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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
November 1, 2004 was 175,717,875.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net revenues ..................................... $ 490,843 $ 423,784 $ 1,448,025 $ 1,144,862
Cost of revenues ................................. 403,076 322,369 1,153,635 922,617
----------- ----------- ----------- -----------
Gross profit ..................................... 87,767 101,415 294,390 222,245
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ........ 53,236 43,977 160,993 128,607
Research and development ................... 8,664 7,882 27,541 22,675
Gain on disposal of fixed assets, net ...... (292) (148) (490) (870)
Amortization of acquired intangibles ....... 1,867 2,035 5,032 6,103
----------- ----------- ----------- -----------
Total operating expenses ............. 63,475 53,746 193,076 156,515
----------- ----------- ----------- -----------
Operating income ................................. 24,292 47,669 101,314 65,730
----------- ----------- ----------- -----------
Other expense (income):
Interest expense, net ...................... 38,075 35,151 107,725 107,494
Foreign currency loss (gain) ............... 1,503 (895) 4,213 (1,083)
Other expense (income), net ................ (534) 2,742 (24,090) 34,708
----------- ----------- ----------- -----------
Total other expense .................. 39,044 36,998 87,848 141,119
----------- ----------- ----------- -----------
Income (loss) before income taxes, equity
investment gains (losses), minority interest
and discontinued operations ................ (14,752) 10,671 13,466 (75,389)
Equity investment gain (loss) .................... 12 -- 2 (3,555)
Minority interest ................................ (1,266) (1,809) (1,621) (2,135)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes ............................... (16,006) 8,862 11,847 (81,079)
----------- ----------- ----------- -----------
Provision (benefit) for income taxes ............. 6,328 (6,908) 13,291 (6,072)
----------- ----------- ----------- -----------
Income (loss) from continuing operations ......... (22,334) 15,770 (1,444) (75,007)
----------- ----------- ----------- -----------
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 (loss) ................................ $ (22,334) $ 15,770 $ (1,444) $ (20,441)
=========== =========== =========== ===========
Per Share Data:
Basic and diluted income (loss) per common share
from continuing operations ............... $ (0.13) $ 0.09 $ (0.01) $ (0.45)
Basic and diluted income per common share from
discontinued operations .................. -- -- -- 0.33
----------- ----------- ----------- -----------
Basic and diluted net income (loss) per common
share .................................... $ (0.13) $ 0.09 $ (0.01) $ (0.12)
=========== =========== =========== ===========
Shares used in computing basic income (loss)
per common share ......................... 175,717 166,628 175,216 165,883
=========== =========== =========== ===========
Shares used in computing diluted income (loss)
per common share ......................... 175,717 171,440 175,216 165,883
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 231,311 $ 313,259
Accounts receivable:
Trade, net of allowance of $5,010 in 2004 and $6,514 in 2003.... 272,325 310,096
Other .......................................................... 4,785 4,413
Inventories .......................................................... 119,969 92,439
Other current assets ................................................. 32,147 49,606
----------- -----------
Total current assets ..................................... 660,537 769,813
----------- -----------
Property, plant and equipment, net ......................................... 1,387,742 1,007,648
----------- -----------
Investments ................................................................ 11,626 51,181
----------- -----------
Other assets:
Goodwill ............................................................. 654,226 629,850
Acquired intangibles ................................................. 46,309 37,730
Other ................................................................ 73,448 67,697
----------- -----------
............................................................................. 773,983 735,277
----------- -----------
Total assets ............................................. $ 2,833,888 $ 2,563,919
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ....................................................... $ 6,805 $ 2,690
Short-term borrowings and current portion of long-term debt .......... 171,174 28,665
Trade accounts payable ............................................... 235,888 230,396
Accrued expenses ..................................................... 175,908 170,145
----------- -----------
Total current liabilities ................................ 589,775 431,896
Long-term debt ............................................................. 1,744,545 1,650,707
Other noncurrent liabilities ............................................... 97,273 78,974
----------- -----------
Total liabilities ........................................ 2,431,593 2,161,577
----------- -----------
Commitments and contingencies
Minority interest .......................................................... 7,304 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 175,718 in 2004 and 174,508 in 2003... 176 175
Additional paid-in capital ........................................... 1,323,557 1,317,164
Accumulated deficit .................................................. (932,980) (931,536)
Accumulated other comprehensive income ............................... 4,238 15,201
----------- -----------
Total stockholders' equity ............................... 394,991 401,004
----------- -----------
Total liabilities and stockholders' equity ............... $ 2,833,888 $ 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 PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------- ------ ---------- -----------
Balance at December 31, 2002 ............... 165,156 $ 166 $1,170,227 $ (933,734)
Net loss ................................ -- -- -- (20,441)
Unrealized gain on investments,
net of tax ........................... -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss ......................
