information systems, and serves as a
satellite sales office for our eastern sales region. Our marketing and sales
office locations include sites in the U.S. (Chandler, Arizona; Irvine, Santa
Clara and San Diego, California; Boston, Massachusetts; Greensboro, North
Carolina; West Chester, Pennsylvania, and Austin and Dallas, Texas), Cayman
Islands, China, France, Japan, Korea, the Philippines, Singapore, Taiwan and the
United Kingdom.
15
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to various legal proceedings, including those
noted below. While we currently believe that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on our financial position or overall trends in results of operations,
litigation is subject to inherent uncertainties. If an unfavorable ruling were
to occur, there exists the possibility of a material adverse impact on our net
income in the period in which the ruling occurs. The estimate of the potential
impact from the following legal proceedings on our financial position or overall
results of operations could change in the future.
EPOXY MOLD COMPOUND LITIGATION
Recently, we have become party to an increased number of litigation matters
relative to our historic levels. Much of our recent increase in litigation
relates to an allegedly defective epoxy mold compound, formerly used in some of
our products, which is alleged to be responsible for certain semiconductor chip
failures. In the case of each of these matters, we believe we have meritorious
defenses, as well as valid third-party claims against Sumitomo Bakelite Co.,
Ltd. ("Sumitomo Bakelite"), the manufacturer of the challenged epoxy product,
should the epoxy mold compound be found to be defective. We cannot be certain,
however, that we will be able to recover any amount from Sumitomo Bakelite if we
are held liable in these matters, or that any adverse result would not have a
material impact upon us. Moreover, other customers of ours have made inquiries
about the epoxy mold compound, which was widely used in the semiconductor
industry, and no assurance can be given that claims similar to those already
asserted will not be made against us by other customers in the future.
Fujitsu Limited v. Cirrus Logic, Inc., et al.
On April 16, 2002, we were served with a third-party complaint in an action
entitled Fujitsu Limited v. Cirrus Logic, Inc., No. 02-CV-01627 JW, pending in
the United States District Court for the Northern District of California, San
Jose Division. In this action, Fujitsu Limited ("Fujitsu") alleges that
semiconductor devices it purchased from Cirrus Logic, Inc. ("Cirrus Logic") are
defective in that a certain epoxy mold compound used in the manufacture of the
chip causes a short circuit which renders Fujitsu disk drive products
inoperable. Cirrus Logic, in response, denied the allegations of the complaint,
counterclaimed against Fujitsu for unpaid invoices, and filed its third-party
complaint against us alleging that any liability for chip defects should be
assigned to us because we assembled the subject semiconductor devices. Upon
receipt of Cirrus Logic's third-party complaint, we filed an answer denying all
liability, and our own third-party complaint against Sumitomo Bakelite. Sumitomo
Bakelite filed an answer denying liability. In June 2003, Fujitsu amended its
complaint and added direct claims against us. In response, we filed an answer
denying all liability to Fujitsu. Fujitsu has indicated that it may seek damages
in excess of $100 million. Discovery is ongoing and a trial is currently
scheduled to begin in the Northern District Court of California on January 31,
2005. In November 2003, Fujitsu filed an action against Cirrus Logic, Sumitomo
Bakelite and us entitled Fujitsu Limited v. Cirrus Logic, Inc., et al., No.
1-03-CV-009885, in the California Superior Court for the County of Santa Clara,
based on facts and allegations substantially similar to those asserted in the
Northern District Court of California. In December 2003, Cirrus Logic filed a
cross-complaint against Sumitomo Bakelite and us in the Superior Court case,
also based on facts and allegations substantially similar to those asserted in
the Northern District Court case. By stipulation among the parties, Fujitsu and
Cirrus Logic have stated their intent to stay the action pending in the Northern
District Court of California in favor of the action pending in the Santa Clara
Superior Court. Trial in the Superior Court action is currently scheduled to
begin on January 31, 2005. Amkor intends to deny all liability, to file
cross-claims against Sumitomo Bakelite, and to seek dismissal of all claims
against it in due course.
Seagate Technology LLC v. Atmel Corporation, et al.
In March 2003, we were served with a cross-complaint in an action between
Seagate Technology LLC ("Seagate") and Atmel Corporation ("Atmel") in the
Superior Court of California, Santa Clara County. Atmel's cross-complaint seeks
indemnification from us for any damages incurred from the claims by Seagate
involving the allegedly defective epoxy mold compound manufactured by Sumitomo
Bakelite. We have answered Atmel's cross-complaint, denying all liability, and
have filed a cross-complaint against Sumitomo Bakelite. Atmel later amended its
cross-complaint, including adding ChipPAC Inc. ("ChipPAC") as a cross-defendant.
ChipPAC filed a cross-complaint against Sumitomo Bakelite and us. On January 27,
2004, the Superior Court sustained Sumitomo Bakelite's motion to dismiss Atmel's
cross-complaint, granting Atmel 30 days to file an amended pleading. We filed a
motion to dismiss ChipPAC's cross-complaint on February 13, 2004, and otherwise
intend to deny all liability to ChipPAC. We also intend to deny all liability to
Atmel and may seek the dismissal of Atmel's
16
further amended cross-complaint upon receipt, if appropriate. All parties are
currently conducting discovery and no trial date has been set.
Maxtor Corporation v. Koninklijke Philips Electronics N.V., et al.
In April 2003, we were served with a cross-complaint in an action between
Maxtor Corporation ("Maxtor") and Koninklijke Philips Electronics ("Philips").
Philips' cross-complaint seeks indemnification from us for any damages incurred
from the claims by Maxtor involving the allegedly defective epoxy mold compound
manufactured by Sumitomo Bakelite. Philips subsequently filed a cross-complaint
directly against Sumitomo Bakelite, alleging, among other things, that Sumitomo
Bakelite breached its contractual obligations to both us and Philips by
supplying a defective mold compound resulting in the failure of certain Philips
semiconductor devices. We have denied all liability in this matter and have also
asserted a cross-complaint against Sumitomo Bakelite. Sumitomo Bakelite has
denied any liability. The parties' discovery efforts are ongoing, including
expert discovery. In December 2003, we filed a motion for summary judgment
against Philips's cross-claims. The motion shall be heard March 30, 2004. The
trial is scheduled to start on April 12, 2004.
Maxim Integrated Products, Inc. v. Amkor Technology, Inc., et al.
In August 2003, we were served with a complaint filed by Maxim Integrated
Products, Inc. ("Maxim") against us, Sumitomo Bakelite and Sumitomo Plastics
America, Inc. ("Sumitomo Plastics") in the Superior Court of California, Santa
Clara County. The complaint seeks damages related to our use of Sumitomo
Bakelite's epoxy mold compound in assembling Maxim's semiconductor packages.
Both the Sumitomo defendants and we filed motions to dismiss Maxim's complaint
in September 2003. In lieu of contesting those motions to dismiss, Maxim has
indicated its intent to file an amended pleading. We intend to deny all
liability to Maxim and to file cross-claims against Sumitomo Bakelite; we may
file another motion to dismiss Maxim's amended complaint upon receipt, if
appropriate. Discovery has not commenced and there is no trial date set.
Fairchild Semiconductor Corporation v. Sumitomo Bakelite Singapore Pte.
Ltd., et al.
In September 2003, we were served with an amended complaint filed by
Fairchild Semiconductor Corporation ("Fairchild") against us, Sumitomo Bakelite,
Sumitomo Plastics and Sumitomo Bakelite Singapore Pte. Ltd. in the Superior
Court of California, Santa Clara County. The amended complaint seeks damages
related to our use of Sumitomo Bakelite's epoxy mold compound in assembling
Fairchild's semiconductor packages. Both the Sumitomo defendants and we filed
motions to dismiss Fairchild's amended complaint in October 2003. Fairchild
filed a second amended complaint in January 2004. On February 11, 2004, we filed
a motion to dismiss Fairchild's second amended complaint. We also intend to deny
all liability and to file cross-claims against Sumitomo Bakelite. Discovery is
ongoing and no trial date has been scheduled.
OTHER LITIGATION
Amkor Technology, Inc. v. Motorola, Inc.
On August 16, 2002, we filed a complaint against Motorola, Inc. in an
action captioned Amkor Technology, Inc. v. Motorola, Inc., C.A. No. 02C-08-160
CHT, pending in the Superior Court of the State of Delaware in and for New
Castle County. In this action, we were seeking declaratory judgment relating to
a controversy between us and Motorola concerning: (i) the assignment by Citizen
Watch Co., Ltd. ("Citizen") to us of a Patent License Agreement dated January
25, 1996 between Motorola and Citizen (the "License Agreement") and concurrent
assignment by Citizen to us of Citizen's interest in U.S. Patents 5,241,133 and
5,216,278 (the "'133 and '278 patents"); and (ii) our obligation to make certain
payments pursuant to an immunity agreement (the "Immunity Agreement") dated June
30, 1993 between us and Motorola.
We and Motorola resolved the controversy with respect to all issues
relating to the Immunity Agreement, and all claims and counterclaims filed by
the parties in the case relating to the Immunity Agreement were dismissed or
otherwise disposed of without further litigation. The claims relating to the
License Agreement and the '133 and '278 Patents remained pending.
We and Motorola both filed motions for summary judgment on the remaining
claims, and oral arguments were heard on September 3, 2003. On October 6, 2003,
the Superior Court of Delaware ruled in favor of us and issued an Opinion and
Order granting our motion for summary judgment and denying Motorola's motion for
summary judgment. On October 22, 2003, Motorola filed an appeal in Supreme Court
of Delaware. We believe we will prevail on the same merits in such
17
appeal. In addition, should Motorola prevail at the appellate level, we believe
we have recourse against Citizen. However, no assurance can be given that an
adverse outcome in the case cannot occur, or that any adverse outcome would not
have a material impact.
Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd,
and Carsem Inc.
In November 2003, we filed complaints against Carsem (M) Sdn Bhd, Carsem
Semiconductor Sdn Bhd, and Carsem Inc. (collectively "Carsem") with the
International Trade Commission ("ITC") in Washington, D.C. and subsequently in
the Northern District of California. The complaints allege infringement of our
United States Patent Nos. 6,433,277, 6,455,356, and 6,630,728 (collectively the
"Amkor Patents"). We allege that by making, using, selling, offering for sale,
or importing into the U.S. the Carsem Dual and Quad Flat No-Lead Package, Carsem
has infringed on one or more of our MicroLeadFrame(R) packaging technology
claims in the Amkor Patents. The District Court action has been stayed pending
resolution of the ITC case. The ITC action is scheduled for trial in June 2004.
Alcatel Business Systems vs. Amkor Technology, Inc., Anam Semiconductor,
Inc.
On November 5, 1999, we agreed to sell certain semiconductor parts to
Alcatel Microelectronics, N.V. ("AME"), a subsidiary of Alcatel S.A. The parts
were manufactured for us by Anam Semiconductor, Inc. ("ASI"). AME transferred
the parts to another Alcatel subsidiary, Alcatel Business Systems ("ABS"), which
incorporated the parts into cellular phone products. In early 2001, a dispute
arose as to whether the parts sold by us were defective. On March 18, 2002, ABS
and its insurer filed suit against us and ASI in the Paris Commercial Court of
France, claiming damages of 50 million Euros (approximately $62.8 million based
on the spot exchange rate at December 31, 2003). We have denied all liability
and intend to vigorously defend ourselves. Additionally, we have entered into a
written agreement with ASI whereby ASI has agreed to indemnify us fully against
any and all loss related to the claims of AME, ABS and ABS' insurer. The Paris
Commercial Court commenced a special proceeding before a technical expert to
report on the facts of the dispute. The report of the court-appointed expert was
put forth on December 31, 2003. The report does not specifically allocate
liability to any particular party. The next proceeding in this matter is
expected in April 2004. At that time, it will be determined if jurisdiction over
this case is permissible in the Paris Court. If jurisdiction is found not to be
permissible, the case will be dismissed. Otherwise, the case will proceed to
hearing.
In response to the lawsuit, on May 22, 2002, we filed a petition to compel
arbitration in the United States District Court for the Eastern District of
Pennsylvania (the "Court") against ABS, AME and ABS' insurer, claiming that the
dispute is subject to the arbitration clause of the November 5, 1999 agreement
between us and AME. ABS and ABS' insurer have refused to arbitrate. In August
2003, the Court denied the motion of ABS and its insurer to dismiss our petition
for arbitration. The Court also subsequently denied a motion for reconsideration
filed by ABS. The Court has not yet set a date for final disposition of our
petition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth fiscal quarter of the fiscal year ended December 31, 2003.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"AMKR." Public trading of the common stock began on May 1, 1998. Prior to that,
there was no public market for our common stock. The following table sets forth,
for the periods indicated, the high and low sale price per share of our common
stock as quoted on the Nasdaq National Market.
High Low
------ ------
2003
First Quarter........................ $ 6.44 $ 4.13
Second Quarter....................... 13.19 5.35
Third Quarter........................ 18.50 13.47
Fourth Quarter....................... 21.40 14.72
2002
First Quarter........................ $22.31 $13.00
Second Quarter....................... 24.25 3.90
Third Quarter........................ 6.10 1.20
Fourth Quarter....................... 7.47 1.61
There were approximately 236 holders of record of our common stock as of
February 27, 2004.
DIVIDEND POLICY
Since our public offering in 1998, we have never paid a dividend to our
stockholders. We currently expect to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. In addition, our secured bank debt
agreements and the indentures governing our senior, senior subordinated and
convertible subordinated notes restrict our ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On May 8, 2003, we sold, at an aggregate offering price, $425.0 million of
7.75% senior notes. The underwriters involved with this transaction were
Citigroup Global Markets Inc., Deutsche Bank Securities and J.P. Morgan
Securities Inc. The aggregate underwriting discount was 1.875%, or $8.0 million,
other related transaction fees were $0.7 million and the final net proceeds to
us were $416.3 million. These notes mature on May 15, 2013 and have an annual
coupon rate of 7.75%. The issue price of the notes was 100%. With the proceeds
from this sale, together with cash on hand, we redeemed all of our outstanding
9.25% senior notes due 2006 on June 7, 2003. The price of this redemption was
104.625% of the principal amount then outstanding, together with accrued and
unpaid interest, in accordance with the indenture governing the 9.25% senior
notes due 2006. The aggregate redemption price was $448.6 million, including
$19.7 million of redemption premium and $3.9 million of accrued interest.
The 7.75% senior notes were sold to qualified institutional buyers in
reliance on Rule 144A and outside the United States in compliance with
Regulation S under the Securities Act of 1933. The 7.75% senior notes were not
registered under the Securities Act of 1933, as amended, and could not be
offered or sold in the United States except pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws.
In connection with the May 8, 2003 offering of the $425.0 million of 7.75%
senior notes due 2013 ("original notes"), we entered into a registration rights
agreement with the initial purchasers of the original notes in which we agreed
to commence an exchange offer for the original notes. In the exchange offer, the
original note holders were entitled to exchange their original notes for
exchange notes ("exchange notes"), with substantially identical terms as the
original notes. The terms of the exchange notes are identical in all material
respects to those of the original notes except the exchange notes will not be
subject to transfer restrictions and holders of the exchange notes, with limited
exceptions, will have no registration rights. On July 10, 2003, we filed a Form
S-4 Registration Statement with the Securities and Exchange Commission, which
became effective October 22, 2003, to effect this exchange offer.
19
USE OF PROCEEDS FROM REGISTERED SECURITIES
On November 5, 2003, we offered 7,000,000 shares of our common stock priced
at $19.00 per share. The aggregate offering price for the 7,000,000 shares was
$133.0 million. We also granted to the underwriters an option to purchase
1,050,000 additional shares to cover over-allotments. The transaction was
underwritten through an underwriting syndicate comprised of Citigroup Global
Markets Inc., Deutsche Bank Securities, J.P. Morgan Securities Inc. and Bear,
Stearns & Co. Inc. In total, 7,375,000 shares were sold, including 375,000
over-allotment shares, for aggregate proceeds of $140.1 million.
The aggregate underwriting discount was 4.5%, or $6.3 million, other
related transaction fees were $0.3 million and the final net proceeds to us were
$133.5 million. These net proceeds were used to repurchase $112.3 million of our
5.00% convertible subordinated notes due 2007 and $17.0 million in aggregate
principal amount of our 5.75% convertible subordinated notes due 2006. In
connection with these redemptions, we paid an additional $2.8 million for
associated premiums. This offering was made under a Form S-3 Registration
Statement with the Securities and Exchange Commission, file no. 333-81334, for
which the effective date was April 29, 2002.
EQUITY COMPENSATION PLANS
The information required by this item regarding equity compensation plans
is incorporated by reference to the information set forth in Item 12 of this
annual report on Form 10-K.
20
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
We have derived the selected historical consolidated financial data
presented below for, and as of the end of, each of the years in the five-year
period ended December 31, 2003 from our consolidated financial statements. You
should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes, included elsewhere in this annual report.
The summary consolidated financial data below reflects the following
transactions on a historical basis (i) our 1999 acquisition of the K4 factory
from Anam Semiconductor, Inc. (ASI) for $582.0 million together with its related
financing, (ii) our 2000 acquisitions of the K1, K2 and K3 factories from ASI
for $950.0 million and equity investment in ASI of $459.0 million together with
the related financing for the acquisitions and investment, (iii) our 2001
acquisitions of Amkor Iwate Corporation, Sampo Semiconductor Corporation and
Taiwan Semiconductor Technology Corporation (a prior equity investment) and (iv)
our 2002 acquisitions of semiconductor packaging businesses from Citizen Watch
Co., Ltd. and Agilent Technologies, Inc. We historically marketed the output of
fabricated semiconductor wafers provided by a wafer fabrication foundry owned
and operated by ASI. On February 28, 2003, we sold our wafer fabrication
services business to ASI. We restated our historical results to reflect our
wafer fabrication services segment as a discontinued operation.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net revenues ....................................... $ 1,603,768 $ 1,406,178 $ 1,336,674 $ 2,009,701 $ 1,617,235
Cost of revenues ................................... 1,267,302 1,310,563 1,284,423 1,442,320 1,297,358
----------- ----------- ----------- ----------- -----------
Gross profit ....................................... 336,466 95,615 52,251 567,381 319,877
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative .............. 179,952 179,888 191,136 179,143 133,053
Research and development ......................... 25,784 31,189 38,786 26,057 11,436
Loss (gain) on disposal of fixed assets, net ..... (586) 2,496 14,515 1,355 1,805
Amortization of goodwill and other acquired
intangibles (a) ............................... 8,183 6,992 84,962 63,080 17,105
Special charges (b) .............................. 125 291,970 -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses .................... 213,458 512,535 329,399 269,635 163,399
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............................ 123,008 (416,920) (277,148) 297,746 156,478
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense, net ............................ 140,281 147,497 150,626 119,840 45,364
Foreign currency (gain) loss ..................... (3,022) 906 872 4,812 308
Other (income) expense, net (c,d) ................ 31,052 (1,014) 9,852 (60) 23,312
----------- ----------- ----------- ----------- -----------
Total other expense ........................... 168,311 147,389 161,350 124,592 68,984
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes, equity investment
losses, minority interest and discontinued
operations ....................................... (45,303) (564,309) (438,498) 173,154 87,494
Equity investment losses (e,f,g) ................... (3,290) (208,165) (100,706) (20,991) (1,969)
Minority interest (h) .............................. (4,008) (1,932) (1,896) -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes ..................................... (52,601) (774,406) (541,100) 152,163 85,525
----------- ----------- ----------- ----------- -----------
Income tax provision (benefit) (i) ................. (233) 60,683 (84,613) 14,362 19,526
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations ........... (52,368) (835,089) (456,487) 137,801 65,999
----------- ----------- ----------- ----------- -----------
Discontinued operations:
Income from wafer fabrication services
business, net of tax .......................... 54,566 8,330 5,626 16,352 10,720
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................. $ 2,198 $ (826,759) $ (450,861) $ 154,153 $ 76,719
=========== =========== =========== =========== ===========
Basic income (loss) per common share:
From continuing operations ....................... $ (0.31) $ (5.09) $ (2.91) $ 0.95 $ 0.55
From discontinued operations ..................... 0.32 0.05 0.04 0.11 0.09
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share ............ $ 0.01 $ (5.04) $ (2.87) $ 1.06 $ 0.64
=========== =========== =========== =========== ===========
Diluted income (loss) per common share:
From continuing operations ....................... $ (0.31) $ (5.09) $ (2.91) $ 0.91 $ 0.55
From discontinued operations ..................... 0.32 0.05 0.04 0.11 0.08
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share ............ $ 0.01 $ (5.04) $ (2.87) $ 1.02 $ 0.63
=========== =========== =========== =========== ===========
21
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Shares used in computing basic income (loss)
per common share .................................. 167,142 164,124 157,111 145,806 119,341
Shares used in computing diluted income (loss)
per common share .................................. 167,142 164,124 157,111 153,223 135,067
OTHER FINANCIAL DATA:
Depreciation and amortization including debt issue
costs from continuing operations .................. $238,275 $331,516 $462,912 $330,824 $178,771
Capital expenditures from continuing operations ..... 230,504 95,104 158,595 478,950 239,854
DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ..................... $ 313,259 $ 311,249 $ 200,057 $ 93,517 $ 98,045
Short term investments ........................ -- -- -- -- 136,595
Working capital ............................... 337,917 163,498 139,097 62,311 164,435
Total assets .................................. 2,571,874 2,557,984 3,223,318 3,393,284 1,755,089
Total long-term debt .......................... 1,650,707 1,737,690 1,771,453 1,585,536 687,456
Total debt, including short-term borrowings and
current portion of long-term debt ........... 1,679,372 1,808,713 1,826,268 1,659,122 693,921
Stockholders' equity .......................... 401,004 231,367 1,008,717 1,314,834 737,741
(a) As of January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets. We reclassified
$30.0 million of intangible assets previously identified as an assembled
workforce intangible to goodwill. Additionally, we stopped amortizing
goodwill of $659.1 million.
(b) During 2003 and 2002, we recorded $0.1 million and $292.0 million of
special charges, respectively. Special charges, in thousands, were
comprised of:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002
-------- ---------
Impairment of long-lived assets...................... $ -- $ 190,266
Impairment of goodwill............................... -- 73,080
Lease termination and other exit costs............... (1,886) 28,624
Contract termination fee............................. 2,011 --
------- ---------
$ 125 $ 291,970
======= =========
(c) In 2003 we recognized a pre-tax loss of $37.8 million as a result of the
early conversion of $425.0 million principal amount of our 9 1/4% senior
notes due 2006, $29.5 million principal amount of our 9 1/4% senior notes
due 2008, $17.0 million principal amount of our 5 3/4% convertible
subordinated notes due 2006 and $112.3 million principal amount of our 5%
convertible subordinated notes due 2007. This loss is offset by a $7.3
million gain on the sale of our investment in an intellectual property
company.
(d) In 1999 we recognized a pre-tax loss of $17.4 million as a result of the
early conversion of $153.6 million principal amount of our 5 3/4%
convertible subordinate notes due 2003.
(e) 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.
(f) During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value.
ASI is a publicly traded company on the Korean stock exchange. Additionally
during 2002, we recorded a loss of $1.8 million on the disposition of a
portion of our interest in ASI to Dongbu.
(g) Beginning March 24, 2003, we ceased accounting for our investment in ASI
under the equity method of accounting.
(h) In 2003, 2002 and 2001, minority interest primarily reflects Toshiba's 40%
ownership interest in Amkor Iwate in Japan which we acquired in January
2004.
(i) During 2002, we recorded a $214.8 million charge to establish a valuation
allowance against our deferred tax assets consisting primarily of U.S. and
Taiwanese net operating loss carryforwards and tax credits.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the federal securities laws, including but not limited to statements
regarding: (1) the condition and growth of the industry in which we operate,
including trends toward increased outsourcing, reductions in inventory and
demand and selling prices for our services, (2) our anticipated capital
expenditures and financing needs, (3) our belief as to our future capacity
utilization rates, revenue, gross margin and operating performance, (4) our
contractual obligations and (5) other statements that are not historical facts.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue," or the negative of these terms
or other comparable terminology. Because such statements include risks and
uncertainties, actual results may differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including those
set forth in the following discussion as well as in "Risk Factors that May
Affect Future Operating Performance." The following discussion provides
information and analysis of our results of operations for the three years ended
December 31, 2003 and our liquidity and capital resources. You should read the
following discussion in conjunction with our consolidated financial statements
and the related notes, included elsewhere in this annual report as well as other
reports we file with the Securities and Exchange Commission.
COMPANY OVERVIEW
Amkor is one of the world's largest subcontractors of semiconductor
packaging and test services. We have built a leading position by:
- - Providing a broad portfolio of packaging and test technologies and
services,
- - Maintaining a leading role in the design and development of new package and
test technologies,
- - Cultivating long-standing relationships with customers, including many of
the world's leading semiconductor companies,
- - Developing expertise in high-volume manufacturing; and
- - Diversifying our operational scope by providing production capabilities in
China, Japan and Taiwan, in addition to long-standing capabilities in Korea
and the Philippines.
The semiconductors that we package and test for our customers ultimately
become components in electronic systems used in communications, computing,
consumer, industrial, automotive and military applications. Our customers
include, among others, Atmel Corporation, Infineon Technologies AG, Intel
Corporation, LSI Logic Corporation, Mediatek Inc., Philips Electronics N.V., ST
Microelectronics PTE, Sony Semiconductor Corporation, Toshiba Corporation and
Xilinx, Inc. The outsourced semiconductor packaging and test market is very
competitive. We also compete with the internal semiconductor packaging and test
capabilities of many of our customers, some of whom can use us as a source of
overflow capacity.
Packaging and test are an integral part of the semiconductor manufacturing
process. Semiconductor manufacturing begins with silicon wafers and involves the
fabrication of electronic circuitry into complex patterns, thus creating
individual chips on the wafers. The packaging process creates an electrical
interconnect between the semiconductor chip and the system board. In packaging,
the fabricated semiconductor wafers are cut into individual chips which are then
attached to a substrate and encased in a protective material to provide optimal
electrical and thermal performance. Increasingly, packages are custom designed
for specific chips and specific end-market applications. The packaged chips are
then tested using sophisticated equipment to ensure that each packaged chip
meets its design specifications.
We historically marketed the output of fabricated semiconductor wafers
provided by a wafer fabrication foundry owned and operated by Anam
Semiconductor, Inc. ("ASI"). On February 28, 2003, we sold our wafer fabrication
services business to ASI. We reflect our wafer fabrication services segment as a
discontinued operation and have restated our historical results.
23
OUR EXPECTATIONS REGARDING FUTURE BUSINESS CONDITIONS
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Based on industry estimates, from 1981 through 2003,
there were 12 years when semiconductor industry growth, measured by revenue
dollars, was 10% or less and 11 years when growth was 16% or greater. Since
1981, the semiconductor industry declined in 1985, 1996, 1998 and 2001. The
semiconductor industry declined an unprecedented 32% in 2001, experienced a 1%
growth in 2002 as compared to 2001, and experienced 16% growth in 2003 as
compared to 2002. The historical trends in the semiconductor industry are not
necessarily indicative of the results of any future period. Semiconductor
industry analysts are forecasting further growth in the semiconductor industry
in both 2004 and 2005. 2004 is projected to increase approximately 19% over
2003, and 2005 is projected to increase approximately 6% over 2004. The strength
of the semiconductor industry is dependent primarily upon the strength of the
computer and communications systems markets as well as the strength of the
worldwide economy.
In addition to the historical trend in the semiconductor industry as a
whole, the trend towards increased outsourcing of packaging and test services in
the semiconductor industry has been a primary factor for our historical growth
in revenues. We expect this trend to continue into the foreseeable future as we
believe technological advances are driving our customers to outsource more of
their packaging requirements.
Although the first calendar quarter is typically a seasonally down quarter
for us, we currently expect packaging and test revenue for the first quarter of
2004 to be around 2% to 4% higher than packaging and test revenues for the
fourth quarter of 2003. We expect that first quarter of 2004 gross margin will
be around 24%. Our profitability is dependent upon the utilization of our
capacity, semiconductor package mix and the average selling price of our
services. Because a substantial portion of our costs at our factories is fixed,
relatively insignificant increases or decreases in capacity utilization rates
can have a significant effect on our profitability. Prices for packaging and
test services have declined over time. Historically, we have been able to
partially offset the effect of price declines by successfully developing and
marketing new packages with higher prices, such as advanced leadframe and
laminate packages, by negotiating lower prices with our material vendors, and by
driving engineering and technological changes in our packaging and test
processes which resulted in reduced manufacturing costs. We expect that average
selling prices for our packaging and test services will continue to decline in
the future. If our semiconductor package mix does not shift to new technologies
with higher prices or we cannot reduce the cost of our packaging and test
services to offset a decline in average selling prices, our future operating
results will suffer. Beginning in the second quarter of 2003, we began to
experience increases in substrate material costs as a result of supply
shortages. In the third quarter of 2003, substrate material costs stabilized at
the higher price levels set during the second quarter of 2003. We have
significantly enhanced our supply base and do not foresee substrate material
availability as an ongoing issue. However, supply shortages may again occur in
the future and in such an event, gross margins could be negatively impacted. In
addition, the average price of gold has been increasing over the past few years.
Although we have been able to partially offset the effect of gold price
increases through price adjustments to customers and changes in our product
designs, gold prices may continue to increase. To the extent that we are unable
to offset these increases in the future, our gross margins could be negatively
impacted. Average selling prices for 2003 declined 6% as compared to average
selling prices in 2002. Average selling prices for 2002 declined 16% as compared
to average selling prices in 2001. The impact of average selling price erosion
on our gross margins in 2003 has diminished in comparison to 2002.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
------ ------ ------
Net revenues.................................................. 100.0% 100.0% 100.0%
Gross profit.................................................. 21.0 6.8 3.9
Operating income (loss)....................................... 7.7 (29.6) (20.7)
Loss before income taxes, equity investment losses,
minority interest and discontinued operations............... (2.8) (40.1) (32.8)
Net loss from continuing operations........................... (3.3) (59.4) (34.2)
24
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net Revenues. Net revenues increased $197.6 million, or 14.1%, to $1,603.8
million in 2003 from $1,406.2 million in 2002. This increase in net revenues for
2003, excluding the impact of Amkor Iwate, was principally attributed to an
overall unit volume increase of 19.9%. This increase in volume was driven by a
26.7% increase for advanced packages and an 11.5% increase in our traditional
packages. Partially offsetting the volume increases, average selling prices for
2003 declined 6% as compared to average selling prices in 2002. Our Japanese
joint venture, Amkor Iwate, provided packaging and test services principally to
Toshiba's Iwate factory under a long-term supply agreement on a cost plus basis
during the term of the joint venture. This joint venture ended in January 2004.
Accordingly, the revenues associated with this facility fluctuate
proportionately with its costs. The revenues of Amkor Iwate increased $17.6
million in 2003 compared to 2002 due primarily to higher costs associated with a
shift in product mix, and to a lesser extent, the weakening of the U.S. dollar
relative to the Japanese yen.
Prices for packaging and test services have declined over time.
Historically, we have been able to partially offset the effect of price declines
by successfully developing and marketing new packages with higher prices, such
as advanced leadframe and laminate packages, by negotiating lower prices with
our material vendors, and by driving engineering and technological changes in
our packaging and test processes which resulted in reduced manufacturing costs.
Gross Profit (Loss). Gross profit increased $240.9 million, or 251.9%, to
$336.5 million in 2003 from $95.6 million in 2002. Our cost of revenues consists
principally of costs of materials, labor and depreciation. Because a substantial
portion of our costs at our factories is fixed, relatively insignificant
increases or decreases in capacity utilization rates can have a significant
effect on our gross margin.
Gross margins as a percentage of net revenues increased 14.2 percentage
points to 21.0% in 2003 as compared to 6.8% in 2002 principally as a result of
the following events at our factories, excluding Amkor Iwate:
- Increased unit volumes contributed approximately 8 percentage points
to the increase in gross margin.
- Approximately 6 percentage points of the increase in gross margin was
due to a reduction in depreciation costs of $101.6 million. $22.1
million of the reduced depreciation costs was attributable to the
fixed asset impairment charge recorded during the second quarter of
2002, and approximately $46.1 million was the result of the change in
estimated useful lives of certain packaging equipment beginning with
the fourth quarter of 2002. The remaining decrease in depreciation
costs is due to assets reaching fully depreciated status partially
offset by an increase in depreciation costs related to capital
expenditures.
- Material cost savings contributed approximately 5 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 5 percentage points decline in gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly by $0.1 million to $180.0 million, or
11.2% of net revenues, in 2003 from $179.9 million, or 12.8% of net revenues, in
2002. During 2003, we experienced a significant increase in our litigation costs
as a result of the mold compound litigation matter. Legal fees associated with
this mold compound litigation matter were $8.2 million during 2003, as opposed
to $0.3 million in 2002. The increase in legal costs during 2003 was offset by
savings from our administrative overhead cost reduction initiatives which began
in 2002, including savings from certain facilities which were shutdown in 2002.
Research and Development. Research and development expenses decreased $5.4
million to $25.8 million, or 1.6% of net revenues, in 2003 from $31.2 million,
or 2.2% of net revenues, in 2002. The decrease in these costs was primarily
attributable to our corporate cost reduction initiatives, which included closing
our two U.S. research and development facilities during the second and third
quarters of 2002 and consolidating these activities within our existing
Asian-based research and development facilities. Our research and development
efforts support our customers' needs for smaller packages and increased
functionality. We continue to invest our research and development resources to
further the development of flip chip interconnection solutions, chip scale
packages that are nearly the size of the semiconductor die, MEMS devices used in
a
25
variety of end markets including automotive, industrial and personal
entertainment, our stacked chip packages that stack as many as three
semiconductor dies in a single package, and System-in-Package technology, that
uses both advanced packaging and traditional surface mount techniques to enable
the combination of technologies in a single chip. We currently expect to
increase our 2004 research and development expenditures by approximately 40%
over our 2003 spending levels.
Special Charges. During 2003, we recorded $0.1 million of special charges,
as compared to $292.0 million in 2002. During 2003, a contract termination fee
of $2.0 million was paid in order to terminate our commitment to purchase a
tract of land adjacent to our Amkor Iwate facility. Also during 2003, we
recorded a gain of $1.9 million related to the settlement of a pre-existing
contingency. During 2002, we recorded $292.0 million of special charges which
are further discussed below under "Significant Event, 2002 Special Charges."
