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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-29472
AMKOR TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 23-1722724
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1345 ENTERPRISE DRIVE
WEST CHESTER, PA 19380
(610) 431-9600
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock as of
May 1, 2004 was 174,666,140.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2004 2003
------------------ ------------------
(UNAUDITED)
Net revenues............................................................................. $ 464,646 $ 343,131
Cost of revenues ........................................................................ 352,798 296,562
------------------ ------------------
Gross profit............................................................................. 111,848 46,569
------------------ ------------------
Operating expenses:
Selling, general and administrative................................................ 52,178 41,423
Research and development........................................................... 8,977 7,609
Resolution of legal dispute (see Note 14).......................................... 1,500 --
Amortization of acquired intangibles............................................... 1,328 2,030
Loss on disposal of fixed assets, net.............................................. 8 69
------------------ ------------------
Total operating expenses..................................................... 63,991 51,131
------------------ ------------------
Operating income (loss) ................................................................. 47,857 (4,562)
------------------ ------------------
Other expense (income):
Interest expense, net.............................................................. 33,290 35,862
Foreign currency loss (gain)....................................................... 75 (925)
Other expense, net................................................................. 1,789 1,229
------------------ ------------------
Total other expense.......................................................... 35,154 36,166
------------------ ------------------
Income (loss) before income taxes, equity in loss of investees,
minority interest and discontinued operations...................................... 12,703 (40,728)
Equity in loss of investees.............................................................. -- (3,628)
Minority interest ....................................................................... (358) 149
------------------ ------------------
Income (loss) from continuing operations before income taxes............................. 12,345 (44,207)
------------------ ------------------
Provision (benefit) for income taxes..................................................... 1,435 (4,177)
------------------ ------------------
Income (loss) from continuing operations................................................. 10,910 (40,030)
------------------ ------------------
Discontinued operations (see Note 2):
Income from wafer fabrication services business, net of tax........................ -- 3,047
Gain on sale of wafer fabrication services business, net of tax.................... -- 51,519
------------------ ------------------
Income from discontinued operations................................................ -- 54,566
------------------ ------------------
Net income ............................................................................. $ 10,910 $ 14,536
================== ==================
Per Share Data:
Basic and diluted income (loss) per common share from continuing operations........ $ 0.06 $ (0.24)
Basic and diluted income per common share from discontinued operations............. -- 0.33
------------------ ------------------
Net income per common share........................................................ $ 0.06 $ 0.09
================== ==================
Shares used in computing basic income (loss) per common share 174,622 165,156
================== ==================
Shares used in computing diluted income (loss) per common share 180,202 165,156
================== ==================
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
------------------ ------------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 345,496 $ 313,259
Accounts receivable:
Trade, net of allowance of $5,298 in 2004 and $6,514 in 2003.............. 284,825 310,096
Other ....................................................................... 5,636 4,413
Inventories ....................................................................... 112,406 92,439
Other current assets............................................................... 38,445 49,606
------------------ ------------------
Total current assets................................................... 786,808 769,813
------------------ ------------------
Property, plant and equipment, net....................................................... 1,131,503 1,007,648
------------------ ------------------
Investments ............................................................................. 55,860 51,181
------------------ ------------------
Other assets:
Goodwill ....................................................................... 626,596 629,850
Acquired intangibles............................................................... 39,877 37,730
Other ........................................................................... 74,357 67,601
Assets of discontinued operations (see Note 2)..................................... -- 96
------------------ ------------------
740,830 735,277
------------------ ------------------
Total assets........................................................... $ 2,715,001 $ 2,563,919
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................................................... $ 535 $ 2,690
Short-term borrowings and current portion of long-term debt........................ 22,488 28,665
Trade accounts payable............................................................. 280,401 230,396
Accrued expenses................................................................... 166,810 170,145
------------------ ------------------
Total current liabilities.............................................. 470,234 431,896
Long-term debt ....................................................................... 1,734,407 1,650,707
Other noncurrent liabilities............................................................. 87,296 78,974
------------------ ------------------
Total liabilities...................................................... 2,291,937 2,161,577
------------------ ------------------
Commitments and contingencies
Minority interest ....................................................................... 1,564 1,338
------------------ ------------------
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 174,665 in 2004 and 174,508 in 2003................ 175 175
Additional paid-in capital......................................................... 1,319,010 1,317,164
Accumulated deficit................................................................ (920,626) (931,536)
Accumulated other comprehensive income............................................. 22,941 15,201
------------------ ------------------
Total stockholders' equity............................................. 421,500 401,004
------------------ ------------------
Total liabilities and stockholders' equity............................. $ 2,715,001 $ 2,563,919
================== ==================
The accompanying notes are an integral part of these statements.
3
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK RECEIVABLE
--------------- PAID-IN ACCUMULATED FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER
------- ------ ----------- ----------- -----------
Balance at December 31, 2002........... 165,156 $ 166 $ 1,170,227 $ (933,734) $ (2,887)
Net income.......................... -- -- -- 14,536 --
Unrealized loss on investments,
net of tax....................... -- -- -- -- --
Cumulative translation adjustment... -- -- -- -- --
Comprehensive income................
------- ------ ----------- ----------- -----------
Balance at March 31, 2003.............. 165,156 $ 166 $ 1,170,227 $ (919,198) $ (2,887)
======= ====== =========== =========== ===========
Balance at December 31, 2003........... 174,508 $ 175 $ 1,317,164 $ (931,536) $ --
Net income.......................... -- -- -- 10,910 --
Unrealized gain on investments,
net of tax....................... -- -- -- -- --
Cumulative translation adjustment... -- -- -- -- --
Comprehensive income................