Issuance of stock through stock
compensation plans ................... 1,611 1 9,677 --
Payment received from stockholder ....... -- -- -- --
------- ------ ---------- ----------
Balance at September 30, 2003 .............. 166,767 $ 167 $1,179,904 $ (954,175)
======= ====== ========== ==========
Balance at December 31, 2003 ............... 174,508 $ 175 $1,317,164 $ (931,536)
Net loss ................................ -- -- -- (1,444)
Change in unrealized gain on investments,
net of tax ........................... -- -- -- --
Cumulative translation adjustment ....... -- -- -- --
Comprehensive loss ......................
Issuance of stock through stock
compensation plans ................... 1,210 1 6,393 --
------- ------ ---------- ----------
Balance at September 30, 2004 .............. 175,718 $ 176 $1,323,557 $ (932,980)
======= ====== ========== ==========
ACCUMULATED
RECEIVABLE OTHER
FROM COMPREHENSIVE COMPREHENSIVE
STOCKHOLDERS INCOME (LOSS) TOTAL LOSS
------------ ------------- ---------- -------------
Balance at December 31, 2002 ............... $(2,887) $ (2,405) $ 231,367
Net loss ................................ -- -- (20,441) $ (20,441)
Unrealized gain on investments,
net of tax ........................... -- 5,225 5,225 5,225
Cumulative translation adjustment ....... -- 6,326 6,326 6,326
----------
Comprehensive loss ...................... $ (8,890)
==========
Issuance of stock through stock
compensation plans ................... -- -- 9,678
Payment received from stockholder ....... 2,887 -- 2,887
------- --------- ----------
Balance at September 30, 2003 .............. $ -- $ 9,146 $ 235,042
======= ========= ==========
Balance at December 31, 2003 ............... $ -- $ 15,201 $ 401,004
Net loss ................................ -- -- (1,444) $ (1,444)
Change in unrealized gain on investments,
net of tax ........................... -- (11,741) (11,741) (11,741)
Cumulative translation adjustment ....... -- 778 778 778
----------
Comprehensive loss ...................... $ (12,407)
==========
Issuance of stock through stock
compensation plans ................... -- -- 6,394
------- --------- ----------
Balance at September 30, 2004 .............. $ -- $ 4,238 $ 394,991
======= ========= ==========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2004 2003
--------- ---------
Cash flows from continuing operating activities:
Income (loss) from continuing operations ......................................................... $ (1,444) $ (75,007)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by operating activities --
Depreciation and amortization ................................................................. 169,164 165,360
Amortization of deferred debt issuance costs and discounts .................................... 8,759 15,658
Provision for accounts receivable ............................................................. 284 --
Provision for excess and obsolete inventory ................................................... 10,692 2,904
Deferred income taxes ......................................................................... (3,769) 9,621
Equity in loss of investees ................................................................... (2) 3,555
Other (gains) losses, net ..................................................................... (25,470) 2,358
Loss on debt redemption premium payment ....................................................... 1,687 21,304
Minority interest ............................................................................. 1,621 2,135
Changes in assets and liabilities excluding effects of acquisition --
Accounts receivable ........................................................................... 39,707 (41,842)
Other receivables ............................................................................. (367) 1,869
Inventories ................................................................................... (37,270) (18,369)
Other current assets .......................................................................... 1,204 413
Other non-current assets ...................................................................... (5,231) 4,275
Accounts payable .............................................................................. 1,653 9,117
Accrued expenses .............................................................................. 15,128 (16,841)
Other long-term liabilities ................................................................... 17,599 13,499
--------- ---------
Net cash provided by operating activities .................................................. 193,945 100,009
--------- ---------
Cash flows from continuing investing activities:
Purchases of property, plant and equipment ....................................................... (368,078) (148,230)
Acquisition, net of cash acquired ................................................................ (63,538) --
Proceeds from the sale of property, plant and equipment and other ................................ 7,023 2,802
Proceeds from the sale of investments ............................................................ 49,409 44,746
Purchase of investments .......................................................................... -- (13,765)
Proceeds from note receivable .................................................................... 18,627 18,253
Other ............................................................................................ -- 829