Other (Income) Expense. Other expenses, net, increased $20.9 million, to
$168.3 million, or 10.5% of net revenues, in 2003 from $147.4 million, or 10.5%
of net revenues, in 2002. Other expenses during 2003 primarily resulted from
debt retirement costs of $37.8 million and losses of $5.7 million related to our
ASI call options (discussed further below under Significant Events). These
expenses were partially offset by a gain of $7.3 million related to the sale of
our investment in an intellectual property company, our decrease in interest
expense of $7.2 million, a gain of $4.7 million related to the sale of 12
million shares of common stock of ASI and an increase in foreign currency gains,
net, of $3.9 million. Our $7.2 million decrease in interest expense was
primarily as a result our of debt refinancing and debt repurchase activity
during 2003.
Provision (Benefit) for Income Taxes. We recorded an income tax benefit of
$0.2 million in 2003, as compared to an income tax provision of $60.7 million in
2002. In 2002, in light of our three years of cumulative losses, an
unprecedented industry downturn and continued poor visibility of customer
demand, we determined that a valuation allowance representing substantially all
of our deferred tax assets was appropriate. Accordingly, in 2003, there is only
a modest tax benefit resulting from our losses from continuing operations
primarily because we continue to record a valuation allowance for substantially
all of our deferred tax assets generated. We will resume the recognition of
deferred tax assets when we return to sustained profitability in our various tax
jurisdictions. Further, we recorded a tax provision of $7.5 million related to
our discontinued operations, for which we were able to record an offsetting tax
benefit related to our continuing operations. We also reduced tax accruals,
during 2003, by $20.0 million related to tax periods no longer open. These tax
benefits have been offset by taxes related to our profitable foreign tax
jurisdictions. We have remaining U.S. net operating losses available to be
carried forward totaling $404.9 million expiring between 2021 and 2023.
Additionally, at December 31, 2003, we have non-U.S. net operating losses
available to be carried forward totaling $49.1 million expiring between 2004 and
2013.
Equity Investment Losses. Our earnings include our share of losses in our
equity affiliates in 2003 of $3.3 million, as compared to $208.2 million in
2002. In 2002, our earnings included our share of losses in our equity
affiliates, principally ASI, in 2002 of $33.9 million and impairment charges
totaling $172.5 million to reduce the carrying value of our investment in ASI to
ASI's market value. Additionally during 2002, we recorded a loss of $1.8 million
on the disposition of a portion of our interest in ASI.
Our 2003 equity investment losses are comprised primarily of our share of
losses from our investment in ASI during the period January 1, 2003 through
March 23, 2003. On March 24, 2003, we divested 7 million shares of ASI which
reduced our ownership percentage in ASI to 16% at that time, and we then ceased
the equity method accounting for our investment in ASI.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Revenues. Net revenues increased $69.5 million, or 5.2%, to $1,406.2
million in 2002 from $1,336.7 million in 2001. This increase in net revenues for
2002, excluding the impact of our acquisitions and expansion in Japan, Taiwan
and China, was principally attributed to an overall unit volume increase of
19.7% which was driven by a 42.0% increase for advanced packages and a 1.2%
increase in our traditional packages. Partially offsetting the volume increases,
average selling prices for 2002 declined 16% as compared to average selling
prices in 2001. The revenues of Amkor Iwate declined $12.4 million in 2002
compared to 2001 due primarily to lower costs associated with a shift in product
mix, and, to a lesser extent, the strengthening of the U.S. dollar relative to
the Japanese yen. Our acquisitions in Taiwan and expansion into China
contributed $54.6 million to the increase in net revenues for 2002.
Prices for packaging and test services have declined over time.
Historically, we have been able to partially offset the effect of price declines
by successfully developing and marketing new packages with higher prices, such
as advanced leadframe and laminate packages, by negotiating lower prices with
our material vendors, and by driving engineering and technological changes
26
in our packaging and test processes which resulted in reduced manufacturing
costs. During 2002, the decline in average selling prices significantly impacted
our gross margins as compared to 2001.
Gross Profit (Loss). Gross profit increased $43.4 million, or 83.0%, to
$95.6 million in 2002 from $52.3 million in 2001. Our cost of revenues consists
principally of costs of materials, labor and depreciation. Because a substantial
portion of our costs at our factories is fixed, relatively insignificant
increases or decreases in capacity utilization rates can have a significant
effect on our gross margin. As a result of acquisitions in Japan and Taiwan in
2001 as well as other geographic expansions, we substantially increased our
fixed costs.
Gross margins as a percentage of net revenues increased 2.9 percentage
points to 6.8% in 2002 as compared to 3.9% in 2001 principally as a result of
the following:
- Increased capacity utilization as a result of increased unit volumes
at our factories in Korea and the Philippines together with the impact
of our cost savings initiatives at those factories caused an
approximate 8 percentage point increase in gross margins.
- Material cost savings contributed approximately 5 percentage points to
the increase in gross margins.
- Reduced depreciation expense of approximately $39 million as a result
of the impact of the fixed asset impairment charge recorded as of June
30, 2002 caused an approximate 2 percentage points increase in gross
margins.
- Reduced depreciation expense of approximately $17 million as a result
of the impact of the change in estimated useful lives of certain
packaging equipment beginning with the fourth quarter of 2002 caused
an approximate 1 percentage point increase in gross margins.
The positive impacts on gross margins were partially offset by:
- Average selling price erosion across our product lines caused an
estimated 12 percentage points decline in gross margins.
- Our acquisitions in Taiwan and expansion into China contributed
approximately 1.6 percentage points to the decline in gross margin as
a result of the costs associated with ramping and reconfiguring
operations at these facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $11.2 million, or 5.9%, to $179.9 million, or
12.8% of net revenues, in 2002 from $191.1 million, or 14.3% of net revenues, in
2001. The decrease in these costs was largely attributed to $12.6 million in
cost reductions principally related to our U.S. based administrative overhead
cost reduction initiatives; partially offset by $0.9 million for increased
administrative costs related to our factories. Our factory administrative
expenses increased overall as a result of our 2002 and 2001 acquisitions offset
by factory cost reduction initiatives.
Research and Development. Research and development expenses decreased $7.6
million to $31.2 million, or 2.2% of net revenues, in 2002 from $38.8 million,
or 2.9% of net revenues, in 2001. The decrease in these costs was primarily
attributable to our corporate cost reduction initiatives, which included closing
our two U.S. research and development facilities during the second and third
quarters of 2002 and consolidating these activities within our existing
Asian-based research and development facilities.
Amortization of Goodwill and Other Acquired Intangibles. As of January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets. We reclassified $30.0 million of intangible assets
previously identified as an assembled workforce intangible to goodwill.
Additionally, we stopped amortizing goodwill of $659.1 million. The cessation of
amortization reduced amortization expense by $80.2 million for 2002 as compared
with 2001.
Special Charges. During 2002, we recorded $292.0 million of special charges
which are further discussed below under "Significant Events, 2002 Special
Charges."
Other (Income) Expense. Other expenses, net decreased $14.0 million, to
$147.4 million, or 10.5% of net revenues, in
27
2002 from $161.3 million, or 12.1% of net revenues, in 2001. The net decrease in
other expenses was primarily the result of $13.4 million of unamortized deferred
debt issuance costs expensed in connection with the repayment in February, May
and November 2001 of term loans outstanding under our secured bank facility and
the reduction of the revolving line of credit commitment.
Provision (Benefit) for Income Taxes. During 2002, we recorded a $214.8
million charge to establish a valuation allowance against our deferred tax
assets consisting primarily of U.S. and Taiwanese net operating loss
carryforwards and tax credits. In connection with our divestiture in 2002 of 21
million shares of ASI common stock, we realized a capital loss of approximately
$117.0 million and recognized a U.S. tax benefit of $44.5 million for which we
provided a full valuation allowance because we did not have any offsetting
capital gains. Generally accepted accounting principles require companies to
weigh both positive and negative evidence in determining the need for a
valuation allowance. In light of our three years of cumulative losses, an
unprecedented industry downturn and continued poor visibility of customer
demand, we determined in the fourth quarter that a valuation allowance
representing substantially all of our deferred tax assets was appropriate. These
negative factors outweighed our forecasted future profitability and expectation
that we will be able to utilize our net operating loss carryforwards. In
December 2002, we utilized $33.3 million of U.S. net operating losses by
carrying back such amounts to offset U.S. reported taxable income in prior
years. At December 31, 2002, our company has remaining U.S. net operating losses
available to be carried forward totaling $375.5 million expiring between 2021
and 2022. Additionally, at December 31, 2002, our company had non-U.S. net
operating losses available to be carried forward totaling $61.2 million expiring
between 2003 and 2012.
Equity Investment Losses. Our earnings included our share of losses in our
equity affiliates, principally ASI, in 2002 of $33.9 million compared to $100.7
million ($65.2 million excluding the amortization of equity method goodwill) in
2001. As of January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets. We stopped amortizing
equity method goodwill of $118.6 million associated with our investment in ASI.
The cessation of amortization reduced equity in loss of investees by $35.5
million for 2002 as compared with the corresponding period.
During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value.
Additionally during 2002, we recorded a loss of $1.8 million on the disposition
of a portion of our interest in ASI to Dongbu. With Dongbu's purchase of 12.0
million newly issued shares of ASI together with its purchase of 20 million
shares from our company and our disposition of an additional 1 million shares of
ASI stock as payment of transaction costs to our financial advisors in
connection with the transaction with Dongbu, our ownership interest in ASI was
reduced to approximately 21%.
RESULTS OF DISCONTINUED OPERATIONS
On February 28, 2003, we sold our wafer fabrication services business to
ASI. Additionally, we obtained a release from Texas Instruments regarding our
contractual obligations with respect to wafer fabrication services to be
performed subsequent to the transfer of the business to ASI. We restated our
historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded, in the first quarter of 2003, $1.0 million in
severance and other exit costs to close our wafer fabrication services
operations in Boise, Idaho and Lyon, France. Also in the first quarter of 2003,
we recognized a pre-tax gain on the disposition of our wafer fabrication
services business of $58.6 million ($51.5 million, net of tax). The carrying
value of the sold net assets associated with the business as of February 28,
2003 was $2.4 million.
SIGNIFICANT EVENTS
OUR HISTORICAL RELATIONSHIP WITH ASI
Historically, under a former supply agreement, we subcontracted for
packaging and test services which were sourced from ASI's factories in Korea.
Beginning in May 2000 with the completion of our acquisitions of ASI's packaging
and test facilities, we no longer depend upon ASI for packaging or test
services. In connection with the acquisition of the facilities, we committed to
making equity investments in ASI and, as a result, accumulated a 42% ownership
interest in ASI. Under a former wafer fabrication services supply agreement, we
purchased the wafer output of ASI's wafer fabrication facility.
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business, we entered into the following series of
transactions beginning in the second half of 2002:
28
- - In September 2002, we sold 20 million shares of ASI common stock to Dongbu
Group in exchange for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we entered
into the share sale agreement. We received $58.1 million in net cash
proceeds and 42 billion won (approximately $34.2 million based on the spot
exchange rate on the closing date) of interest bearing notes from Dongbu
Corporation payable in two equal principal payments in September 2003 and
February 2004. The Dongbu Group comprises Dongbu Corporation, Dongbu Fire
Insurance Co., Ltd. and Dongbu Life Insurance Co., Ltd., all of which are
Korean corporations and are collectively referred to herein as "Dongbu."
Associated with this transaction, we recorded a $1.8 million loss.
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction. On September 30, 2003, we received 21 billion won
(approximately $18.3 million based on the spot exchange rate on the
transaction date), consisting of the principal amount due under the notes
from Dongbu. The remaining principal, or 21 billion won (approximately
$17.8 million based on the spot exchange rate on the transaction date), was
received on February 10, 2004.
- - In separate transactions designed to facilitate a future merger between ASI
and Dongbu, (i) we acquired a 10% interest in Acqutek from ASI for $1.9
million, the market value of the shares as publicly traded in Korea; (ii)
we acquired the Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million, its fair value; and (iii) Anam
Instruments, which had been partially owned by ASI, utilized the proceeds
from the sale of PMD to us to buy back all of the Anam Instruments shares
owned by ASI. Acqutek supplies materials to the semiconductor industry and
is publicly traded in Korea. An entity controlled by the family of James
Kim, our Chairman and Chief Executive Officer, held a 25% ownership
interest in Acqutek at the time of our acquisition of our interest in
Acqutek. We have historically purchased and continue to purchase leadframes
from Acqutek. On September 17, 2003, we sold our entire ownership interest
in Acqutek. PMD supplies sophisticated die mold systems and tooling to the
semiconductor industry and historically over 90% of its sales were to
Amkor. We determined the fair value of PMD based on projected cash flows
discounted at a rate commensurate with the risk involved. At the time of
our acquisition of PMD, Anam Instruments was owned 20% by ASI and 20% by a
family member of James Kim.
- - On February 28, 2003, we sold our wafer fabrication services business to
ASI for $62 million. We negotiated the fair value of our wafer fabrication
services business with ASI and Dongbu. The parties calculated fair value
based on an assessment of projected cash flows discounted at a rate
commensurate with the risk involved. We obtained a release from Texas
Instruments regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of the
business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different conclusions as to fair value. It is likely that we would not have
entered into the Acqutek or PMD transactions absent the share sale to Dongbu and
the sale of the wafer fabrication services business to ASI. Had these
transactions not been interrelated, we may have utilized a different negotiation
strategy for the investment in Acqutek and the acquisition of PMD, which could
have resulted in us reaching a different conclusion of the fair value of both of
these transactions.
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.
Subsequent to the sale of a portion of our investment in ASI to Dongbu in
2002, we were unable to identify another strategic buyer. ASI's common stock,
which is listed on the Korean Stock Exchange, is relatively thinly traded and
subject to volatile swings in daily trading volumes. In an effort to continue to
monetize our investment in ASI's common stock, we evaluated, in consultation
with a financial institution, the most efficient method to divest a large block
of shares into the market without destabilizing the share price of ASI's common
stock. On March 24, 2003, we consummated a series of transactions proposed by a
financial institution. We irrevocably sold a block of 7 million shares of ASI
common stock to the financial institution for approximately $19.5 million, or
$2.81 per share. We also entered into a nondeliverable call option with the
financial institution for $6.8 million, the fair value of the option at that
date plus the transaction costs. In May 2003, we exercised the nondeliverable
call option realizing $5.6 million of cash proceeds. Accordingly, during 2003 we
recorded a loss of $1.2 million related to this nondeliverable call option.
29
On September 17, 2003, we sold an additional 5 million shares of ASI common
stock to the same financial institution for approximately $18.5 million based on
the spot exchange rate as of the transaction date, or $3.69 per share, and
recorded an associated gain of $4.7 million during 2003. We also entered into a
nondeliverable call option with the financial institution for $6.5 million, the
fair value of the option at that date plus the transaction costs. In December
2003, we exercised the nondeliverable call option realizing $2.0 million of cash
proceeds. Accordingly, during 2003 we recorded a loss of $4.5 million related to
this nondeliverable call option.
The March and September 2003 call options discussed above allowed us to
continue to monetize our investment in ASI at a fixed price with unlimited
upside and limited downside economics. In addition, it provided us with the
economic benefits of selling shares through a dollar averaging sales program
without incurring the transaction costs associated with multiple small quantity
sales. The call premiums provided the financial institution some downward
protection if the market for ASI's common stock destabilized as it sold its
investment in ASI's common stock into the market. All ownership rights and
privileges associated with the 12 million shares of ASI's common stock sold
during 2003 were irrevocably transferred to the financial institution. In no
event could the financial institution have put the shares back to Amkor nor was
there a provision in the agreements for Amkor to reacquire the shares.
2002 SPECIAL CHARGES
During 2002, we recorded $292.0 million of special charges. Special
charges, in thousands, were comprised of:
Impairment of long-lived assets ............................ $ 190,266
Impairment of goodwill ..................................... 73,080
Lease termination and other exit costs ..................... 28,624
---------
$ 291,970
=========
During 2001, the semiconductor industry declined an unprecedented 32%,
which impacted the utilization rates of our packaging and test assets. During
the second quarter of 2002, total packaging and test revenues grew over 21% as
compared to the first quarter of 2002. We experienced significant recovery in
most of our company's packaging services. However, our test services assets and
several packaging services assets:
- did not contribute significantly to the growth experienced during the
second quarter of 2002,
- remained at low utilization rates relative to our projections and
- were no longer expected to reach previously anticipated utilization
levels.
In addition, as of June 30, 2002, we experienced a 72% decline in our market
capitalization as compared to March 31, 2002. These events triggered an
impairment review in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144. This review included a company-wide evaluation of
underutilized assets and a detailed update of our operating and cash flow
projections.
Based on our company-wide evaluation of underutilized assets, we identified
$19.8 million of test and packaging assets to be disposed. We recognized an
$18.7 million impairment charge to reduce the carrying value of the test and
packaging fixed assets to be disposed to their fair value less cost to sell.
Fair value of the assets to be disposed was determined with the assistance of an
appraisal firm and available information on the resale value of the equipment.
As of December 31, 2003, we have disposed of all of the identified test and
packaging assets.
Upon the completion of the process to identify the packaging and test net
assets to be disposed, we reviewed our assets to be held and used for
impairment. Based on the June 30, 2002 operating and cash flow projections, we
determined that the carrying value of our test services assets and several
packaging services assets being held and used, including intangible assets that
we are amortizing, exceeded the anticipated cash flows attributable to those
assets. We grouped our long-lived assets with other assets and liabilities at
the lowest level for which identifiable cash flows were largely independent of
the cash flows of other assets and liabilities. For our company, the lowest
level of identifiable cash flows is at the test reporting unit level and for our
packaging services reporting unit at the package type level.
Our test reporting unit and the outsourced integrated circuit test services
industry were adversely impacted by excess capacity at the large integrated
device manufacturers. We expected that when the semiconductor industry recovered
the
30
integrated device manufacturers demand for outsourced test services would also
recover. However, that anticipated recovery failed to materialize in connection
with the initial recovery we noted in the semiconductor industry during the
first half of 2002 due to continued excess test capacity held by the large
integrated device manufacturers. We no longer expected that the demand for our
test services on our existing technology platforms would return to the
previously anticipated rates. Several of our package types based on more mature
technologies and processes, including older leadframe and laminate package
types, were adversely impacted by a technology shift to matrix and high density
leadframes and the movement from multi-layer laminate substrates to tape and
chip arrays and stacked-die packages. We expected that when the semiconductor
industry recovered there would still be sufficient demand for these more mature
products. However, that anticipated recovery failed to materialize in connection
with the initial recovery we noted in the semiconductor industry during the
first half of 2002 due to these technology shifts and the related significant
excess capacity in the industry. We no longer expected that the demand for these
package types would return to the previously anticipated rates. Additionally, we
experienced insufficient demand related to select investments in advanced
package technologies principally as a result of alternative advanced package
technologies which became industry standard.
As of June 30, 2002, we recognized a $171.6 million impairment charge to
reduce the carrying value of test and packaging assets to be held and used to
their fair value. The components of the this charge were as follows:
CARRYING FAIR IMPAIRMENT
VALUE VALUE CHARGE
---------- ---------- -----------
(IN THOUSANDS)
Test assets:
Property, plant and equipment and acquired intangibles....... $ 95,400 $ 21,900 $ 73,500
Packaging assets:
Property, plant and equipment............................... 157,700 59,600 98,100
---------- ---------- -----------
$ 253,100 $ 81,500 $ 171,600
========== ========== ===========
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.
Depreciation expense was reduced by $38.5 million during the six month period
following the second quarter of 2002 and by $60.4 million for the year 2003. The
impact to depreciation expense diminishes quarterly as these assets reach the
end of their respective useful lives.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances,
including when a significant adverse change in the business climate occurs and
when long-lived assets are tested for recoverability. Accordingly we retested
goodwill for impairment as of June 30, 2002, and concluded that the carrying
value of the assets and liabilities associated with the test services reporting
unit exceeded its fair value. As of June 30, 2002, we recognized a $73.1 million
goodwill impairment charge. Such impairment charge was measured by comparing the
implied fair value of the goodwill associated with the test services reporting
unit to its carrying value. An appraisal firm was engaged to assist in the
determination of the fair value of our reporting units. The determination of
fair value was based on projected cash flows using a discount rate commensurate
with the risk involved. During 2003, we performed our annual review of goodwill
for impairment. Based on our review, we concluded that goodwill was not
impaired.
During 2002, we recorded $28.6 million of charges related to the
consolidation of our worldwide facilities to increase operational efficiency and
reduce costs. The charges were comprised of $20.8 million to write-off leasehold
improvements and other long-lived assets and $7.8 million for lease termination
and other exit costs. Our consolidation efforts included:
- Transferring the packaging operations at our K2 site in Bucheon, South
Korea into our K4 factory in Kwangju, South Korea and closing the K2
facility,
- Merging our factory operations in Taiwan into a single location, and
- Consolidating select U.S. office locations and closing our San Jose
test facility.
The charges associated with the consolidation initiatives in Korea, Taiwan
and the U.S. were $10.0 million, $13.8 million and $4.8 million, respectively.
We completed the closing of the K2 facility during the second quarter of 2003
and the other
31
activities were substantially completed during 2002. We saved approximately
$11.5 million during 2003 as a result of these consolidation efforts.
CHANGE IN DEPRECIATION
We calculate depreciation using the straight-line method over the estimated
useful lives of the depreciable assets. We have historically estimated the
useful lives of our machinery and equipment to be three to five years, with the
substantial majority of our packaging assets having estimated useful lives of
four years. Effective with the fourth quarter of 2002, we changed the estimated
useful lives of certain of our packaging equipment from four years to seven
years for depreciation purposes, which is in line with our historical usage and
consistent with other companies in our industry. We did not extend the useful
lives of the packaging equipment associated with the second quarter 2002
impairment charge based on our expected use of that equipment and the associated
cash flows. This change reduced depreciation expense by approximately $17
million in the fourth quarter of 2002. This change further reduced depreciation
expense by approximately $62 million in 2003. Our decision to change the
estimated useful lives of such packaging equipment was based on the following:
- historical experience,
- expected future cash flows,
- prevailing industry practice,
- consultations with an independent appraisal firm, and
- consultations with equipment manufacturers.
We believe that our principal competitors depreciate their packaging assets
over periods of six to eight years.
OUR 2002 ACQUISITIONS
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The business acquired
includes a manufacturing facility, over 80 employees and intellectual property.
The purchase price included a $7.8 million cash payment at closing. We were
required to make additional payments one year from closing for the amount of the
deferred purchase price as well as contingent payments. Based on the resolution
of the contingency as of January 2003, the total amount of additional payments
due in April 2003 was 1.7 billion Japanese yen. In April 2003, we made a payment
of 300.0 million Japanese yen, or $2.5 million based on the exchange rate on the
date of the payment. We are withholding payment of 1.4 billion yen ($13.1
million based on the spot exchange rate at December 31, 2003) of this amount
pending resolution of a controversy relating to the patents acquired in
connection with the acquisition. We recorded $19.6 million of intangible assets
for patent rights that are amortizable over 7 years. Our results of operation
were not significantly impacted by this acquisition.
In January 2002, we acquired Agilent Technologies, Inc.'s packaging
business related to semiconductor packages utilized in printers for $2.8 million
in cash. The acquired tangible assets were integrated into our existing
manufacturing facilities. The purchase price was principally allocated to the
tangible assets. Our results of operations were not significantly impacted by
this acquisition.
OUR VENTURE WITH TOSHIBA CORPORATION
In January 2001, Amkor Iwate Corporation commenced operations and acquired
from Toshiba a packaging and test facility located in the Iwate prefecture in
Japan. At that time, we owned 60% of Amkor Iwate and Toshiba owned the balance
of the outstanding shares. In January 2004, we acquired the remaining 40%
ownership interest of Amkor Iwate from Toshiba for $12.8 million. Also in
January 2004, we paid to Toshiba 220.0 million Japanese yen to terminate our
commitment to purchase a tract of land adjacent to the Amkor Iwate facility. A
$2.0 million charge was recorded in special charges during the fourth quarter of
2003 related to this termination fee. 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
through December 2003 and then at market based rates beginning January 2004.
This long-term supply agreement with Toshiba's Iwate factory terminates January
2006.
32
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 ("Sampo") in
Taiwan. In connection with earn-out provisions that provided for additional
purchase price based in part on the results of the acquisitions, we issued an
additional 1.8 million shares of our common stock in January 2002 and recorded
an additional $35.2 million in goodwill. The results of TSTC and Sampo have been
included in our consolidated financial statements since the acquisition date.
QUARTERLY RESULTS
The following table sets forth our unaudited restated consolidated
financial data, including as a percentage of our net revenues, for the last
eight fiscal quarters ended December 31, 2003. Our results of operations have
varied and may continue to vary from quarter to quarter and are not necessarily
indicative of the results of any future period. The results of the semiconductor
packaging businesses acquired from Citizen Watch Co., Ltd. and Agilent
Technologies, Inc. in 2002 are included in the consolidated financial data from
the date of the acquisitions.
The quarterly results stated below reflect improved gross margins in the
second half of 2002, as well as improved gross margins in each quarter of 2003.
Related to the improvement in the second half of 2002, gross margins were
positively impacted by the reduction of depreciation expense resulting from the
fixed asset impairment charge recorded in the second quarter of 2002 and the
impact of the change in the estimated useful lives of certain packaging
equipment during the fourth quarter of 2002. Further, the second half of 2002
gross margins benefited from the impact of increased revenues from overall unit
volumes and material cost reductions. Also, margins were improved as a result of
consolidation efforts which reduced rental expense and depreciation. In 2002,
the total cost reductions related to the impairment charge, change in useful
lives and consolidation efforts positively impacted gross margins by
approximately $20 million and $41 million in the third and fourth quarters of
2002, respectively. In 2003, the total cost reductions related to the impairment
charge, change in useful lives and consolidation efforts positively impacted
gross margins by approximately $34 million, $32 million, $33 million and $32
million in the first, second, third and fourth quarters of 2003, respectively.
Also, our 2003 quarterly gross margins benefited from the impact of increased
revenues from overall unit volumes and material cost reductions throughout the
year.
We believe that we have included in the amounts stated below all necessary
adjustments, consisting only of normal recurring adjustments, for a fair
presentation of our selected quarterly data. You should read our selected
quarterly data in conjunction with our restated consolidated financial
statements and the related notes, included elsewhere in this report.
Our net revenues, gross profit and operating income are generally lower in
the first quarter of the year as compared to the fourth quarter of the preceding
year primarily due to the combined effect of holidays in the U.S. and Asia.
Semiconductor companies in the U.S. generally reduce their production during the
holidays at the end of December which results in a significant decrease in
orders for packaging and test services during the first two weeks of January. In
addition, we typically close our factories in the Philippines for holidays in
January, and we close our factories in Korea for holidays in February.
During the second quarter of 2003, in connection with our redemption of our
$425 million senior notes due May 2006 we recorded charges of $19.7 million
related to the premium paid in the redemption, $6.0 million for the associated
unamortized deferred debt costs of $2.5 million of other costs; or $28.2 million
in total, which is included in other expense, net.
During the fourth quarter of 2003, we recorded a gain of $7.3 million
related to the sale of our investment in an intellectual property company, which
is included in other expense, net.
The calculation of basic and diluted per share amounts for each quarter is
based on the average shares outstanding for that period; consequently, the sum
of the quarters may not necessarily be equal to the full year basic and diluted
net income (loss) per share.
33
QUARTER ENDED
-------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2003 2003 2003 2003
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ....................................... $ 458,906 $ 423,784 $ 377,947 $ 343,131
Cost of revenues ................................... 344,685 322,369 303,686 296,562
--------- --------- --------- ---------
Gross profit (loss) ........................ 114,221 101,415 74,261 46,569
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ............. 48,124 45,023 44,261 42,544
Research and development ........................ 6,330 6,836 6,130 6,488
Loss (gain) on disposal of assets, net .......... 284 (148) (791) 69
Amortization of goodwill and other acquired
intangibles ................................ 2,080 2,035 2,038 2,030
Special charges ................................. 125 -- -- --
--------- --------- --------- ---------
Total operating expenses ................... 56,943 53,746 51,638 51,131
--------- --------- --------- ---------
Operating income (loss) ............................ 57,278 47,669 22,623 (4,562)
Other expense, net ................................. 27,192 36,998 67,955 36,166
--------- --------- --------- ---------
Income (loss) before income taxes, equity
investment gain (loss), minority interest
and discontinued operations ................ 30,086 10,671 (45,332) (40,728)
Equity investment gain (loss) ...................... 265 -- 73 (3,628)
Minority interest .................................. (1,873) (1,809) (475) 149
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes .................................... 28,478 8,862 (45,734) (44,207)
--------- --------- --------- ---------
Provision for income taxes (benefit) ............... 5,839 (6,908) 5,013 (4,177)
--------- --------- --------- ---------
Income (loss) from continuing operations ........... 22,639 15,770 (50,747) (40,030)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax ............................ -- -- -- 54,566
--------- --------- --------- ---------
Net income (loss) .................................. $ 22,639 $ 15,770 $ (50,747) $ 14,536
========= ========= ========= =========
Basic and diluted income (loss) per common share:
from continuing operations ...................... $ 0.13 $ 0.09 $ (0.31) $ (0.24)
from discontinued operations .................... -- -- -- 0.33
--------- --------- --------- ---------
Net income (loss) per common share ......... $ 0.13 $ 0.09 $ (0.31) $ 0.09
========= ========= ========= =========
QUARTER ENDED
------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ....................................... $ 373,189 $ 393,563 $ 350,471 $ 288,955
Cost of revenues ................................... 312,006 346,053 344,026 308,478
--------- --------- --------- ---------
Gross profit (loss) ........................ 61,183 47,510 6,445 (19,523)
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ............. 42,249 45,118 46,981 45,540
Research and development ........................ 6,654 7,622 8,769 8,144
Loss (gain) on disposal of assets, net .......... (416) (200) 1,438 1,674
Amortization of goodwill and other acquired
intangibles ................................ 1,997 2,000 1,743 1,252
Special charges ................................. 9,985 13,819 268,166 --
--------- --------- --------- ---------
Total operating expenses ................... 60,469 68,359 327,097 56,610
--------- --------- --------- ---------
Operating income (loss) ............................ 714 (20,849) (320,652) (76,133)
Other expense, net ................................. 34,509 37,566 37,629 37,685
--------- --------- --------- ---------
Income (loss) before income taxes, equity
investment gain (loss), minority interest
and discontinued operations ................ (33,795) (58,415) (358,281) (113,818)
Equity investment gain (loss) ...................... (42,125) (14,299) (53,071) (98,670)
Minority interest .................................. 306 423 (908) (1,753)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes .................................... (75,614) (72,291) (412,260) (214,241)
--------- --------- --------- ---------
Provision for income taxes (benefit) ............... 122,574 (11,078) (26,709) (24,104)
--------- --------- --------- ---------
Income (loss) from continuing operations ........... (198,188) (61,213) (385,551) (190,137)
--------- --------- --------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax ............................ 2,072 1,906 2,023 2,329
--------- --------- --------- ---------
Net income (loss) .................................. $(196,116) $ (59,307) $(383,528) $(187,808)
========= ========= ========= =========
Basic and diluted income (loss) per common share:
from continuing operations ...................... $ (1.20) $ (0.37) $ (2.34) $ (1.16)
from discontinued operations .................... 0.01 0.01 0.01 0.01
--------- --------- --------- ---------
Net income (loss) per common share ......... $ (1.19) $ (0.36) $ (2.33) $ (1.15)
========= ========= ========= =========
QUARTER ENDED
---------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2003 2003 2003 2003
-------- --------- -------- ---------
Net revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................ 75.1 76.1 80.4 86.4
----- ----- ----- -----
Gross profit (loss) ..................... 24.9 23.9 19.6 13.6
----- ----- ----- -----
Operating expenses:
Selling, general and administrative .......... 10.5 10.6 11.7 12.4
Research and development ..................... 1.4 1.6 1.6 1.9
Loss (gain) on disposal of assets, net ....... -- -- (0.2) --
Amortization of goodwill and other acquired
intangibles ............................. 0.5 0.5 0.5 0.6
Special charges .............................. -- -- -- --
----- ----- ----- -----
Total operating expenses ................ 12.4 12.7 13.6 14.9
----- ----- ----- -----
Operating income (loss) ......................... 12.5 11.2 6.0 (1.3)
Other expense, net .............................. 5.9 8.7 18.0 10.5
----- ----- ----- -----
Income (loss) before income taxes, equity
investment gain (loss), minority interest
and discontinued operations .................. 6.6 2.5 (12.0) (11.8)
Equity investment gain (loss) ................... -- -- -- (1.1)
Minority interest ............................... (0.4) (0.4) (0.1) --
----- ----- ----- -----
Income (loss) from continuing operations before
income taxes ................................. 6.2 2.1 (12.1) (12.9)
----- ----- ----- -----
Provision for income taxes (benefit) ............ 1.3 (1.6) 1.3 (1.2)
----- ----- ----- -----
Income (loss) from continuing operations ........ 4.9 3.7 (13.4) (11.7)
----- ----- ----- -----
QUARTER ENDED
--------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
-------- --------- -------- ---------
Net revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................ 83.6 87.9 98.2 106.8
----- ----- ------ -----
Gross profit (loss) ..................... 16.4 12.1 1.8 (6.8)
----- ----- ------ -----
Operating expenses:
Selling, general and administrative .......... 11.3 11.5 13.4 15.8
Research and development ..................... 1.8 1.9 2.5 2.8
Loss (gain) on disposal of assets, net ....... (0.1) (0.1) 0.4 0.6
Amortization of goodwill and other acquired
intangibles ............................. 0.5 0.5 0.5 0.4
Special charges .............................. 2.7 3.5 76.5 --
----- ----- ------ -----
Total operating expenses ................ 16.2 17.4 93.3 19.6
----- ----- ------ -----
Operating income (loss) ......................... 0.2 (5.3) (91.5) (26.3)
Other expense, net .............................. 9.2 9.5 10.7 13.0
----- ----- ------ -----
Income (loss) before income taxes, equity
investment gain (loss), minority interest
and discontinued operations .................. (9.1) (14.8) (102.2) (39.4)
Equity investment gain (loss) ................... (11.3) (3.6) (15.1) (34.1)
Minority interest ............................... 0.1 0.1 (0.3) (0.6)
----- ----- ------ -----
Income (loss) from continuing operations before
income taxes ................................. (20.3) (18.4) (117.6) (74.1)
----- ----- ------ -----
Provision for income taxes (benefit) ............ 32.8 (2.8) (7.6) (8.3)
----- ----- ----- -----
Income (loss) from continuing operations ........ (53.1) (15.6) (110.0) (65.8)
----- ----- ------ -----
34
QUARTER ENDED
----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2003 2003 2003 2003 2002 2002 2002 2002
-------- --------- -------- --------- -------- --------- -------- ---------
Discontinued operations:
Income from wafer fabrication services
business, net of tax .............. -- -- -- 15.9 0.6 0.5 0.6 0.8
--- --- ----- ---- ----- ----- ------ -----
Net income (loss) .................... 4.9% 3.7% (13.4)% 4.2% (52.6)% (15.1)% (109.4)% (65.0)%
=== === ===== ==== ===== ===== ====== =====
LIQUIDITY AND CAPITAL RESOURCES
Our ongoing primary cash needs are for debt service (principally interest),
equipment purchases and working capital. Our cash and cash equivalents balance
as of December 31, 2003 was $313.3 million, and we had $30.0 million available
under our $200.0 million senior secured credit facility. 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 and working capital requirements for at least
the next twelve months. We may require additional cash to consummate business
combinations to diversify our geographic operations and expand our customer
base. We intend to access the capital markets to meet these needs. We cannot
assure you that additional financing will be available when we need it or, if
available, that it will be available on satisfactory terms. In addition, the
terms of the secured bank facility, senior notes and senior subordinated notes
significantly reduce our ability to incur additional debt. Failure to obtain any
such required additional financing could have a material adverse effect on us.