Issuance of stock through stock
compensation plans............... 157 -- 1,846 -- --
------- ------ ----------- ----------- -----------
Balance at March 31, 2004.............. 174,665 $ 175 $ 1,319,010 $ (920,626) $ --
======= ====== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) TOTAL INCOME
------------- --------- -------------
Balance at December 31, 2002........... $ (2,405) $ 231,367
Net income.......................... -- 14,536 $ 14,536
Unrealized loss on investments,
net of tax....................... (4,904) (4,904) (4,904)
Cumulative translation adjustment... (188) (188) (188)
-------------
Comprehensive income................ $ 9,444
------------- --------- =============
Balance at March 31, 2003.............. $ (7,497) $ 240,811
============= =========
Balance at December 31, 2003........... $ 15,201 $ 401,004
Net income.......................... -- 10,910 $ 10,910
Unrealized gain on investments,
net of tax....................... 4,679 4,679 4,679
Cumulative translation adjustment... 3,061 3,061 3,061
-------------
Comprehensive income................ $ 18,650
=============
Issuance of stock through stock
compensation plans............... -- 1,846
------------- ---------
Balance at March 31, 2004.............. $ 22,941 $ 421,500
============= =========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------------ ------------
(UNAUDITED)
Cash flows from continuing operating activities:
Income (loss) from continuing operations......................................................... $ 10,910 $ (40,030)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities --
Depreciation and amortization................................................................. 52,397 57,793
Amortization of deferred debt issuance costs.................................................. 2,390 2,080
Provision for excess and obsolete inventory................................................... 376 869
Deferred income taxes......................................................................... 443 (884)
Equity in loss of investees................................................................... -- 3,628
Loss on disposal of fixed assets, net......................................................... 8 69
Other losses on investments, net ............................................................. -- 2,201
Loss on debt redemption premium payment....................................................... 1,687 --
Minority interest............................................................................. 358 (149)
Changes in assets and liabilities excluding effects of acquisition --
Accounts receivable........................................................................... 27,176 19,293
Other receivables............................................................................. (1,220) 1,102
Inventories................................................................................... (20,108) 2,811
Other current assets.......................................................................... (6,950) 710
Other non-current assets...................................................................... (3,613) 5,415
Accounts payable.............................................................................. 48,137 (34,331)
Accrued expenses.............................................................................. 7,893 6,520
Other long-term liabilities................................................................... 4,345 2,367
------------ ------------
Net cash provided by operating activities.................................................. 124,229 29,464
------------ ------------
Cash flows from continuing investing activities:
Purchases of property, plant and equipment....................................................... (170,838) (16,571)
Acquisition, net of cash acquired................................................................ (12,858) --
Proceeds from the sale of property, plant and equipment.......................................... 685 514
Proceeds from the sale of investments............................................................ -- 19,541
Purchase of investments.......................................................................... -- (6,777)
Proceeds from note receivable.................................................................... 18,627 --
------------ ------------
Net cash used in investing activities...................................................... (164,384) (3,293)
------------ ------------
Cash flows from continuing financing activities:
Net change in bank overdrafts and short-term borrowings.......................................... (7,550) (1,968)
Net proceeds from issuance of long-term debt..................................................... 249,007 --
Payments of long-term debt, including redemption premium payment................................. (171,551) (5,899)
Proceeds from issuance of stock through stock compensation plans................................. 1,846 --
------------ ------------
Net cash provided by (used in) financing activities........................................ 71,752 (7,867)
------------ ------------
Effect of exchange rate fluctuations on cash and cash equivalents related to continuing operations.. 544 (207)
------------ ------------
Cash flows from discontinued operations:
Net cash provided by operating activities........................................................ 96 19,727
Net cash provided by investing activities........................................................ -- 2,412
Net cash used in financing activities............................................................ -- --
------------ ------------
Net cash provided by discontinued operations............................................... 96 22,139
------------ ------------
Net increase in cash and cash equivalents........................................................... 32,237 40,236
Cash and cash equivalents, beginning of period...................................................... 313,259 311,249
------------ ------------
Cash and cash equivalents, end of period............................................................ $ 345,496 $ 351,485
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................................................... $ 27,519 $ 31,390
Income taxes.................................................................................. $ 11,781 $ 4,028
The accompanying notes are an integral part of these statements.
5
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation. The consolidated financial statements and related
disclosures as of March 31, 2004 and for the three months ended March 31, 2004
and 2003 are unaudited, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In our opinion, these financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the results for the interim periods. These financial statements
should be read in conjunction with our latest annual report as of December 31,
2003 filed on Form 10-K with the Securities and Exchange Commission. The results
of operations for the three months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the full year. Certain previously
reported amounts have been reclassified to conform with the current
presentation.
Risks and Uncertainties. Our future results of operations involve a number
of risks and uncertainties. Factors that could affect future 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, capital expenditure requirements, 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.
Consolidation of Variable Interest Entities. 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, in
accordance with FIN 46, we consolidated these Philippine realty corporations
within our financial statements and have elected not to restate prior periods.
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.
The creditors of the Philippine realty corporations have no recourse to the
general credit of Amkor Technology, Inc., the primary beneficiary of these
variable interest entities.
Recent Accounting Pronouncements. 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 our plans, the new disclosures were effective for interim
periods ending after December 15, 2003. The adoption of SFAS No. 132 (revised
2003) did not have a material effect on our financial position, results of
operations, or cash flows.
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. 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 and per share amounts would have been decreased.
The following table illustrates the effect on net income and per share
amounts as if the fair value based method had been applied to all outstanding
and unvested awards in each period.
6
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2004 2003
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
Net income, as reported...................................................... $ 10,910 $ 14,536
Deduct: Total stock-based employee compensation determined
under fair value based method, net of related tax effects................. 7,757 7,259
------------------ ----------------
Net income, pro forma........................................................... $ 3,153 $ 7,277
================== ================
Earnings per share:
Basic and diluted:
As reported............................................................ $ 0.06 $ 0.09
Pro forma.............................................................. $ 0.02 $ 0.04
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 THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------------- -----------
Expected life (in years)........................................................ 4 4
Risk-free interest rate......................................................... 2.5% 2.4%
Volatility...................................................................... 56% 90%
Dividend yield.................................................................. -- --
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. Beginning with the
first quarter of 2003, we reflect our wafer fabrication services segment as a
discontinued operation and have restated our historical results. In connection
with the disposition of our wafer fabrication business, we recorded, during the
three months ended March 31, 2003, $1.0 million in severance and other exit
costs to close our wafer fabrication services operations in Boise, Idaho and
Lyon, France. Also, during the three months ended March 31, 2003 we recognized a
pre-tax gain on the disposition of our wafer fabrication services business of
$58.6 million ($51.5 million, net of tax), which is reflected in income from
discontinued operations. The carrying value of the sold net assets associated
with the business as of February 28, 2003 was $2.4 million. Assets of our
discontinued operations at December 31, 2003 included $0.1 million of accounts
receivable.