--------- ---------
Net cash used in investing activities ...................................................... (356,557) (95,365)
--------- ---------
Cash flows from continuing financing activities:
Net change in bank overdrafts and short-term borrowings .......................................... 5,108 4,026
Net proceeds from issuance of long-term debt ..................................................... 248,116 576,970
Payments of long-term debt, including redemption premium payment ................................. (178,103) (585,106)
Proceeds from issuance of stock through stock compensation plans ................................. 6,394 9,678
Payment received from stockholder ................................................................ -- 2,887
--------- ---------
Net cash provided by financing activities .................................................. 81,515 8,455
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents related to continuing operations... (962) 2,522
--------- ---------
Cash flows from discontinued operations:
Net cash provided by operating activities ........................................................ 111 11,221
Net cash provided by investing activities ........................................................ -- 2,412
--------- ---------
Net cash provided by discontinued operations ............................................... 111 13,633
--------- ---------
Net (decrease) increase in cash and cash equivalents ................................................ (81,948) 29,254
Cash and cash equivalents, beginning of period ...................................................... 313,259 311,249
--------- ---------
Cash and cash equivalents, end of period ............................................................ $ 231,311 $ 340,503
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................................... $ 96,210 $ 107,869
Income taxes .................................................................................. $ 22,114 $ 7,553
The accompanying notes are an integral part of these statements.
5
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation. The consolidated financial statements and related
disclosures as of September 30, 2004 and for the three and nine months ended
September 30, 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. We operate within one reportable segment,
packaging and test services. The results of operations for the three and nine
months ended September 30, 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 in our debt instruments,
our investment in Anam Semiconductor, Inc., 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.
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 and our
reported net loss and per share amounts would have been increased.
During August 2004, the compensation committee of our board of directors
approved the full vesting of all unvested outstanding employee stock options
that were issued prior to July 1, 2004. The following table illustrates the
effect on net income (loss) and per share amounts as if the fair value based
method had been applied to all outstanding and unvested awards in each period.
This table includes a pro forma charge of approximately $43 million for the
three and nine months ended September 30, 2004 related to the above August 2004
accelerated vesting event.
6
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
Net income (loss), as reported ............ $(22,334) $ 15,770 $ (1,444) $(20,441)
Deduct: Total stock-based employee
compensation determined under fair value
based method ........................... 47,280 7,934 62,737 22,259
-------- -------- -------- --------
Pro forma net income (loss) .................. $(69,614) $ 7,836 $(64,181) $(42,700)
======== ======== ======== ========
Income (loss) per share:
Basic and diluted:
As reported ............................ $ (0.13) $ 0.09 $ (0.01) $ (0.12)
Pro forma .............................. $ (0.40) $ 0.05 $ (0.37) $ (0.26)
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 AND NINE
MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
---- ----
Expected life (in years).... 4 4
Risk-free interest rate..... 3.2% 2.5%
Volatility ................. 97% 44%
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 both the three and
nine months ended September 30, 2003 are as follows:
(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
7
3. ACQUISITIONS
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 $12.9 million, bringing our total
ownership 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 and nine months ended September 30, 2003, we recorded AIC minority
interest expense of $1.8 million and $3.1 million, respectively, 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.
ACQUISITION FROM INTERNATIONAL BUSINESS MACHINE CORP. AND XIN DEVELOPMENT
CO., LTD.
In May 2004, we acquired certain assembly and test assets from
International Business Machines Corp. ("IBM") and Xin Development Co., Ltd. The
acquired assets included a test operation located in Singapore (primarily test
equipment and workforce), a 950,000 square foot building and associated 50-year
land use rights located in China, and other intangible assets. These assets were
acquired for the purposes of increasing our assembly and test capacity. The
results of our acquisition have been included in the accompanying consolidated
financial statements since the acquisition date.