Please refer to "Risk Factors That May Affect Future Operating Performance"
below for further discussion.
CASH FLOWS
Net cash provided by (used in) operating, investing and financing
activities from continuing operations and cash provided by discontinued
operations for the three years ended December 31, 2003 were as follows:
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Operating activities from continuing operations $ 176,346 $ 113,175 $ 140,964
Investing activities from continuing operations (167,096) (54,565) (168,110)
Financing activities from continuing operations (22,012) (11,382) 114,686
Discontinued operations ....................... 13,284 62,631 19,397
Cash flows from continuing operating activities: Our 2003 cash flows from
continuing operating activities increased $63.2 million to $176.4 million in
2003, from $113.2 in 2002. Our cash flows from continuing operating activities
increased as a result of our improved operating performance, primarily driven by
revenue increases, partially offset by our increased needs for working capital.
The primary contributors to cash flow from continuing operations in 2003
were $223.2 million of cash flows provided by continuing operations (adjusted
for non-cash items) and a $39.5 million increase in trade payables associated
with the increase in business activity. These sources were primarily offset by a
$77.2 million increase in accounts receivable resulting from increased revenues
and average credit terms extending slightly due to higher mix of Asian based
customers, and a $23.8 million increase in inventory levels required to
accommodate the demand for our services.
Cash flows from continuing investing activities: Our 2003 cash flows used
in continuing investing activities increased by $112.5 as compared to 2002
primarily due to a $135.4 million increase in capital expenditures from $95.1
million in 2002 to $230.5 million in 2003. Cash used for capital expenditures in
2003 was offset by cash proceeds from the collection of $18.3 million of notes
receivable from Dongbu in 2003, $38.0 million from the sale of ASI common stock
in 2003 and $9.8 million from the sale of our investment in an intellectual
property company during 2003.
Cash flows from continuing financing activities: Our 2003 net cash outflows
from continuing financing activities were $22.0 million, as compared to $11.4
million in 2002. In 2002, our financing activity was minimal and was related
primarily to scheduled debt payments of $30.1 million offset by proceeds related
to our stock compensation plans of $11.5 million.
35
During 2003, significant uses of cash for financing activities were primarily
related our debt repurchase activity as follows:
- In April 2003, we repaid our $96.9 million term loan with the proceeds
received from a senior secured debt refinancing transaction,
- In May 2003, we repaid our $425.0 million 9.25% senior notes due in
2006, primarily with the proceeds from the issuance of our new 7.75%
senior notes due in 2013,
- In November 2003, we repaid $112.3 million of our 5.0% convertible
subordinated notes due 2007 and $17.0 million of our 5.75% convertible
subordinated notes due June 2006 with the proceeds from our November
2003 7.4 million common share offering,
- During 2003, we repaid $29.5 million of our 9.25% senior notes due 2008
with cash on hand,
- During 2003, we repaid $42.2 million our outstanding foreign debt with
cash on hand,
- In connection with the above transactions, we paid $24.1 of debt call
premiums, and
- In connection with the new debt issuances discussed below, we incurred
$10.6 million of debt acquisition costs.
Cash used for financing activities during 2003 was offset by the following
sources of cash:
- In April 2003, we received $170.0 million of proceeds from a senior
secured debt refinancing transaction,
- In May 2003, we received $425.0 million of proceeds from the issuance
of our new 7.75% senior notes due in 2013,
- In November 2003, we received $133.5 million of net proceeds from our
7.4 million common share offering, and
- During 2003, we received $13.5 million of proceeds related to our
employee stock compensation plans.
We engaged in these significant financing activities to reduce our level of
outstanding debt, lower our cost of capital and enhance our financial
flexibility. These transactions and the related financial instruments are
discussed in greater detail below.
DEBT INSTRUMENTS AND RELATED COVENANTS
Following is a summary of short-term borrowings and long-term debt:
DECEMBER 31, DECEMBER 31,
2003 2002
------------- -------------
(IN THOUSANDS)
Senior secured credit facilities:
Term loan, LIBOR plus 4% due January 2006........................................ $ 168,725 $ --
$30.0 million revolving line of credit, LIBOR plus 4.25% due October 2005........ -- --
Senior credit facilities:
Term B loans, LIBOR plus 4% due September 2005................................... -- 97,118
$100.0 million revolving line of credit, LIBOR plus 3.75% due March 2005......... -- --
9.25% Senior notes due May 2006...................................................... -- 425,000
9.25% Senior notes due February 2008................................................. 470,500 500,000
7.75% Senior notes due May 2013...................................................... 425,000 --
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................................................... 233,000 250,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share................................................... 146,422 258,750
Other debt........................................................................... 35,725 77,845
------------- -------------
1,679,372 1,808,713
Less -- Short-term borrowings and current portion of long-term debt (28,665) (71,023)
------------- -------------
$ 1,650,707 $ 1,737,690
============= =============
We now have, and for the foreseeable future will continue to have, a
significant amount of indebtedness. Our indebtedness requires us to dedicate a
substantial portion of our cash flow from operations to service payments on our
debt, with such payments principally for interest. For 2003, interest expense
payable in cash was $140.3 million.
36
The covenants included in the agreements governing our existing debt, and
debt we may incur in the future, may materially restrict our operations,
including our ability to incur debt, pay dividends, make certain investments and
payments and encumber or dispose of assets. In addition, financial covenants
contained in agreements relating to our existing and future debt could lead to a
default in the event our results of operations do not meet our plans and we are
unable to amend such financial covenants prior to default. A default under one
debt instrument may also trigger cross-defaults under our other debt
instruments. As of December 31, 2003 and through the date of this filing, we
were in compliance with all financial covenants. An event of default under one
or more of our debt instruments, if not cured or waived, could have a material
adverse effect on us. Our credit and debt ratings were lowered in August 2002,
and accordingly, it may be difficult for us to secure additional financing, if
we need it, on satisfactory terms or at all.
Our business strategy has been, in part, to enhance our financial
flexibility. During 2003, we have refinanced or repurchased various debt
instruments, including our term loan and various senior notes, thereby lowering
our effective interest rate and increasing our maturity dates.
In April 2003, we entered into a new $200.0 million senior secured credit
facility consisting of a $170.0 million term loan maturing January 31, 2006 and
a $30.0 million revolving line of credit that is available through October 31,
2005. This new credit facility replaced the previously existing $196.9 million
senior secured credit facility, which included a $96.9 million term loan and a
$100.0 million revolving credit facility that were scheduled to mature September
30, 2005 and March 31, 2005, respectively. The new term loan bears interest at
LIBOR plus 4.00% and the revolving line of credit bears interest at LIBOR plus
4.25%. These interest rates are subject to downward or upward adjustment
according to respective improvements or deteriorations in our senior secured
debt ratings. The remaining term loan principal repayments are due $1.7 million,
$125.4 million and $41.6 million in 2004, 2005 and 2006, respectively. In
addition, the credit facility includes certain affirmative, negative and
financial covenants (including minimum EBITDA, as defined by the credit
facility, minimum daily liquidity and maximum annual capital expenditures) and
events of default, which are customary for credit facilities of this type. On
October 17, 2003, we amended certain covenants under our new $200.0 million
senior secured credit facility as follows:
- our maximum annual capital expenditures have been increased to the
greater of (i) $250 million or (ii) 50% of EBITDA (as defined), not to
exceed $350 million,
- we are permitted to repurchase or redeem any senior notes, senior
subordinated notes or convertible notes with the net cash proceeds of
equity offerings,
- the basket for permitted investments has been increased from $25
million to $50 million, and
- the annual basket for repurchases or redemptions of senior notes from
cash (including proceeds of ASI shares) can be rolled over (to the
extent unused) from year to year up to an aggregate amount of $300
million, of which up to $25 million may alternatively be used to
repurchase or redeem senior subordinated notes or convertible notes.
In May 2003, we received proceeds of $416.3 million, net of closing costs,
in connection with our sale of $425.0 million of 7.75% senior notes due May
2013. We sold these notes to qualified institutional buyers and used the net
proceeds of the issuance to redeem our outstanding 9.25% senior notes due 2006.
The notes bear interest at the rate of 7.75 % annually and interest payments are
due semi-annually. In connection with the redemption, we recorded charges during
the second quarter of 2003 of $19.7 million related to the premium paid in the
redemption, $6.0 million for the associated unamortized deferred debt issuance
costs and $2.5 million of other costs.
In November 2003, we sold 7,375,000 shares of our common stock priced at
$19.00 per share. The final net proceeds to us were $133.5 million. These net
proceeds were used to repurchase $112.0 million of our 5.00% convertible notes
due 2007 and $17.0 million of our 5.75% convertible notes due 2006. In
connection with this redemption, we recorded charges during the fourth quarter
of 2003 of $2.8 million for the associated premiums paid and $2.3 million for
the associated unamortized deferred debt issuance costs.
Other debt as of December 31, 2003 and 2002 included our foreign debt
principally related to the financing of Amkor Iwate's acquisition of a Toshiba
packaging and test facility and the debt assumed in connection with the
acquisition of Sampo Semiconductor Corporation in Taiwan. Our foreign debt
included fixed and variable debt maturing between 2003 and 2010, with the
substantial majority maturing by 2003. As of December 31, 2003, the foreign debt
had interest rates ranging from 1.0% to 4.35%. These debt instruments do not
include significant financial covenants.
37
CAPITAL EXPENDITURES AND CONTRACTUAL OBLIGATIONS
We expect significant growth in our business in 2004 based on industry
estimates for the semiconductor industry as a whole, and our expectation that
the trend towards increased outsourcing of packaging and test services in the
semiconductor industry will continue. Accordingly, we have budgeted first
quarter capital expenditures of $200 million and will most likely spend between
$300 million and $500 million in 2004, which may include business combinations
to diversify our geographic operations and expand our customer base.
A summary of our contractual obligations as of December 31, 2003 are as
follows:
PAYMENT DUE BY YEAR ENDING DECEMBER 31,
---------------------------------------------------
2005 - 2007 - AFTER
TOTAL 2004 2006 2008 2009
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Total debt, including capital leases................... $ 1,679,372 $ 28,665 $ 406,539 $ 618,309 $ 625,859
Purchase obligations (1)............................... 148,805 148,805 -- -- --
Operating lease obligations............................ 133,824 10,935 16,238 16,664 89,987
Other long-term obligations (2)........................ -- -- -- -- --
------------- ----------- ----------- ----------- -----------
Total contractual obligations.......................... $ 1,962,001 $ 188,405 $ 422,777 $ 634,973 $ 715,846
============= =========== =========== =========== ===========
(1) Includes $89.0 million of capital-related purchase obligations.
(2) Our other noncurrent liabilities as of December 31, 2003 were $79.0
million. These other noncurrent liabilities included $76.3 million related
to pension and severance obligations and $1.5 million related deferred tax
liabilities, both of which are not included in the above chart due to
uncertainty as to timing of payment. Also included in other noncurrent
liabilities is an accrual of $1.2 million related to facility lease
shutdowns, which is included in the chart above as operating lease
obligations.
Included in accrued expenses at December 31, 2003, and not included above, are
the following:
- In January 2004, we acquired the remaining 40% ownership interest of
Amkor Iwate from Toshiba for $12.8 million. Also in January 2004, we
paid to Toshiba 220.0 million Japanese yen to terminate our commitment
to purchase a tract of land adjacent to the Amkor Iwate facility. A
$2.0 million charge was recorded in other expense (income) during the
fourth quarter of 2003 related to this termination fee.
- In connection with our acquisition of a semiconductor packaging
business from Citizen Watch Co., Ltd. we are required to make
additional payments one year from closing for the amount of the
deferred purchase price as well as contingent payments. Based on the
resolution of the contingency as of January 2003, the total amount of
additional payments due in April 2003 was 1.7 billion Japanese yen. In
April 2003, we made a payment of 300.0 million Japanese yen, or $2.5
million based on the exchange rate on the date of the payment. We are
withholding payment of 1.4 billion yen ($13.1 million based on the spot
exchange rate at December 31, 2003) of this amount pending resolution
of a controversy relating to the patents acquired in connection with
the acquisition.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet guarantees or other off-balance sheet
arrangements as of December 31, 2003.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, released by the Securities and Exchange
Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. A summary of our significant
accounting policies used in the preparation of our consolidated financial
statements appears in Note 1 of the notes to the consolidated financial
statements. Our preparation of this annual report on Form 10-K 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. We do not take ownership of customer-supplied
semiconductor
38
wafers. Title and risk of loss remains with the customer for these materials at
all times. Accordingly, the cost of the customer-supplied materials is not
included in the consolidated financial statements. Prior to the sales of our
wafer fabrication services business on February 28, 2003, we recorded wafer
fabrication services revenues upon shipment of completed wafers. Such policies
are consistent with provisions in the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Provision for Income Taxes. We operate in and file income tax returns in
various U.S. and non-U.S. jurisdictions which are subject to examination by tax
authorities. The tax returns for open years in all jurisdictions in which we do
business are subject to changes upon examination. We believe that we have
estimated and provided adequate accruals for the probable additional taxes and
related interest expense that may ultimately result from examinations related to
our transfer pricing and local attribution of income resulting from significant
intercompany transactions, including ownership and use of intellectual property,
in various U.S. and non-U.S. jurisdictions. Our estimated tax liability is
subject to change as examinations of specific tax years are completed in the
respective jurisdictions. We believe that any additional taxes or related
interest over the amounts accrued will not have a material effect on our
financial condition or results of operations, nor do we expect that examinations
to be completed in the near term would have a material effect. As of December
31, 2003 and 2002, the accrual for current taxes and estimated additional taxes
was $39.8 million and $48.8 million, respectively. While it is reasonably
possible that future payments may exceed amounts accrued, we recorded a net tax
benefit during the year ended December 31, 2003 of $20.0 million to reduce our
tax accruals based on related tax periods no longer open. 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. Generally accepted accounting principles require
companies to weigh both positive and negative evidence in determining the need
for a valuation allowance for deferred tax assets. In 2002, in light of our
three years of cumulative losses, an unprecedented industry downturn and
continued poor visibility of customer demand, we determined that a valuation
allowance representing substantially all of our deferred tax assets was
appropriate. These negative factors outweighed our forecasted future
profitability and expectation that we will be able to utilize our net operating
loss carryforwards, and accordingly, during 2002 we recorded a $214.8 million
charge to establish a valuation allowance against our deferred tax assets
consisting primarily of U.S. and Taiwanese net operating loss carryforwards and
tax credits. We will resume the recognition of deferred tax assets when we
return to sustained profitability in certain jurisdictions. As of December 31,
2003, we had U.S. net operating losses totaling approximately $404.9 million
expiring between 2021 and 2023. Additionally, as of December 31, 2003, we had
approximately $49.1 million of non-U.S. net operating losses available for
carryforward, expiring between 2004 and 2013.
In connection with our divestiture in 2002 of 21 million shares of ASI
common stock, we realized a capital loss of approximately $117.0 million and
recognized a U.S. tax benefit of $44.5 million for which we provided a full
valuation allowance because we did not have any offsetting capital gains. In
connection with our divestiture in 2003 of 12 million shares of ASI common
stock, we realized a capital loss of approximately $80.6 million and recognized
a U.S. tax benefit of $32.2 million for which we provided a full valuation
allowance because we did not have any offsetting capital gains.
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
39
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.
Due to the existence of certain of the aforementioned indicators of
impairment, we conducted a review in accordance with SFAS No. 144, "Accounting
for the Impairment of Disposal of Long-Lived Assets," during the second quarter
of 2002. As a result of this analysis, we identified $19.8 million of packaging
and test fixed assets to be disposed and recognized an $18.7 million impairment
charge to reduce the carrying values to their fair values less costs to sell. In
addition, we recognized a $171.6 million impairment charge to reduce test and
certain packaging assets that were to be held and used to their fair values
based on projected cash flows discounted at a rate commensurate with the risk
involved.
In 2002, 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.
Since we tested our long-lived assets for recoverability during the second
quarter of 2002, we tested goodwill for impairment, and concluded that the
carrying value of the assets and liabilities associated with the test services
reporting unit exceeded its fair value. As a result, we recognized a $73.1
million goodwill impairment charge based on projected cash flows discounted at a
rate commensurate with the risk involved.
Depreciation accounting requires estimation of the useful lives of the
assets to be depreciated as well as adoption of a method of depreciation. We
have historically calculated depreciation using the straight-line method over
the estimated useful lives of the depreciable assets. We have historically
estimated the useful lives of our machinery and equipment to be three to five
years, with the substantial majority of our packaging assets having estimated
useful lives of four years. Effective with the fourth quarter of 2002, we
changed the estimated useful lives of certain of our packaging equipment from
four years to seven years for depreciation purposes, which is in line with our
historical usage and consistent with other companies in our industry. We did not
extend the useful lives of the packaging equipment associated with the second
quarter impairment charge based on our expected use of that equipment and the
associated cash flows. This change reduced depreciation expense by $38.5 million
during the six month period following the second quarter of 2002 and by $60.6
million for the year 2003. Our decision to change the estimated useful lives of
such packaging equipment was based on the following:
- historical experience,
- expected future cash flows,
- prevailing industry practice,
- consultations with an independent appraisal firm, and
- consultations with equipment manufacturers.
We believe that our principal competitors depreciate their packaging assets
over periods of six to eight years. The change of the estimated useful lives is
considered a change in estimate and was accounted for prospectively beginning
with the fourth quarter of 2002.
Legal contingencies. We are subject to certain legal proceedings, lawsuits
and other claims. We assess the likelihood of any adverse judgment or outcome
related to these matters, as well as potential ranges of probable losses. Our
determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue, often
with the assistance of outside legal counsel. We record provisions in our
consolidated financial statements for pending litigation when we determine that
an unfavorable outcome is probable and the amount of the loss can be reasonably
estimated.
Regarding our epoxy mold compound litigation matter, claims against us may
run in excess of $100 million. We have concluded that a loss is not probable,
and are currently unable to estimate the amount or range of loss that could
result in the event of an unfavorable outcome of this pending litigation.
Accordingly, we have not provided any amounts in our consolidated financial
statements for legal contingencies.
40
Our assessment of required reserves may change in the future due to new
developments in each matter. The present legislative and litigation environment
is substantially uncertain, and it is possible that our consolidated results of
operations, cash flows or financial position could be materially affected by an
unfavorable outcome or settlement of our pending litigation. We believe, and
have been so advised by outside counsel handling these cases, that we have
meritorious defenses to our litigation. All such cases are, and will continue to
be, vigorously defended.
Evaluation of Equity Investments. We evaluate our investments for
impairment due to declines in market value that are considered other than
temporary. In the event of a determination that a decline in market value is
other than temporary, a charge to earnings is recorded for the unrealized loss.
The stock prices of semiconductor companies' stocks, including ASI and its
competitors, have experienced significant volatility during the past several
years. During 2002, we recorded impairment charges totaling $172.5 million to
reduce the carrying value of our investment in ASI to ASI's market value. At
January 1, 2002, we owned 47.7 million shares of ASI common stock with a
carrying value of $377.9 million. During the second half of 2002, we commenced a
strategy to sell our investment in ASI. As of December 31, 2003, we have reduced
our investment in ASI to 14.7 million shares with a carrying value of $50.4
million, including a $10.0 unrealized gain reflected in accumulated other
comprehensive income. We intend to sell our remaining investment in ASI. The
ultimate level of proceeds from the sale of our remaining investment in ASI
could be less than the current carrying value.
Valuation of Inventory. We order raw materials based on customers'
forecasted demand and we do not maintain any finished goods inventory. If our
customers change their forecasted requirements and we are unable to cancel our
raw materials order or if our vendors require that we order a minimum quantity
that exceeds the current forecasted demand, we will experience a build-up in raw
material inventory. We will either seek to recover the cost of the materials
from our customers or utilize the inventory in production. However, we may not
be successful in recovering the cost from our customers or be able to use the
inventory in production and accordingly if we believe that it is probable that
we will not be able to recover such costs we adjust our reserve estimate.
Additionally, our reserve for excess and obsolete inventory is based on
forecasted demand we receive from our customers. When a determination is made
that the inventory will not be utilized in production it is written-off and
disposed.
MARKET RISK SENSITIVITY
We are 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. Our use of derivatives
instruments, including forward exchange contracts, has been insignificant
throughout 2003 and 2002, and it is expected that our use of derivative
instruments will continue to be minimal.
FOREIGN CURRENCY RISKS
Our primary exposures to foreign currency fluctuations are associated with
transactions and related assets and liabilities denominated in Philippine pesos,
Korean won, Japanese yen, and Taiwanese dollar and Chinese renminbi. The
objective in managing these foreign currency exposures is to minimize the risk
through minimizing the level of activity and financial instruments denominated
in those currencies. Our foreign currency financial instruments primarily
consist of cash, trade receivables, investments, deferred taxes, trade payables
and accrued expenses.
For an entity with various financial instruments denominated in a foreign
currency in a net asset position, an increase in the exchange rate would result
in less net assets when converted to U.S. dollars. Conversely, for an entity
with various financial instruments denominated in a foreign currency in a net
liability position, a decrease in the exchange rate would result in more net
liabilities when converted to U.S. dollars. Based on our portfolio of foreign
currency based financial instruments at December 31, 2003 and 2002, a 20%
increase (decrease) in the foreign currency to U.S. dollar spot exchange rate
would result in the following foreign currency risk for our entities in a net
asset (liability) position:
41
CHART OF FOREIGN CURRENCY RISK
------------------------------------------------------------
PHILIPPINE KOREA TAIWANESE JAPANESE CHINESE
PESO WON DOLLAR YEN RENMINBI
---------- ------- --------- -------- --------
(IN THOUSANDS)
As of December 31, 2003 ...... $(3,269) $ 3,954 $(2,041) $ 3,718 $ 315
As of December 31, 2002 ...... $(1,782) $ 8,506 $ 1,933 $(7,589) $ (599)
INTEREST RATE RISKS
Our company has interest rate risk with respect to our long-term debt. As
of December 31, 2003, we had a total of $1,679.4 million of debt of which 88.1%
was fixed rate debt and 11.9% was variable rate debt. Our variable rate debt
principally consisted of short-term borrowings and amounts outstanding under our
secured bank facilities that included term loans and a $30.0 million revolving
line of credit of which no amounts were drawn as of December 31, 2003. The fixed
rate debt consisted of senior notes, senior subordinated notes, convertible
subordinated notes and foreign debt. As of December 31, 2002, we had a total of
$1,808.7 million of debt of which 91.3% was fixed rate debt and 8.7% was
variable rate debt. Changes in interest rates have different impacts on our
fixed and variable rate portions of our debt portfolio. A change in interest
rates on the fixed portion of the debt portfolio impacts the fair value of the
instrument but has no impact on interest incurred or cash flows. A change in
interest rates on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the fair value of the
instrument. The fair value of the convertible subordinated notes is also
impacted by the market price of our common stock.
The table below presents the interest rates, maturities and fair value of
our fixed and variable rate debt as of December 31, 2003.
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------
FAIR
2004 2005 2006 2007 2008 THEREAFTER TOTAL VALUE
--------- ---------- ----------- ----------- ---------- ---------- ----------- ----------
Long-term debt:
Fixed rate debt $ 2,543 $ 1,547 $ 233,867 $ 146,422 $ 470,500 $ 625,000 $1,479,879 $1,583,334
Average interest rate 4.3% 4.0% 5.7% 5.0% 9.3% 8.6% 8.0%
Variable rate debt $ 26,122 $ 127,438 $ 43,687 $ 815 $ 572 $ 859 $ 199,493 $ 199,493
Average interest rate 1.6% 5.0% 4.9% 2.6% 2.7% 2.7% 4.5%
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. During the fourth quarter
of 2003, we repurchased $112.3 million of our 5.00% convertible notes due 2007
and $17.0 million of our 5.75% convertible notes due 2006. We currently intend
to repay our remaining convertible subordinated notes upon maturity, unless
converted. If investors were to decide to convert their notes to common stock,
our future earnings would benefit from a reduction in interest expense and our
common stock outstanding would be increased. If we paid a premium to induce such
conversion, our earnings could include an additional charge.
Further, 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. Such
fluctuations could impact our decision or ability to utilize the equity markets
as a potential source of our funding needs in the future.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The following section discloses the known material risks facing our
company. Additional risks and uncertainties not presently known to us, or that
we currently deem immaterial, may also impair our business operations. We cannot
assure you that any of the events discussed in the risk factors below will not
occur. If they do, our business, financial condition or results of operations
could be materially adversely affected.
42
This report contains forward-looking statements regarding our expected
performance that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including the risks faced by us described below.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND ELECTRONIC PRODUCTS
INDUSTRIES -- WE OPERATE IN VOLATILE INDUSTRIES, AND INDUSTRY DOWNTURNS HARM OUR
PERFORMANCE.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Because our business is, and will continue to be,
dependent on the requirements of semiconductor companies for subcontracted
packaging and test services, any downturn in the semiconductor industry or any
other industry that uses a significant number of semiconductor devices, such as
the personal computer and telecommunication devices industries, could have a
material adverse effect on our business. We experienced significant recovery in
most of our packaging services during 2002 and 2003. Visibility has improved in
light of customer forecasts and positive trends are forming. Beginning in the
second half of 2003, a large number of customers over-supported their forecasts
as demand materialized faster than initially projected. However, there still
remains some uncertainty as to the sustainability of these trends. If industry
conditions do not continue to improve, we could sustain significant losses which
could materially impact our business, including our liquidity.
FLUCTUATIONS IN OPERATING RESULTS -- OUR RESULTS HAVE VARIED AND MAY VARY
SIGNIFICANTLY AS A RESULT OF FACTORS THAT WE CANNOT CONTROL.
Many factors could materially and adversely affect our revenues, gross
profit and operating income, or lead to significant variability of quarterly or
annual operating results. Our profitability is dependent upon the utilization of
our capacity, semiconductor package mix, the average selling price of our
services and our ability to control our costs including labor, material,
overhead and financing costs. Our operating results have varied significantly
from period to period. During the three year period ended December 31, 2003, our
revenues, gross margins and operating income have fluctuated significantly as a
result of the following factors over which we have little or no control and
which we expect to continue to impact our business:
- fluctuation in demand for semiconductors and the overall health of the
semiconductor industry,
- changes in our capacity utilization,
- declining average selling prices,
- changes in the mix of semiconductor packages,
- absence of backlog and the short-term nature of our customers'
commitments and the impact of these factors on the timing and volume of
orders relative to our production capacity,
- changes in costs, availability and delivery times of raw materials and
components,
- changes in labor costs to perform our services,
- the timing of expenditures in anticipation of future orders,
- changes in effective tax rates,
- high leverage and restrictive covenants,
- international events that impact our operations and environmental
events such as earthquakes, and
- difficulties integrating acquisitions and our ability to attract
qualified employees to support our geographic expansion.
We have historically been unable to accurately predict the impact of these
factors upon our results for a particular period. These factors, as well the
factors set forth below which have not significantly impacted our recent
historical results, may impair our future business operations and may materially
and adversely affect our revenues, gross profit and operating income, or lead to
significant variability of quarterly or annual operating results:
- the availability and cost of financing for expansion,
- loss of key personnel or the shortage of available skilled workers,
- rescheduling and cancellation of large orders,
- warranty and product liability claims,
- intellectual property transactions and disputes, and
- fluctuations in our manufacturing yields.
43
DECLINING AVERAGE SELLING PRICES -- THE SEMICONDUCTOR INDUSTRY PLACES DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS.
Prices for packaging and test services have declined over time.
Historically, we have been able to partially offset the effect of price declines
by successfully developing and marketing new packages with higher prices, such
as advanced leadframe and laminate packages, by negotiating lower prices with
our material vendors, and by driving engineering and technological changes in
our packaging and test processes which resulted in reduced manufacturing costs.
During 2003 and 2002, as compared to the comparable prior year periods, the
decline in average selling prices eroded margins by 6% and 16%, respectively. We
expect that average selling prices for our packaging and test services will
continue to decline in the future. If our semiconductor package mix does not
shift to new technologies with higher prices or we cannot reduce the cost of our
packaging and test services to offset a decline in average selling prices, our
future operating results will suffer.
HIGH LEVERAGE AND RESTRICTIVE COVENANTS -- OUR SUBSTANTIAL INDEBTEDNESS COULD
MATERIALLY RESTRICT OUR OPERATIONS AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We now have, and for the foreseeable future will have, a significant amount
of indebtedness. As of December 31, 2003, total debt was $1,679.4 million. In
addition, despite current debt levels, the terms of the indentures governing our
indebtedness may limit our ability to increase our indebtedness, but they do not
prohibit us or our subsidiaries from incurring substantially more debt. If new
debt is added to our consolidated debt level, the related risks that we now face
could intensify.
On April 22, 2003, we entered into a new $200 million senior secured credit
facility consisting of a $170 million term loan which matures on January 31,
2006 and a $30 million revolving line of credit (under which no amounts are
currently outstanding) which is available through October 31, 2005. The new
credit facility replaces our previous $197 million senior secured credit
facility, which included a $97 million term loan that was to mature September
30, 2005 and a $100 million revolving credit facility that was to be available
through March 31, 2005. A portion of the proceeds from the term loan was used to
repay the $97 million term loan then outstanding under the previous credit
facility and the remainder of the proceeds will be used for general corporate
purposes.
In January 2004 we purchased the remaining 40% ownership interest of Amkor
Iwate currently owned by Toshiba for $12.8 million.
We were required to pay to Citizen Watch Co., Ltd. 1.7 billion Japanese yen
in deferred purchase price and other contingent payments in connection with our
purchase of the semiconductor packaging business of Citizen Watch Co, Ltd. In
April 2003, we made a payment of 300.0 million Japanese yen, or $2.5 million
based on the exchange rate on the date of the payment. We are withholding
payment of 1.4 billion yen ($13.1 million based on the spot exchange rate at
December 31, 2003) of this amount pending resolution of a controversy relating
to the patents acquired in connection with the acquisition.
In general, covenants in the agreements governing our existing debt, and
debt we may incur in the future, may materially restrict our operations,
including our ability to incur debt, pay dividends, make certain investments and
payments and encumber or dispose of assets. In addition, financial covenants
contained in agreements relating to our existing and future debt could lead to a
default in the event our results of operations do not meet our plans and we are
unable to amend such financial covenants prior to default. A default under one
debt instrument may also trigger cross-defaults under our other debt
instruments. As of December 31, 2003 and through the date of this filing, we
were in compliance with all financial covenants. An event of default under one
or more of our debt instruments, if not cured or waived, could have a material
adverse effect on us. Our credit and debt ratings were lowered in August 2002,
and accordingly, it may be difficult for us to secure additional financing, if
we need it, on satisfactory terms or at all. Our substantial indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions,
- limit our ability to fund future working capital, capital expenditures,
research and development and other general corporate requirements,
- require us to dedicate a substantial portion of our cash flow from
operations to service interest and principal payments on our debt,
- 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
44
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds.
INVESTMENT IN ASI -- OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY
AFFECTED BY DECREASES IN THE PRICE OF ASI'S COMMON STOCK.
At December 31, 2003 we owned 14.7 million shares, or 12%, of ASI's voting
stock. We currently account for our investment in ASI as a marketable security
that is available for sale. We intend to sell our remaining investment in ASI.
The ultimate level of proceeds from the sale of our remaining investment in ASI
could be less than the current carrying value of $50.4 million. In addition, in
the event of a decline in the market value of the ASI stock that is not
temporary, we will be required to record a charge to earnings for the unrealized
loss, and a new cost basis for the stock will be established.
In connection with our sale of ASI shares to Dongbu in September 2002,
Amkor and Dongbu agreed to use their best efforts to provide releases and
indemnifications to the past and incumbent chairman, directors and officers of
ASI, including James Kim, our CEO and chairman, and members of his family, from
any and all liabilities arising out of the performance of their duties at ASI
between January 1, 1995 and December 31, 2001. We are not aware of any claims or
other liabilities which these individuals would be released from or for which
they would receive indemnification.
ABSENCE OF BACKLOG -- WE MAY NOT BE ABLE TO ADJUST COSTS QUICKLY IF OUR
CUSTOMERS' DEMAND FALLS SUDDENLY.