A summary of the results from discontinued operations for the three months ended
March 31, 2003 are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
--------------------------
(IN THOUSANDS)
Net sales......................................................................... $ 34,636
Gross profit...................................................................... 3,451
Operating income.................................................................. 3,455
Gain on sale of wafer fabrication services business............................... 58,600
Interest ......................................................................... --
Other (income) expense............................................................ (11)
Tax expense ($7.1 million associated with gain on sale of the business in 2003)... 7,500
Net income from discontinued operations........................................... 54,566
3. ACQUISITION OF MINORITY INTEREST IN AMKOR IWATE CORPORATION
In January 2004 we acquired the remaining 40% ownership interest in Amkor
Iwate Corporation ("AIC") from Toshiba for 1.4 billion Japanese yen, or $12.9
million based on the exchange rate on the date of payment, bringing our total
ownership
7
percentage to 100%. AIC provides packaging and test services principally to
Toshiba's Iwate factory under a long-term supply agreement, which terminates in
January 2006. The difference between the purchase price of $12.9 million and the
carrying value of the minority interest liability of $11.9 million was recorded
as an adjustment to the carrying values of the assets and liabilities of AIC.
This step acquisition adjustment was recorded based on the proportion of the
minority interest acquired as follows:
(IN MILLIONS)
Reduction of minority interest liability........................................ $ 11.9
Property, plant and equipment .................................................. 2.4
Acquired intangible assets...................................................... 3.3
Adjustment to previously existing goodwill...................................... (4.1)
Deferred tax liability.......................................................... (0.6)
-------------
Cash paid for minority interest acquisition..................................... $ 12.9
=============
For the three months ended March 31, 2003, we recorded AIC minority interest
expense of $0.8 million associated with Toshiba's then existing ownership
interest. The results of our acquisition have been included in the accompanying
consolidated financial statements since the acquisition date.
4. OUR INVESTMENT IN ANAM SEMICONDUCTOR, INC. (ASI)
At January 1, 2003, we owned 26.7 million shares, or 21%, of ASI voting
common stock. The carrying value of our investment in ASI at January 1, 2003 was
$77.5 million, or $2.90 per share. 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 an available for sale marketable security. Including this
transaction, we have completed the following transactions to continue the
liquidation of our investment in ASI during 2003 and 2004:
- - 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. As a result of these transactions, we
owned 14.7 million shares of ASI, or 12% of ASI's voting stock, at March
31, 2004. The carrying value of our remaining investment in ASI at March
31, 2004, including an unrealized gain of $4.7, was $55.1 million, or
$3.74 per share.
- - In April 2004, we sold 10.1 million shares of ASI common stock for
approximately $49.7 million, or $4.91 per share, based on the spot
exchange rate as of the transaction dates, reducing our ownership to
approximately 4%. The pre-tax gain related to this transaction is $21.6
million and will be recorded as other expense (income) during the second
quarter of 2004.
5. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory of $17.0
million and $18.7 million at March 31, 2004 and December 31, 2003, respectively,
consist of raw materials and purchased components that are used in the
semiconductor packaging process.
8
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(IN THOUSANDS)
Raw materials and purchased components.......................................... $ 92,361 $ 77,775
Work-in-process................................................................. 20,045 14,664
--------- ------------
$ 112,406 $ 92,439
========= ============
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
--------------- --------------
(IN THOUSANDS)
Land .......................................................................... $ 109,248 $ 103,610
Buildings and improvements...................................................... 578,241 556,106
Machinery and equipment......................................................... 1,757,455 1,640,471
Furniture, fixtures and other equipment......................................... 165,312 155,719
Construction in progress........................................................ 4,150 2,355
--------------- --------------
2,614,406 2,458,261
Less -- Accumulated depreciation and amortization............................... (1,482,903) (1,450,613)
--------------- --------------
$ 1,131,503 $ 1,007,648
=============== ==============
7. ACQUIRED INTANGIBLES
Acquired intangibles consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
-------------- --------------
(IN THOUSANDS)
Patents and technology rights................................................... $ 66,323 $ 62,899
Less -- Accumulated amortization................................................ (26,446) (25,169)
-------------- --------------
$ 39,877 $ 37,730
============== ==============
Amortization expense was $1.3 million and $2.0 million for the three
months ended March 31, 2004 and 2003, 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.
8. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------------ ------------------
(IN THOUSANDS)
Marketable securities classified as available for sale:
ASI (ownership of 12% at March 31, 2004
and December 31, 2003) (see Note 4)....................................... $ 55,059 $ 50,397
Other marketable securities classified as available for sale................. 694 677
------------------ ------------------
Total marketable securities............................................... 55,753 51,074
Equity investments.............................................................. 107 107
------------------ ------------------
$ 55,860 $ 51,181
================== ==================
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
9
MARCH 31, DECEMBER 31,
2004 2003
-------------- ------------
(IN THOUSANDS)
Accrued income taxes............................................................ $ 30,563 $ 39,779
Accrued interest................................................................ 32,253 34,681
Accrued payroll................................................................. 24,871 27,238
Other accrued expenses.......................................................... 79,123 68,447
-------------- ------------
$ 166,810 $ 170,145
============== ============
10. RESTRUCTURING RESERVES
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.
Of the total $28.6 million restructuring charges recorded in 2002, $1.9
million and $2.2 million remained outstanding as of March 31, 2004 and December
31, 2003, respectively, and is reflected in accrued expenses and other
noncurrent liabilities. The outstanding liability is principally future lease
payments of which $0.7 million is expected be paid during the remainder of 2004.
The remaining lease payments are expected to be paid through 2007 unless the
leases can be terminated earlier. During the three months ended 2004, the
restructuring reserve was reduced by $0.3 million for cash expenditures.
11. DEBT
Following is a summary of short-term borrowings and long-term debt:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(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...... -- --
9.25% Senior notes due February 2008................................................ 470,500 470,500
7.75% Senior notes due May 2013..................................................... 425,000 425,000
7.125% Senior notes due March 2011, net of unamortized discount of $1.7 million..... 248,315 --
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.................................................. 233,000 233,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share.................................................. 146,422 146,422
Other debt.......................................................................... 33,658 35,725
------------ ------------
1,756,895 1,679,372
Less -- Short-term borrowings and current portion of long-term debt (22,488) (28,665)
------------ ------------
$ 1,734,407 $ 1,650,707
============ ============
In March 2004, we sold $250.0 million of 7.125% senior notes due March
2011. The notes were priced at 99.321% of the $250.0 million face value,
yielding an effective interest rate of 7.25%. We sold these notes to qualified
institutional investors, used the net proceeds of the issuance to satisfy in
full our outstanding term loan due 2006 of $168.7 million and used the remainder
of the proceeds for general corporate purposes, including working capital and
capital expenditures. The notes have a coupon rate of 7.125 % annually and
interest payments are due semi-annually. In connection with the satisfaction of
the term loan, we recorded charges during the first quarter of 2004 of $1.7
million for the associated premiums paid and $1.0 million for the associated
unamortized deferred debt issuance costs. In connection with the offering of
these notes, we entered into a registration rights agreement with the
purchasers. The registration rights agreement will entitle the purchasers,
within 210 days from the original issuance, to exchange their notes for
registered notes with substantially identical terms as the original notes.