The purchase price was valued at approximately $138.1 million, consisting
of $117.0 million of short-term notes payable (net of a $4.6 million discount),
$20.0 million paid at closing and other acquisition costs of $1.1 million. The
short-term notes payable, and interest thereon of $4.6 million, is expected to
be paid during the fourth quarter of 2004. The purchase price allocation of
$138.1 million was as follows:
(IN MILLIONS)
------------
Property, plant and equipment.................... $ 132.6
Acquired intangible assets....................... 5.5
-------
$ 138.1
=======
ACQUISITIONS OF UNITIVE, INC. AND UNITIVE SEMICONDUCTOR TAIWAN CORPORATION
In August 2004, we acquired approximately 93% of the capital stock of
Unitive, Inc., based in North Carolina ("Unitive"), and approximately 60% of the
capital stock of Unitive Semiconductor Taiwan Corporation ("UST"), a
Taiwan-based venture owned by Unitive and various Taiwanese investors. Unitive
and UST are providers of wafer level technologies and services for flip chip and
wafer level packaging applications. The acquisition of Unitive and UST provide
us with leading-edge technology, a strong applications development team and high
volume production capacity for 300mm wafers, which contributed to the purchase
price resulting in the recognition of acquired intangible assets and goodwill.
The total purchase price was comprised of $47.9 million, which included
cash consideration due at closing of $31.6 million, $0.9 million of direct
acquisition costs and $16.2 million (or $15.4 million based on the discounted
value) due one year after closing. In addition, we assumed $24.9 million of
debt. Both transactions include provisions for contingent, performance-based
earn-outs which could increase the value of the transactions. Related to
Unitive, the maximum earn-out is $55.0 million. Related to UST, we currently
estimate the value of the earn-out to be
8
approximately $0 to $2 million. The earn-outs will be paid approximately one
year after closing; the Unitive earn-out may be paid in either cash or stock, at
our option. We also retain an option to acquire the remaining interest of
approximately 40% of UST for a maximum of $18.0 million, which expires 18 months
after closing. However, if UST meets certain production-related goals prior to
the expiration of the 18 month call option period, at the option of the minority
interest holders we would be required to purchase the remaining interest of
approximately 40% of UST for a maximum of $18.0 million. The results of Unitive
and UST operations are included in our consolidated statement of income
beginning on their dates of acquisition, August 19, 2004 and August 20, 2004,
respectively.
The preliminary purchase price allocation of $47.9 million was as follows:
(IN MILLIONS)
------------
Current assets....................................... $ 9.9
Property, plant and equipment ....................... 45.0
Acquired intangible assets........................... 5.2
Goodwill ............................................ 28.7
Other assets......................................... 2.5
-------
Total assets acquired................................ 91.3
-------
Current liabilities.................................. 21.4
Long term debt....................................... 14.8
Other liabilities.................................... 2.8
Minority interest.................................... 4.4
-------
Total liabilities and minority interest assumed...... 43.4
-------
$ 47.9
=======
The pro forma financial information below assumes that the Unitive and UST
acquisitions occurred on January 1, 2003 and includes the effects of
amortization of other acquired intangibles and other related effects from that
date. The following pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of
future operations that would have been achieved had the acquisitions taken place
at January 1, 2003.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------------
2004 2003 2004 2003
---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ............................ $ 493,382 $ 427,063 $ 1,459,932 $ 1,152,613
Net income (loss) ....................... (23,387) 12,661 (10,476) (30,143)
Basic income (loss) per common share .... (0.13) 0.08 (0.06) (0.18)
Diluted income (loss) per common share... $ (0.13) $ 0.07 $ (0.06) $ (0.18)
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 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
9
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 December 31, 2003.
- - During April 2004, we sold 10.1 million shares of ASI common stock for
approximately $49.7 million, or $4.91 per share, reducing our ownership to
approximately 4%. The pre-tax gain related to this transaction is $21.6
million, net of $0.3 million of transaction costs, and was recorded as
other expense (income) during the second quarter of 2004. The carrying
value of our remaining 4.6 million ASI share investment at September 30,
2004, including an unrealized loss of $2.3 million, was $10.8 million, or
$2.35 per share.
5. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory of $24.3
million at September 30, 2004 and $18.7 million at December 31, 2003, consist of
raw materials and purchased components that are used in the semiconductor
packaging process.