Our packaging and test business does not typically operate with any
material backlog. We expect that in the future our quarterly net revenues from
packaging and test will continue to be substantially dependent upon our
customers' demand in that quarter. None of our customers have committed to
purchase any significant amount of packaging or test services or to provide us
with binding forecasts of demand for packaging and test services for any future
period. In addition, our customers could reduce, cancel or delay their purchases
of packaging and test services. Because a large portion of our costs is fixed
and our expense levels are based in part on our expectations of future revenues,
we may be unable to adjust costs in a timely manner to compensate for any
revenue shortfall.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- WE DEPEND ON OUR FACTORIES IN
THE PHILIPPINES, KOREA, JAPAN, TAIWAN AND CHINA. MANY OF OUR CUSTOMERS' AND
VENDORS' OPERATIONS ARE ALSO LOCATED OUTSIDE OF THE U.S.
We provide packaging and test services through our factories located in the
Philippines, Korea, Japan, Taiwan and China. Moreover, many of our customers'
and vendors' operations are located outside the U.S. The following are some of
the risks inherent in doing business internationally:
- regulatory limitations imposed by foreign governments,
- fluctuations in currency exchange rates,
- political, military and terrorist risks,
- disruptions or delays in shipments caused by customs brokers or
government agencies,
- unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers,
- difficulties in staffing and managing foreign operations, and
- potentially adverse tax consequences resulting from changes in tax
laws.
DIFFICULTIES INTEGRATING ACQUISITIONS -- WE FACE CHALLENGES AS WE INTEGRATE NEW
AND DIVERSE OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR
GEOGRAPHIC EXPANSION.
As a result of our geographic expansion we have experienced, and expect to
continue to experience, growth in the scope and complexity of our operations.
For example, each business we have acquired had, at the time of acquisition,
multiple systems for managing its own manufacturing, sales, inventory and other
operations. Migrating these businesses to our systems typically is a slow,
expensive process requiring us to divert significant amounts of resources from
multiple aspects of our operations. This growth has strained our managerial,
financial, manufacturing and other resources. Future acquisitions and expansions
may result in inefficiencies as we integrate new operations and manage
geographically diverse operations. Our success depends to a significant extent
upon the continued service of our key senior management and technical personnel,
any of whom would be difficult to replace. Competition for qualified employees
is intense, and our business could be adversely affected by the loss of the
services of any of our existing key personnel. Additionally, as part of our
ongoing
45
strategic planning, we evaluate our management team and engage in long-term
succession planning in order to ensure orderly replacement of key personnel. We
cannot assure you that we will be successful in these efforts or in hiring and
properly training sufficient numbers of qualified personnel and in effectively
managing our growth. Our inability to attract, retain, motivate and train
qualified new personnel could have a material adverse effect on our business.
DEPENDENCE ON MATERIALS AND EQUIPMENT SUPPLIERS -- OUR BUSINESS MAY SUFFER IF
THE COST, QUALITY OR SUPPLY OF MATERIALS OR EQUIPMENT CHANGES ADVERSELY.
We obtain from various vendors the materials and equipment required for the
packaging and test services performed by our factories. We source most of our
materials, including critical materials such as leadframes, laminate substrates
and gold wire, from a limited group of suppliers. Furthermore, we purchase all
of our materials on a purchase order basis and have no long-term contracts with
any of our suppliers. Our business may be harmed if we cannot obtain materials
and other supplies from our vendors: (1) in a timely manner, (2) in sufficient
quantities, (3) in acceptable quality or (4) at competitive prices.
Beginning in the second quarter of 2003, we began to experience increases
in substrate material costs as a result of supply shortages. Substrate material
costs have stabilized at the higher price levels set during the second quarter
of 2003. We have significantly enhanced our supply base and do not foresee
substrate material availability as an ongoing issue. However, supply shortages
may again occur in the future and in such an event, gross margins could be
negatively impacted.
In addition, the average price of gold has been increasing over the past
few years. Although we have been able to partially offset the effect of gold
price increases through price adjustments to customers and changes in our
product designs, gold prices may continue to increase. To the extent that we are
unable to offset these increases in the future, our gross margins could be
negatively impacted.
INCREASED LITIGATION INCIDENT TO OUR BUSINESS -- OUR BUSINESS MAY SUFFER AS A
RESULT OF OUR INVOLVEMENT IN VARIOUS LAWSUITS.
We are currently a party to various legal proceedings, including those
described in Part I, Item 3 above. While we currently believe that the ultimate
outcome of these proceedings, individually and in the aggregate, will not have a
material adverse effect on our financial position or overall trends in results
of operations, litigation is subject to inherent uncertainties. If an
unfavorable ruling were to occur, there exists the possibility of a material
adverse impact on our net income in the period in which the ruling occurs. The
estimate of the potential impact from the following legal proceedings on our
financial position or overall results of operations could change in the future.
As we discuss more fully in Part I, Item 3 above, recently we have become party
to an increased number of litigation matters relative to our historic levels.
Much of our recent increase in litigation relates to an allegedly defective
epoxy mold compound, formerly used in some of our products, which is alleged to
be responsible for certain semiconductor chip failures.
RAPID TECHNOLOGICAL CHANGE -- OUR BUSINESS WILL SUFFER IF WE CANNOT KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY.
The complexity and breadth of semiconductor packaging and test services are
rapidly changing. As a result, we expect that we will need to offer more
advanced package designs in order to respond to competitive industry conditions
and customer requirements. Our success depends upon our ability to develop and
implement new manufacturing processes and package design technologies. The need
to develop and maintain advanced packaging capabilities and equipment could
require significant research and development and capital expenditures in future
years. In addition, converting to new package designs or process methodologies
could result in delays in producing new package types that could adversely
affect our ability to meet customer orders.
Technological advances also typically lead to rapid and significant price
erosion and may make our existing products less competitive or our existing
inventories obsolete. If we cannot achieve advances in package design or obtain
access to advanced package designs developed by others, our business could
suffer.
COMPETITION -- WE COMPETE AGAINST ESTABLISHED COMPETITORS IN THE PACKAGING AND
TEST BUSINESS.
The subcontracted semiconductor packaging and test market is very
competitive. We face substantial competition from
46
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. On a
larger scale, we also compete with the internal semiconductor packaging and test
capabilities of many of our customers.
ENVIRONMENTAL REGULATIONS -- FUTURE ENVIRONMENTAL REGULATIONS COULD PLACE
ADDITIONAL BURDENS ON OUR MANUFACTURING OPERATIONS.
The semiconductor packaging process uses chemicals and gases and generates
byproducts that are subject to extensive governmental regulations. For example,
at our foreign manufacturing facilities, we produce liquid waste when silicon
wafers are diced into chips with the aid of diamond saws, then cooled with
running water. Federal, state and local regulations in the United States, as
well as international environmental regulations, impose various controls on the
storage, handling, discharge and disposal of chemicals used in our manufacturing
processes and on the factories we occupy.
Increasingly, public attention has focused on the environmental impact of
semiconductor manufacturing operations and the risk to neighbors of chemical
releases from such operations. In the future, applicable land use and
environmental regulations may: (1) impose upon us the need for additional
capital equipment or other process requirements, (2) restrict our ability to
expand our operations, (3) subject us to liability or (4) cause us to curtail
our operations.
PROTECTION OF INTELLECTUAL PROPERTY -- WE MAY BECOME INVOLVED IN INTELLECTUAL
PROPERTY LITIGATION.
We maintain an active program to protect our investment in technology by
acquiring intellectual property protection and enforcing our intellectual
property rights. Intellectual property rights that apply to our various products
and services include patents, copyrights, trade secrets and trademarks. We have
filed and obtained a number of patents in the United States and abroad. We
expect to continue to file patent applications when appropriate to protect our
proprietary technologies, but we cannot assure you that we will receive patents
from pending or future applications. In addition, any patents we obtain may be
challenged, invalidated or circumvented and may not provide meaningful
protection or other commercial advantage to us.
We may need to enforce our patents or other intellectual property rights or
defend ourselves against claimed infringement of the rights of others through
litigation, which could result in substantial cost and diversion of our
resources. The semiconductor industry is characterized by frequent claims
regarding patent and other intellectual property rights. If any third party
makes an enforceable infringement claim against us, we could be required to:
- discontinue the use of certain processes,
- cease the manufacture, use, import and sale of infringing products,
- pay substantial damages,
- develop non-infringing technologies, or
- acquire licenses to the technology we had allegedly infringed.
If we fail to obtain necessary licenses or if we are subjected to litigation
relating to patent infringement or other intellectual property matters, our
business could suffer.
CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN SUBSTANTIALLY CONTROL THE OUTCOME OF ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL.
As of December 31, 2003, Mr. James Kim and members of his family
beneficially owned approximately 41.9% of our outstanding common stock. Mr.
James Kim's family, acting together, will substantially control all matters
submitted for approval by our stockholders. These matters could include:
- the election of all of the members of our board of directors,
- proxy contests,
- mergers involving our company,
- tender offers, and
- open market purchase programs or other purchases of our common stock.
47
STOCK PRICE VOLATILITY
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to
factors such as:
- actual or anticipated quarter-to-quarter variations in operating
results,
- announcements of technological innovations or new products and services
by Amkor or our competitors,
- general conditions in the semiconductor industry,
- changes in earnings estimates or recommendations by analysts, and
- other events or factors, many of which are out of our control.
In addition, the stock market in general, and the Nasdaq National Market
and the markets for technology companies in particular, have experienced extreme
price and volume fluctuations. This volatility has affected the market prices of
securities of companies like ours for reasons that have often been unrelated or
disproportionate to such companies' operating performance. These broad market
fluctuations may adversely affect the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of information regarding quantitative and qualitative
disclosures about market risk, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Market Risk Sensitivity."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We present the information required by Item 8 of Form 10-K here in the
following order:
Report of Independent Auditors.................................................................... 49
Consolidated Statements of Operations -- Years ended December 31, 2003, 2002 and 2001............. 50
Consolidated Balance Sheets -- December 31, 2003 and 2002......................................... 51
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2003, 2002 and 2001... 52
Consolidated Statements of Cash Flows -- Years ended December 31, 2003, 2002 and 2001............. 53
Notes to Consolidated Financial Statements........................................................ 54
Reports of Independent Auditors................................................................... 82
Schedule II -- Valuation and Qualifying Accounts.................................................. 84
In addition, pursuant to General Instruction G(1) of Form 10-K and Rule
12b-23 promulgated under the Securities Exchange Act of 1934, as amended, the
following financial information of Anam Semiconductor, Inc. required to be
included in this Report by Rule 3-09 of Regulation S-X is incorporated by
reference from our Report on 8-K, as amended, filed on October 17, 2003.
Reports of Independent Accountants
Consolidated Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Operations -- Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) -- Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
48
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Amkor Technology, Inc.:
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Amkor Technology,
Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. For 2002 and 2001, we
did not audit the combined financial statements of Amkor Technology Philippines,
Inc. (formerly Amkor Technology Philippines (P1/P2), Inc. and Amkor Technology
Philippines (P3/P4), Inc.), a wholly owned subsidiary, referred to herein as
ATP, which combined financial statements reflect total assets of 14% of the
consolidated total assets at December 31,2002 and operating expenses of 14% and
18% of the related consolidated total operating expenses for each of the two
years in the period ended December 31, 2002. The combined financial statements
of ATP as of December 31, 2002 and for the year ended December 31, 2002 were
audited by another auditor whose report thereon has been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
ATP, is based solely on the report of the other auditor. The financial
statements of ATP as of December 31, 2001 and for the year ended December 31,
2001 were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report dated March 19, 2002. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
As discussed in Note 4 and Note 5, the Company adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangibles" and No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" as of
January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 28, 2004
49
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues..................................................... $ 1,603,768 $ 1,406,178 $ 1,336,674
Cost of revenues................................................. 1,267,302 1,310,563 1,284,423
------------- ------------- -------------
Gross profit..................................................... 336,466 95,615 52,251
------------- ------------- -------------
Operating expenses:
Selling, general and administrative......................... 179,952 179,888 191,136
Research and development.................................... 25,784 31,189 38,786
Loss (gain) on disposal of fixed assets, net................ (586) 2,496 14,515
Amortization of goodwill and other acquired intangibles..... 8,183 6,992 84,962
Special charges, net (see Note 3)........................... 125 291,970 --
------------- ------------- -------------
Total operating expenses................................ 213,458 512,535 329,399
------------- ------------- -------------
Operating income (loss).......................................... 123,008 (416,920) (277,148)
------------- ------------- -------------
Other (income) expense:
Interest expense, net....................................... 140,281 147,497 150,626
Foreign currency (gain) loss................................ (3,022) 906 872
Other (income) expense, net................................. 31,052 (1,014) 9,852
------------- ------------- -------------
Total other expense..................................... 168,311 147,389 161,350
------------- ------------- -------------
Loss before income taxes, equity investment losses,
minority interest and discontinued operations............... (45,303) (564,309) (438,498)
Equity investment losses (see Note 12)........................... (3,290) (208,165) (100,706)
Minority interest................................................ (4,008) (1,932) (1,896)
------------- ------------- -------------
Loss from continuing operations before income taxes.............. (52,601) (774,406) (541,100)
------------- ------------- -------------
Provision for income taxes (benefit)............................. (233) 60,683 (84,613)
------------- ------------- -------------
Loss from continuing operations.................................. (52,368) (835,089) (456,487)
------------- ------------- -------------
Income from discontinued operations, net of tax (see Note 2)..... 54,566 8,330 5,626
------------- ------------- -------------
Net income (loss)................................................ $ 2,198 $ (826,759) $ (450,861)
============= ============= =============
Per Share Data:
Basic and diluted loss per common share
from continuing operations................................ $ (0.31) $ (5.09) $ (2.91)
Basic and diluted income per common share
from discontinued operations.............................. 0.32 0.05 0.04
------------- ------------- -------------
Basic and diluted income (loss) per common share............ $ 0.01 $ (5.04) $ (2.87)
============= ============= =============
Shares used in computing basic and diluted income (loss)
per common share.......................................... 167,142 164,124 157,111
============= ============= =============
The accompanying notes are an integral part of these financial statements.
50
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 313,259 $ 311,249
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,514 and $7,122...... 318,051 234,056
Other................................................................... 4,413 8,532
Inventories................................................................. 92,439 72,121
Other current assets........................................................ 49,606 48,661
------------- -------------
Total current assets............................................... 777,768 674,619
------------- -------------
Property, plant and equipment, net............................................... 1,007,648 966,338
------------- -------------
Investments...................................................................... 51,181 83,235
------------- -------------
Other assets:
Goodwill ................................................................... 629,850 628,099
Acquired intangibles........................................................ 37,730 45,033
Due from affiliates......................................................... -- 20,852
Other....................................................................... 67,601 114,178
Assets of discontinued operations (see Note 2).............................. 96 25,630
------------- -------------
735,277 833,792
------------- -------------
Total assets...................................................... $ 2,571,874 $ 2,557,984
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................................. $ 2,690 $ 4,633
Short-term borrowings and current portion of long-term debt................ 28,665 71,023
Trade accounts payable..................................................... 227,239 180,999
Due to affiliates.......................................................... 3,157 70,243
Accrued expenses........................................................... 178,100 184,223
------------- -------------
Total current liabilities......................................... 439,851 511,121
Long-term debt.................................................................. 1,650,707 1,737,690
Other noncurrent liabilities.................................................... 78,974 67,661
------------- -------------
Total liabilities................................................. 2,169,532 2,316,472
------------- -------------
Commitments and contingencies
Minority interest............................................................... 1,338 10,145
------------- -------------
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized
designated Series A, none issued....................................... -- --
Common stock, $0.001 par value, 500,000 shares authorized,
issued and outstanding of 174,508 in 2003 and 165,156 in 2002.......... 175 166
Additional paid-in capital................................................. 1,317,164 1,170,227
Accumulated deficit........................................................ (931,536) (933,734)
Receivable from stockholders............................................... -- (2,887)
Accumulated other comprehensive income (loss).............................. 15,201 (2,405)
------------- -------------
Total stockholders' equity........................................ 401,004 231,367
------------- -------------
Total liabilities and stockholders' equity........................ $ 2,571,874 $ 2,557,984
============= =============
The accompanying notes are an integral part of these financial statements.
51
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2000 ................. 152,118 152 975,026 343,886
Net loss ................................ -- -- -- (450,861)
Unrealized losses on investments,
net of tax .......................... -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss ......................
Issuance of stock for acquisitions ...... 4,948 5 87,869 --
Issuance of stock through employee
stock purchase plan and stock options 1,000 1 11,698 --
Debt conversion ......................... 3,716 4 48,948 --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 ................. 161,782 162 1,123,541 (106,975)
Net loss ................................ -- -- -- (826,759)
Unrealized loss on investments,
net of tax .......................... -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss ......................
Issuance of stock for acquisitions ...... 1,827 2 35,200 --
Issuance of stock through employee
stock purchase plan and stock options 1,547 2 11,486 --
Payment received from stockholders ...... -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 ................. 165,156 $ 166 $ 1,170,227 $ (933,734)
Net income .............................. -- -- -- 2,198
Unrealized gain on investments,
net of tax .......................... -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive income ....................
Issuance of common stock ................ 7,375 7 133,459 --
Issuance of stock through employee
stock purchase plan and stock options 1,977 2 13,478 --
Payment received from stockholders ...... -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 ................. 174,508 $ 175 $ 1,317,164 $ (931,536)
=========== =========== =========== ===========
ACCUMULATED
RECEIVABLE OTHER COMPREHENSIVE
FROM COMPREHENSIVE INCOME
STOCKHOLDER INCOME (LOSS) TOTAL (LOSS)
----------- ------------- ------------ -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2000 ................. (3,276) (954) 1,314,834
Net loss ................................ -- -- (450,861) $ (450,861)
Unrealized losses on investments,
net of tax .......................... -- (103) (103) (103)
Cumulative translation adjustment ....... -- (3,678) (3,678) (3,678)
-----------
Comprehensive loss ...................... $ (454,642)
===========
Issuance of stock for acquisitions ...... -- -- 87,874
Issuance of stock through employee
stock purchase plan and stock options -- -- 11,699
Debt conversion ......................... -- -- 48,952
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 ................. (3,276) (4,735) 1,008,717
Net loss ................................ -- -- (826,759) $ (826,759)
Unrealized loss on investments,
net of tax .......................... -- (1,224) (1,224) (1,224)
Cumulative translation adjustment ....... -- 3,554 3,554 3,554
-----------
Comprehensive loss ...................... $ (824,429)
===========
Issuance of stock for acquisitions ...... -- -- 35,202
Issuance of stock through employee
stock purchase plan and stock options -- -- 11,488
Payment received from stockholders ...... 389 -- 389
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 ................. $ (2,887) $ (2,405) $ 231,367
Net income .............................. -- -- 2,198 $ 2,198
Unrealized gain on investments,
net of tax .......................... -- 12,152 12,152 12,152
Cumulative translation adjustment ....... -- 5,454 5,454 5,454
-----------
Comprehensive income .................... $ 19,804
===========
Issuance of common stock ................ -- -- 133,466
Issuance of stock through employee
stock purchase plan and stock options -- -- 13,480
Payment received from stockholders ...... 2,887 -- 2,887
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 ................. $ -- $ 15,201 $ 401,004
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
52
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Cash flows from continuing operating activities:
Loss from continuing operations .................................... $ (52,368) $(835,089) $(456,487)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities --
Depreciation and amortization .................................. 219,735 323,265 440,591
Amortization of deferred debt issuance costs ................... 18,540 8,251 22,321
Provision for accounts receivable .............................. -- 500 4,000
Provision for excess and obsolete inventory .................... 4,463 5,841 17,869
Deferred income taxes .......................................... 7,895 72,719 (85,022)
Equity in loss of investees .................................... 3,290 33,865 100,706
Loss (gain) on disposal of fixed assets, net ................... (586) 2,496 14,515
Other (gains) losses on investments, net ....................... (4,019) 174,300 --
Loss on debt redemption premium payments ....................... 24,148 -- --
Asset impairment charges and facility closure costs ............ (1,886) 284,602 3,600
Minority interest .............................................. 4,008 1,932 1,896
Changes in assets and liabilities excluding effects
of acquisitions --
Accounts receivable ............................................ (77,161) (39,328) 84,641
Other receivables .............................................. 4,035 719 (2,488)
Inventories .................................................... (23,825) 218 31,372
Due to/from affiliates, net .................................... (835) 529 (2,447)
Other current assets ........................................... (2,335) (2,210) 6,034
Other non-current assets ....................................... 12,374 19,433 (214)
Accounts payable ............................................... 39,542 28,313 (23,808)
Accrued expenses ............................................... (11,652) 24,394 (24,126)
Other long-term liabilities .................................... 12,983 8,425 8,011
--------- --------- ---------
Net cash provided by operating activities ................. 176,346 113,175 140,964
--------- --------- ---------
Cash flows from continuing investing activities:
Purchases of property, plant and equipment ......................... (230,504) (95,104) (158,595)
Acquisitions, net of cash acquired ................................. (2,505) (18,459) (11,057)
Proceeds from the sale of property, plant and equipment ............ 4,001 2,870 1,863
Proceeds from disposition of equity investment ..................... -- 58,139 --
Proceeds from the sale of investments .............................. 56,595 -- --
Purchase of investments ............................................ (13,765) (2,011) (321)
Proceeds from note receivable ...................................... 18,253 -- --
Other .............................................................. 829 -- --
--------- --------- ---------
Net cash used in investing activities ..................... (167,096) (54,565) (168,110)
--------- --------- ---------
Cash flows from continuing financing activities:
Net change in bank overdrafts and short-term borrowings ............ (1,943) 6,860 15,067
Net proceeds from issuance of long-term debt ....................... 584,423 -- 750,486
Payments of long-term debt, including redemption premium payment.... (754,325) (30,119) (662,565)
Net proceeds from the issuance of common stock ..................... 133,466 -- --
Proceeds from issuance of stock through employee stock
purchase plan and stock options ................................ 13,480 11,488 11,698
Payment on receivable received from stockholders ................... 2,887 389 --
--------- --------- ---------
Net cash provided by (used in) financing activities ....... (22,012) (11,382) 114,686
--------- --------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents
Related to continuing operations ................................... 1,488 1,333 (397)
--------- --------- ---------
Cash flows from discontinued operations:
Net cash provided by operating activities .......................... 10,872 63,302 19,502
Net cash provided by (used in) investing activities ................ 2,412 -- (105)
Net cash used in financing activities .............................. -- (671) --
--------- --------- ---------
Net cash provided by discontinued operations .................. 13,284 62,631 19,397
--------- --------- ---------
Net increase in cash and cash equivalents ............................... 2,010 111,192 106,540
Cash and cash equivalents, beginning of period .......................... 311,249 200,057 93,517
--------- --------- ---------
Cash and cash equivalents, end of period ................................ $ 313,259 $ 311,249 $ 200,057
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest ....................................................... $ 147,188 $ 142,299 $ 144,345
Income taxes ................................................... $ 7,839 $ (845) $ (642)
The accompanying notes are an integral part of these financial statements.
53
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Amkor
Technology, Inc. and its subsidiaries. The consolidated financial statements
reflect the elimination of all significant intercompany accounts and
transactions. As discussed further below, we elected early adoption of FASB
Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities" on
July 1, 2003. Accordingly, our investments in variable interest entities in
which we are the primary beneficiary are consolidated. Our investments in
variable interest entities in which we are not the primary beneficiary are
accounted for under the equity method. Investments in and the operating results
of 20% to 50% owned companies which are not variable interest entities are
included in the consolidated financial statements using the equity method of
accounting. Prior to the adoption of FIN 46, all investments in and the
operating results of 20% to 50% owned companies were included in the
consolidated financial statements using the equity method of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Certain
previously reported amounts have been reclassified to conform with the current
presentation.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN 46, "Consolidation of Variable Interest Entities." The primary objective of
FIN 46 is to provide guidance on the identification of, and financial reporting
for, entities over which control is achieved through means other than voting
rights; such entities are known as variable interest entities. FIN 46 requires
variable interest entities to be consolidated by the primary beneficiary of the
variable interest entities and expands disclosure requirements for both variable
interest entities that are consolidated as well as those within which an
enterprise holds a significant variable interest. On July 1, 2003, we elected
early adoption of FIN 46 and have elected not to restate years prior to 2003.
We have variable interests in certain Philippine realty corporations in
which we have a 40% ownership and from whom we lease land and buildings in the
Philippines. Beginning July 1, 2003, we have consolidated these Philippine
realty corporations within our financial statements. As of December 31, 2003,
the combined book value of the assets and liabilities associated with these
Philippine realty corporations included in our consolidated balance sheet were
$21.0 million and $1.0 million (which excludes an intercompany payable of $21.8
million which eliminates during consolidation), respectively. There was no net
effect to our consolidated statements of income as a result of the consolidation
of the Philippine realty corporations as these entities were previously
accounted for as equity investments with our proportionate share of gains and
losses recorded in our historical consolidated statements of income. In
addition, the consolidation of Philippine realty companies was treated as a
non-cash transaction.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of the majority of our
subsidiaries in Korea and the Philippines, and the foreign currency asset and
liability amounts at these subsidiaries are remeasured into U.S. dollars at
end-of-period exchange rates, except for nonmonetary items which are remeasured
at historical rates. Foreign currency income and expenses are remeasured at
average exchange rates in effect during the year, except for expenses related to
balance sheet amounts remeasured at historical exchange rates. Exchange gains
and losses arising from remeasurement of foreign currency-denominated monetary
assets and liabilities are included in other income (expense) in the period in
which they occur.
The local currency is the functional currency of our subsidiaries in Japan,
Taiwan and China, and the asset and liability amounts of these subsidiaries are
translated into U.S. dollars at end-of-period exchange rates. The resulting
translation adjustments are reported as a component of accumulated other
comprehensive income (loss) in the stockholders' equity section of the balance
sheets. Assets and liabilities denominated in currency other than the local
currency are remeasured into
54
the local currency prior to translation into U.S. dollars, and the resulting
exchange gains or losses are included in other income (expense) in the period in
which they occur. Income and expenses are translated into U.S. dollars at
average exchange rates in effect during the period.
CONCENTRATIONS AND CREDIT RISK
Financial instruments, for which we are subject to credit risk, consist
principally of accounts receivable, cash and cash equivalents and marketable
securities. With respect to accounts receivable, we mitigate our credit risk by
selling primarily to well established companies, performing ongoing credit
evaluations and making frequent contact with customers. We have historically
mitigated our credit risk with respect to cash and cash equivalents through
diversification of our holdings into various high-grade money market accounts.
RISKS AND UNCERTAINTIES
Our future results of operations involve a number of risks and
uncertainties. Factors that could affect future results and cause actual results
to vary materially from historical results include, but are not limited to,
dependence on the highly cyclical nature of the semiconductor industry,
fluctuation in operating results, the decline in average selling prices, our
high leverage and the restrictive covenants contained in the agreements
governing our indebtedness, our investment in ASI, the absence of significant
backlog in our business, our dependence on international operations and sales,
difficulties integrating acquisitions, our dependence on materials and equipment
suppliers, the increased litigation incident to our business, rapid
technological change, competition, our need to comply with existing and future
environmental regulations, the enforcement of intellectual property rights by or
against us, continued control by existing stockholders and stock price
volatility.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by using a moving average method. We order raw materials based on
the customers' forecasted demand and we do not maintain any finished goods
inventory. If our customers change their forecasted requirements and we are
unable to cancel our raw materials order or if our vendor requires that we order
a minimum quantity that exceeds the current forecasted demand, we will
experience a build-up in raw material inventory. We will either seek to recover
the cost of the materials from our customers or utilize the inventory in
production. However, we may not be successful in recovering the cost from our
customers or successful in being able to use the inventory in production, which
we would consider as part of our reserve estimate. Our reserve for excess and
obsolete inventory is based on the forecasted demand we receive from our
customers and the age of our inventory. When a determination is made that the
inventory will not be utilized in production it is written-off and disposed.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful lives of
depreciable assets. Accelerated methods are used for tax purposes. Depreciable
lives follow:
Buildings and improvements ................ 10 to 30 years
Machinery and equipment ................... 3 to 7 years
Furniture, fixtures and other equipment.... 3 to 10 years
Effective with the fourth quarter of 2002, we changed the estimated useful
lives of certain packaging equipment from four years to seven years for
depreciation purposes, which is in line with our historical usage. This change
increased our 2003 net income by approximately $62 million, or $0.37 per share,
and decreased our 2002 net loss by approximately $16.7 million, or $0.10 per
share. The offsetting impact to our tax provision in 2003 and 2002 related to
the change in useful lives was immaterial due to tax holidays in certain tax
jurisdictions and due to our recognition of valuation allowances against net
operating loss carryforwards in certain other tax jurisdictions (see Note 17).
55
Cost and accumulated depreciation for property retired or disposed of are
removed from the accounts and any resulting gain or loss is included in
earnings. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense related to continuing operations was $211.0
million, $315.6 million and $354.5 million for 2003, 2002 and 2001,
respectively.
GOODWILL AND ACQUIRED INTANGIBLES
Goodwill is recorded when the cost of an acquisition exceeds the fair
market value of the net tangible and identifiable intangible assets acquired. On
January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(see Note 5). The standard requires that goodwill and indefinite-lived
intangible assets no longer be amortized. In addition, goodwill and
indefinite-lived intangible assets are tested for impairment at least annually.
These tests are performed more frequently if warranted. Impairment losses are
recorded when the carrying amount of goodwill exceeds its implied fair value.
Such impairment losses are recorded as a part of income from continuing
operations.
Definite-lived intangible assets include acquired patents and technology
rights and are amortized on a straight-line basis over their estimated useful
lives, generally for periods ranging from 5 to 10 years. We continually evaluate
the reasonableness of the useful lives of these assets. The unamortized balances
recorded for acquired intangibles are evaluated periodically for potential
impairment. An impairment loss, if any, would be measured as the excess of the
carrying value over the fair value.
OTHER NONCURRENT ASSETS
Other noncurrent assets consist principally of deferred income taxes and
tax credits, deferred debt issuance costs and refundable security deposits. As
discussed in Note 17, we have established valuation allowances against the
majority of our deferred tax assets.
At December 31, 2002, other noncurrent assets included $6.0 million for the
cash surrender value of life insurance policies in which the beneficiary was our
Chairman and CEO. In December 2003, our Chairman and CEO paid to us $6.0 million
for this asset, the book value and fair value of the asset at that time, and
accordingly, no balance exists at December 31, 2003.
DUE FROM AND TO AFFILIATES
At December 31, 2002, due from affiliates primarily related to advances
made to Philippine realty companies in which we own 40%. Such investment was
previously accounted for under the equity method of accounting. Beginning on
July 1, 2003, we have consolidated these entities within our consolidated
financial statement in accordance with FIN 46. Accordingly, this advance now
eliminates during consolidation. The affiliated entities have no long-term
obligations other than their obligations to us and we have not extended
guarantees or other commitments to the entities. Due to affiliates primarily
relates to our transactions with Anam Semiconductor, Inc. (see Note 8). Due from
affiliates of $0.1 million and $0.3 million at December 31, 2003 and 2002,
respectively, are included in accounts receivable - other.
DEBT EXTINGUISHMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of
FASB Statement 13, and Technical Corrections as of April 2002." SFAS 145
provides guidance for income statement classification of gains and losses on
extinguishments of debt. Such gains and losses must be analyzed to determine if
they meet the criteria for extraordinary item classification based on the event
being both unusual and infrequent. We adopted SFAS 145 beginning January 1,
2003. During 2003, we charged $24.1 million of debt premiums, $11.1 million of
associated unamortized deferred debt issuance costs and $2.5 million of other
debt retirement costs to other (income) expense, net. During 2001, we charged
$13.4 million of unamortized deferred debt issuance costs to other (income)
expense, net.
OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist primarily of Korean severance plan
obligations, Philippine pension obligations and
56
noncurrent income taxes payable.
RECEIVABLE FROM STOCKHOLDERS
Amkor Electronics, Inc. (AEI), which was merged into our company just prior
to the initial public offering of our company in May 1998, elected to be taxed
as an S Corporation under the provisions of the Internal Revenue Code of 1986
and comparable state tax provisions. As a result, AEI did not recognize U.S.
federal corporate income taxes. Instead, the stockholders of AEI were taxed on
their proportionate share of AEI's taxable income. Accordingly, no provision for
U.S. federal income taxes was recorded for AEI. Just prior to the initial public
offering, AEI terminated its S Corporation status at which point the profits of
AEI became subject to federal and state income taxes at the corporate level. We
consummated a tax indemnification agreement between us, our predecessor and
James Kim and his family (collectively, the "Kim Family"). James Kim, is our
founder and significant stockholder, and currently serves as our Chairman and
CEO. Under the terms of the tax indemnification agreement, Amkor indemnified the
former owners of AEI for the settlement of AEI's S Corporation federal and state
tax returns and any adjustments to the reported taxable income. During 2003, all
tax years in which AEI filed U.S. federal income tax returns are closed and,
accordingly, are no longer subject to review.
At the time AEI was converted to a C Corporation, AEI and the Kim Family
identified certain federal and state tax overpayments associated with the
results of AEI during S Corporation status years, and AEI, in May 1998, paid
such amounts to the Kim Family. These amounts, which principally related to the
finalization of AEI's federal tax return, have been reflected as a receivable
from stockholders in the stockholders' equity section of our balance sheets.
During the fourth quarter of 2003, the receivable was collected in full.
REVENUE RECOGNITION AND RISK OF LOSS
Our company does not take ownership of customer-supplied semiconductor
wafers. Title and risk of loss remains with the customer for these materials at
all times. Accordingly, the cost of the customer-supplied materials is not
included in the consolidated financial statements. Revenues from packaging
semiconductors and performing test services are recognized upon shipment or
completion of the services. Such policies are consistent with provisions in the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
STOCK COMPENSATION
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations, to our stock option
plans. These stock option plans are discussed more fully in Note 19, "Stock
Compensation Plans." No compensation expense has been recognized for our
employee stock options that have been granted. If compensation costs for our
stock option plans had been determined using the fair value method of accounting
as set forth in SFAS No. 123, "Accounting for Stock-Based Compensation," our
reported net income (loss) and per share amount would have been increased
(decreased).