Other debt as of March 31, 2004 and December 31, 2003 includes our foreign
debt principally related to our operations in Japan and Taiwan. Our foreign debt
includes fixed and variable debt maturing between 2004 and 2010, with the
substantial
10
majority maturing in 2004. As of March 31, 2004, 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 $0.7 million and $1.8 million for the three
months ended March 31, 2004 and 2003, respectively, in the accompanying
consolidated statements of income.
12. PENSION AND SEVERANCE PLANS
Our Philippine and Taiwan subsidiaries sponsor defined benefit plans that
cover substantially all of their respective 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:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------------ -----------
(IN THOUSANDS)
Service cost of current period.................................................. $ 552 $ 602
Interest cost on projected benefit obligation................................... 391 362
Expected return on plan assets.................................................. (15) (60)
Amortization of transition obligation........................................... 15 15
Gain............................................................................ (206) (118)
------------ -----------
Total pension expense.............................................. $ 737 $ 801
============ ===========
For the three months ended March 31, 2004, nothing was contributed to fund
the Philippine pension plan. We presently anticipate contributing $3.2 million
in 2004 to fund the Philippine pension plan.
The components of net periodic pension cost for the Taiwan defined benefit
plan are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------------ -----------
(IN THOUSANDS)
Service cost of current period.................................................. $ 873 $ 710
Interest cost on projected benefit obligation................................... 82 78
Expected return on plan assets.................................................. (82) (81)
Amortization of transition obligation........................................... 2 2
Loss............................................................................ 7 20
------------ -----------
Total pension expense.............................................. $ 882 $ 729
============ ===========
For the three months ended March 31, 2004, $0.1 million was contributed to
fund the Taiwan pension plan. We presently anticipate contributing an additional
$0.8 million, for an estimated total of $0.9 million in 2004, to fund the Taiwan
pension 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. For the three months ended March 31, 2004 and 2003, the provision
(benefit) recorded for severance benefits was $4.3 and ($1.5), respectively. The
balance recorded in long-term liabilities for accrued severance was $69.6 and
$65.3 at March 31, 2004 and December 31, 2003, respectively.
13. EARNINGS PER SHARE
11
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic EPS is computed using only the weighted
average number of common shares outstanding for the period, while diluted EPS is
computed assuming conversion of all dilutive securities, such as options,
convertible debt and warrants. For the three months ended March 31, 2004, we
included approximately 5.6 million shares of common stock equivalents for
outstanding stock options in the computation of diluted earnings per share. For
the three months ended March 31, 2004, potentially dilutive securities related
to our convertible notes and warrants of 9.2 million and 3.9 million,
respectively, were antidilutive and therefore excluded from the diluted earnings
per share calculation. The warrants expire during May 2004. For the three months
ended March 31, 2003, we excluded from the computation of diluted earnings per
share potentially dilutive securities which would have an antidilutive effect on
EPS due. As of March 31, 2003, the total number of potentially dilutive
securities outstanding was 6.1 million, 11.7 million and 3.9 million for
outstanding options, convertible notes and warrants for common stock,
respectively.
14. COMMITMENTS AND CONTINGENCIES
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd ("Citizen"). In connection with this acquisition, we were
required to make certain additional payments one year from the closing. Pending
the resolution of a controversy relating to patents acquired from Citizen, we
are withholding payment of 1.4 billion yen ($13.3 million based on the spot
exchange rate at March 31, 2004).
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. 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.
Associated with our sale of ASI common stock to Dongbu Group ("Dongbu")
during 2002, we and Dongbu agreed to use our 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. The maximum amount of future payments is
generally unlimited. 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 March 31, 2004, we have outstanding $1.6 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
We have become party to an increased number of litigation matters relative
to our historic levels. Much of our recent
12
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. The parties engaged in discovery
activities. Fujitsu has indicated that it may seek damages in excess of $100
million. In November 2003, Fujitsu filed an action against Cirrus Logic,
Sumitomo Bakelite and us entitled Fujitsu Limited v. Cirrus Logic, Inc., et al.,
Case 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,
the Court has granted a stay of the action pending in the Northern District
Court of California in favor of the action pending in the Santa Clara Superior
Court, where discovery is ongoing and a trial is scheduled to begin on January
31, 2005. On March 29, 2004, we filed a motion to dismiss Fujitsu's amended
complaint in the Superior Court. On April 2, 2004, we also filed a motion to
dismiss Cirrus Logic's cross-complaint. The hearing on our motions to dismiss is
scheduled to take place on May 4, 2004. If necessary, we intend to deny all
liability, to file cross-claims against Sumitomo Bakelite, and to seek judgment
in our favor 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 and Seagate Technology International ("Seagate") and
Atmel Corporation and Atmel Sarl ("Atmel") in the Superior Court of California,
Santa Clara County, Case No. 1-02-CV809883. 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 answered Atmel's cross-complaint, denying all liability, and 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
amended cross-complaint, granting Atmel 30 days to file an amended pleading.
Atmel filed its Second Amended Cross-Complaint on or about March 12, 2004. On
April 13, 2004, we filed an answer denying all liability to Atmel. We filed a
motion to dismiss ChipPAC's cross-complaint on February 13, 2004; ChipPAC has
indicated its intent to file an amended cross-complaint by April 27, 2004. If
appropriate, we may seek to dismiss ChipPAC's amended pleading, and otherwise
intend to deny all liability to ChipPAC. 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"),
in the Superior Court of California, Santa Clara County, Case No.
1-02-CV-808650. Philips' cross-complaint sought 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
13
denied all liability in this matter and also asserted a cross-complaint against
Sumitomo Bakelite. Sumitomo Bakelite has denied any liability. The parties
completed fact discovery and most expert discovery. Maxtor and Philips reached a
settlement of Maxtor's claims against Philips on or about April 28, 2004.