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(IN THOUSANDS)
Raw materials and purchased components.... $ 98,099 $ 76,939
Work-in-process .......................... 21,870 15,500
-------- --------
$119,969 $ 92,439
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(IN THOUSANDS)
Land ............................................ $ 110,994 $ 103,610
Buildings and improvements ...................... 615,369 556,106
Machinery and equipment ......................... 1,934,123 1,640,471
Furniture, fixtures and other equipment ......... 165,469 155,719
Construction in progress ........................ 123,817 2,355
----------- -----------
2,949,772 2,458,261
Less -- Accumulated depreciation and amortization (1,562,030) (1,450,613)
----------- -----------
$ 1,387,742 $ 1,007,648
=========== ===========
Included in Construction in progress at September 30, 2004 is $92.8 million and
$20.0 million related to the 950,000 square foot facility and associated land
use rights, respectively, acquired in connection with our May 2004 business
acquisition (see Note 3).
7. GOODWILL AND ACQUIRED INTANGIBLES
Our goodwill balance at September 30, 2004 and December 31, 2003 relates
to our packaging services reporting unit. The changes in the carrying value of
goodwill are as follows:
(IN THOUSANDS)
-------------
Balance as of January 1, 2004 ........................... $ 629,850
Goodwill acquired from current year acquisitions, net.... 24,729
Translation adjustments ................................. (353)
---------
Balance as of September 30, 2004 ........................ $ 654,226
=========
Acquired intangibles consist of the following:
10
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(IN THOUSANDS)
Patents and technology rights ...... $ 71,039 $ 62,899
Supply agreement, net .............. 5,280 --
Less -- Accumulated amortization.... (30,010) (25,169)
-------- --------
$ 46,309 $ 37,730
======== ========
Amortization expense was $1.8 million and $2.0 million for the three
months ended September 30, 2004 and 2003, respectively. Amortization expense was
$4.8 million and $6.1 million for the nine months ended September 30, 2004 and
2003, respectively. The estimated annual amortization expense for 2004, 2005,
2006, 2007 and 2008 is $6.6 million, $7.5 million, $7.5 million, $7.5 million
and $7.5 million, respectively. The weighted average amortization period for the
patents and technology rights is 8.8 years. The weighted average amortization
period for all acquired intangible assets is 8.5 years.
In connection with our May 2004 acquisition from IBM and Xin Development
Co., Ltd., which is discussed in Note 3, we entered into a supply agreement with
IBM to provide IBM certain assembly and test services. This supply agreement was
recorded as an acquired intangible asset in our consolidated balance sheet at a
cost of $5.5 million. The supply agreement expires December 31, 2010 and is
amortized on a straight-line basis against net revenues.
8. INVESTMENTS
Investments include noncurrent marketable securities and equity
investments in affiliated companies as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(IN THOUSANDS)
Marketable securities classified as available for sale:
ASI (ownership of 4% at September 30, 2004
and 12% at December 31, 2003) (see Note 4) .................. $10,773 $50,397
Other marketable securities classified as available for sale.... 749 677
------- -------
Total marketable securities ................................. 11,522 51,074
Equity investments ................................................ 104 107
------- -------
$11,626 $51,181
======= =======
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(IN THOUSANDS)
Accrued income taxes .... $ 34,302 $ 39,779
Accrued interest ........ 32,055 27,238
Accrued payroll ......... 30,869 34,681
Other accrued expenses... 78,682 68,447
-------- --------
$175,908 $170,145
======== ========
10. RESTRUCTURING RESERV
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, $1.4
million and $2.2 million remained outstanding as of September 30, 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 $0.2 million is expected be paid during
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the remainder of 2004. The remaining lease payments are expected to be paid
through 2007 unless the leases can be terminated earlier. During the nine months
ended September 30, 2004, the restructuring reserve was reduced by $0.8 million
for cash expenditures.
11. DEBT
Following is a summary of short-term borrowings and long-term debt:
SEPTEMBER 30, 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 3.5% due June 2007 .... -- --
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 $1.6 million.... 248,407 --
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
Notes payable, net of unamortized discount of $2.2 million ........................ 135,535 --
Other debt ........................................................................ 56,855 35,725
----------- -----------
.................................................................................... 1,915,719 1,679,372
Less -- Short-term borrowings and current portion of long-term debt ............... (171,174) (28,665)
----------- -----------
$ 1,744,545 $ 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 entitled the purchasers, within
210 days from the original issuance, to exchange their notes for registered
notes with substantially identical terms as the original notes. We filed a
registration statement with the Securities and Exchange Commission for the
exchange of the notes, and the exchange was completed in July 2004.