The following table illustrates the effect on net income (loss) and per
share amounts as if the fair value based method had been applied to all
outstanding and unvested awards in each period. Refer to Note 19 for a
discussion of the assumptions used in calculating the fair value of the options
granted.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Net income (loss), as reported ....................... $ 2,198 $(826,759) $(450,861)
Deduct: Total stock-based employee compensation
determined under fair value based method,
net of tax .................................. (31,573) (41,470) (29,619)
--------- --------- ---------
Net loss, pro forma .................................. $ (29,375) $(868,229) $(480,480)
========= ========= =========
Earnings (loss) per share:
Basic and diluted:
As reported ......................................... 0.01 (5.04) (2.87)
Pro forma ........................................... (0.18) (5.29) (3.06)
57
For 2003 and 2002 pro forma net losses, there was no offsetting impact to
our tax provision related to the pro forma Black-Scholes stock option expense
because of our consolidated net losses for 2003 and 2002 and our associated
recognition of valuation allowances against net operating loss carryforwards
(see Note 17).
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses include costs directly attributable to
the conduct of research and development programs primarily related to the
development of new package designs and improving the efficiency and capabilities
of our existing production process. Such costs include salaries, payroll taxes,
employee benefit costs, materials, supplies, depreciation on and maintenance of
research equipment, fees under licensing agreements, services provided by
outside contractors, and the allocable portions of facility costs such as rent,
utilities, insurance, repairs and maintenance, depreciation and general support
services. All costs associated with research and development are expensed as
incurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, FASB issued Statement of Financial Accounting Standard
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning after June
15, 2003. In November 2003, FASB issued "FASB Staff Position No. FAS 150-3,"
which deferred indefinitely the measurement provisions of SFAS 150 for certain
mandatorily redeemable noncontrolling interests that were issued before November
5, 2003. The adoption of SFAS 150 did not have a material effect on our
financial position, results of operations, or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
postretirement plans. The statement does not change the measurement or
recognition of pension plans and other postretirement benefit plans. For
domestic plans, the new disclosures are generally effective for periods ending
after December 15, 2003. For foreign plans, the new disclosures are generally
effective for periods ending after June 15, 2004. All of our defined benefit
pension plans are foreign. The adoption of SFAS No. 132 (revised 2003) is not
expected to have a material effect on our financial position, results of
operations, or cash flows.
2. DISCONTINUED OPERATIONS
On February 28, 2003, we sold our wafer fabrication services business to
ASI. Additionally, we obtained a release from Texas Instruments regarding our
contractual obligations with respect to wafer fabrication services to be
performed subsequent to the transfer of the business to ASI. We restated our
historical results to reflect our wafer fabrication services segment as a
discontinued operation. In connection with the disposition of our wafer
fabrication business, we recorded, during the first quarter of 2003, $1.0
million in severance and other exit costs to close our wafer fabrication
services operations in Boise, Idaho and Lyon, France. Also in the first quarter
of 2003, we recognized a pre-tax gain on the disposition of our wafer
fabrication services business of $58.6 million (or $51.5 million net of $7.1
million of associated tax expense). The carrying value of the sold net assets
associated with the business as of February 28, 2003 was $2.4 million.
A summary of the results from discontinued operations for the years ended
December 31, 2003, 2002 and 2001 are as follows:
58
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS)
Net revenues...................................................... $ 34,636 $ 233,529 $ 181,188
Gross profit...................................................... 3,451 22,205 17,547
Operating income.................................................. 3,455 13,526 8,465
Gain on sale of wafer fabrication services business............... 58,600 -- --
Other (income) expense............................................ (11) 64 (83)
Tax expense....................................................... 7,500 5,132 2,922
Net income from discontinued operations........................... 54,566 8,330 5,626
A summary of the assets of our discontinued operations are as follows:
DECEMBER 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
Accounts receivable........................................................... $ 96 $ 23,025
Property, plant and equipment, net of accumulated depreciation of
$8.4 million at December 31, 2002........................................ -- 2,605
------------- -------------
$ 96 $ 25,630
============= =============
3. SPECIAL CHARGES
Special charges consist of the following:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS)
Impairment of long-lived assets (Note 4)......................... $ -- $ 190,266 $ --
Impairment of goodwill (Note 5).................................. -- 73,080 --
Lease termination and other exit costs (Note 6).................. (1,886) 28,624 --
Contract termination fee (Note 7)................................ 2,011 -- --
------------- ------------- -------------
$ 125 $ 291,970 $ --
============= ============= =============
4. SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121. This standard
provides a single accounting model for long-lived assets to be disposed of by
sale and establishes additional criteria that would have to be met to classify
an asset as held for sale. The carrying amount of an asset or asset group is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or asset group.
Estimates of future cash flows used to test the recoverability of a long-lived
asset or asset group must incorporate the entity's own assumptions about its use
of the asset or asset group and must factor in all available evidence. SFAS No.
144 requires that long-lived assets be tested for recoverability whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. Such events include significant under-performance relative to the
expected historical or projected future operating results; significant changes
in the manner of use of the assets; significant negative industry or economic
trends and significant changes in market capitalization.
During 2001, the semiconductor industry declined an unprecedented 32%,
which impacted the utilization rates of our packaging and test assets. During
the second quarter of 2002, total packaging and test revenues grew over 21% as
compared to the first quarter of 2002. We experienced significant recovery in
most of our company's packaging services. However, at that time, our test
services assets and several packaging services assets:
- did not contribute significantly to the growth experienced during the
second quarter of 2002,
59
- remained at low utilization rates relative to our projections and
- were no longer expected to reach previously anticipated utilization
levels.
In addition, as of June 30, 2002, we experienced a 72% decline in our market
capitalization as compared to March 31, 2002. These events triggered an
impairment review in accordance with SFAS No. 144. This review included a
company-wide evaluation of underutilized assets and a detailed update of our
operating and cash flow projections.
Based on our company-wide evaluation of underutilized assets during 2002,
we identified $19.8 million of test and packaging assets to be disposed. We
recognized an $18.7 million impairment charge to reduce the carrying value of
the test and packaging fixed assets to be disposed to their fair value less cost
to sell. Fair value of the assets to be disposed was determined with the
assistance of an appraisal firm and available information on the resale value of
the equipment. As of December 31, 2003, we have disposed of all of the
identified test and packaging assets.
Upon the completion of the process to identify the packaging and test net
assets to be disposed, we reviewed our assets to be held and used for
impairment. Based on the June 30, 2002 operating and cash flow projections, we
determined that the carrying value of our test services assets and several
packaging services assets being held and used, including intangible assets that
we are amortizing, exceeded the anticipated cash flows attributable to those
assets. We grouped our long-lived assets with other assets and liabilities at
the lowest level for which identifiable cash flows were largely independent of
the cash flows of other assets and liabilities. For our company, the lowest
level of identifiable cash flows is at the test reporting unit level and for our
packaging services reporting unit at the package type level.
Our test reporting unit and the outsourced integrated circuit test services
industry were adversely impacted by excess capacity at the large integrated
device manufacturers. We expected that when the semiconductor industry recovered
the integrated device manufacturers' demand for outsourced test services would
also recover. However, that anticipated recovery failed to materialize in
connection with the initial recovery we noted in the semiconductor industry
during the first half of 2002 due to continued excess test capacity held by the
large integrated device manufacturers. We no longer expected that the demand for
our test services on our existing technology platforms would return to the
previously anticipated rates. Several of our package types based on more mature
technologies and processes, including older leadframe and laminate package
types, were adversely impacted by a technology shift to matrix and high density
leadframes and the movement from multi-layer laminate substrates to tape and
chip arrays and stacked-die packages. We expected that when the semiconductor
industry recovered there would still be sufficient demand for these more mature
products. However, that anticipated recovery failed to materialize in connection
with the initial recovery we noted in the semiconductor industry during the
first half of 2002 due to these technology shifts and the related significant
excess capacity in the industry. We no longer expected that the demand for these
package types would return to the previously anticipated rates. Additionally, we
experienced insufficient demand related to select investments in advanced
package technologies principally as a result of alternative advanced package
technologies which became industry standard.
As of June 30, 2002, we recognized a $171.6 million impairment charge to
reduce the carrying value of test and packaging assets to be held and used to
their fair value. The components of this charge were as follows:
CARRYING FAIR IMPAIRMENT
VALUE VALUE CHARGE
------------- ------------- -------------
(IN MILLIONS)
Test assets:
Property, plant and equipment and acquired intangibles.... $ 95.4 $ 21.9 $ 73.5
Packaging assets:
Property, plant and equipment............................. 157.7 59.6 98.1
------------- ------------- -------------
$ 253.1 $ 81.5 $ 171.6
============= ============= =============
An appraisal firm was engaged to assist in the determination of the fair value
of the assets held for use. The determination of fair value was based on
projected cash flows using a discount rate commensurate with the risk involved.
5. SFAS NO. 141, BUSINESS COMBINATIONS AND SFAS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
prohibits the pooling-of-interests method
60
of accounting for business combinations initiated after June 30, 2001 and
addresses the accounting for purchase method business combinations completed
after June 30, 2001. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets." For existing acquisitions, the provisions of SFAS
No. 142 were effective as of January 1, 2002 and are generally effective for
business combinations initiated after June 30, 2001. SFAS No. 142 includes
provisions regarding the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, the cessation of amortization related to goodwill and
indefinite-lived intangibles, and the testing for impairment of goodwill and
other intangibles annually or more frequently if circumstances warrant.
Additionally, SFAS No. 142 requires that within six months of adoption of SFAS
No. 142, goodwill be tested for impairment at the reporting unit level as of the
date of adoption.
We adopted SFAS No. 142 as of January 1, 2002 and we reclassified $30.0
million of intangible assets previously identified as an assembled workforce
intangible to goodwill. Additionally, at adoption of SFAS No. 142 we stopped
amortizing goodwill of $659.1 million, as well as goodwill of $118.6 million
associated with our investment in ASI then accounted for under the equity method
of accounting. The as adjusted financial information below assumes that the
cessation of amortization occurred as of January 1, 2001.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Loss from continuing operations, as reported ............. $ (52,368) $ (835,089) $ (456,487)
----------- ----------- -----------
Goodwill and assembled workforce amortization ............ -- -- 80,232
Goodwill related to equity investments ................... -- -- 35,544
----------- ----------- -----------
-- -- 115,776
----------- ----------- -----------
Loss from continuing operations, as adjusted ............. (52,368) (835,089) (340,711)
Income from discontinued operations, as reported ......... 54,566 8,330 5,626
----------- ----------- -----------
Net income (loss), as adjusted ........................... $ 2,198 $ (826,759) $ (335,085)
=========== =========== ===========
Basic and diluted earning per share:
Loss from continuing operations per share, as reported ... $ (0.31) $ (5.09) $ (2.91)
----------- ----------- -----------
Goodwill and assembled workforce amortization ............ -- -- 0.51
Goodwill related to equity investments ................... -- -- 0.23
----------- ----------- -----------
-- -- 0.74
----------- ----------- -----------
Loss from continuing operations per share, as adjusted ... (0.31) (5.09) (2.17)
Income from discontinued operations, as reported ......... 0.32 0.05 0.04
----------- ----------- -----------
Net income (loss), as adjusted ........................... $ 0.01 $ (5.04) $ (2.13)
=========== =========== ===========
As of the adoption date of the standard, we reassessed the useful lives of
our identified intangibles and they continue to be appropriate. Goodwill and
other intangible assets are attributable to two reporting units, packaging and
test services. Goodwill is allocated to each reporting unit proportionate to the
fair values of the acquired packaging and test assets. We completed the initial
impairment test during the second quarter of 2002. Based on the comparison of
the fair value of the reporting units with their respective carrying values each
as of January 1, 2002, we concluded that goodwill associated with our packaging
and test services reporting units was not impaired as of adoption. An appraisal
firm was engaged to assist in the determination of the fair value of our
reporting units. The determination of fair value was based on projected cash
flows using a discount rate commensurate with the risk involved.
SFAS No. 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business climate and testing for
recoverability of long-lived assets. Our test services assets and several
packaging services assets remained at low utilization rates during the second
quarter of 2002 and were no longer expected to reach previously anticipated
utilization levels. As discussed in Note 4, we tested the recoverability of such
assets as of June 30, 2002 and concluded that a portion of those assets was
impaired. Accordingly, we retested goodwill for impairment as of June 30, 2002,
and concluded that the carrying value of the assets and liabilities associated
with the test services reporting unit exceeded its fair value. As of June 30,
2002, we recognized a $73.1 million goodwill impairment charge. Such impairment
charge was measured by comparing the implied fair value of the goodwill
associated with the test services reporting unit to its carrying value. An
appraisal firm was engaged to assist in the determination of the fair value of
our reporting units. The determination of fair value was based on projected cash
flows using a
61
discount rate commensurate with the risk involved. During the second quarter of
2003, we performed our annual review for impairment and concluded that goodwill
was not impaired.
The changes in the carrying value of goodwill by reporting unit are as
follows:
PACKAGING TEST
SERVICES SERVICES TOTAL
-------- -------- ---------
(IN THOUSANDS)
Balance as of January 1, 2002 .............................. $586,344 $ 72,786 $ 659,130
Goodwill acquired .......................................... 40,890 -- 40,890
Goodwill impairment ........................................ -- (73,080) (73,080)
Translation adjustments .................................... 865 294 1,159
-------- -------- ---------
Balance as of December 31, 2002 ............................ $628,099 $ -- $ 628,099
Translation adjustments .................................... 1,751 -- 1,751
-------- -------- ---------
Balance as of December 31, 2003 ............................ $629,850 $ -- $ 629,850
======== ======== =========
6. RESTRUCTURING CHARGES
During 2002, we recorded $28.6 million of charges related to the
consolidation of our worldwide facilities to increase operational efficiency and
reduce costs. The charges were comprised of $20.8 million to write-off leasehold
improvements and other long-lived assets and $7.8 million for lease termination
and other exit costs. Our consolidation efforts included:
- Transferring the packaging operations at our K2 site in Bucheon, South
Korea into our K4 factory in Kwangju, South Korea and closing the K2
facility,
- Merging our factory operations in Taiwan into a single location, and
- Consolidating select U.S. office locations and closing our San Jose
test facility.
The 2002 charges associated with the consolidation initiatives in Korea,
Taiwan and the U.S. were $10.0 million, $13.8 million and $4.8 million,
respectively. We completed the closing of the K2 facility during the second
quarter of 2003 and the other activities were substantially completed during
2002. Of the total $28.6 million restructuring charges recorded in 2002, $2.2
million and $6.1 million remained outstanding as of December 31, 2003 and
December 31, 2002, respectively, and is reflected in accrued expenses and other
noncurrent liabilities. The outstanding liability is principally future lease
payments of which $1.0 million is expected be paid during 2004. The remaining
lease payments are expected to be paid through 2007 unless the leases can be
terminated earlier. During 2003, the restructuring reserve was reduced by $2.0
million for cash expenditures and $1.9 million for the settlement of a
previously existing contingency.
7. ACQUISITIONS IN JAPAN AND TAIWAN
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd. located in the Iwate prefecture in Japan. The purchase price
included a $7.8 million cash payment at closing. We were required to make
additional payments one year from closing for the amount of the deferred
purchase price as well as contingent payments. Based on the resolution of the
contingency as of January 2003, the total amount of additional payments due in
April 2003 was 1.7 billion Japanese yen. In April 2003, we made a payment of
300.0 million Japanese yen, or $2.5 million based on the exchange rate on the
date of the payment. We are withholding payment of 1.4 billion yen ($13.1
million based on the spot exchange rate at December 31, 2003) of this amount
pending resolution of a controversy relating to the patents acquired in
connection with the acquisition. We recorded $19.6 million of intangible assets
for patent rights that are amortizable over 7 years. The fair value of the other
assets acquired and liabilities assumed was approximately $2.5 million for fixed
assets, $0.1 million for inventory and other assets and $14.2 million for the
deferred purchase price payment and minimum amount of the contingent payments.
Such net assets principally relate to our packaging services reporting unit.
In January 2002, we acquired Agilent Technologies, Inc.'s packaging
business related to semiconductor packages utilized in printers for $2.8 million
in cash. The 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.
62
In July 2001, we acquired, in separate transactions, 69% of Taiwan
Semiconductor Technology Corporation ("TSTC") and Sampo Semiconductor
Corporation ("Sampo") in Taiwan. Including our prior ownership interest in TSTC,
our ownership increased to 94% of the outstanding shares of TSTC. The combined
purchase price was paid with the issuance of 4.9 million shares of our common
stock valued at $87.9 million based on our closing share price two days prior to
each acquisition, the assumption of $34.8 million of debt and $3.7 million of
cash consideration, net of acquired cash. We recorded intangible assets,
principally goodwill, of $23.8 million as of the acquisition date that is
nonamortizable. In connection with earn-out provisions that provided for
additional purchase price based in part on the results of the acquisitions, we
issued an additional 1.8 million shares in January 2002 and recorded an
additional $35.2 million in goodwill.
In January 2001, Amkor Iwate Corporation commenced operations and acquired
from Toshiba a packaging and test facility located in the Iwate prefecture in
Japan. We owned 60% of Amkor Iwate and Toshiba owned the balance of the
outstanding shares. At December 31, 2003, our minority interest in Amkor Iwate
of $11.8 million was recorded as a liability in accrued expenses, in accordance
with SFAS No. 150. In January 2004, we acquired the remaining 40% ownership
interest of Amkor Iwate from Toshiba for approximately 1.4 billion Japanese yen
($12.8 million based on the spot exchange rate at December 31, 2003). Also in
January 2004, we paid to Toshiba 220.0 million Japanese yen (or $2.0 million
based on the spot exchange rate at December 31, 2003) to terminate our
commitment to purchase a tract of land adjacent to the Amkor Iwate facility. A
$2.0 million charge was recorded in special charges (see Note 3) during the
fourth quarter of 2003 related to this termination fee. 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 through December 2003 and then at market based rates beginning
January 2004. This long-term supply agreement with Toshiba's Iwate factory
terminates January 2006.
The results of our acquisitions have been included in the accompanying
consolidated financial statements since their respective acquisition dates.
8. OUR RELATIONSHIP WITH ANAM SEMICONDUCTOR, INC. (ASI) AND INVESTMENT IN ASI
OUR RELATIONSHIP WITH ASI
We have had a long-standing relationship with ASI. ASI was founded in 1956
by Mr. H. S. Kim, the father of Mr. James Kim, our Chairman and Chief Executive
Officer. Through former supply agreements with ASI, we historically
subcontracted for packaging and test services which were sourced from ASI's
factories in Korea. Beginning in May 2000, with the completion of our
acquisitions of ASI's packaging and test facilities, we no longer receive
packaging and test services from ASI. In connection with the acquisition of
these factories, we committed to making equity investments in ASI, and as a
result, accumulated a 42% ownership interest in ASI. Under the former wafer
fabrication services supply agreement, we purchased the wafer output of ASI's
wafer fabrication facility. Beginning in February 2003, when we sold our wafer
fabrication services business to ASI, we no longer purchase ASI's wafer output.
In addition, we have had other relationships with ASI affiliated companies for
construction services and equipment. We believe each of these transactions was
conducted on an arms-length basis in the ordinary course of business. Total
purchases from ASI and its affiliates for the years ended December 31, 2003,
2002 and 2001 were $31.1 million, $212.6 million and $161.6 million.
Construction services and equipment purchases received from ASI and its
affiliates capitalized during the years ended December 31, 2002 and 2001 were
$2.8 million and $14.7 million, respectively. We received less than $0.1 million
of construction services from ASI and its affiliates during 2003.
OUR INVESTMENT IN ASI
We evaluate our investments for impairment due to declines in market value
that are considered other than temporary. In the event of a determination that a
decline in market value is other than temporary, a charge to earnings is
recorded for the unrealized loss, and a new cost basis in the investment is
established. The stock prices of semiconductor companies' stocks, including ASI
and its competitors, have experienced significant volatility during the past
several years. The most recent downturn in the semiconductor industry 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. As a result, we recorded $172.5
million of impairment charges during 2002 to reduce the carrying value of our
investment in ASI to ASI's market value. At January 1, 2001 and 2002 Amkor owned
42% of ASI's voting stock. During 2002, we divested 21 million shares of ASI
stock and at December 31, 2002, Amkor owned 26.7 million shares of ASI or 21%.
The carrying value of our investment in ASI at December 31, 2002
63
was $77.5 million, or $2.90 per share. As discussed further below, on March 24,
2003 we sold 7 million shares of ASI common stock. Beginning on this date we
ceased accounting for our investment in ASI under the equity method of
accounting and commenced accounting for our investment as a marketable security
that is available for sale. As of December 31, 2003, we owned 14.7 million
shares of ASI, or 12% of ASI's voting stock. The carrying value of our remaining
investment in ASI at December 31, 2003, including an unrealized gain of $10.0,
was $50.4 million, or $3.43 per share. We intend to sell our remaining
investment in ASI. The ultimate level of proceeds from the sale of our remaining
investment in ASI could be less than the current carrying value.
As part of our strategy to sell our investment in ASI and to divest our
wafer fabrication services business (see Note 2), we entered into a series of
transactions beginning in the second half of 2002:
- - In September 2002, we sold 20 million shares of ASI common stock to Dongbu
Group in exchange for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we entered
into the share sale agreement. We received $58.1 million in net cash
proceeds and 42 billion won (approximately $34.2 million based on the spot
exchange rate on the closing date) of interest bearing notes from Dongbu
Corporation payable in two equal principal payments in September 2003 and
February 2004. The Dongbu Group comprises Dongbu Corporation, Dongbu Fire
Insurance Co., Ltd. and Dongbu Life Insurance Co., Ltd., all of which are
Korean corporations and are collectively referred to herein as "Dongbu."
Associated with this transaction, we recorded a $1.8 million loss.
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction. On September 30, 2003, we received 21 billion won
(approximately $18.3 million based on the September 30, 2003 spot exchange
rate), consisting of the principal amount due under the notes from Dongbu.
- - In separate transactions designed to facilitate a future merger between ASI
and Dongbu, (i) we acquired a 10% interest in Acqutek from ASI for $1.9
million, the market value of the shares as publicly traded in Korea; (ii)
we acquired the Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million, its fair value; and (iii) Anam
Instruments, which had been partially owned by ASI, utilized the proceeds
from the sale of PMD to us to buy back all of the Anam Instruments shares
owned by ASI. Acqutek supplies materials to the semiconductor industry and
is publicly traded in Korea. An entity controlled by the family of James
Kim, our Chairman and Chief Executive Officer, held a 25% ownership
interest in Acqutek at the time of our acquisition of our interest in
Acqutek. We have historically purchased and continue to purchase leadframes
from Acqutek. On September 17, 2003, we sold our entire ownership interest
in Acqutek (see Note 12). PMD supplies sophisticated die mold systems and
tooling to the semiconductor industry and historically over 90% of its
sales were to Amkor. We determined the fair value of PMD based on projected
cash flows discounted at a rate commensurate with the risk involved. At the
time of our acquisition of PMD, Anam Instruments was owned 20% by ASI and
20% by a family member of James Kim.
- - On February 28, 2003, we sold our wafer fabrication services business to
ASI for $62 million. We negotiated the fair value of our wafer fabrication
services business with ASI and Dongbu. The parties calculated fair value
based on an assessment of projected cash flows discounted at a rate
commensurate with the risk involved. We obtained a release from Texas
Instruments regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of the
business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different conclusions as to fair value. It is likely that we would not have
entered into the Acqutek or PMD transactions absent the share sale to Dongbu and
the sale of the wafer fabrication services business to ASI. Had these
transactions not been interrelated, we may have utilized a different negotiation
strategy for the investment in Acqutek and the acquisition of PMD, which could
have resulted in us reaching a different conclusion of the fair value of both of
these transactions.
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.
64
Subsequent to the sale of a portion of our investment in ASI to Dongbu in
2002, we were unable to identify another strategic buyer. ASI's common stock,
which is listed on the Korean Stock Exchange, is relatively thinly traded and
subject to volatile swings in daily trading volumes. In an effort to continue to
monetize our investment in ASI's common stock, we evaluated, in consultation
with a financial institution, the most efficient method to divest a large block
of shares into the market without destabilizing the share price of ASI's common
stock. On March 24, 2003, we consummated a series of transactions proposed by a
financial institution. We irrevocably sold a block of 7 million shares of ASI
common stock to the financial institution for approximately $19.5 million, or
$2.81 per share. We also entered into a nondeliverable call option with the
financial institution for $6.8 million, the fair value of the option at that
date plus the transaction costs. In May 2003, we exercised the nondeliverable
call option realizing $5.6 million of cash proceeds. Accordingly, during 2003 we
recorded a loss of $1.2 million related to this nondeliverable call option.
On September 17, 2003, we sold an additional 5 million shares of ASI common
stock to the same financial institution for approximately $18.5 million, or
$3.69 per share, and recorded an associated gain of $4.7 million. We also
entered into a nondeliverable call option with the financial institution for
$6.5 million, the fair value of the option at that date plus the transaction
costs. In December 2003, we exercised the nondeliverable call option realizing
$2.0 million of cash proceeds. Accordingly, during 2003 we recorded a loss of
$4.5 million related to this nondeliverable call option.
The March and September 2003 call options discussed above allowed us to
continue to monetize our investment in ASI at a fixed price with unlimited
upside and limited downside economics. In addition, it provided us with the
economic benefits of selling shares through a dollar averaging sales program
without incurring the transaction costs associated with multiple small quantity
sales. The call premiums provided the financial institution some downward
protection if the market for ASI's common stock destabilized as it sold its
investment in ASI's common stock into the market. All ownership rights and
privileges associated with the 12 million shares of ASI's common stock sold
during 2003 were irrevocably transferred to the financial institution. In no
event could the financial institution have put the shares back to Amkor nor was
there a provision in the agreements for Amkor to reacquire the shares.
FINANCIAL INFORMATION FOR ASI
The following summary of consolidated financial information was derived
from the consolidated financial statements of ASI. As discussed above, on March
24, 2003, we ceased accounting for our investment in ASI under the equity method
of accounting and commenced accounting for our investment as a marketable
security that is available for sale. Accordingly, summary consolidated financial
information related to ASI is only presented for the periods in which ASI was a
significant equity investment:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001
------------- -------------
(IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues.......................................... $ 213,813 $ 161,700
Gross profit (loss)................................... (99,417) (100,295)
Net loss.............................................. (97,129) (162,173)
DECEMBER 31,
2002
-------------
(IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits............................... $ 65,891
Current assets.................................................................. 167,145
Property, plant and equipment, net.............................................. 482,028
Noncurrent assets (including property, plant and equipment)..................... 622,487
Current liabilities............................................................. 111,409
Total debt and other long-term financing (including current portion)............ 150,607
Noncurrent liabilities (including debt and other long-term financing)........... 119,493
Total stockholders' equity...................................................... 558,730
65
9. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory of $18.7
million and $20.2 million for 2003 and 2002, respectively, consist of raw
materials and purchased components that are used in the semiconductor packaging
process.
DECEMBER 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
Raw materials and purchased components............ $ 77,775 $ 61,806
Work-in-process................................... 14,664 10,315
------------- -------------
$ 92,439 $ 72,121
============= =============
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
--------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
Land ............................................ $ 103,610 $ 88,744
Buildings and improvements ...................... 556,106 537,288
Machinery and equipment ......................... 1,640,471 1,488,484
Furniture, fixtures and other equipment ......... 155,719 145,434
Construction in progress ........................ 2,355 1,707
----------- -----------
2,458,261 2,261,657
Less -- Accumulated depreciation and amortization (1,450,613) (1,295,319)
----------- -----------
$ 1,007,648 $ 966,338
=========== ===========
As described in Note 4, we recorded in 2002 a $185.5 million impairment
charge associated with our test and packaging fixed assets. Such impairment
charge principally related to machinery and equipment.
As discussed in Note 1, beginning July 1, 2003, we consolidate certain
Philippine realty corporations in which we have a 40% ownership and from whom we
lease land and buildings in the Philippines. Gross value of land and buildings
related to these Philippine realty corporations at December 31, 2003 are $15.2
million and $10.8 million, respectively.
11. ACQUIRED INTANGIBLES
Acquired intangibles consist of the following:
DECEMBER 31,
--------------------
2003 2002
-------- --------
(IN THOUSANDS)
Patents and technology rights ..... $ 62,899 $ 61,994
Less -- Accumulated amortization .. (25,169) (16,961)
-------- --------
$ 37,730 $ 45,033
======== ========
Amortization expense was $8.2 million, $7.3 million and $5.6 million in
2003, 2002 and 2001, respectively. The estimated annual amortization expense for
2004, 2005, 2006, 2007 and 2008 is $8.3 million, $7.1 million, $6.9 million,
$6.9 million and $6.4 million, respectively. The weighted average amortization
period for the patents and technology rights is 8 years.
12. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
66
DECEMBER 31,
-----------------
2003 2002
------- -------
(IN THOUSANDS)
Marketable securities classified as available for sale:
ASI (ownership of 12% and 21% at December 31, 2003
and 2002, respectively) (see Note 8) .......................... $50,397 $77,450
Other marketable securities classified as available for sale ... 677 4,590
------- -------
Total marketable securities ................................... 51,074 82,040
Equity investments ................................................... 107 1,195
------- -------
$51,181 $83,235
======= =======
Our investment in ASI is classified as available for sale in the table
above. ASI was previously accounted for as an equity investment through March
24, 2003 (see Note 8).
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 (see Note 8). Our investment in Acqutek was classified as a marketable
security available for sale at December 31, 2002. In September 2003, our
investment in Acqutek was sold at a loss of $0.3 million. Previous to the sale
of Acqutek, we recorded during the second quarter of 2003 a $0.9 million charge
to earnings to reflect the decline in market value of Acqutek, which was
considered to be other than temporary. Total purchases from Acqutek included in
cost of revenue for 2003, 2002 and 2001 were $16.1 million, $16.0 million and
$14.0 million, respectively, which we believe were conducted on an arms-length
basis in the ordinary course of business.
In November 2003, we sold our investment in an intellectual property
company which was classified as available for sale. This investment was sold for
$9.8 million and we recorded an associated gain of $7.3 million in other
(income) expense, net.
Equity investment losses, as recorded in our consolidated statements of
income, are comprised of the following:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
Equity in loss of investees ........................... $ (3,290) $ (33,865) $(100,706)
Loss on impairment of equity investment (see Note 8) .. -- (172,533) --
Loss on equity investment (see Note 8) ................ -- (1,767) --
--------- --------- ---------
$ (3,290) $(208,165) $(100,706)
========= ========= =========
13. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Accrued income taxes ......... $ 39,779 $ 48,787
Accrued payroll .............. 34,681 29,295
Accrued interest ............. 27,238 32,690
Other accrued expenses ....... 76,402 73,451
-------- --------
$178,100 $184,223
======== ========
14. DEBT
Following is a summary of short-term borrowings and long-term debt:
67
DECEMBER 31,
--------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
Senior secured credit facilities:
Term loan, LIBOR plus 4% due January 2006 .................................. $ 168,725 $ --
$30.0 million revolving line of credit, LIBOR plus 4.25% due October 2005 .. -- --
Senior credit facilities:
Term B loans, LIBOR plus 4% due September 2005 ............................. -- 97,118
$100.0 million revolving line of credit, LIBOR plus 3.75% due March 2005 ... -- --
9.25% Senior notes due May 2006 ................................................ -- 425,000
9.25% Senior notes due February 2008 ........................................... 470,500 500,000
7.75% Senior notes due May 2013 ................................................ 425,000 --
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 ............................................. 233,000 250,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share ............................................. 146,422 258,750
Other debt ..................................................................... 35,725 77,845
----------- -----------
1,679,372 1,808,713
Less -- Short-term borrowings and current portion of long-term debt ............ (28,665) (71,023)
----------- -----------
$ 1,650,707 $ 1,737,690
=========== ===========
On April 22, 2003, we entered into a new $200.0 million senior secured
credit facility consisting of a $170.0 million term loan maturing January 31,
2006 and a $30.0 million revolving line of credit that is available through
October 31, 2005. The term loan principal repayments are due $1.7 million,
$125.4 million and $41.6 million in 2004, 2005 and 2006, respectively. In
addition, the term loan includes certain financial covenants including, but not
limited to, minimum EBITDA, as defined by the credit facility, minimum daily
liquidity and maximum annual capital expenditures. A default under one debt
instrument may also trigger cross-defaults under our other debt instruments.
This new credit facility replaced the previous $196.9 million secured credit
facility, which included a $96.9 million term loan and a $100.0 million
revolving credit facility that were scheduled to mature September 30, 2005 and
March 31, 2005, respectively. The funds available under this new credit facility
were used to repay the $96.9 million term loan outstanding under the existing
credit facility and for general corporate purposes. In connection with the
redemption of our term loan, we recorded a charge of $2.4 million during the
second quarter of 2003 for the associated unamortized deferred debt issuance
costs.
In May 2003, we sold $425.0 million of 7.75% senior notes due May 2013
("original notes"). We sold these notes to qualified institutional investors and
used the net proceeds of the issuance to redeem our outstanding 9.25% senior
notes due 2006. The notes have a coupon rate of 7.75 % annually and interest
payments are due semi-annually. In connection with the redemption, we recorded
charges during the second quarter of 2003 of $19.7 million related to the
premium paid to redeem these notes, $6.0 million for the associated unamortized
deferred debt issuance costs and $2.5 million of other costs.
In connection with the original notes, we entered into a registration
rights agreement with the initial purchasers of the original notes. In the
exchange offer, the original note holders were entitled to exchange their
original notes for exchange notes ("exchange notes"), with substantially
identical terms as the original notes. In July 2003, we filed a Form S-4
Registration Statement with the Securities and Exchange Commission to effect
this exchange offer which became effective October 22, 2003.
During 2003, we received board of director approval to purchase up to
$150.0 million of the 9.25% senior notes due 2008, and we have been purchasing
these notes in the open market. As of December 31, 2003, we purchased $29.5
million of the 9.25% senior notes due 2008 for which we recognized a loss on
this retirement of debt of $1.6 million and a charge of $0.4 million for the
associated unamortized deferred debt issuance costs during 2003.