Philips and Amkor reached resolution on Philips' claims against us on April 29,
2004, pursuant to which we agreed to pay Philips $1.5 million within 15 days
plus a contingent amount ranging between $0.0 and $2.0 million based on the
resolution of Philips' claims against Sumitomo Bakelite. For the three months
ended March 31, 2004, we recorded a charge of $1.5 million in Resolution of
Legal Dispute in our consolidated statement of income associated with this
resolution. The trial of Philips' claims against Sumitomo Bakelite is scheduled
to start on August 2, 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, Case No. 1-03-CV-001310. 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 filed an amended pleading on or about April 26, 2004. We
intend to file a motion to dismiss Maxim's amended complaint, to deny all
liability to Maxim and to file cross-claims against Sumitomo Bakelite. 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, Case No. 1-02-CV-810034. 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. The Superior Court granted our motion to dismiss on March 16, 2004,
giving Fairchild thirty days to file a further amended pleading. Fairchild filed
a third amended complaint on or about April 15, 2004. We intend to file a motion
to dismiss Fairchild's third amended pleading. We otherwise 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. The appeal was argued on March 9, 2004, and we are awaiting the
Court's decision. 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.
14
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 $60.9 million based
on the spot exchange rate at March 31, 2004). 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. A hearing was held on April 28, 2004, and
a ruling is expected within 30 days of this date.
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.
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 July 2004.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the federal securities laws, including but not limited to statements
regarding: (1) the condition and growth of the industry in which we operate,
including trends toward increased outsourcing, reductions in inventory and
demand and selling prices for our services, (2) our anticipated capital
expenditures and financing needs, (3) our belief as to our future capacity
utilization rates, revenue, gross margins and operating performance and (4)
other statements that are not historical facts. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue," or the negative of these terms or other comparable
terminology. Because such statements include risks and uncertainties, actual
results may differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
following discussion as well as in "Risk Factors that May Affect Future
Operating Performance." The following discussion provides information and
analysis of our results of operations for the three months ended March 31, 2004
and our liquidity and capital resources. You should read the following
discussion in conjunction with our consolidated financial statements and the
related notes, included elsewhere in this quarterly report as well as other
reports we file with the Securities and Exchange Commission.
COMPANY OVERVIEW
Amkor is one of the world's largest subcontractor of semiconductor
packaging and test services. The company has built a leading position by:
- Providing a broad portfolio of packaging and test technologies and
services;
- Maintaining a leading role in the design and development of new
package and test technologies;
- Cultivating long-standing relationships with customers, including
many of the world's leading semiconductor companies;
- Developing expertise in high-volume manufacturing; and
- Diversifying our operational scope by establishing production
capabilities in China, Japan and Taiwan, in addition to
long-standing capabilities in Korea and the Philippines.
The semiconductors that we package and test for our customers ultimately
become components in electronic systems used in communications, computing,
consumer, industrial, automotive and military applications. Our customers
include, among others, Agilent Technologies, Atmel Corporation, Conexant
Systems, Inc., Infineon Technologies AG, Intel Corporation, Philips Electronics
N.V., Samsung Electronics Corporation LTD, ST Microelectronics PTE, Texas
Instruments Inc. and Toshiba Corporation. The outsourced semiconductor packaging
and test market is very competitive. We also compete with the internal
semiconductor packaging and test capabilities of many of our customers, 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.
16
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 17% 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
for 2004. 2004 is projected to increase by more than 20% over 2003. 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.
We currently expect packaging and test revenue for the second quarter of
2004 to be around 5% to 8% higher than packaging and test revenues for the first
quarter of 2004. We expect that second 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.
Supply shortages for critical components may occur in the future and in such an
event, component prices could increase, and gross margin 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.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain continuing operating data as a
percentage of net revenues for the periods indicated:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
----------- ------------
(UNAUDITED)
Net revenues.................................................................... 100.0% 100.0%
Gross profit ................................................................... 24.1 13.6
Operating income (loss)......................................................... 10.3 (1.3)
Income (loss) before income taxes, equity in loss
of investees, minority interest and discontinued operations.................. 2.7 (11.9)
Income (loss) from continuing operations........................................ 2.3 (11.7)
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Net Revenues. Packaging and test net revenues increased 35.4% to $464.6
million in the three months ended March 31, 2004 from $343.1 million in the
three months ended March 31, 2003. This increase in net revenues was principally
attributed to an overall unit volume increase of 56.6%. This increase in volume
was driven by a 53.2% increase for advanced packages and a 61.0% increase in our
traditional packages. Partially offsetting the volume increases, average selling
prices for the three months ended March 31, 2004 declined approximately 11% as
compared to average selling prices in the three months ended
17
March 31, 2003. This decrease in overall average selling prices was driven by a
10% decrease in average selling prices for advances packages and a 12% decrease
in average selling prices for traditional packages.
Gross Profit. Gross profit increased $65.2 million, to a gross profit of
$111.8 million in the three months ended March 31, 2003 from $46.6 million in
the three months ended March 31, 2003. Our cost of revenues consists principally
of costs of materials, labor and depreciation.
Gross margin increased to 24.1% in the three months ended March 31, 2004
from 13.6% in the three months ended March 31, 2003. The improvement of 10.5% is
principally a result of the following:
- - Increased unit volumes contributed approximately 21 percentage points to
the increase in gross margin.
- - Material cost savings contributed approximately 3 percentage points to the
increase in gross margin.
The positive impacts on gross margin were partially offset by the following:
- - Average selling price erosion across our product lines decreased gross
margin by approximately 10 percentage points.
- - Product mix decreased gross margin by approximately 3 percentage points.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.8 million, or 26.0%, to $52.2 million, or
11.2% of net revenues, in the three months ended March 31, 2004 from $41.4
million, or 12.1% of net revenues, in the three months ended March 31, 2003.
During 2004, 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 $4.9 million during the three months ended
March 31, 2004, as opposed to $0.3 million in the comparable prior year period.
In addition, approximately $6.0 million of our increase in selling, general and
administrative expenses is the result of increased headcount, compensation costs
and general business activity to support our overall business growth; although
selling, general and administrative expenses have decreased as a percentage of
revenue over the prior year comparable period.
Research and Development. Research and development expenses increased $1.4
million to $9.0 million, or 1.9% of net revenues, in the three months ended
March 31, 2004 from $7.6 million, or 2.2% of net revenues, in the three months
ended March 31, 2003. Our increase in our research and development expenses were
primarily related to the establishment of a research and development center,
during the three months ended March 31, 2004, located within our Amkor Iwate
factory in Japan and increased activities related to our leading edge
technologies. 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 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.