In June 2004, we entered into a new $30.0 million senior secured revolving
credit facility (the "Facility"). The Facility, which is available through June
2007, replaced our prior $30.0 million secured revolving line of credit which
was scheduled to mature on October 31, 2005. The maximum annual capital
expenditures, minimum EBITDA and minimum daily liquidity financial covenants
that were conditions of the previous revolving credit facility have been
eliminated under the Facility.
In October 2004, we entered into a new $300.0 million term loan credit
facility with a group of institutional lenders. The term loan bears interest at
a rate of LIBOR plus 450 basis points and matures in October 2010. We intend to
use the net proceeds of approximately $289 million from the term loan for
working capital and general corporate purposes. As the term loan transaction was
completed subsequent to September 30, 2004, the proceeds are not included in the
above debt table.
Notes payable, net, consists of $120.1 million (net of a $1.5 million
unamortized debt discount), which is due in the fourth quarter of 2004, related
to our May 2004 acquisition from IBM (see Note 3) and $15.5 million (net of a
$0.7 million unamortized debt discount) related to our acquisition of Unitive
(see Note 3), which is due in the first quarter of 2006.
Other debt as of September 30, 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
12
the majority due in 2004. As of September 30, 2004, the foreign debt has
interest rates ranging from 0.6% to 8.18%. These other 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 $0.5 million and $1.3 million for the three
months ended September 30, 2004 and 2003, respectively, in the accompanying
consolidated statements of income. Interest expense related to short-term
borrowings and long-term debt is presented net of interest income of $1.9
million and $5.0 million for the nine months ended September 30, 2004 and 2003,
respectively, in the accompanying consolidated statements of income.
Pursuant to the indentures governing our senior and senior subordinated
notes, Unitive, a domestic subsidiary acquired in August 2004, and Unitive's
domestic subsidiary, are required to guarantee the debt obligations under our
senior and senior subordinated notes. The guarantees were put in place on
October 29, 2004. At September 30, 2004, Unitive and its domestic subsidiary
had total assets of $36.8 million, of which $16.6 million was comprised of
goodwill. At September 30, 2004, Unitive and its domestic subsidiary had total
liabilities of $11.1 million.
12. PENSION AND SEVERANCE PLANS
Our Philippine, Taiwan and Japanese 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
(IN THOUSANDS)
Service cost of current period .................. $ 556 $ 595 $ 1,664 $ 1,804
Interest cost on projected benefit obligation.... 394 359 1,180 1,088
Expected (return) loss on plan assets ........... 187 (446) 701 (1,851)
Amortization of transition obligation ........... 15 15 44 45
Actuarial (gain) loss ........................... (409) 270 (1,367) 1,318
----- ----- ------- -------
Total pension expense .................. $ 743 $ 793 $ 2,222 $ 2,404
===== ===== ======= =======
For the three and nine months ended September 30, 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
(IN THOUSANDS)
Service cost of current period .................. $ 218 $ 178 $ 654 $ 533
Interest cost on projected benefit obligation.... 21 20 63 59
Expected return on plan assets .................. (21) (20) (63) (60)
Amortization of transition obligation ........... 1 1 3 2
Actuarial loss .................................. 2 5 6 15
----- ----- ----- -----
Total pension expense ................. $ 221 $ 184 $ 663 $ 549
===== ===== ===== =====
For the nine months ended September 30, 2004, $0.7 million was contributed
to fund the Taiwan pension plan. We presently anticipate contributing an
additional $0.2 million, for an estimated total of $0.9 million in 2004, to fund
the Taiwan pension plan.
The Japanese pension plan began during the three months ended December 31,
2003. The components of net periodic pension cost for 2004 are as follows:
13
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
(IN THOUSANDS)
Service cost of current period .................. $ 369 $ -- $ 1,118 $ --
Interest cost on projected benefit obligation.... 3 -- 10 --
Expected return on plan assets .............. -- -- -- --
Amortization of transition obligation ........... 10 -- 30 --
--------- ------- --------- -------
Total pension expense ................. $ 382 $ -- $ 1,158 $ --
========= ======= ========= =======
No contributions have been made to the Japanese pension plan and no
contributions are expected during 2004.