In November 2003, we repurchased $112.3 million of our 5.00% convertible
subordinated notes due March 2007 and $17.0 million of our 5.75% convertible
subordinated notes due June 2006. In connection with the redemption of these
convertible notes, we recorded charges during the fourth quarter of 2003 of $2.8
million related to premiums paid to redeem these notes and $2.3 million for the
associated unamortized deferred debt issuance costs.
68
Other debt as of December 31, 2003 and 2002 includes our foreign debt
principally related to the financing of Amkor Iwate's acquisition of a Toshiba
packaging and test facility and the debt assumed in connection with the
acquisition of Sampo Semiconductor Corporation in Taiwan. Our foreign debt
includes fixed and variable debt maturing between 2003 and 2010, with the
substantial majority maturing by 2003. As of December 31, 2003, the foreign debt
has interest rates ranging from 1.0% to 4.35%. These debt instruments do not
include significant financial covenants.
Interest expense related to short-term borrowings and long term debt is
presented net of interest income of $5.9 million, $4.2 million and $10.3 million
for 2003, 2002 and 2001, respectively, in the accompanying consolidated
statements of income. The principal payments required under short-term and
long-term debt borrowings at December 31, 2003 are as follows: 2004 -- $28.7
million, 2005 -- $129.0 million, 2006 -- $277.5 million, 2007 -- $147.2 million,
2008 -- $471.1 million and thereafter -- $625.9 million.
15. STOCKHOLDERS' EQUITY
In connection with a $410.0 million private equity offering in May 2000, we
issued 20.5 million shares of our common stock and granted warrants that expire
four years from issuance to purchase 3.9 million additional shares of our common
stock at $27.50 per share. None of these warrants have been exercised to date.
The estimated fair value of the stock warrants of $35.0 million is included in
additional paid-in capital on our consolidated balance sheet.
In November 2003, we sold 7.4 million shares of our common stock for net
proceeds of $133.5 million. These net proceeds were used to repurchase $112.3
million of our 5.00% convertible notes due 2007 and $17.0 million of our 5.75%
convertible notes due 2006.
In September 2003, a receivable due to us of $2.9 million was collected in
full. This receivable was previously reflected as a receivable from stockholders
in the stockholders' equity section of our balance sheet (see Note 1).
16. EMPLOYEE BENEFIT PLANS
U.S. Defined Contribution Plan
Our company has a defined contribution benefit plan covering substantially
all U.S. employees. Employees can contribute up to the lesser of 60% of salary
or $12,000 annually to the plan. The company matches in cash 75% of the
employee's contributions up to a defined maximum on an annual basis. The expense
for this plan was $1.7 million, $2.0 million and $2.1 million in 2003, 2002 and
2001, respectively.
Philippine Pension Plan
Our Philippine subsidiary sponsors a defined benefit plan that covers
substantially all employees who are not covered by statutory plans. Charges to
expense are based upon costs computed by independent actuaries.
The components of net periodic pension cost for the Philippine defined
benefit plan are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
------- ------- -------
(IN THOUSANDS)
Service cost of current period ................... $ 2,343 $ 2,339 $ 2,534
Interest cost on projected benefit obligation .... 1,412 1,681 1,919
Expected return on plan assets ................... (693) (920) (1,482)
Amortization of transition obligation ............ 59 62 64
------- ------- -------
Total pension expense ................... $ 3,121 $ 3,162 $ 3,035
======= ======= =======
It is our policy to make contributions sufficient to meet the minimum
contributions required by law and regulation. The following table sets forth the
funded status of our Philippine defined benefit pension plan and the related
changes in the projected benefit obligation and plan assets:
69
2003 2002
-------- --------
(IN THOUSANDS)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year ............ $ 18,607 $ 19,742
Service cost ................................................. 2,343 2,339
Interest cost ................................................ 1,412 1,681
Effect of curtailment ........................................ -- (2,148)
Actuarial gain ............................................... (751) (1,997)
Foreign exchange gain ........................................ (744) (807)
Benefits paid ................................................ (448) (203)
-------- --------
Projected benefit obligation at end of year .................. 20,419 18,607
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year ............... 7,609 10,003
Actual return on plan assets ................................. 2,461 (283)
Effect of curtailment ........................................ -- (1,500)
Employer contributions ....................................... 3,243 --
Foreign exchange gain ........................................ (303) (408)
Benefits paid ................................................ (448) (203)
-------- --------
Fair value of plan assets at end of year ..................... 12,562 7,609
-------- --------
Funded status:
Projected benefit obligation in excess of plan assets ........ 7,857 10,996
Unrecognized actuarial loss .................................. 942 (1,642)
Unrecognized transition obligation ........................... (363) (440)
-------- --------
Accrued pension costs ........................................ $ 8,436 $ 8,914
======== ========
The fair value of plan assets includes an investment in our common stock of
$1.8 million and $0.5 million at December 31, 2003 and 2002, respectively.
The weighted-average assumptions, which reflect the economic and market
conditions in the Philippines, used to determine the benefit obligation were as
follows:
DECEMBER 31,
--------------------
2003 2002 2001
---- ---- ----
Discount rate ..................... 8% 8% 10%
Rate of compensation increase ..... 7% 7% 9%
The weighted-average assumptions, which reflect the economic and market
conditions in the Philippines, used to determine the net periodic benefit cost
were as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
---- ---- ----
Discount rate ............................... 8% 8% 10%
Rate of compensation increase ............... 7% 7% 9%
Expected long-term return on plan assets .... 8% 8% 12%
KOREAN SEVERANCE PLAN
Our Korean subsidiary participates in an accrued severance plan that covers
employees and directors with one year or more of service. Eligible plan
participants are entitled to receive a lump-sum payment upon termination of
their employment, based on their length of service and rate of pay at the time
of termination. Accrued severance benefits are estimated assuming all eligible
employees were to terminate their employment at the balance sheet date. The
contributions to the national pension fund made under the National Pension Plan
of the Republic of Korea are deducted from accrued severance benefit
liabilities. Contributed amounts are:
70
DECEMBER 31,
--------------------
2003 2002
-------- --------
(IN THOUSANDS)
Balance at the beginning of year ................................ $ 52,346 $ 40,002
Provision of severance benefits ................................. 24,010 16,805
Severance payments .............................................. (9,229) (8,897)
(Gain)/loss on foreign currency translation ..................... (188) 4,436
-------- --------
66,939 52,346
Payments remaining with the Korean National Pension Fund ........ (1,424) (1,632)
-------- --------
Balance at the end of year ...................................... $ 65,515 $ 50,714
======== ========
TAIWAN PENSION PLAN
Our Taiwan subsidiary sponsors a defined benefit plan that covers
substantially all full-time employees. Charges to expense are based upon costs
computed by independent actuaries. As of December 31, 2003 and 2002, the
projected benefit obligation was $2.7 million and $2.1 million, respectively.
Pension assets at fair market value as of December 31, 2003 and 2002 were $2.5
million and $1.9 million, respectively. Prepaid (accrued) pension cost at
December 31, 2003 and 2002 was $0.2 million and ($0.5) million, respectively.
The weighted-average assumptions, which reflect the economic and market
conditions in Taiwan, used to determine the benefit obligation were as follows:
DECEMBER 31,
-----------------------------------
2003 2002 2001
-------- --------- ---------
Discount rate................................. 3.0% 3.5% 4.3%
Rate of compensation increase................. 3.5% 3.5% 3.5%
The weighted-average assumptions, which reflect the economic and market
conditions in the Taiwan, used to determine the net periodic benefit cost were
as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
-------- --------- ---------
Discount rate....................................... 3.0% 3.5% 4.3%
Rate of compensation increase....................... 3.5% 3.5% 3.5%
Expected long-term return on plan assets............ 3.0% 3.5% 4.0%
17. INCOME TAXES
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between
the financial statement and the tax bases of assets and liabilities. The
components of the provision for income taxes are as follows:
71
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---------- ---------- ---------
(IN THOUSANDS)
Current:
Federal.................................................... $ (20,242) $ (21,275) $ --
State ..................................................... -- -- --
Foreign.................................................... 19,614 14,371 3,331
---------- ---------- ---------
(628) (6,904) 3,331
---------- ---------- ---------
Deferred:
Federal.................................................... 10,219 70,738 (87,077)
Foreign.................................................... (2,324) 1,981 2,055
---------- ---------- ---------
7,895 72,719 (85,022)
---------- ---------- ---------
Total provision (benefit)..................................... 7,267 65,815 (81,691)
Less: Discontinued operations............................. 7,500 5,132 2,922
---------- ---------- ---------
Total provision (benefit) from continuing operations... $ (233) $ 60,683 $ (84,613)
========== ========== =========
The reconciliation between the taxes payable based upon the U.S. federal
statutory income tax rate and the recorded provision is as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---------- ---------- ---------
(IN THOUSANDS)
Federal statutory rate......................................................... $ 4,716 $ (258,927) $(185,730)
Foreign subsidiaries subject to tax holiday.................................... (7,652) 63,337 33,762
Foreign exchange gains recognized for income taxes............................. 5,822 14,855 13,221
Change in valuation allowance.................................................. 20,726 214,762 43,938
Difference in rates on foreign subsidiaries.................................... (4,223) 24,140 20,415
Change in tax accruals, tax rates & adjustments related to prior years......... (9,477) -- 5,796
State taxes, net of federal benefit............................................ (792) (13,705) (13,515)
Goodwill and other permanent differences....................................... (1,853) 21,353 422
---------- ---------- ---------
Total................................................................. $ 7,267 $ 65,815 $ (81,691)
========== ========== =========
The following is a summary of the significant components of the deferred
tax assets and liabilities:
72
DECEMBER 31,
-------------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards...................... $ 167,747 $ 160,043
Investments........................................... 41,992 81,103
Capital loss carryover................................ 84,038 45,069
Inventories........................................... 8,326 7,945
Corporate income tax credits.......................... 2,259 5,447
Accounts receivable................................... 2,688 3,605
Property, plant and equipment......................... 11,751 3,594
Goodwill.............................................. 3,641 4,023
Other accrued liabilities............................. 4,645 2,790
Unrealized foreign exchange losses.................... 935 1,054
Loss on impairment/lease shutdown reserves............ 7,748 11,890
Other................................................. 5,667 6,666
------------- -------------
Total deferred tax assets................................ 341,437 333,229
Valuation allowance...................................... (294,289) (277,545)
------------- -------------
Total deferred tax assets net of valuation allowance..... 47,148 55,684
------------- -------------
Deferred tax liabilities:
Property, plant and equipment......................... 5,825 8,714
Goodwill.............................................. 9,137 6,146
Unrealized foreign exchange gains..................... 2,297 2,203
Other................................................. 587 1,424
------------- -------------
Total deferred tax liabilities........................... 17,846 18,487
------------- -------------
Net deferred tax assets.................................. $ 29,302 $ 37,197
============= =============
During 2003 and 2002, we recorded a $20.7 million and $214.8 million charge
to establish a valuation allowance against certain deferred tax assets
consisting primarily of U.S., Taiwanese and Chinese net operating loss
carryforwards, capital loss carryforwards and tax credits. In connection with
our divestiture in 2003 of 12 million shares of ASI common stock and other
investments, we recognized a capital loss of approximately $80.6 million and
recognized a U.S. tax benefit of $32.2 million for which we provided a full
valuation allowance because we did not have any offsetting capital gains. In
connection with our divestiture in 2002 of 21 million shares of ASI common
stock, we realized a capital loss of approximately $117.0 million and recognized
a U.S. tax benefit of $44.5 million for which we provided a full valuation
allowance because we did not have any offsetting capital gains. Generally
accepted accounting principles require companies to weigh both positive and
negative evidence in determining the need for a valuation allowance. During
2002, in light of our three years of cumulative losses, an unprecedented
industry downturn and continued poor visibility of customer demand, we
determined that a valuation allowance representing a substantial majority of our
deferred tax assets was appropriate. These negative factors outweighed, and
continued to outweigh in 2003, our forecasted future profitability and
expectation that we will be able to utilize our net operating loss
carryforwards.
As a result of certain capital investments, export commitments and
employment levels, income from operations in Korea, the Philippines and China is
subject to reduced tax rates, and in some cases is wholly exempt from taxes. In
Korea, we benefit from a tax holiday extending through 2013 that provides for a
100% tax holiday for seven years and then 50% tax holiday for an additional 3
years. In the Philippines, our operating locations operate in economic zones and
in exchange for tax holidays we have committed to certain export and employment
levels. For 2004 and beyond, certain qualifying Philippine operations will
benefit from a one year full tax holiday, subject to extension, while the
remaining operations will benefit from a perpetual reduced tax rate of 5%. As a
result of our 2001 investment in China, we expect to benefit from a 100% tax
holiday for five years and then 50% tax holiday for an additional two years. As
a result of the net losses incurred by our foreign subsidiaries subject to tax
holidays during 2003, 2002 and 2001, there is a forgone income tax benefit
attributable to the tax status of these subsidiaries of approximately $4.8
million, or $0.03 per share, $63.3 million, or $0.39 per share and $33.8
million, or $0.21 per share in 2003, 2002 and 2001, respectively.
73
In December 2002, we utilized $33.3 million of U.S. net operating losses by
carrying back such amounts to offset U.S. reported taxable income in prior
years. At December 31, 2003, we have remaining U.S. net operating losses
available to be carried forward totaling $404.9 million expiring between 2021
and 2023. Additionally, at December 31, 2003, we had non-U.S. net operating
losses available to be carried forward totaling $49.1 million expiring between
2004 and 2013. Non-U.S. income (loss) before taxes and minority interest was
$53.4 million, ($395.3) million and ($180.7) million in 2003, 2002 and 2001,
respectively. At December 31, 2003 and 2002, net cumulative undistributed losses
of non-U.S. subsidiaries totaled approximately $8.1 million and $61.4 million,
respectively. No liabilities are recognized for our cumulative earnings loss
position and no U.S. income and foreign withholding taxes would be due on the
cumulative earnings loss. It is the company's intention to reinvest any
undistributed earnings outside the U.S.
At December 31, 2003 and 2002 current deferred tax assets of $2.3 million
and $5.5 million, respectively, are included in other current assets and
noncurrent deferred tax assets of $28.5 million and $36.3 million, respectively,
are included in other assets in the consolidated balance sheet. The net deferred
tax assets include amounts, which, in our opinion, are more likely than not to
be realizable through future taxable income. In addition, at December 31, 2003
and 2002, noncurrent deferred tax liabilities of $1.5 million and $4.6 million,
respectively, are included in other noncurrent liabilities in the consolidated
balance sheet.
We operate in and file income tax returns in various U.S. and non-U.S.
jurisdictions which are subject to examination by tax authorities. For our
larger operations, our tax returns have been examined through 1998 in the
Philippines and the U.S. and through 2000 in Japan and Taiwan. The tax returns
for open years in all jurisdictions in which we do business are subject to
changes upon examination. During 2003, the Internal Revenue Service commenced an
examination related to years 2001 and 2000. 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. During
2003, we reduced tax accruals by $20.0 million related to tax periods no longer
open. As of December 31, 2003 and 2002, the accrual for current taxes and
estimated additional taxes was $39.8 million and $48.8 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.
18. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic EPS is computed using only the weighted
average number of common shares outstanding for the period, while diluted EPS is
computed assuming conversion of all dilutive securities, such as options,
convertible debt and warrants. For the years ended December 31, 2003, 2002 and
2001, we excluded from the computation of diluted earnings per share potentially
dilutive securities which would have an antidilutive effect on EPS. As of
December 31, 2003, the total number of potentially dilutive securities
outstanding was 15.8 million, 9.2 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. As of
December 31, 2002, the total number of potentially dilutive securities
outstanding was 6.6 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. As of
December 31, 2001, the total number of potentially dilutive securities
outstanding was 12.4 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. The
basic and diluted per share amounts are the same for the years 2003, 2002 and
2001 due to net losses from continuing operations.
19. STOCK COMPENSATION PLANS
1998 Director Option Plan. A total of 300,000 shares of common stock have
been reserved for issuance under the Director Plan. The option grants under the
Director Plan are automatic and non-discretionary. As of January 1, 2003, the
Director Plan provides for an initial grant of options to purchase 20,000 shares
of common stock to each new non-employee director of the company when such
individual first becomes an outside director. In addition, each non-employee
director will automatically be granted subsequent options to purchase 10,000
shares of common stock on each date on which such director
74
is re-elected by the stockholders of the company, provided that as of such date
such director has served on the board of directors for at least six months. The
exercise price of the options is 100% of the fair market value of the common
stock on the grant date. The term of each option is ten years and each option
granted to an non-employee director vests over a three year period. The Director
Plan will terminate in January 2008 unless sooner terminated by the board of
directors.
1998 Stock Plan. The 1998 Stock Plan generally provides for the grant to
employees, directors and consultants of stock options and stock purchase rights.
Unless terminated sooner, the 1998 Plan will terminate automatically in January
2008. A total of 5,000,000 shares are available for issuance under the 1998
Stock Plan, and there is a provision for an annual replenishment to bring the
number of shares of common stock reserved for issuance under the plan up to
5,000,000 as of each January 1.
Unless determined otherwise by the board of directors or a committee
appointed by the board of directors, options and stock purchase rights granted
under the 1998 Plan are not transferable by the optionee. Generally, the
exercise price of all stock options granted under the 1998 Plan must be at least
equal to the fair market value of the shares on the date of grant. In general,
the options granted will vest over a four year period and the term of the
options granted under the 1998 Plan may not exceed ten years.
On November 8, 2002, we initiated a voluntary stock option replacement
program such that employees and members of our board of directors could elect to
surrender their existing options and be granted new options no earlier than six
months and one day after the tendered options were cancelled. Pursuant to the
terms and conditions of the offer to exchange, a total of 1,633 eligible
employees participated. On June 16, 2003, we granted 6,978,563 shares of our
common stock under the 1998 Stock Plan and 35,000 shares of our common stock
under the 1998 Director Option Plan for the options tendered by eligible
employees and members of our board of directors and accepted by our company. For
options that were granted under the previously existing 1998 French Plan, which
was terminated in April 2003, and that were surrendered pursuant to voluntary
stock option replacement program, we granted an additional 248,200 replacement
options under the 1998 Stock Plan. We have issued new option grants equal to the
same number of shares surrendered by the employees. The exercise price of the
new options was $10.79, which was equal to the fair market value of our stock
price on the date of grant. The vesting term of these new options are similar to
the tendered options except the new options contain an additional one-year
vesting period prior to any options becoming exercisable.
2003 Nonstatutory Inducement Grant Stock Plan. On September 9, 2003, we
initiated the 2003 Nonstatutory Inducement Grant Stock Plan (the "2003 Plan").
The 2003 Plan generally provides for the grant to employees, directors and
consultants of stock options and stock purchase rights and is generally used as
an inducement benefit for the purpose of retaining new employees. The 2003 Plan
terminates at the discretion of the Board of Directors. As of December 31, 2003,
a total of 300,000 shares were reserved for issuance under the 2003 Stock Plan
and there is a provision for an annual replenishment to bring the number of
shares of common stock reserved for issuance under the plan up to 300,000.
A summary of the status of the stock option plans follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE GRANT DATE
OF SHARES PER SHARE FAIR VALUES
------------- ---------------- ----------------
Balance at December 31, 2000............ 9,270,201 $ 25.48
Granted................................. 4,313,850 15.14 $ 8.47
===========
Exercised............................... 517,822 9.88
Cancelled............................... 709,863 27.60
------------- -----------
Balance at December 31, 2001............ 12,356,366 22.40
Granted................................. 4,004,460 12.76 $ 7.94
===========
Exercised............................... 547,862 10.30
Cancelled............................... 9,239,701 24.88
------------- -----------
Balance at December 31, 2002............ 6,573,263 14.15
Granted................................. 11,406,399 11.29 $ 4.84
===========
Exercised............................... 976,903 10.40
Cancelled............................... 1,213,189 19.81
------------- -----------
Balance at December 31, 2003............ 15,789,570 $ 11.90
============= ===========
75
Options exercisable at:
December 31, 2001....................... 4,508,557 $ 22.35
December 31, 2002....................... 3,436,469 13.95
December 31, 2003....................... 3,181,757 13.52
Significant option groups outstanding at December 31, 2003 and the related
weighted average exercise price and remaining contractual life information are
as follows:
OUTSTANDING EXERCISABLE
----------------------------- ----------------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
SHARES PRICE SHARES PRICE LIFE (YEARS)
------------- ------------- ------------- ------------- -------------
Options with exercise price of:
$1.61 - $5.66 ................................ 453,515 $ 4.86 209,727 $ 5.29 7.36
$5.67 - $9.06 ................................ 430,726 $ 8.99 422,288 $ 9.04 5.42
$9.07 - $10.79 ................................ 7,575,828 $ 10.74 153,616 $ 9.95 7.88
$10.80 - $12.40 ............................... 4,375,445 $ 12.12 877,291 $ 11.01 8.46
$12.41 - $14.88 .............................. 2,399,584 $ 13.79 1,181,738 $ 13.96 7.83
$14.89 - $32.31 ............................... 397,057 $ 18.84 183,248 $ 20.29 8.15
$32.32 - $50.44 ............................... 157,415 $ 43.38 153,849 $ 43.37 6.11
------------- -------------
Options outstanding at December 31, 2003 ...... 15,789,570 3,181,757
============= =============
In order to calculate the fair value of stock options at date of grant, we
used the Black-Scholes option pricing model. The following assumptions were used
to calculate weighted average fair values of the options granted:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
---- ---- ----
Expected life (in years) ..... 4 4 4
Risk-free interest rate ...... 2.9% 2.5% 4.5%
Volatility ................... 68% 85% 70%
Dividend yield ............... -- -- --
1998 Employee Stock Purchase Plan. A total of 1,000,000 shares of common
stock are available for sale under the Stock Purchase Plan and an annual
increase is to be added as of each January 1 to restore the maximum aggregate
number of shares of common stock available for sale under the plan up to
1,000,000. Employees (including officers and employee directors of the company
but excluding 5% or greater stockholders) are eligible to participate if they
are customarily employed for at least 20 hours per week. The Stock Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 15% of the compensation an employee receives on each
payday. Each participant will be granted an option on the first day of a two
year offering period, and shares of common stock will be purchased on four
purchase dates within the offering period. The purchase price of the common
stock under the Stock Purchase Plan will be equal to 85% of the lesser of the
fair market value per share of common stock on the start date of the offering
period or on the purchase date. Employees may end their participation in an
offering period at any time, and participation ends automatically on termination
of employment with the company. The Stock Purchase Plan will terminate in
January 2008, unless sooner terminated by the board of directors.
For the years ended December 31, 2003, 2002 and 2001, employees purchased
common stock shares under the stock purchase plan of 999,827, 996,617 and
482,937, respectively. The average estimated fair values of the purchase rights
granted during the years ended December 31, 2003, 2002 and 2001 based on the
Black-Scholes option pricing model were $1.70, $3.16 and $6.53, respectively.
The following assumptions were used to calculate weighted average fair values of
the purchase rights granted:
76
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
---- ---- ----
Expected life (in years) ..... 0.5 0.5 0.5
Risk-free interest rate ...... 2.9% 2.5% 4.5%
Volatility ................... 68% 85% 70%
Dividend yield ............... -- -- --
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined using
available market information and appropriate methodologies; however,
considerable judgment is required in interpreting market data to develop the
estimates for fair value. Accordingly, these estimates are not necessarily
indicative of the amounts that we could realize in a current market exchange.
Certain of these financial instruments are with major financial institutions and
expose us to market and credit risks and may at times be concentrated with
certain counterparties or groups of counterparties. The creditworthiness of
counterparties is continually reviewed, and full performance is anticipated.
The carrying amounts reported in the balance sheet for due from affiliates,
other accounts receivable, due to affiliates, accrued expenses and accrued
income taxes approximate fair value due to the short-term nature of these
instruments. The methods and assumptions used to estimate the fair value of
other significant classes of financial instruments is set forth below:
Cash and Cash Equivalents. Cash and cash equivalents are due on demand or
carry a maturity date of less than three months when purchased. The carrying
amount of these financial instruments is a reasonable estimate of fair value.
Available for sale investments. The fair value of these financial
instruments was estimated based on market quotes, recent offerings of similar
securities, current and projected financial performance of the company and net
asset positions.
Long-term debt. The carrying amount of our total long-term debt as of
December 31, 2003 and 2002 was $1,650.7 million and $1,737.7, respectively. The
fair value of our total long-term debt as of December 31, 2003 and 2002, based
on available market quotes, was estimated to be $1,754.2 million and $1,321.3
million, respectively.
21. 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.
Net future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are:
DECEMBER 31,
2003
-------------
(IN THOUSANDS)
2004 ....................................................... $ 10,935
2005 ....................................................... 7,739
2006 ....................................................... 8,499
2007 ....................................................... 8,276
2008 ....................................................... 8,388
Thereafter ................................................. 89,987
-------------
Total (net of minimum sublease income of $5,094) .... $ 133,824
=============
Rent expense amounted to $16.4 million, $15.0 million and $21.8 million for
2003, 2002 and 2001, respectively. We lease office space in West Chester,
Pennsylvania from certain of our stockholders. The lease expires in 2006. We
have the option to extend the lease for an additional 10 years through 2016.
Amounts paid for this lease in 2003, 2002 and 2001 were
77
$1.1 million, $1.2 million and $1.2 million, respectively. Our sublease income
includes $0.5 million in each of the three years ended December 31, 2003 from a
company in which certain related parties have ownership interests.
INDEMNIFICATIONS AND GUARANTEES
We have indemnified members of our board of directors and our corporate
officers against any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that the Indemnitee is or was a director or officer of the company. The
indemnities are indemnified, to the fullest extent permitted by law, against
related expenses, judgments, fines and any amounts paid in settlement. We also
maintain Directors and Officers insurance coverage in order to mitigate our
exposure to these indemnification obligations. The maximum amount of future
payments is generally unlimited. There is no amount recorded for this
indemnification at December 31, 2003. Due to the nature of this indemnification,
it is not possible to make a reasonable estimate of the maximum potential loss
or range of loss. No assets are held as collateral and no specific recourse
provisions exist related to this indemnification.
As of December 31, 2003, we have outstanding $2.2 million of standby
letters of credit. Such standby letters of credit are used in our ordinary
course of business and are collateralized by our cash balances.
We generally provide a standard ninety-day warranty on our services. Our
warranty activity has historically been immaterial and is expected to continue
to be immaterial in the foreseeable future.
LITIGATION
We are currently a party to various legal proceedings, including those
noted below. While we currently believe that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on our financial position or overall trends in results of operations,
litigation is subject to inherent uncertainties. If an unfavorable ruling were
to occur, there exists the possibility of a material adverse impact on our net
income in the period in which the ruling occurs. The estimate of the potential
impact from the following legal proceedings on our financial position or overall
results of operations could change in the future.
EPOXY MOLD COMPOUND LITIGATION
Recently, we have become party to an increased number of litigation matters
relative to our historic levels. Much of our recent increase in litigation
relates to an allegedly defective epoxy mold compound, formerly used in some of
our products, which is alleged to be responsible for certain semiconductor chip
failures. In the case of each of these matters, we believe we have meritorious
defenses, as well as valid third-party claims against Sumitomo Bakelite Co.,
Ltd. ("Sumitomo Bakelite"), the manufacturer of the challenged epoxy product,
should the epoxy mold compound be found to be defective. We cannot be certain,
however, that we will be able to recover any amount from Sumitomo Bakelite if we
are held liable in these matters, or that any adverse result would not have a
material impact upon us. Moreover, other customers of ours have made inquiries
about the epoxy mold compound, which was widely used in the semiconductor
industry, and no assurance can be given that claims similar to those already
asserted will not be made against us by other customers in the future.
Fujitsu Limited v. Cirrus Logic, Inc., et al.
On April 16, 2002, we were served with a third-party complaint in an action
entitled Fujitsu Limited v. Cirrus Logic, Inc., No. 02-CV-01627 JW, pending in
the United States District Court for the Northern District of California, San
Jose Division. In this action, Fujitsu Limited ("Fujitsu") alleges that
semiconductor devices it purchased from Cirrus Logic, Inc. ("Cirrus Logic") are
defective in that a certain epoxy mold compound used in the manufacture of the
chip causes a short circuit which renders Fujitsu disk drive products
inoperable. Cirrus Logic, in response, denied the allegations of the complaint,
counterclaimed against Fujitsu for unpaid invoices, and filed its third-party
complaint against us alleging that any liability for chip defects should be
assigned to us because we assembled the subject semiconductor devices. Upon
receipt of Cirrus Logic's third-party complaint, we filed an answer denying all
liability, and our own third-party complaint against Sumitomo Bakelite. Sumitomo
Bakelite filed an answer denying liability. In June 2003, Fujitsu amended its
complaint and added direct claims against us. In response, we filed an answer
denying all liability to Fujitsu. Fujitsu has indicated that it may seek damages
in excess of $100 million. Discovery is ongoing and a trial is currently
scheduled to begin in the Northern District Court of California on January 31,
2005. In November 2003, Fujitsu filed an action against Cirrus Logic, Sumitomo
78
Bakelite and us entitled Fujitsu Limited v. Cirrus Logic, Inc., et al., No.
1-03-CV-009885, in the California Superior Court for the County of Santa Clara,
based on facts and allegations substantially similar to those asserted in the
Northern District Court of California. In December 2003, Cirrus Logic filed a
cross-complaint against Sumitomo Bakelite and us in the Superior Court case,
also based on facts and allegations substantially similar to those asserted in
the Northern District Court case. By stipulation among the parties, Fujitsu and
Cirrus Logic have stated their intent to stay the action pending in the Northern
District Court of California in favor of the action pending in the Santa Clara
Superior Court. Trial in the Superior Court action is currently scheduled to
begin on January 31, 2005. Amkor intends to deny all liability, to file
cross-claims against Sumitomo Bakelite, and to seek dismissal of all claims
against it in due course.
Seagate Technology LLC v. Atmel Corporation, et al.
In March 2003, we were served with a cross-complaint in an action between
Seagate Technology LLC ("Seagate") and Atmel Corporation ("Atmel") in the
Superior Court of California, Santa Clara County. Atmel's cross-complaint seeks
indemnification from us for any damages incurred from the claims by Seagate
involving the allegedly defective epoxy mold compound manufactured by Sumitomo
Bakelite. We have answered Atmel's cross-complaint, denying all liability, and
have filed a cross-complaint against Sumitomo Bakelite. Atmel later amended its
cross-complaint, including adding ChipPAC Inc. ("ChipPAC") as a cross-defendant.
ChipPAC filed a cross-complaint against Sumitomo Bakelite and us. On January 27,
2004, the Superior Court sustained Sumitomo Bakelite's motion to dismiss Atmel's
cross-complaint, granting Atmel 30 days to file an amended pleading. We filed a
motion to dismiss ChipPAC's cross-complaint on February 13, 2004, and otherwise
intend to deny all liability to ChipPAC. We also intend to deny all liability to
Atmel and may seek the dismissal of Atmel's further amended cross-complaint upon
receipt, if appropriate. All parties are currently conducting discovery and no
trial date has been set.
Maxtor Corporation v. Koninklijke Philips Electronics N.V., et al.
In April 2003, we were served with a cross-complaint in an action between
Maxtor Corporation ("Maxtor") and Koninklijke Philips Electronics ("Philips").
Philips' cross-complaint seeks indemnification from us for any damages incurred
from the claims by Maxtor involving the allegedly defective epoxy mold compound
manufactured by Sumitomo Bakelite. Philips subsequently filed a cross-complaint
directly against Sumitomo Bakelite, alleging, among other things, that Sumitomo
Bakelite breached its contractual obligations to both us and Philips by
supplying a defective mold compound resulting in the failure of certain Philips
semiconductor devices. We have denied all liability in this matter and have also
asserted a cross-complaint against Sumitomo Bakelite. Sumitomo Bakelite has
denied any liability. The parties' discovery efforts are ongoing, including
expert discovery. In December 2003, we filed a motion for summary judgment
against Philips's cross-claims. The motion shall be heard March 30, 2004. The
trial is scheduled to start on April 12, 2004.
Maxim Integrated Products, Inc. v. Amkor Technology, Inc., et al.
In August 2003, we were served with a complaint filed by Maxim Integrated
Products, Inc. ("Maxim") against us, Sumitomo Bakelite and Sumitomo Plastics
America, Inc. ("Sumitomo Plastics") in the Superior Court of California, Santa
Clara County. The complaint seeks damages related to our use of Sumitomo
Bakelite's epoxy mold compound in assembling Maxim's semiconductor packages.
Both the Sumitomo defendants and we filed motions to dismiss Maxim's complaint
in September 2003. In lieu of contesting those motions to dismiss, Maxim has
indicated its intent to file an amended pleading. We intend to deny all
liability to Maxim and to file cross-claims against Sumitomo Bakelite; we may
file another motion to dismiss Maxim's amended complaint upon receipt, if
appropriate. Discovery has not commenced and there is no trial date set.
Fairchild Semiconductor Corporation v. Sumitomo Bakelite Singapore Pte.
Ltd., et al.
In September 2003, we were served with an amended complaint filed by
Fairchild Semiconductor Corporation ("Fairchild") against us, Sumitomo Bakelite,
Sumitomo Plastics and Sumitomo Bakelite Singapore Pte. Ltd. in the Superior
Court of California, Santa Clara County. The amended complaint seeks damages
related to our use of Sumitomo Bakelite's epoxy mold compound in assembling
Fairchild's semiconductor packages. Both the Sumitomo defendants and we filed
motions to dismiss Fairchild's amended complaint in October 2003. Fairchild
filed a second amended complaint in January 2004. On February 11, 2004, we filed
a motion to dismiss Fairchild's second amended complaint. We also intend to deny
all liability and to file cross-claims against Sumitomo Bakelite. Discovery is
ongoing and no trial date has been scheduled.
79
OTHER LITIGATION
On August 16, 2002, we filed a complaint against Motorola, Inc. in an
action captioned Amkor Technology, Inc. v. Motorola, Inc., C.A. No. 02C-08-160
CHT, pending in the Superior Court of the State of Delaware in and for New
Castle County. In this action, we were seeking declaratory judgment relating to
a controversy between us and Motorola concerning: (i) the assignment by Citizen
Watch Co., Ltd. ("Citizen") to us of a Patent License Agreement dated January
25, 1996 between Motorola and Citizen (the "License Agreement") and concurrent
assignment by Citizen to us of Citizen's interest in U.S. Patents 5,241,133 and
5,216,278 (the "'133 and '278 patents"); and (ii) our obligation to make certain
payments pursuant to an immunity agreement (the "Immunity Agreement") dated June
30, 1993 between us and Motorola.