Resolution of Legal Dispute. On April 29, 2004, we reached legal
resolution with a customer regarding their claims against us related to our mold
compound matter. Accordingly, for the three months ended March 31, 2004, we
recorded a charge of $1.5 million associated with this settlement (see Item I -
Legal Proceedings for further discussion).
Other Expenses. Other expenses, net, decreased $1.0 million, to $35.2
million, or 7.6% of net revenues, in the three months ended March 31, 2004 from
$36.2 million, or 10.5% of net revenues, in the three months ended March 31,
2003. The net decrease in other expenses was primarily the result of a decrease
in interest expense of $2.6 related to our debt refinancing and debt repurchase
activity during 2003 and 2004, partially offset by an unfavorable change related
to foreign currency of $1.0 million. For the three months ended March 31, 2004,
other expenses included $2.7 million of debt retirement costs. For the three
months ended March 31, 2003, other expenses included a $2.2 million unrealized
loss related to our then existing ASI call options.
Equity in Loss of Investees. For the three months ended March 31, 2004, we
had no share of gains or losses related to our equity affiliates. For the prior
year comparable period, our earnings included our share of losses in our equity
affiliates of $3.6 million, which principally related to our equity investment
in ASI through March 24, 2003. On March 24, 2003, we divested 7
18
million shares of ASI, bringing our total voting share holdings to 16% of ASI,
and on this date we ceased the equity method of accounting for our ASI
investment.
Income Taxes. For the three months ended March 31, 2004, we recorded
income tax expense of $1.4 million related to continuing operations, reflecting
an effective tax rate of 11.6%, as compared to an income tax benefit of $4.2
million for the three months ended March 31, 2003, reflecting an effective tax
rate of 9.5%. During the three months ended March 31, 2004, we (1) generated
income in certain tax holiday jurisdictions and (2) utilized a portion of our
loss carryforwards which previously carried valuation allowances in other tax
jurisdictions. From an effective tax rate perspective, both of these items
offset our taxes in other higher tax jurisdictions where we are also profitable,
thereby lowering our overall effective tax rate. During 2002 and 2003 we
recorded valuation allowances against the majority of our deferred tax assets in
certain tax jurisdictions. We will resume the recognition of deferred tax assets
when we return to sustained profitability in certain tax jurisdictions. As of
March 31, 2004, we had U.S. net operating losses totaling $417.9 million
expiring between 2021 and 2024. Additionally, as of March 31, 2004, we had $44.5
million of non-U.S. net operating losses available for carryforward, expiring
between 2004 and 2012.
RESULTS OF DISCONTINUED OPERATIONS
On February 28, 2003, we sold our wafer fabrication services business to
ASI for $62 million. Additionally, we obtained a release from Texas Instruments
regarding our contractual obligations with respect to wafer fabrication services
to be performed subsequent to the transfer of the business to ASI. We reflect
our wafer fabrication services segment as a discontinued operation and restated
our historical results. In connection with the disposition of our wafer
fabrication business, we have reflected $1.0 million in severance and other exit
costs to close our wafer fabrication services operations in Boise, Idaho and
Lyon, France. Also, in the first quarter of 2003 we recognized a pre-tax gain on
the disposition of our wafer fabrication services business of $58.6 million
($51.5 million, net of tax), which is reflected in income from discontinued
operations. The carrying value of the sold net assets associated with the
business as of February 28, 2003 was $2.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Our ongoing primary cash needs are for debt service (principally
interest), equipment purchases and working capital. Our cash and cash
equivalents balance as of March 31, 2004 was $345.5 million, and we had $28.4
million available under our $30.0 million senior secured credit facility. The
amount available under our senior secured credit facility at March 31, 2004 was
reduced by $1.6 million related to outstanding letters of credit. 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 and 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 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.
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 months ended March 31, 2004 and 2003 were as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ -----------
(IN THOUSANDS)
Operating activities from continuing operations................................. $ 124,229 $ 29,464
Investing activities from continuing operations................................. (164,384) (3,293)
Financing activities from continuing operations................................. 71,752 (7,867)
Discontinued operations......................................................... 96 22,139
Cash flows from continuing operating activities: Our cash flows from
continuing operating activities for the three months ended March 31, 2004
increased $94.8 million to $124.2 million over the comparable prior year period.
Our cash flows from
19
continuing operating activities increased as a result of our improved operating
performance, primarily driven by revenue increases, as well as cash generated
from a reduction of our working capital.
The primary contributors to cash flow from continuing operations for the
three months ended March 31, 2004 were $69.9 million of cash flows provided by
continuing operations (adjusted for non-cash items), a $48.1 million increase in
trade payables associated with the increase in business activity and a decrease
in accounts receivable of $27.2 million. These sources were primarily offset by
a $20.1 million increase in inventory levels required to accommodate the demand
for our services.
Cash flows from continuing investing activities: Our cash flows used in
continuing investing activities for the three months ended March 31, 2004
increased by $161.1 over the comparable prior year period, to $164.4 million,
primarily due to a $154.2 million increase in capital expenditures from $16.6
million in the three months ended March 31, 2003 to $170.8 million in the three
months ended March 31, 2004. In addition to cash used for capital expenditures,
we paid $12.9 million during the three months ended March 31, 2004 to acquire
the minority interest ownership in Amkor Iwate, bringing our ownership to 100%.
These cash outflows were offset by cash proceeds from the collection of $18.6
million of notes receivable from Dongbu.
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 $12.9 million. We now own
100% of Amkor Iwate. Also in January 2004, we paid to Toshiba 220.0 million
Japanese yen (or approximately $2.0 million, which was included as a special
charge during the three months ended December 31, 2003) to terminate our
commitment to purchase a tract of land adjacent to the Amkor Iwate facility.
Amkor Iwate provides packaging and test services principally to Toshiba's Iwate
factory under a long-term supply agreement that provided 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.
During 2003 and 2004, we completed the following transactions to continue
the liquidation of our investment in ASI:
- - On March 24, 2003, we irrevocably sold a block of 7 million shares of ASI
common stock to the financial institution for approximately $19.5 million.
We also entered into a nondeliverable call option for $6.8 million. In May
2003, we exercised the nondeliverable call option realizing $5.6 million
of cash proceeds.
- - On September 17, 2003, we sold an additional 5 million shares of ASI
common stock for approximately $18.5 million. We also entered into a
nondeliverable call option for $6.5 million. In December 2003, we
exercised the nondeliverable call option realizing $2.0 million of cash
proceeds.