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 September 30, 2004 and 2003, the
provision recorded for severance benefits was $5.6 million and $7.3 million,
respectively. For the nine months ended September 30, 2004 and 2003, the
provision recorded for severance benefits was $15.3 million and $15.0 million,
respectively. The balance recorded in long-term liabilities for accrued
severance was $80.7 million and $65.3 million at September 30, 2004 and December
31, 2003, respectively.
13. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic EPS is computed using only the weighted
average number of common shares outstanding for the period, while diluted EPS is
computed assuming conversion of all dilutive securities, such as options,
convertible debt and warrants. For the three and nine months ended September 30,
2004, we excluded from the computation of diluted earnings per share potentially
dilutive securities which would have an antidilutive effect on EPS. As of
September 30, 2004, the total number of potentially dilutive securities
outstanding was 15.8 million and 9.2 million for outstanding options and
convertible notes, respectively. For the nine months ended September 30, 2003,
we excluded from the computation of diluted earnings per share potentially
dilutive securities which would have an antidilutive effect on EPS. As of
September 30, 2003, the total number of potentially dilutive securities
outstanding was 16.2 million, 11.7 million and 3.9 million for outstanding
options, convertible notes and warrants for common stock, respectively. The
warrants expired in May 2004.
For the three months ended September 30, 2003, basic and diluted EPS was
calculated as follows:
WEIGHTED
EARNINGS AVG. SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Earnings Per Share - Three Months
Ended September 30, 2003
Basic earnings per share ..... $15,770 166,628 $ 0.09
Dilutive effect of options ... -- 4,812 --
------- ------- -------
Dilutive earnings per share .. $15,570 171,440 $ 0.09
======= ======= =======
14. COMMITMENTS AND CONTINGENCIES
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
14
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 September 30, 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
results 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 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 (refer to discussion of October 14, 2004 Sumitomo Bakelite settlement
agreement discussed below). 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 and amended our cross-claims against
Sumitomo Bakelite to reflect Fujitsu's new claims against us. The parties
engaged in extensive discovery activities. Fujitsu has indicated that it may
seek damages in excess of $100 million. In November
15
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 Northern District Court
granted a stay of the action pending before it in favor of the action pending in
the Santa Clara Superior Court, where discovery has continued. 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 Superior Court held a hearing on our motions to dismiss on
May 4, 2004 and granted dismissal of some of Fujitsu's and Cirrus Logic's claims
against us. Fujitsu filed a second amended complaint in the Superior Court on or
about June 18, 2004; Cirrus Logic filed a first amended cross-complaint on or
about the same date. On July 19, 2004, we filed motions to dismiss certain
claims asserted in the new complaints. At a hearing on August 24, 2004, the
Superior Court denied our motion with respect to Fujitsu's claims, and granted
our motion with respect to Cirrus Logic's claims. Cirrus Logic and Sumitomo
Bakelite answered Fujitsu's second amended complaint on or about September 13
and 23, 2004, respectively, by generally denying all liability and asserting
affirmative defenses. We filed a cross-complaint against Sumitomo Bakelite on
October 1, 2004, asserting claims for breaches of warranties and
indemnification; Sumitomo Bakelite filed an answer generally denying all
liability and asserting affirmative defenses. We answered Fujitsu's second
amended complaint on October 13, 2004, generally denying all liability and
asserting affirmative defenses. On or about October 4, 2004, Cirrus Logic filed
its second amended complaint. We filed a motion to dismiss Cirrus Logic's second
amended complaint on November 2, 2004; the motion is scheduled for hearing by
the Court on November 23, 2004. Fact discovery is nearing completion, with
expert discovery to follow. A trial in this matter is set to begin on May 2,
2005. We intend to deny all liability, defend ourselves vigorously, pursue our
cross-claims against Sumitomo Bakelite, and 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 and 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 and, on or about June 7, 2004, ChipPAC filed a request for
dismissal of its cross-complaint against us which the Court granted on June 14,
2004. On or about July 30, 2004, Atmel filed a third amended cross-complaint,
which asserted no new claims against us. We answered Atmel's third amended
cross-complaint on August 27, 2004 by denying all liability and asserting
affirmative defenses; other defendants' responsive pleadings remain outstanding.
All parties are currently conducting written discovery and have completed some
physical plant inspection discovery. No trial date has been set. We intend to
deny all liability, defend ourselves vigorously, pursue our cross-claims against
Sumitomo Bakelite, and seek judgment in our favor in due course.