We and Motorola resolved the controversy with respect to all issues
relating to the Immunity Agreement, and all claims and counterclaims filed by
the parties in the case relating to the Immunity Agreement were dismissed or
otherwise disposed of without further litigation. The claims relating to the
License Agreement and the '133 and '278 Patents remained pending.
We and Motorola both filed motions for summary judgment on the remaining
claims, and oral arguments were heard on September 3, 2003. On October 6, 2003,
the Superior Court of Delaware ruled in favor of us and issued an Opinion and
Order granting our motion for summary judgment and denying Motorola's motion for
summary judgment. On October 22, 2003, Motorola filed an appeal in Supreme Court
of Delaware. We believe we will prevail on the same merits in such appeal. In
addition, should Motorola prevail at the appellate level, we believe we have
recourse against Citizen. However, no assurance can be given that an adverse
outcome in the case cannot occur, or that any adverse outcome would not have a
material impact.
Alcatel Business Systems vs. Amkor Technology, Inc., Anam Semiconductor,
Inc.
On November 5, 1999, we agreed to sell certain semiconductor parts to
Alcatel Microelectronics, N.V. ("AME"), a subsidiary of Alcatel S.A. The parts
were manufactured for us by Anam Semiconductor, Inc. ("ASI"). AME transferred
the parts to another Alcatel subsidiary, Alcatel Business Systems ("ABS"), which
incorporated the parts into cellular phone products. In early 2001, a dispute
arose as to whether the parts sold by us were defective. On March 18, 2002, ABS
and its insurer filed suit against us and ASI in the Paris Commercial Court of
France, claiming damages of 50 million Euros (approximately $62.8 million based
on the spot exchange rate at December 31, 2003). We have denied all liability
and intend to vigorously defend ourselves. Additionally, we have entered into a
written agreement with ASI whereby ASI has agreed to indemnify us fully against
any and all loss related to the claims of AME, ABS and ABS' insurer. The Paris
Commercial Court commenced a special proceeding before a technical expert to
report on the facts of the dispute. The report of the court-appointed expert was
put forth on December 31, 2003. The report does not specifically allocate
liability to any particular party. The next proceeding in this matter is
expected in April 2004.
In response to the lawsuit, on May 22, 2002, we filed a petition to compel
arbitration in the United States District Court for the Eastern District of
Pennsylvania (the "Court") against ABS, AME and ABS' insurer, claiming that the
dispute is subject to the arbitration clause of the November 5, 1999 agreement
between us and AME. ABS and ABS' insurer have refused to arbitrate. In August
2003, the Court denied the motion of ABS and its insurer to dismiss our petition
for arbitration. The Court also subsequently denied a motion for reconsideration
filed by ABS. The Court has not yet set a date for final disposition of our
petition.
22. CUSTOMER CONCENTRATIONS AND GEOGRAPHIC INFORMATION
With the commencement of operations of Amkor Iwate and the acquisition of a
packaging and test facility from Toshiba in 2001, total net revenues derived
from Toshiba accounted for 11.6%, 14.7% and 16.3% of our consolidated net
revenues for 2003, 2002 and 2001, respectively. Prior to the sale of our wafer
fabrication services business to ASI in February 2003, we derived 92.8% and
79.4% of our wafer fabrication revenues from Texas Instruments (TI) for 2002 and
2001, respectively. Effective as of February 28, 2003, we obtained a release
from Texas Instruments regarding our contractual obligations with respect to
wafer fabrication services to be performed subsequent to the transfer of the
business to ASI. We restated our historical results to reflect our wafer
fabrication services segment as a discontinued operation (see Note 2).
80
The following table presents net revenues by country based on the location
of the customer:
NET REVENUES
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(IN THOUSANDS)
United States....................... $ 494,425 $ 443,489 $ 449,766
China (including Hong Kong)......... 96,965 72,944 74,406
Ireland............................. 74,206 71,197 76,882
Japan............................... 348,861 322,774 286,919
Singapore........................... 177,981 150,737 151,304
Taiwan.............................. 142,163 108,620 72,930
Other foreign countries............. 269,167 236,417 224,467
-------------- -------------- --------------
Consolidated........................ $ 1,603,768 $ 1,406,178 $ 1,336,674
============== ============== ==============
The following table presents property, plant and equipment, net, based on
the location of the asset:
PROPERTY, PLANT AND EQUIPMENT
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(IN THOUSANDS)
United States....................... $ 60,308 $ 71,728 $ 83,466
Philippines......................... 295,963 281,089 471,302
Korea............................... 527,159 484,938 698,448
Taiwan.............................. 75,473 76,542 90,088
Japan............................... 31,892 39,727 35,074
China............................... 16,537 11,996 9,093
Other foreign countries............. 316 318 148
-------------- -------------- --------------
Consolidated........................ $ 1,007,648 $ 966,338 $ 1,387,619
============== ============== ==============
The following supplementary information presents net revenues allocated by
product family:
NET REVENUES
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(IN THOUSANDS)
Traditional packages................ $ 340,081 $ 391,338 $ 438,557
Advanced packages................... 1,124,251 915,067 790,495
Test................................ 139,436 99,773 107,622
-------------- -------------- --------------
Consolidated........................ $ 1,603,768 $ 1,406,178 $ 1,336,674
============== ============== ==============
81
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
Amkor Technology Philippines, Inc.
We have audited the accompanying balance sheet of Amkor Technology
Philippines, Inc. (the Company, formerly Amkor Technology Philippines (P1/P2),
Inc., a company incorporated under the laws of the Republic of the Philippines)
as of December 31, 2002, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amkor Technology
Philippines, Inc. as of December 31, 2002, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ SYCIP GORRES VELAYO & CO.
Makati City, Philippines
January 15, 2003
82
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY SYCIP GORRES
VELAYO & CO., A MEMBER FIRM OF ARTHUR ANDERSEN, AND HAS NOT BEEN REISSUED BY
SYCIP GORRES VELAYO & CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Stockholders and the Board of Directors
Amkor Technology Philippines (P1/P2), Inc. and
Amkor Technology Philippines (P3/P4), Inc.
We have audited the combined balance sheet of Amkor Technology Philippines
(P1/P2), Inc. and Amkor Technology Philippines (P3/P4), Inc., (companies
incorporated under the laws of the Republic of the Philippines and collectively
referred to as the "Companies") as of December 31, 2001 and 2000, and the
related combined statements of income, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Amkor
Technology Philippines (P1/P2), Inc. and Amkor Technology Philippines (P3/P4),
Inc. as of December 31, 2001 and 2000, and the combined results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ SYCIP GORRES VELAYO & CO.
Makati City, Philippines
March 19, 2002
83
AMKOR TECHNOLOGY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO BALANCE AT
OF PERIOD EXPENSE WRITE-OFFS OTHER END OF PERIOD
---------- ---------- ---------- ---------- -------------
Year ended December 31, 2001:
Allowance for doubtful accounts ...... $ 2,426 $ 4,000 $ (1,037) 1,453 $ 6,842
Year ended December 31, 2002:
Allowance for doubtful accounts ...... $ 6,842 $ 500 $ (220) -- $ 7,122
Year ended December 31, 2003:
Allowance for doubtful accounts ...... $ 7,122 $ -- $ (608) -- $ 6,514
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective September 30, 2003, SyCip Gorres Velayo & Co. ("SGV"), a member
practice of Ernst & Young Global, was replaced as external auditors of our
wholly owned subsidiary, Amkor Technology Philippines, Inc. ("ATP"). SGV became
a member practice of Ernst & Young Global beginning September 1, 2002. SGV was a
member firm of Arthur Andersen at the time it provided its report on the
combined financial statements of Amkor Technology Philippines (P1/P2), Inc. and
Amkor Technology Philippines (P3/P4), Inc., which were the predecessor entities
of ATP. PricewaterhouseCoopers LLP, our principal accountant, relied in its
report on our consolidated financial statements on SGV's report on the financial
statements of ATP as of and for the year ended December 31, 2002 and on SGV's
report on the combined financial statements of ATP's predecessor entities as of
and for the fiscal years ended December 31, 2001 and 2000. The replacement was
approved by the Audit Committee of our board of directors.
PricewaterhouseCoopers has expanded the scope of its services to include the
audit of ATP for the year ending December 31, 2003.
The independent auditors' reports of SGV on the financial statements of ATP
or on the combined financial statements of its predecessor entities during the
two fiscal years ended December 31, 2002 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the two fiscal years ended December 31, 2002 and through September
30, 2003, we had no disagreements with SGV on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which, if not resolved to the satisfaction of SGV, would have caused
it to make a reference to the subject matter of the disagreement in connection
with its reports. During the two fiscal years ended December 31, 2002 and
through September 30, 2003, there have been no "reportable events" as defined in
Item 304(a)(1)(v) of Regulation S-K.
We provided SGV with a copy of this disclosure, and we requested that SGV
furnish us with a letter addressed to the Securities and Exchange Commission
("SEC"), stating whether it agrees with the above statements. A copy of SGV's
letter to the SEC, dated September 30, 2003, is filed as Exhibit 16.1 to this
Form 10-K.
ITEM 9A. CONTROLS AND PROCEDURES
During the fourth quarter of 2003, Amkor management, including the
principal executive officer and principal financial officer, evaluated Amkor's
disclosure controls and procedures related to the recording, processing,
summarization and reporting of information in its periodic reports that Amkor
files with the SEC. These disclosure controls and procedures have been designed
to ensure that (a) material information relating to Amkor, including its
consolidated subsidiaries, is made known to Amkor's management, including these
officers, by other employees of Amkor and its subsidiaries, and (b) this
information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC's rules and forms. Due
to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls could be circumvented by the individual
acts of some persons or by collusion of two or more people. Amkor's controls and
procedures can only provide reasonable, not absolute, assurance that the above
objectives have been met.
Accordingly, as of December 31, 2003, these officers (principal executive
officer and principal financial officer) concluded that Amkor's disclosure
controls and procedures were effective to accomplish their objectives. Amkor
continually strives to improve its disclosure controls and procedures to enhance
the quality of its financial reporting and to maintain dynamic systems that
change as conditions warrant. There was no change in our internal control over
financial reporting that occurred during the period covered by this Annual
Report on Form 10-K that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
85
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names and the ages as of February 29,
2004 of our named executive officers, our significant employee and our incumbent
directors. In January 2004, we announced the promotions of John N. Boruch to the
position of Vice Chairman, Bruce J. Freyman to the positions of President and
Chief Operating Officer and Jooho Kim to the position of Executive Vice
President, Worldwide Manufacturing.
NAME AGE POSITION
- ----------------------------------------------------- --- ----------------------------------------------------
James J. Kim......................................... 68 Chief Executive Officer and Chairman
John N. Boruch....................................... 61 Vice Chairman and Director
Bruce J. Freyman..................................... 43 President and Chief Operating Officer
Kenneth T. Joyce..................................... 56 Executive Vice President and Chief Financial Officer
Oleg Khaykin......................................... 39 Executive Vice President, Corporate Development
Jooho Kim............................................ 51 Executive Vice President, Worldwide Manufacturing
Michael J. Lamble.................................... 48 Corporate Vice President, Worldwide Sales
Winston J. Churchill (1)(2)(3)(4).................... 63 Director
Thomas D. George (1)(4).............................. 63 Director
Gregory K. Hinckley (2)(4)........................... 57 Director
Juergen Knorr........................................ 71 Director
John B. Neff (2)(3)(4)............................... 72 Director
James W. Zug (2)(4).................................. 63 Director
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Nominating and Governance Committee.
(4) Independent directors, as determined by the board of directors.
JAMES J. KIM. James J. Kim, 68, has served as our Chief Executive
Officer and Chairman since September 1997. Mr. Kim founded our predecessor,
Amkor Electronics, Inc., in 1968 and served as its Chairman from 1970 to April
1998. Mr. Kim is a director of Electronics Boutique Holdings Corp., an
electronics retail chain. Mr. James Kim is the brother of Jooho Kim, our
Executive Vice President of Worldwide Manufacturing.
JOHN N. BORUCH. John N. Boruch, 61, has served as our Vice Chairman
since January 2004 and as a director since September 1997. Mr. Boruch joined
Amkor in 1984, and from 1984 to 1992 he was Corporate Vice President in charge
of sales. He was named President in February 1992 and Chief Operating Officer in
September 1997. Prior to joining Amkor, Mr. Boruch was with Motorola, a
communications and electronics company, for 18 years. Mr. Boruch earned a B.A.
in Economics from Cornell University. Mr. Boruch is also a director of the
Fabless Semiconductor Association.
BRUCE J. FREYMAN. Bruce J. Freyman, 43, has served as our Chief
Operating Officer and President since January 2004. Prior to Mr. Freyman's
January 2004 appointment as Chief Operating Officer and President, Mr. Freyman
served in a number of positions at Amkor beginning in 1997, including Corporate
Vice President of Laminate Products and Executive Vice President of
Manufacturing and Product Operations. Before joining Amkor, Mr. Freyman spent
several years with Motorola, last serving as the Semiconductor Packaging Manager
for Motorola's Communications Sector. Mr. Freyman earned an M.B.A. from Florida
Atlantic University, and a B.S. in Chemical Engineering from the University of
Massachusetts.
KENNETH T. JOYCE. Kenneth T. Joyce, 56, has served as our Executive
Vice President and Chief Financial Officer since July 1999. Prior to his
election as our Chief Financial Officer, Mr. Joyce served as our Vice President
and Operations Controller since 1997. Prior to joining our company, he was Chief
Financial Officer of Selas Fluid Processing Corporation, a
86
subsidiary of Linde AG. Mr. Joyce is also former Vice President, Finance and
Chief Financial Officer of Selas Corporation of America (Amex: SLS) and was
responsible for the sale of Selas' Fluid Processing business to Linde AG. Mr.
Joyce began his accounting career in 1971 at KPMG Peat Marwick. Mr. Joyce is a
certified public accountant. Mr. Joyce earned a B.S. in Accounting from Saint
Joseph's University and an M.B.A. in Finance from Drexel University.
OLEG KHAYKIN. Oleg Khaykin, 39, has served as our Executive Vice
President of Corporate Development since joining Amkor in May 2003. Mr. Khaykin
was appointed as an executive officer in January 2004. Prior to joining Amkor,
Mr. Khaykin was the Vice President of Strategy and Business Development for
Conexant Systems Inc./Mindspeed Technologies. Mr. Khaykin also spent eight years
working for The Boston Consulting Group (BCG), a strategic consulting firm. Mr.
Khaykin earned a B.S in Electrical and Computer Engineering with the Highest
University Honors from Carnegie Mellon University and an M.B.A. from
Northwestern University's J.L. Kellogg Graduate School of Management.
JOOHO KIM. Jooho Kim, 51, has served as our Executive Vice President of
Worldwide Manufacturing since January 2004. Prior to his appointment as
Executive Vice President of Worldwide Manufacturing, Mr. Kim served as our
Senior Vice President of Enterprise Infrastructure. Mr. Kim joined Amkor in
February 2001 as Vice President of Business Technology. Prior to joining Amkor,
Mr. Kim was President and Chief Executive Officer of Anam Telecom Inc. in Seoul,
Korea. Mr. Kim earned a Bachelor in Law from KyungHee University, an M.B.A from
Penn State University and a Ph.D. in Business Administration from the University
of Colorado. Mr. Jooho Kim is the brother of James J. Kim, our Chief Executive
Officer and Chairman.
MICHAEL J. LAMBLE. Michael J. Lamble, 48, has served as our Corporate
Vice President of Worldwide Sales since August 2002. Beginning in September
1997, Mr. Lamble was our Senior Vice President of Sales. Mr. Lamble joined Amkor
in December 1992. Prior to joining Amkor, Mr. Lamble was the Vice President and
General Manager for the Materials Division at Heraeus Incorporated responsible
for U.S. manufacturing and sales. Mr. Lamble earned a B.S. in Business from
Santa Clara University.
WINSTON J. CHURCHILL. Winston J. Churchill, 63, has been a director of
our company since July 1998. Mr. Churchill is a managing general partner of SCP
Private Equity Partners, which manages private equity funds for institutional
investors. Mr. Churchill is also Chairman of CIP Capital Management, Inc., an
SBA licensed private equity fund. Previously, Mr. Churchill was a managing
partner of Bradford Associates, which managed private equity funds on behalf of
Bessemer Securities Corporation and Bessemer Trust Company. From 1967 to 1983 he
practiced law at the Philadelphia firm of Saul, Ewing, Remick & Saul where he
served as Chairman of the Banking and Financial Institutions Department,
Chairman of the Finance Committee and was a member of the Executive Committee.
Mr. Churchill is a director of Griffin Land and Nurseries, Inc., Innovative
Solutions and Support, Inc. and of various SCP portfolio companies. In addition,
he serves as a director of a number of charities and as trustee of educational
institutions including Fordham University, Georgetown University, the Gesu
School and the Young Scholars Charter School. From 1989-1993 he served as
Chairman of the Finance Committee of the Pennsylvania Public School Employees'
Retirement System. Mr. Churchill is also an active member of the Council of
Institutional Investors.
THOMAS D. GEORGE. Thomas D. George, 63, has been a director of our
company since November 1997. Mr. George was Executive Vice President, and
President and General Manager, Semiconductor Products Sector ("SPS") of
Motorola, Inc., from April 1993 to May 1997. Prior to that, he held several
positions with Motorola, Inc., including Executive Vice President and Assistant
General Manager, SPS, from November 1992 to April 1993 and Senior Vice President
and Assistant General Manager, SPS, from July 1986 to November 1992. Mr. George
is currently retired, and is a director of Ultratech Stepper.
GREGORY K. HINCKLEY. Gregory K. Hinckley, 57, has been a director of
our company since November 1997. Mr. Hinckley has served as Director, President
and Chief Operating Officer of Mentor Graphics Corporation, an electronics
design automation software company, since November 2000. From January 1997 until
November 2000, he held the position of Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Mentor Graphics Corporation. From
November 1995 until January 1997, he held the position of Senior Vice President
with VLSI Technology, Inc., a manufacturer of complex integrated circuits. From
August 1992 until December 1996, Mr. Hinckley held the position of Vice
President, Finance and Chief Financial Officer with VLSI Technology, Inc.
87
JUERGEN KNORR. Juergen Knorr, 71, has been a director of our company
since February 2001. Dr. Knorr is the former CEO and Group President of Siemens
Semiconductor Group, and a former Member of the Executive Board of Siemens AG.
Following his retirement from Siemens in 1996, Dr. Knorr has taken an active
role in advancing the European semiconductor industry as a member of the Joint
European Submicron Silicon Initiative, as past president of the European
Electronics Components Manufacturer Association, and as president and chairman
of Micro Electronics Development for European Applications (MEDEA).
JOHN B. NEFF. John B. Neff, 72, has been a director of our company
since January 1999. Mr. Neff was portfolio manager for Windsor Fund and Gemini
II mutual fund from 1964 until his retirement in 1995. He was also Senior Vice
President and Managing Partner of Wellington Management, one of the largest
investment management firms in the United States. From 1996 to 1998, Mr. Neff
was a director with Chrysler Corporation. He is a member of the board of
directors of Crown Holdings, Inc. and Greenwich Associates.
JAMES W. ZUG. James W. Zug, 63, has been a director of our company
since January 2003. Mr. Zug retired from PricewaterhouseCoopers LLP in 2000
following a 36-year career at PricewaterhouseCoopers and Coopers & Lybrand. From
1998 until his retirement Mr. Zug was Global Leader -- Global Deployment for
PricewaterhouseCoopers. From 1993 to 1998 Mr. Zug was Managing Director
International for Coopers & Lybrand. PricewaterhouseCoopers is Amkor's
independent accountants; however, Mr. Zug was not involved with servicing Amkor
during his tenure at PricewaterhouseCoopers. Mr. Zug serves on the boards of
directors of Brandywine Fund Inc. and Brandywine Blue Fund Inc. He is also on
the boards of directors of the Philadelphia Orchestra Association, the Kimmel
Center for the Performing Arts, the Episcopal Academy, and the Merion Golf Club.
Mr. Zug served on the boards of directors of SPS Technologies, Inc. and
Stackpole Ltd. prior to the sale of both of these companies in 2003. Mr. Zug has
been recently nominated to the board of directors of Teleflex Inc. and election
is expected to be held during Teleflex Inc.'s annual shareholders' meeting in
April 2004.
CODE OF ETHICS
We have adopted a code of ethics, the Amkor Code of Business Conduct and
Ethical Guidelines, which applies to our chief executive officer, chief
financial officer, controller and all other Amkor employees. In addition, we
have adopted a Code of Ethics applicable to members of our board of directors.
We will provide to any person without charge, upon request, a copy of our codes
of ethics. Such a request should be made in writing and addressed to Corporate
Communications, Amkor Technology, Inc., 1900 South Price Road, Chandler, Arizona
85248. Further, our Amkor Code of Ethics and our Amkor Directors' Code of Ethics
are included as exhibits to this Form 10-K. We intend to disclose any amendments
or waivers to our codes of ethics on our website: www.amkor.com.
BOARD MEETINGS AND COMMITTEES
Our board of directors meets approximately four times a year in regularly
scheduled meetings, but will meet more often if necessary. The board of
directors held four meetings and acted by unanimous written consent on three
occasions during 2003. Each director attended at least 75% of all board and
applicable committee meetings.
The full board of directors considers all major decisions of Amkor.
However, the board of directors has established a compensation committee, an
audit committee and a nominating committee. Both the compensation committee and
audit committee are chaired by an outside director.
COMPENSATION COMMITTEE
The Compensation Committee is presently comprised of Messrs. George and
Churchill. The Compensation Committee: (1) reviews and approves annual salaries,
bonuses, and grants of stock options pursuant to our 1998 Stock Plan and our
2003 Nonstatutory Inducement Grant Stock Plan and (2) reviews and approves the
terms and conditions of all employee benefit plans or changes to these plans.
During 2003, the Compensation Committee met three times apart from regular
meetings with the entire board of directors.
THE AUDIT COMMITTEE
The Audit Committee is comprised of Messrs. Churchill, Hinckley, Neff and
Zug all of whom meet the independence
88
and experience requirements set forth in the Nasdaq rules. The board of
directors has determined that three of our four Audit Committee members, Messrs.
Hinckley, Neff and Zug, qualify as audit committee financial experts, and are
independent, as both are defined by the SEC. The Audit Committee: (1) recommends
to the board of directors the annual appointment of our independent auditors,
(2) discusses and reviews in advance the scope and the fees of the annual audit,
(3) reviews the results of the audit with the independent auditors and discusses
the foregoing with the company's management, (4) reviews and approves non-audit
services of the independent auditors, (5) reviews the activities, organizational
structure and qualifications of the company's internal audit function, (6)
reviews management's procedures and policies relating to the adequacy of our
internal accounting controls and compliance with applicable laws relating to
accounting practices and (7) reviews and discusses with our independent auditors
their independence. The Audit Committee met twelve times apart from regular
meetings with the entire board. In connection with the execution of the
responsibilities of the Audit Committee, including the review of the company's
quarterly earnings prior to the public release of the information, the Audit
Committee members communicated throughout 2003 with the company's management and
independent accountants.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers, Inc. Such officers,
directors and ten-percent stockholders are also required by SEC rules to furnish
Amkor with copies of all forms that they file pursuant to Section 16(a). Based
solely on our review of the copies of such forms received by us, or written
representations from certain reporting persons that no other reports were
required for such persons, Amkor believes that all Section 16(a) filing
requirements applicable to our officers, directors and ten-percent stockholders
were complied with in a timely fashion.
89
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation earned
during each of the three years in the period ending 2003 by our Chief Executive
Officer and our four other most highly compensated employees, which include all
three of our executive officers as of December 31, 2003 other than our Chief
Executive Officer:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION SECURITIES
------------------------------- UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- -------------------------------------- ----------- ------------- ------------- ------------- ---------------
James J. Kim (4)...................... 2003 $ 790,000 $ 2,150,000 1,000,000 $ 9,502
Chief Executive Officer 2002 $ 790,000 $ -- 250,000 $ 8,454
and Chairman 2001 $ 790,000 $ 79,000 250,000 $ 8,173
John N. Boruch (5).................... 2003 $ 580,000 $ 580,000 1,125,000 $ 10,209
Vice Chairman 2002 $ 580,000 $ -- 225,000 $ 9,326
2001 $ 580,000 $ 58,000 175,000 $ 14,780
Bruce J. Freyman (7) ................. 2003 $ 385,000 $ 200,000 650,000 $ 11,300
Chief Operating Officer 2002 $ 385,000 $ -- 200,000 $ 9,807
and President 2001 $ 352,692 $ 35,000 150,000 $ 6,000
Kenneth T. Joyce (6)(7)............... 2003 $ 273,923 $ 200,000 250,000 $ 9,366
Executive Vice President and Chief 2002 $ 235,000 $ -- 70,000 $ 8,286
Financial Officer 2001 $ 235,000 $ 23,500 40,000 $ 106,000
Michael J. Lamble (7)................. 2003 $ 275,000 $ 125,000 260,000 $ 17,415
Corporate Vice President, 2002 $ 257,692 $ -- 50,000 $ 6,000
Worldwide Sales 2001 $ 250,000 $ 25,000 150,000 $ 6,000
- ------------------------
(1) Bonus amounts include incentive compensation earned in the year indicated
but that were approved by our board of directors and paid in the following
year. Payments under the Employee Profit Sharing Plan are for the year
indicated and related to the prior year's results. No incentive
compensation was earned or paid in 2002. 2003 bonus amounts were paid in
2004.
(2) Long-term compensation represents stock options issued under the 1998 Stock
Plan.
(3) All other compensation for all of the named executives includes $6,000 paid
to each executive's 401(k) plan.
(4) All other compensation for Mr. Kim includes a reimbursement for vehicle
expenses.
(5) All other compensation for Mr. Boruch includes a reimbursement for vehicle
expenses and in 2001 imputed loan interest.
(6) All other compensation for Mr. Joyce in 2001 includes a reimbursement for
relocation costs.
(7) All other compensation for Messrs. Freyman, Joyce and Lamble in 2003
includes a reimbursement for vehicle expenses.
90
OPTION GRANTS IN FISCAL 2003
The following table provides information concerning each grant of options
to purchase our common stock made during 2003 to our Chief Executive Officer and
our four other most highly compensated employees, which include all three of our
executive officers as of December 31, 2003 other than our Chief Executive
Officer:
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------ MINUS EXERCISE PRICE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ----------------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
---- --------- ------------ --------- ---------- ---------- ----------
James J. Kim ................... 250,000 (3) 2.2% $10.79 7/19/11 $1,305,555 $3,134,873
Chief Executive Officer and 250,000 (3) 2.2% $10.79 4/4/12 $1,447,126 $3,544,597
Chairman 250,000 (3) 2.2% $10.79 2/22/13 $1,629,993 $4,093,914
250,000 (1) 2.2% $12.40 6/26/13 $1,949,573 $4,940,602
John N. Boruch ................. 350,000 (3) 3.1% $10.79 5/1/09 $1,253,348 $2,833,919
Vice Chairman 150,000 (3) 1.3% $10.79 2/4/11 $ 730,939 $1,733,352
175,000 (3) 1.6% $10.79 4/4/12 $1,012,988 $2,481,218
225,000 (3) 2.0% $10.79 2/22/13 $1,466,994 $3,684,522
225,000 (1) 2.0% $12.40 6/26/13 $1,754,616 $4,446,541
Bruce J. Freyman ............... 150,000 (3) 1.3% $10.79 2/4/11 $ 730,939 $1,733,352
Chief Operating Officer and 150,000 (3) 1.3% $10.79 4/4/12 $ 868,276 $2,126,758
President 200,000 (3) 1.8% $10.79 2/22/13 $1,303,995 $3,275,131
150,000 (1) 1.3% $12.40 6/26/13 $1,169,744 $2,964,361
Kenneth T. Joyce ............... 40,000 (3) 0.4% $10.79 2/4/11 $ 194,917 $ 462,227
Executive Vice President and 40,000 (3) 0.4% $10.79 4/4/12 $ 231,540 $ 567,135
Chief Financial Officer 70,000 (3) 0.6% $10.79 2/22/13 $ 456,398 $1,146,296
100,000 (1) 0.9% $12.40 6/26/13 $ 779,829 $1,976,241
Michael J. Lamble............... 25,000 (3) 0.2% $10.79 2/4/11 $ 121,823 $ 288,892
Corporate Vice President, 15,000 (3) 0.1% $10.79 10/26/11 $ 81,533 $ 197,257
Worldwide Sales 100,000 (3) 0.9% $10.79 1/2/12 $ 558,368 $1,357,934
30,000 (3) 0.3% $10.79 4/4/12 $ 173,655 $ 425,352
70,000 (1) 0.6% $12.40 6/26/13 $ 545,881 $1,383,368
20,000 (3) 0.2% $10.79 9/5/13 $ 139,542 $ 355,895
- --------------------
(1) 25% of shares subject to the option become exercisable one year after the
date of grant and an additional 1/48 of such shares subject to the option
becoming exercisable each month thereafter.
(2) Potential realizable value is based on the assumption that: (1) our common
stock will appreciate at the compound annual rate shown from the date of
grant until the expiration of the option term and (2) that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price. We assume stock appreciation of 5% and 10% pursuant to
rules promulgated by the Securities and Exchange Commission, and these
percentages do not reflect our estimate of future stock price growth.
(3) These options were granted pursuant to a voluntary stock option replacement
program initiated on November 8, 2002. This program allowed employees and
members of our board of directors to surrender their existing options and
to receive new option grants six months and one day after the tendered
options were cancelled. On June 16, 2003, we issued these new option grants
equal to the same number of shares surrendered by the employees and members
of our board of directors. The exercise price is $10.79 per share, equal to
the fair market value of common stock as of the new grant date. The vesting
term of these new options are similar to the tendered options except the
new options contain an additional one-year vesting period prior to any
options becoming exercisable.
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YEAR-END OPTION VALUES
The following table shows the number of shares covered by both exercisable
and non-exercisable stock options held by our Chief Executive Officer and our
four other most highly compensated employees as of December 31, 2003, which
include all three of our executive officers as of December 31, 2003 other than
our Chief Executive Officer. Also reported are the values for "in-the-money"
options which represent the positive spread between the exercise price of any
such existing stock options and the year-end price of our common stock.
NUMBER OF SECURITIES DOLLAR VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2003 DECEMBER 31, 2003
ACQUIRED VALUE --------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
James J. Kim ................... -- -- -- 1,000,000 $ -- $ 6,947,500
Chief Executive Officer and
Chairman
John N. Boruch ................. -- -- 147,735 1,125,000 $ 1,503,733 $ 7,906,500
Vice Chairman
Bruce J. Freyman................ -- -- 153,854 650,000 $ 1,344,475 $ 4,536,000
Chief Operating Officer and
President
Kenneth T. Joyce ............... -- -- 23,000 250,000 $ 179,740 $ 1,676,500
Executive Vice President and
Chief Financial Officer
Michael J. Lamble............... -- -- 114,869 285,835 $ 1,006,286 $ 1,926,300
Corporate Vice President,
Worldwide Sales
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OPTION REPRICING
On November 8, 2002, we initiated a voluntary stock option replacement
program. This program allowed employees and members of our board of directors to
surrender existing options and to receive new option grants six months and one
day after the tendered options were cancelled. On June 16, 2003, we issued new
option grants equal to the same number of shares surrendered. The exercise price
is $10.79 per share, equal to the fair market value of common stock as of the
new grant date. The vesting term of these new options are similar to the
tendered options except the new options contain an additional one-year vesting
period prior to any options becoming exercisable. The following table shows the
number of shares re-granted on June 16, 2003 to our Chief Executive Officer and
our four other most highly compensated employees, which include all three of our
executive officers as of December 31, 2003 other than our Chief Executive
Officer:
LENGTH OF ORIGINAL
NUMBER OF SECURITIES EXERCISE PRICE OPTION
UNDERLYING MARKET PRICE OF STOCK AT TIME OF NEW EXERCISE TERM REMAINING AT
NAME DATE OPTIONS REPRICED AT TIME OF REPRICING REPRICING PRICE DATE OF REPRICING
---- ------- -------------------- --------------------- -------------- ------------ -----------------
James J. Kim.................. 6/16/03 250,000 $10.79 $35.54 $10.79 7.1 Years
Chief Executive Officer 6/16/03 250,000 $10.79 $16.36 $10.79 7.8 Years
and Chairman 6/16/03 250,000 $10.79 $13.00 $10.79 8.7 Years
John N. Boruch................ 6/16/03 350,000 $10.79 $11.00 $10.79 4.8 Years
Vice Chairman 6/16/03 150,000 $10.79 $43.25 $10.79 6.6 Years
6/16/03 175,000 $10.79 $14.88 $10.79 7.8 Years
6/16/03 225,000 $10.79 $13.00 $10.79 8.7 Years
Bruce J. Freyman.............. 6/16/03 150,000 $10.79 $43.25 $10.79 6.6 Years
Chief Operating Officer 6/16/03 150,000 $10.79 $14.88 $10.79 7.8 Years
and President 6/16/03 200,000 $10.79 $13.00 $10.79 8.7 Years
Kenneth T. Joyce.............. 6/16/03 40,000 $10.79 $43.25 $10.79 6.6 Years
Executive Vice President 6/16/03 40,000 $10.79 $14.88 $10.79 7.8 Years
and Chief Financial Officer 6/16/03 70,000 $10.79 $13.00 $10.79 8.7 Years
Michael J. Lamble............. 6/16/03 25,000 $10.79 $43.25 $10.79 6.6 Years
Corporate Vice President, 6/16/03 15,000 $10.79 $18.13 $10.79 7.4 Years
Worldwide Sales 6/16/03 100,000 $10.79 $14.63 $10.79 7.5 Years
6/16/03 30,000 $10.79 $14.88 $10.79 7.8 Years
6/16/03 20,000 $10.79 $ 2.00 $10.79 9.2 Years
COMPENSATION COMMITTEE REPORT ON REPRICING
We grant stock options to officers, employees, and directors in order to
incent such persons in their provision of services to us. The Compensation
Committee believes that such equity incentives are a significant factor in our
ability to attract, retain and motivate officers, employees, and directors who
are critical to our business plan and long-term success. As a result of the
decline in the fair market value our common stock in the several months prior to
November 8, 2002, many of our officers, employees and directors held stock
options with exercise prices substantially in excess of the fair market value
our common stock. It was the view of the Compensation Committee that stock
options with exercise prices substantially above the fair market value of our
common stock were viewed negatively by, and provided little incentive to, the
holders of these options.