- - In April 2004, we sold 10.1 million shares of ASI common stock for
approximately $49.7 million, reducing our ownership in ASI to
approximately 4%, or 4.6 million shares.
Cash flows from continuing financing activities: Our net cash inflows from
continuing financing activities for the three months ended March 31, 2004 were
$71.8 million, as compared to $7.9 million of outflows for the three months
ended March 31, 2003. The increase in cash flows from continuing financing
activities during the three months ended March 31, 2004 primarily related to our
March offering of $250.0 million of senior notes due 2011. The net proceeds to
us were $245.2 million, net of related discounts and debt acquisition costs, and
these proceeds were used to repay the balance outstanding under our senior
secured term loan of $168.7 million.
DEBT INSTRUMENTS AND RELATED COVENANTS
20
Following is a summary of short-term borrowings and long-term debt:
MARCH 31, DECEMBER 31,
2004 2003
-------------- ------------
(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..... -- --
9.25% Senior notes due February 2008............................................... 470,500 470,500
7.75% Senior notes due May 2013.................................................... 425,000 425,000
7.125% Senior notes due March 2011................................................. 248,315 --
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................................................. 233,000 233,000
5% Convertible subordinated notes due March 2007,
convertible at $57.34 per share................................................. 146,422 146,422
Other debt......................................................................... 33,658 35,725
-------------- ------------
1,756,895 1,679,372
Less -- Short-term borrowings and current portion of long-term debt (22,488) (28,665)
-------------- ------------
$ 1,734,407 $ 1,650,707
============== ============
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 the three months ended
2004, interest expense payable in cash was $27.5 million.
Our senior secured credit facility includes certain affirmative, negative
and financial covenants (including minimum EBITDA, as defined by the credit
facility and minimum daily liquidity) and events of default, including maximum
annual capital expenditures of the greater of (i) $250 million or (ii) 50% of
EBITDA (as defined), not to exceed $350 million. 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 March 31, 2004 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 business strategy has been, in part, to enhance our financial
flexibility. During 2003 and 2004, we 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. Our debt
covenants permit the repurchase or redemption of any senior notes, senior
subordinated notes or convertible notes with the net cash proceeds of equity
offerings, and the annual basket for repurchases or redemptions of senior notes
from cash 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 March 2004, we sold $250.0 million of 7.125% senior notes due March
2011. We sold these notes to qualified institutional investors, used the net
proceeds of the issuance to satisfy in full our outstanding term loan due 2006
of $168.7 million and used the remainder of the proceeds for general corporate
purposes, including working capital and capital expenditures. The notes have a
coupon rate of 7.125% annually and interest payments are due semi-annually. In
connection with the satisfaction of the term loan, we recorded charges during
the first quarter of 2004 of $1.7 million for the associated premiums paid and
$1.0 million for the associated unamortized deferred debt issuance costs. In
connection with the offering of these notes, we entered into a registration
rights agreement with the purchasers. The registration rights agreement will
entitle the purchasers, within 210 days from the original issuance, to exchange
their notes for registered notes with substantially identical terms as the
original notes.
Other debt as of March 31, 2004 and December 31, 2003 includes our foreign
debt principally related to our operations in Japan and Taiwan. Our foreign debt
includes fixed and variable debt maturing between 2004 and 2010, with the
substantial majority maturing by 2003. As of March 31, 2004, the foreign debt
has interest rates ranging from 1.0% to 4.35%. These debt instruments do not
include significant financial covenants.
21
CAPITAL EXPENDITURES
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. Our first quarter capital expenditures
were $170.8 million and we have budgeted second quarter capital expenditures
between $125 million and $150 million. We expect that our full year 2004 capital
expenditures will be between $300 million and $500 million.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet guarantees or other off-balance sheet
arrangements as of March 31, 2004.
CONTINGENCY RELATED TO ACQUISITION OF CITIZEN WATCH CO., LTD.
In April 2002, we acquired the semiconductor packaging business of Citizen
Watch Co., Ltd ("Citizen"). In connection with this acquisition, we were
required to make certain additional payments one year from the closing. Pending
the resolution of a controversy relating to patents acquired from Citizen, we
are withholding payment of 1.4 billion yen ($13.3 million based on the spot
exchange rate at March 31, 2004).
CRITICAL ACCOUNTING POLICIES
Our preparation of this report on Form 10-Q, and related consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America, 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. We base our estimates and judgments on historical
experience, current economic and industry conditions and on various other
factors that we believe reasonable under the circumstances. This forms the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We have identified
the accounting policies below as critical to our business operations and the
understanding of our results of operations.
- - revenue recognition and risk of loss,
- - provision for income taxes
- - valuation of long-lived assets,
- - legal contingencies,
- - evaluation of equity investments, and
- - valuation of inventory.
During the three months ended March 31, 2004, there have been no
significant changes in our critical accounting policies. Other than a $1.5
million charge related to our mold compound litigation in which we resolved our
matter with Koninklijke Philips Electronics N.V. (see Item I - Legal Proceedings
for further discussion), there have been no significant changes in the judgments
and estimates inherent in these critical accounting policies. We refer you to
our December 31, 2003 Annual Report on Form 10-K and for a full discussion of
our critical accounting policies.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
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, capital expenditure requirements, 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.
22
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 contemplated by the risks above will not
occur. If they do, our business, financial condition or results of operations
could be materially adversely affected. You should refer to Risk Factors That
May Affect Future Operating Performance in our 2003 Annual Report on Form 10-K
and in our Form 8-K filed March 12, 2004 for a more detailed discussion of known
material risks facing our company.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2004 and 2003, 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 March 31, 2004 and December 31, 2003, 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:
CHART OF FOREIGN CURRENCY RISK
----------------------------------------------------
PHILIPPINE KOREA TAIWANESE JAPANESE CHINESE
PESO WON DOLLAR YEN RENMINBI
---------- -------- --------- -------- --------
(IN THOUSANDS)
As of March 31, 2004................................... $ (4,225) $ 4,628 $ (1,088) $ (1,648) $ 228
As of December 31, 2003................................ $ (3,269) $ 3,954 $ (2,041) $ 3,718 $ 315
INTEREST RATE RISKS
Our company has interest rate risk with respect to our long-term debt. As
of March 31, 2004, we had a total of $1,756.9 million of debt of which 98.6% was
fixed rate debt and 1.4% was variable rate debt. Our variable rate debt
principally consists of short-term borrowings and amounts outstanding under our
$30.0 million revolving line of credit; of which no amounts were drawn as of
March 31, 2004, but which had been reduced by $1.6 million related to
outstanding letters of credit at that date. The fixed rate debt consists of
senior notes, senior subordinated notes, convertible subordinated notes and
foreign 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.