After considering various alternatives to address employee retention,
compensation incentives and long-term compensation issues, the Compensation
Committee approved the option exchange program described above. In approving
this exchange program, the Compensation Committee was of the opinion that the
disparity between the original exercise prices of the outstanding stock options
and the fair market value of our common stock did not provide a meaningful
incentive or retention device to the service providers holding such stock
options. The Compensation Committee therefore decided that offering the option
exchange program was in the best interests of Amkor and its stockholders.
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Under the exchange program, employees and members of our board of directors
could elect to surrender their existing options and be granted new options no
earlier than six months and one day after the tendered options were cancelled.
Pursuant to the terms and conditions of the offer to exchange, a total of 1,633
eligible employees participated. On June 16, 2003, we granted 6,978,563 shares
of our common stock under the 1998 Stock Plan and 35,000 shares of our common
stock under the 1998 Director Option Plan for the options tendered by eligible
employees and members of our board of directors and accepted by Amkor. For
options that were granted under the previously existing 1998 French Plan, which
was terminated in April 2003, and that were surrendered pursuant to voluntary
stock option replacement program, we granted an additional 248,200 replacement
options under the 1998 Stock Plan. We have issued new option grants equal to the
same number of shares surrendered by the employees. The exercise price of the
new options was $10.79, which was equal to the fair market value of our stock
price on the date of grant. The vesting term of these new options are similar to
the tendered options except the new options contain an additional one-year
vesting period prior to any options becoming exercisable.
MEMBERS OF THE COMPENSATION COMMITTEE
Winston J. Churchill
Thomas D. George
DIRECTOR COMPENSATION
We do not compensate directors who are also employees or officers of our
company for their services as directors. Non-employee directors, however, are
eligible to receive: (1) an annual retainer of $25,000 as of January 2003, (2)
$2,000 per meeting of the board of directors that they attend, (3) $2,000 per
meeting of a committee of the board of directors that they attend and (4) $500
per non-regularly scheduled telephonic meeting of the board of directors in
which they participate. We also reimburse non-employee directors for travel and
related expenses incurred by them in attending board and committee meetings.
1998 Director Option Plan: Our board of directors adopted the 1998 Director
Option Plan (the "Director Plan") in January 1998. A total of 300,000 shares of
common stock have been reserved for issuance under the Director Plan. The option
grants under the Director Plan are automatic and non-discretionary. As of
January 1, 2003, the Director Plan provides for an initial grant of options to
purchase 20,000 shares of common stock to each new non-employee director of the
company when such individual first becomes an outside director. In addition,
each non-employee director will automatically be granted subsequent options to
purchase 10,000 shares of common stock on each date on which such director is
re-elected by the stockholders of the company, provided that as of such date
such director has served on the board of directors for at least six months. The
exercise price of the options is 100% of the fair market value of the common
stock on the grant date. The term of each option is ten years and each option
granted to a non-employee director vests over a three year period. The Director
Plan will terminate in January 2008 unless sooner terminated by the board of
directors.
If all or substantially all of our assets are sold to another entity or we
merge with or into another corporation or entity, the acquiring entity or
corporation may either assume all outstanding options under the Director Plan or
may substitute equivalent options. Following an assumption or substitution, if
the director is terminated other than upon a voluntary resignation, any assumed
or substituted options will vest and become exercisable in full. If the
acquiring entity does not either assume all of the outstanding options under the
Director Plan or substitute an equivalent option, each option issued under the
Director Plan will immediately vest and become exercisable in full. The Director
Plan will terminate in January 2008 unless sooner terminated by the board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Churchill and
George. No member of the Compensation Committee was an officer or employee of
Amkor or any of Amkor's subsidiaries during fiscal 2003. None of Amkor's
Compensation Committee members or executive officers has served on the board of
directors or on the compensation committee of any other entity one of whose
executive officers served on our board of directors or on our Compensation
Committee.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of January 31, 2004 by:
- - each person or entity who is known by us to beneficially own 5% or more of
our outstanding common stock;
- - each of our directors; and
- - each Named Executive Officer as of fiscal year end.
BENEFICIAL OWNERSHIP(a)
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OWNERSHIP
---------------- ------ ---------
James J. Kim Family Control Group (b)............................................... 73,238,641 41.8%
1345 Enterprise Drive
West Chester, PA 19380
Winston J. Churchill (c)............................................................ 30,000 *
Thomas D. George (d)................................................................ 40,001 *
Gregory K. Hinckley (e)............................................................. 38,001 *
Dr. Juergen Knorr (f)............................................................... -- *
John B. Neff (g).................................................................... 125,001 *
James W. Zug (h).................................................................... 11,767 *
John N. Boruch (i).................................................................. 208,547 *
Kenneth T. Joyce (j)................................................................ 41,548 *
Bruce J. Freyman (k)................................................................ 180,963 *
Michael J. Lamble (l)............................................................... 132,233 *
All directors and Named Executive Officers (m)...................................... 74,046,702 42.2%
* Represents less than 1%.
(a) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. The information is not necessarily indicative of beneficial
ownership for any other purpose. Under this rule, beneficial ownership
includes any share over which the individual or entity has voting power or
investment power. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of our common
stock subject to options held by that person that will be exercisable on or
before March 31, 2004 are deemed outstanding. Unless otherwise indicated,
each person or entity has sole voting and investment power with respect to
shares shown as beneficially owned.
(b) Represents 29,727,093 shares held by James J. and Agnes C. Kim; 139,516
shares issuable upon the conversion of convertible debt held by Mrs. Kim
that is convertible on or before March 31, 2004; 14,457,344 shares held by
the David D. Kim Trust of December 31, 1987, 14,457,344 shares held by the
John T. Kim Trust of December 31, 1987; 6,257,344 shares held by the Susan
Y. Kim Trust of December 31, 1987; and 8,200,000 shares held by the Trust
of Susan Y. Kim dated April 16, 1998 established for the benefit of Susan
Y. Kim's minor children, with Susan Y. Kim as the Trustee. James J. and
Agnes C. Kim are husband and wife and, accordingly, each may be deemed to
beneficially own shares of our common stock held in the name of the other.
David D. Kim, John T. Kim and Susan Y. Kim are children of James J. and
Agnes C. Kim. Each of the David D. Kim Trust of December 31, 1987, John T.
Kim Trust of December 31, 1987 and Susan Y. Kim Trust of December 31, 1987
has in common Susan Y. Kim and John F.A. Earley as co-trustees, in addition
to a third trustee (John T. Kim in the case of the Susan Y. Kim Trust and
the John T. Kim Trust, and David D. Kim in the case of the David D. Kim
Trust) (the trustees of each trust may be deemed to be the beneficial
owners of the shares held by such trust). All of the above-referenced
trusts, together with their respective trustees and James J. and Agnes C.
Kim may be
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considered a "group" under Section 13(d) of the Exchange Act on the basis
that the trust agreement for each of these trusts encourages the trustees
of the trusts to vote the shares of our common stock held by them, in their
discretion, in concert with James Kim's extended family. This group may be
deemed to have beneficial ownership of 73,238,641 shares or approximately
41.8% of the outstanding shares of our common stock. Each of the foregoing
persons stated that the filing of their beneficial ownership reporting
statements shall not be construed as an admission that such person is, for
the purposes of Section 13(d) or 13(g) of the Exchange Act, the beneficial
owner of the shares of our common stock reported as beneficially owned by
the other such persons.
(c) Includes 20,000 shares issuable upon the exercise of stock options that are
exercisable by Mr. Churchill on or before March 31, 2004.
(d) Includes 30,001 shares issuable upon the exercise of stock options that are
exercisable by Mr. George on or before March 31, 2004.
(e) Includes 30,001 shares issuable upon the exercise of stock options that are
exercisable by Mr. Hinckley on or before March 31, 2004.
(f) Dr. Knorr has no stock options which are exercisable on or before March 31,
2004.
(g) Includes 25,001 shares issuable upon the exercise of stock options that are
exercisable by Mr. Neff on or before March 31, 2004.
(h) Includes 6,667 shares issuable upon the exercise of stock options that are
exercisable by Mr. Zug on or before March 31, 2004.
(i) Includes 158,392 shares issuable upon the exercise of stock options that
are exercisable by Mr. Boruch on or before March 31, 2004.
(j) Includes 23,000 shares issuable upon the exercise of stock options that are
exercisable by Mr. Joyce on or before March 31, 2004.
(k) Includes 153,854 shares issuable upon the exercise of stock options that
are exercisable by Mr. Freyman on or before March 31, 2004.
(l) Includes 117,994 shares issuable upon the exercise of stock options that
are exercisable by Mr. Lamble on or before March 31, 2004.
(m) Includes 564,910 shares issuable upon the exercise of stock options that
are exercisable on or before March 31, 2004.
EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December
31, 2003:
(c)
(a) NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE (b) FOR FUTURE ISSUANCE
ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLAN
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES
OPTIONS OPTIONS REFLECTED IN COLUMN (a))
---------------- ----------------- -----------------------
Equity compensation plans approved by stockholders........ 15,618,070 $11.84 78,675 (1)-(3)
Equity compensation plans not approved by stockholders.... 171,500 $17.12 128,500 (4)
(1) Includes 18,502 options which were reserved for issuance under the
1998 Stock Plan and 60,000 options which were reserved for issuance
under the 1998 Director Option Plan. The 1998 Stock Option Plan for
French Employees terminated in April 2003 and, accordingly, no options
were reserved for issuance at December 31, 2003. On November 8, 2002,
we initiated a voluntary stock option replacement program such that
employees and members of our board of directors could elect to
surrender their existing options and be granted new options no earlier
than six months and one day after the tendered options were cancelled.
Pursuant to the terms and conditions of the offer to exchange, a total
of 1,633 eligible employees participated. On June 16, 2003, we granted
6,978,563 shares of our common stock under the 1998 Plan and 35,000
shares of our common stock under the Director's Plan for the options
tendered by eligible employees and members of our board of directors
and accepted by our company. For options that were previously granted
under the 1998 French Plan and were surrendered pursuant to this
program, we granted an additional 248,200 replacement options under
the 1998 Plan. We have issued new option grants equal to the same
number of shares surrendered by the employees. The exercise price of
the new options was $10.79, which was
96
equal to the fair market value of our stock price on the date of
grant. The vesting term of these new options are similar to the
tendered options except the new options contain an additional one-year
vesting period prior to any options becoming exercisable.
(2) As of December 31, 2003, 173 shares of common stock were available for
sale under the 1998 Employee Stock Purchase Plan; and there is a
provision for an annual replenishment to bring the number of shares of
common stock available for sale under such plan up to 1,000,000 as of
each January 1. On January 1, 2004, 999,827 additional shares were
made available pursuant to the annual replenishment provision.
(3) As of December 31, 2003, a total of 18,502 shares were reserved for
issuance under the 1998 Stock Plan, and there is a provision for an
annual replenishment to bring the number of shares of common stock
reserved for issuance under the plan up to 5,000,000 as of each
January 1. On January 1, 2004, 4,981,498 additional shares were made
available pursuant to the annual replenishment provision.
(4) On September 9, 2003, we adopted the 2003 Nonstatutory Inducement
Grant Stock Plan (the "2003 Plan"). The 2003 Plan generally provides
for the grant to employees, directors and consultants of stock options
and stock purchase rights. The 2003 Plan terminates at the discretion
of the Board of Directors. As of December 31, 2003, a total of 128,500
shares were available for issuance under the 2003 Plan, and there is a
provision for an annual replenishment to bring the number of shares of
common stock reserved for issuance under the plan to 300,000 as of
each January 1. On January 1, 2004, 171,500 additional shares were
made available pursuant to the annual replenishment provision.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have had a long-standing relationship with Anam Semiconductor, Inc.
("ASI"). ASI was founded in 1956 by Mr. H. S. Kim, the father of Mr. James Kim,
our Chairman and Chief Executive Officer. Through our supply agreements with
ASI, we historically had a first right to substantially all of the packaging and
test services capacity of ASI and the exclusive right to all of the wafer output
of ASI's wafer fabrication facility. With our acquisition of K1, K2 and K3 in
May 2000, we no longer received packaging and test services from ASI. Under the
wafer fabrication services supply agreement which was consummated in January
1998 and terminated as of February 28, 2003, we had the exclusive right but not
the requirement to purchase all of the wafer output of ASI's wafer fabrication
facility on pricing terms negotiated annually. As part of our strategy to sell
our investment in ASI and to divest our wafer fabrication services business, we
entered into a series of transactions beginning in the second half of 2002:
- - In September 2002, we sold 20 million shares of ASI common stock to Dongbu
Group in exchange for 5700 Korean won per share, the market value of ASI
common stock as traded on the Korean Stock Exchange at the time we entered
into the share sale agreement. We received $58.1 million in net cash
proceeds and 42 billion won (approximately $34.2 million based on the spot
exchange rate on the closing date) of interest bearing notes from Dongbu
Corporation payable in two equal principal payments in September 2003 and
February 2004. The Dongbu Group comprises Dongbu Corporation, Dongbu Fire
Insurance Co., Ltd. and Dongbu Life Insurance Co., Ltd., all of which are
Korean corporations and are collectively referred to herein as "Dongbu."
Associated with this transaction, we recorded a $1.8 million loss.
Additionally, we divested one million shares of ASI common stock in
connection with the payment of certain advisory fees related to this
transaction. On September 30, 2003, we received 21 billion won
(approximately $18.3 million based on the September 30, 2003 spot exchange
rate), consisting of the principal amount due under the notes from Dongbu.
The remaining principal, or 21 billon won (approximately $17.8 million
based on the spot exchange rate on the transaction date), was received
on February 10, 2004.
- - In separate transactions designed to facilitate a future merger between ASI
and Dongbu, (i) we acquired a 10% interest in Acqutek from ASI for $1.9
million, the market value of the shares as publicly traded in Korea; (ii)
we acquired the Precision Machine Division ("PMD") of Anam Instruments, a
related party to Amkor, for $8 million, its fair value; and (iii) Anam
Instruments, which had been partially owned by ASI, utilized the proceeds
from the sale of PMD to us to buy back all of the Anam Instruments shares
owned by ASI. Acqutek supplies materials to the semiconductor industry and
is publicly traded in Korea. An entity controlled by the family of James
Kim, our Chairman and Chief Executive Officer, held a 25% ownership
interest in Acqutek at the time of our acquisition of our interest in
Acqutek. We have historically purchased and continue to purchase leadframes
from Acqutek. On September 17, 2003, we sold our entire ownership interest
in Acqutek. PMD supplies sophisticated die mold systems and tooling to the
semiconductor industry and historically over 90% of its sales were to
Amkor. We determined the fair value of PMD based on projected cash flows
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discounted at a rate commensurate with the risk involved. At the time of
our acquisition of PMD, Anam Instruments was owned 20% by ASI and 20% by a
family member of James Kim.
- - On February 28, 2003, we sold our wafer fabrication services business to
ASI for $62 million. We negotiated the fair value of our wafer fabrication
services business with ASI and Dongbu. The parties calculated fair value
based on an assessment of projected cash flows discounted at a rate
commensurate with the risk involved. We obtained a release from Texas
Instruments regarding our contractual obligations with respect to wafer
fabrication services to be performed subsequent to the transfer of the
business to ASI.
Each of the transactions with Dongbu, ASI and Anam Instruments are
interrelated and it is possible that if each of the transactions were viewed on
a stand-alone basis without regard to the other transactions, we could have had
different conclusions as to fair value. It is likely that we would not have
entered into the Acqutek or PMD transactions absent the share sale to Dongbu and
the sale of the wafer fabrication services business to ASI. Had these
transactions not been interrelated, we may have utilized a different negotiation
strategy for the investment in Acqutek and the acquisition of PMD, which could
have resulted in us reaching a different conclusion of the fair value of both of
these transactions.
Pursuant to the definitive agreements, (1) Amkor and Dongbu agreed to use
reasonable best efforts to cause Dongbu Electronics and ASI to be merged
together as soon as practicable, (2) Amkor and Dongbu agreed to cause ASI to use
the proceeds ASI received from its sale of stock to Dongbu to purchase shares in
Dongbu Electronics and (3) Amkor and Dongbu agreed to use their best efforts to
provide releases and indemnifications to the chairman, directors and officers of
ASI, either past or incumbent, from any and all liabilities arising out of the
performance of their duties at ASI between January 1, 1995 and December 31,
2001. The last provision would provide a release and indemnification for James
Kim, our CEO and Chairman, and members of his family. We are not aware of any
claims or other liabilities which these individuals would be released from or
for which they would receive indemnification.
At January 1, 2001 and 2002 Amkor owned 42% of ASI's voting stock. During
2002, we divested 21 million shares of ASI stock and at December 31, 2002 Amkor
owned 26.7 million shares of ASI or 21%. The carrying value of our investment in
ASI at December 31, 2002 was $77.5 million, or $2.90 per share. Beginning March
24, 2003, we ceased accounting for our investment in ASI under the equity method
of accounting and commenced accounting for our investment as a marketable
security that is available for sale. As of December 31, 2003, we owned 14.7
million shares of ASI, or 12% of ASI's voting stock. The carrying value of our
remaining investment in ASI at December 31, 2003, including an unrealized gain
of $10.0, was $50.4 million, or $3.43 per share. We intend to sell our remaining
investment in ASI. The ultimate level of proceeds from the sale of our remaining
investment in ASI could be less than the current carrying value.
We have had other relationships with ASI affiliated companies for
construction services and equipment. We believe each of these transactions was
conducted on an arms-length basis in the ordinary course of business. Total
purchases from ASI and its affiliates for the years ended December 31, 2003,
2002 and 2001 were $31.1 million, $212.6 million and $161.6 million.
Construction services and equipment purchases received from ASI and its
affiliates capitalized during the years ended December 31, 2002 and 2001 were
$2.8 million and $14.7 million, respectively. We received less than $0.1 million
of construction services from ASI and its affiliates during 2003.
Total purchases from Acqutek included in cost of revenue for 2003, 2002 and
2001 were $16.1 million, $16.0 million and $14.0 million, respectively, which we
believe were conducted on an arms-length basis in the ordinary course of
business.
We entered into indemnification agreements with our officers and directors.
These agreements contain provisions which may require us, among other things, to
indemnify the officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature). We also
agreed to advance them any expenses for proceedings against them that we agreed
to indemnify them from.
As of December 31, 2003, Mr. James Kim and members of his immediate family
beneficially owned approximately 42% of our outstanding common stock.
Amkor Electronics, Inc. (AEI), which was merged into our company just prior
to the initial public offering of our company in May 1998, elected to be taxed
as an S Corporation under the provisions of the Internal Revenue Code of 1986
and comparable state tax provisions. As a result, AEI did not recognize U.S.
federal corporate income taxes. Instead, the stockholders of AEI were taxed on
their proportionate share of AEI's taxable income. Accordingly, no provision for
U.S.
98
federal income taxes was recorded for AEI. Just prior to the initial public
offering, AEI terminated its S Corporation status at which point the profits of
AEI became subject to federal and state income taxes at the corporate level. We
consummated a tax indemnification agreement between us, our predecessor and
James Kim and his family (collectively, the "Kim Family"). James Kim, is our
founder and significant stockholder, and currently serves as our Chairman and
CEO. Under the terms of the tax indemnification agreement, Amkor indemnifies the
former owners of AEI for the settlement of AEI's S Corporation federal and state
tax returns and any adjustments to the reported taxable income. At the time AEI
was converted to a C Corporation, AEI and the Kim Family identified certain
federal and state tax overpayments associated with the results of AEI during S
Corporation status years and AEI, in May 1998, paid such amounts to the Kim
Family. These amounts, which principally related to the finalization of AEI's
federal tax return, were reflected as a receivable from stockholders in the
stockholders' equity section of our balance sheets. As the refunds were paid by
the associated taxing authorities and received by the Kim Family, the Kim
Family, in turn, remitted the funds to Amkor. During 2002, $0.4 million of tax
refunds were received by the Kim Family and used to pay down the stockholder
receivables. During the fourth quarter of 2003, the receivable was collected in
full.
At December 31, 2002, other noncurrent assets included $6.0 million for the
cash surrender value of life insurance policies in which the beneficiary was our
Chairman and CEO. In December 2003, our Chairman and CEO paid to us $6.0 million
for this asset, the book value and fair value of the asset at that time, and
accordingly, no balance exists at December 31, 2003.
We lease office space in West Chester, Pennsylvania from certain of our
stockholders. The lease expires in 2006. We have the option to extend the lease
for an additional 10 years through 2016. Amounts paid for this lease in 2003
were $1.1 million. Our sublease income includes $0.5 million in each of the
three years ended December 31, 2003 from a company in which certain related
parties have ownership interests.
In January 1998, we loaned $120,000 to Mr. Boruch, our President and Chief
Operating Officer, which was repaid in full in 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers LLP has served as our independent accountants since
2000. The following table shows the fees paid or accrued by us for the fiscal
years 2003 and 2002. Certain 2002 amounts have been reclassified to conform to
the current year presentation:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Audit fees........................................................................ $ 1,549 $ 1,453
Audit-related fees (a)............................................................ 56 53
Tax fees (b)...................................................................... 58 52
All other fees.................................................................... -- --
---------- ---------
Total.......................................................................... $ 1,663 $ 1,558
========== =========
(a) Audit-related fees consist primarily of fees associated with employee
benefit plan audits, accounting consultations; as well as due
diligence related activity performed during 2002.
(b) Tax fees consist primarily of fees associated with tax compliance
services.
Our Audit Committee is required to pre-approve the audit and non-audit
services performed by our principal accountants, PricewaterhouseCoopers LLP, in
accordance with the Amkor Audit and Non-Audit Services Pre-Approval Policy. This
policy provides for pre-approval of audit, audit-related, tax services and other
services specifically described by the Audit Committee. The policy also provides
for the general approval of additional individual engagements, which, if they
exceed certain pre-established thresholds, must be separately approved by the
Audit Committee. This policy authorizes the Audit Committee to delegate to one
or more of its members pre-approval authority with respect to permitted
services, provided that any such pre-approval decisions must be reported to the
Audit Committee. 100% of the above principal accountant services were approved
by the Audit Committee during 2003, which concluded that the provision of such
services by PricewaterhouseCoopers LLP was compatible with the maintenance of
that firm's independence in the conduct of its auditing functions.
99
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and schedule filed as part of this Annual Report
on Form 10-K are listed in the index under Item 8.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K with the Securities and Exchange
Commission during the quarterly period ended December 31, 2003:
Current Report on Form 8-K dated September 30, 2003 (filed October 2, 2003)
related to the changes in registrant's certifying accountant whereby the
external auditors of a wholly owned subsidiary were replaced with the company's
principal independent accountants, PricewaterhouseCoopers LLP.
Current Report on Form 8-K/A filed October 17, 2003 amending the Current
Report on Form 8-K dated and filed on March 27, 2003 filing the amended
consolidated financial statements of Anam Semiconductor, Inc. for each of the
three years ended December 31, 2002.
Current Report on Form 8-K dated and filed October 27, 2003 related to a
press release dated October 27, 2003 announcing our financial results for the
third quarter ended September 30, 2003.
Current Report on Form 8-K dated filed November 3, 2003 (filed November 4,
2003) related to the announcement of the plan to offer shares of common stock in
an underwritten public offering pursuant to an existing shelf registration on
Form S-3.
Current Report on Form 8-K dated November 5, 2003 (filed November 12, 2003)
related to the pricing of its public offering of shares of common stock, par
value $0.001 per share, at a price of $19.00 per share.
(c) Exhibits
3.1 Certificate of Incorporation. (1)
3.2 Certificate of Correction to Certificate of Incorporation. (4)
3.3 Restated Bylaws. (4)
4.1 Specimen Common Stock Certificate. (3)
4.2 Convertible Subordinated Notes Indenture dated as of May 13, 1998
between the Registrant and State Street Bank and Trust Company,
including form of 5 3/4% Convertible Subordinated Notes due 2003. (3)
4.3 Senior Notes Indenture dated as of May 13, 1999 between the Registrant
and State Street Bank and Trust Company, including form of 9 1/4% Senior
Note Due 2006. (5)
4.4 Senior Subordinated Notes Indenture dated as of May 6, 1999 between the
Registrant and State Street Bank and Trust Company, including form of 10
1/2% Senior Subordinated Note Due 2009. (5)
4.5 Convertible Subordinated Notes Indenture dated as of March 22, 2000
between the Registrant and State Street Bank and Trust Company,
including form of 5% Convertible Subordinated Notes due 2007. (6)
4.6 Registration Agreement between the Registrant and the Initial Purchasers
named therein dated as of March 22, 2000. (6)
4.7 Indenture dated as of February 20, 2001 for 9-1/4% Senior Notes due
February 15, 2008. (7)
4.8 Registration Rights Agreement dated as of February 20, 2001 by and among
Amkor Technology, Inc., Salomon Smith Barney Inc. and Deutsche Banc
Alex. Brown Inc. (7)
4.9 Convertible Subordinated Notes Indenture dated as of May 25, 2001
between the Registrant and State Street Bank and Trust Company, as
Trustee, including the form of the 5.75% Convertible Subordinated Notes
due 2006. (8)
4.10 Registration Rights Agreement between the Registrant and Initial
Purchasers named therein dated as of May 25, 2001. (8)
100
4.11 Amended and restated credit agreement dated as of March 30, 2001 between
the Registrant and the Initial Lenders and Initial Issuing Banks and
Salomon Smith Barney Inc., Citicorp USA, Inc. and Deutsche Banc Alex.
Brown, Inc. (8)
4.12 Amendment No. 1 to the Amended and restated credit agreement dated as of
March 30, 2001 between the Registrant and the Initial Lenders and
Initial Issuing Banks and Salomon Smith Barney Inc., Citicorp USA, Inc.
and Deutsche Banc Alex. Brown, Inc. (8)
4.13 Amendment No. 2 to the Amended and restated credit agreement dated as of
March 30, 2001 between the Registrant and the Initial Lenders and
Initial Issuing Banks and Salomon Smith Barney, Inc., Citicorp USA, Inc.
and Deutsche Banc Alex. Brown, Inc. (9)
4.14 Amendment No. 3 to the Amended and restated credit agreement dated as of
June 24, 2002 between the Registrant and the Issuing Banks and Salomon
Smith Barney, Inc., Citicorp USA, Inc. and Deutsche Banc Alex. Brown,
Inc. (10)
4.15 Amendment No. 4 to the Amended and restated credit agreement dated as of
September 26, 2002 between the Registrant and the Issuing Banks and
Salomon Smith Barney, Inc., Citicorp USA, Inc. and Deutsche Banc Alex.
Brown, Inc. (11)
4.16 Indenture, Amkor Technology, Inc. 7.75% Senior Notes due May 15, 2013,
dated May 9, 2003. (13)
4.17 Registration Rights Agreement dated as of May 8, 2003, between Amkor
Technology, Inc. and Citigroup Global Markets Inc., Deutsche Bank
Securities, Inc. and J.P. Morgan Securities, Inc. (15)
10.1 Form of Indemnification Agreement for directors and officers. (3)
10.2 1998 Stock Plan and form of agreement thereunder. (3)
10.3 Form of Tax Indemnification Agreement between Amkor Technology, Inc.,
Amkor Electronics, Inc. and certain stockholders of Amkor Technology,
Inc. (3)
10.4 Commercial Office Lease between the 12/31/87 Trusts of Susan Y., David
D. and John T. Kim and Amkor Electronics, Inc., dated October 1, 1996.
(1)
10.5 Commercial Office Lease between the 12/31/87 Trusts of Susan Y., David
D., and John T. Kim and Amkor Electronics, Inc., dated June 14, 1996.
(1)
10.6 Contract of Lease between Corinthian Commercial Corporation and
Amkor/Anam Pilipinas Inc., dated October 1, 1990. (1)
10.7 Contract of Lease between Salcedo Sunvar Realty Corporation and
Automated Microelectronics, Inc., dated May 6, 1994. (1)
10.8 Lease Contract between AAP Realty Corporation and Amkor/Anam Advanced
Packaging, Inc., dated November 6, 1996. (1)
10.9 Immunity Agreement between Amkor Electronics, Inc. and Motorola, Inc.,
dated June 30, 1993. (1)
10.10 1998 Director Option Plan and form of agreement thereunder. (1)
10.11 1998 Employee Stock Purchase Plan. (3)
10.12 1998 Stock Option Plan for French Employees. (1)
10.13 Loan Agreement between Amkor Electronics, Inc. and John Boruch dated
January 30, 1998. (2)
10.14 Share Sale and Purchase Agreement between the Registrant and Dongbu
Corporation dated as of July 10, 2002. (10)
10.15 Shareholders Agreement between the Registrant, Dongbu Corporation,
Dongbu Fire Insurance Co., Ltd., and Dongbu Life Insurance Co., Ltd.
dated as of July 29, 2002. (10)
10.16 Amendment to share sale and purchase agreement and shareholders
agreement the Registrant and Dongbu Corporation dated as of September
27, 2002. (11)
10.17 Business Transfer Agreement between Amkor Technology Limited, Anam
Semiconductor, Inc., Anam USA, Inc. and the Registrant dated as of
January 27, 2003. (12)
10.18 Assignment and Assumption Agreement between the Registrant, Anam
Semiconductor, Inc. and Texas Instruments Incorporated dated as of
February 28, 2003. (12)
10.19 Purchase Agreement, Amkor Technology, Inc. $425 million 7.75% Senior
Notes Due May 15, 2013. (13)
10.20 2003 Nonstatutory Inducement Grant Stock Plan dated September 9, 2003.
(14)
10.21 Amendment No. 1 to Second Amended and Restated Credit Agreement dated
October 17, 2003. (14)
12.1 Computation of Ratio of Earnings to Fixed Charges
14.1 Amkor Technology, Inc. Code of Business Conduct and Ethical Guidelines
14.2 Amkor Technology, Inc. Director Code of Ethics
16.1 Letter from SyCip Gorres Velayo & Co. to the SEC, dated September 30,
2003.
21.1 List of subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Sycip Gorres Velayo & Co., a member practice of Ernst & Young
Global
23.3 Consent of Sycip Gorres Velayo & Co., a member firm of Arthur Andersen.
(16)
101
23.4 Consent of Samil Accounting Corporation
31.1 Certification of James J. Kim, Chief Executive Officer of Amkor
Technology, Inc., Pursuant to Rule 13a - 14(a) under the Securities
Exchange Act of 1934
31.2 Certification of Kenneth T. Joyce, Chief Financial Officer of Amkor
Technology, Inc., Pursuant to Rule 13a - 14(a) under the Securities
Exchange Act of 1934.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed October 6, 1997 (File No. 333-37235).
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 6, 1997, as amended on December 31, 1997 (File No.
333-37235).
(3) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 6, 1997, as amended on March 31, 1998 (File No.
333-37235).
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on April 8, 1998, as amended on August 26, 1998 (File No.
333-49645).
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 17, 1999.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 30, 2000.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2001.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 14, 2001.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 14, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 14, 2002.
(11) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 14, 2002.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 27, 2003.
(13) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 9, 2003.
(14) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 3, 2003.
(15) Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on July 10, 2003.
(16) The financial statements of Amkor Technology Philippines (P1/P2), Inc.
and Amkor Technology Philippines (P3/P4), Inc., consolidated subsidiaries of the
Registrant, for each of the two years in the period ended December 31, 2002,
have been audited by the independent public accountants Sycip Gorres Velayo &
Co., a member firm of Arthur Andersen, (referred to herein as Arthur Andersen).
However, the Registrant has been unable to obtain the written consent of Arthur
Andersen with respect to the incorporation by reference of such financial
statements in the Registrant's Registration Statements on Form S-3 (File Nos.
333-39642 and 333-81334) and Form S-8 filings (File Nos. 333-62891, 333-63430,
333-76254, 333-86161, 333-100814 and 333-104601) (collectively, the
"Registration Statements". Therefore, the Registrant has dispensed with the
requirement to file the written consent of Arthur Andersen in reliance upon Rule
437a of the Securities Act of 1933, as amended. As a result, you may not be able
to recover damages from Arthur Andersen under Section 11 of the Securities Act
of 1933, as amended, for any untrue statements of material fact or any omissions
to state a material fact, if any, contained in the financial statements of the
registrant for the aforementioned financial statements which are incorporated by
reference in the Registration Statements.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed, on its behalf by the undersigned, thereunto duly authorized.
AMKOR TECHNOLOGY, INC.
By: /s/ James J. Kim
--------------------------------------
James J. Kim
Chairman and Chief Executive Officer
Date: March 4, 2004
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James J. Kim and Kenneth Joyce, and each
of them, his attorneys-in-fact, and agents, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents of any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ James J. Kim Chief Executive Officer and Chairman March 4, 2004
- -------------------------------
James J. Kim
/s/ John N. Boruch Vice Chairman and Director March 4, 2004
- -------------------------------
John N. Boruch
/s/ Bruce J. Freyman President March 4, 2004
- -------------------------------
Bruce J. Freyman
/s/ Kenneth T. Joyce Chief Financial Officer March 4, 2004
- ------------------------------- (Principal Financial and Accounting Officer)
Kenneth T. Joyce
/s/ Winston J. Churchill Director March 4, 2004
- -------------------------------
Winston J. Churchill
/s/ Thomas D. George Director March 4, 2004
- -------------------------------
Thomas D. George
/s/ Gregory K. Hinckley Director March 4, 2004
- -------------------------------
Gregory K. Hinckley
103
NAME TITLE DATE
---- ----- ----
/s/ John B. Neff Director March 4, 2004
- -------------------------------
John B. Neff
/s/ Juergen Knorr Director March 4, 2004
- -------------------------------
Juergen Knorr
/s/ James W. Zug Director March 4, 2004
- -------------------------------
James W. Zug
104