Changes in interest rates have different impacts on our fixed and variable rate
portions of our debt portfolio. A change in interest rates on the fixed portion
of the debt portfolio impacts the fair value of the instrument but has no impact
on interest incurred or cash flows. A change in interest rates on the variable
portion of the debt portfolio impacts the interest incurred and cash flows but
does not impact the fair value of the instrument. The fair value of the
convertible subordinated notes is also impacted by the market price of our
common stock.
The table below presents the interest rates, maturities and fair value of
our fixed and variable rate debt as of March 31, 2004.
23
MARCH 31, 2004
----------------------------------------------------------------
(IN THOUSANDS) FAIR
2004 2005 2006 2007 2008 THEREAFTER TOTAL VALUE
--------- --------- ----------- ------------ ----------- ---------- ----------- ------------
Long-term debt:
Fixed rate debt $ 3,952 $ 2,404 $ 235,601 $ 146,623 $ 470,500 $ 873,317 $ 1,732,397 $ 1,789,894
Average interest rate 4.2% 4.0% 5.7% 5.0% 9.3% 8.2% 7.9%
Variable rate debt $ 18,535 $ 1,568 $ 2,091 $ 837 $ 587 $ 880 $ 24,498 $ 24,498
Average interest rate 1.4% 2.6% 2.6% 2.6% 2.7% 2.7% 1.7%
EQUITY PRICE RISKS
Our outstanding 5.75% convertible subordinated notes due 2006 and 5%
convertible subordinated notes due 2007 are convertible into common stock at
$35.00 per share and $57.34 per share, respectively. 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.
ITEM 4. CONTROLS AND PROCEDURES
During the first quarter of 2004, 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 March 31, 2004, 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 Report on
Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. 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
24
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. The parties engaged in discovery
activities. Fujitsu has indicated that it may seek damages in excess of $100
million. In November 2003, Fujitsu filed an action against Cirrus Logic,
Sumitomo Bakelite and us entitled Fujitsu Limited v. Cirrus Logic, Inc., et al.,
Case 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,
the Court has granted a stay of the action pending in the Northern District
Court of California in favor of the action pending in the Santa Clara Superior
Court, where discovery is ongoing and a trial is scheduled to begin on January
31, 2005. On March 29, 2004, we filed a motion to dismiss Fujitsu's amended
complaint in the Superior Court. On April 2, 2004, we also filed a motion to
dismiss Cirrus Logic's cross-complaint. The hearing on our motions to dismiss is
scheduled to take place on May 4, 2004. If necessary, we intend to deny all
liability, to file cross-claims against Sumitomo Bakelite, and to seek judgment
in our favor 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 and Seagate Technology International ("Seagate") and
Atmel Corporation and Atmel Sarl ("Atmel") in the Superior Court of California,
Santa Clara County, Case No. 1-02-CV809883. 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 answered Atmel's cross-complaint, denying all liability, and 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
amended cross-complaint, granting Atmel 30 days to file an amended pleading.
Atmel filed its Second Amended Cross-Complaint on or about March 12, 2004. On
April 13, 2004, we filed an answer denying all liability to Atmel. We filed a
motion to dismiss ChipPAC's cross-complaint on February 13, 2004; ChipPAC has
indicated its intent to file an amended cross-complaint by April 27, 2004. If
appropriate, we may seek to dismiss ChipPAC's amended pleading, and otherwise
intend to deny all liability to ChipPAC. 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"),
in the Superior Court of California, Santa Clara County, Case No.
1-02-CV-808650. Philips' cross-complaint sought 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
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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 denied all liability in this matter and also asserted
a cross-complaint against Sumitomo Bakelite. Sumitomo Bakelite has denied any
liability. The parties completed fact discovery and most expert discovery.
Maxtor and Philips reached a settlement of Maxtor's claims against Philips on or
about April 28, 2004. Philips and Amkor reached resolution on Philips' claims
against us on April 29, 2004, pursuant to which we agreed to pay Philips $1.5
million within 15 days plus a contingent amount ranging between $0.0 and $2.0
million based on the resolution of Philips' claims against Sumitomo Bakelite.
For the three months ended March 31, 2004, we recorded a charge of $1.5 million
in Resolution of Legal Dispute in our consolidated statement of income
associated with this resolution. The trial of Philips' claims against Sumitomo
Bakelite is scheduled to start on August 2, 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, Case No. 1-03-CV-001310. 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 filed an amended pleading on or about April 26, 2004. We
intend to file a motion to dismiss Maxim's amended complaint, to deny all
liability to Maxim and to file cross-claims against Sumitomo Bakelite. 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, Case No. 1-02-CV-810034. 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. The Superior Court granted our motion to dismiss on March 16, 2004,
giving Fairchild thirty days to file a further amended pleading. Fairchild filed
a third amended complaint on or about April 15, 2004. We intend to file a motion
to dismiss Fairchild's third amended pleading. We otherwise 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. The appeal was argued on March 9, 2004, and we are awaiting the
Court's decision. 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.
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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 $60.9 million based
on the spot exchange rate at March 31, 2004). 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. A hearing was held on April 28, 2004, and a
ruling is expected within 30 days of this date.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.1 Amkor Technology, Inc. 7.125% Senior Notes due March 15, 2011 Indenture
4.2 Registration Rights Agreement - 7.125% Senior Notes due March 15, 2011
12.1 Computation of Ratio of Earnings to Fixed Charges
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
(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 March 31, 2004:
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Current Report on Form 8-K dated January 28, 2004 (filed January 28, 2004)
related to a press release dated January 28, 2004 announcing our financial
results for the quarter ended December 31, 2003.
Current Report on Form 8-K dated March 8, 2004 (filed March 12, 2004)
related to Amkor announcing its intent to sell $250 million principal amount of
Senior Notes due 2011.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereto duly authorized.
AMKOR TECHNOLOGY, INC.
By:/s/ KENNETH T. JOYCE
------------------------------------------
Kenneth T. Joyce
Chief Financial Officer
(Principal Financial, Chief Accounting Officer and
Duly Authorized Officer)
Date: May 5, 2004
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