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 denied all liability in
this matter and also asserted a cross-complaint against Sumitomo Bakelite.
Sumitomo Bakelite has denied any liability. The parties have completed fact
discovery and most expert discovery. On March 30, 2004, the Court denied our
motion for summary judgment against Philips' claims. Maxtor and Philips reached
a settlement of Maxtor's claims against Philips on or about April 28, 2004 in
which, reportedly, Philips agreed to pay Maxtor $24.8 million. We, Philips and
Sumitomo Bakelite thereafter appeared to reach resolution of
16
Philips' claims against us on April 29, 2004, pursuant to which we agreed to pay
Philips $1.5 million 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. However, the Court subsequently determined that
Philips did not knowingly agree to the terms of the settlement that all three
parties had affirmed in open court, set aside the settlement and ordered the
parties to a further settlement conference that was held on July 9, 2004. That
conference did not result in a renewed settlement. On July 16, 2004, we filed a
petition for a writ of mandate to the California Court of Appeal, seeking to
overturn the Superior Court's decision not to enforce the parties' settlement
agreement of April 29, 2004. The Court of Appeal denied our writ petition on
August 19, 2004. On August 27, 2004, we filed a petition for review to the
California Supreme Court which was denied on October 13, 2004. On October 14,
2004, we and Sumitomo Bakelite reached a settlement agreement whereby Sumitomo
Bakelite will indemnify us for any damages awarded to Philips in excess of $3.5
million. In exchange, we dismissed our cross-claims against Sumitomo Bakelite.
Trial of this matter before a jury began on October 18, 2004 and is expected to
continue through November 2004. We intend to deny all liability, defend
ourselves vigorously, and seek judgment in our favor in due course.
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 filed
a motion to dismiss Maxim's amended complaint which the Court granted in full on
July 6, 2004. Maxim filed a second amended complaint on or about August 5, 2004.
We filed a motion to dismiss the second amended complaint on September 7, 2004.
The Court is scheduled to hear that motion on November 9, 2004. If necessary, we
intend to deny all liability to Maxim, defend ourselves vigorously, file
cross-claims against Sumitomo Bakelite and/or Sumitomo Plastics, and seek
judgment in our favor in due course. 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 in lieu
of opposing those motions to dismiss. 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 and Fairchild filed a third amended
complaint on or about April 15, 2004. We filed a motion to dismiss Fairchild's
third amended pleading which the Court granted in part and denied in part on
June 15, 2004. On or about July 15, 2004, Fairchild filed its Fourth Amended
Complaint. The Court granted our motion to dismiss certain of Fairchild's claims
at a hearing on September 21, 2004. On October 7, 2004, we filed an answer to
the remaining claims in Fairchild's fourth amended complaint, denying liability
generally and asserting affirmative defenses. We also filed a cross-complaint
against Sumitomo Bakelite on October 7, 2004 seeking indemnification for its
breaches of warranties. Written discovery is ongoing and no trial date has been
scheduled. We intend to deny all liability, defend ourselves vigorously, pursue
our cross-claims against Sumitomo Bakelite, and seek judgment in our favor in
due course.
Other Epoxy Mold Compound Matter
In August 2004, we received an indemnification demand from one of our
customers for alleged damages related to the Sumitomo Bakelite molding compound.
The amount of damages claimed to date is $2.5 million, but the demand indicates
that there may be future claims as well without specifying any amount. We have
denied liability in this matter and will defend ourselves accordingly, as
necessary.
17
OTHER LITIGATION
Amkor Technology, Inc. v. Motorola, Inc.
In August 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 in September 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 the Supreme
Court of Delaware. The appeal was argued in March 2004. In May 2004, the Supreme
Court reversed the Superior Court's decision, and remanded for further
development of the factual records. A trial date has been set for May 5, 2005.
We believe we will prevail on the merits at the Superior Court level. In
addition, should Motorola prevail, 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.
Citizen Watch Co. Ltd. v. Amkor Technology, Inc.
We entered into an intellectual property assignment agreement ("IPAA")
with Citizen Watch Co., Ltd. ("Citizen") with an effective date of March 28,
2002, pursuant to which Citizen assigned to us (i) its rights under a Patent
License Agreement dated January 25, 1996 between Motorola and Citizen (the
"License Agreement") and (ii) Citizen's interest in U.S. Patents the 133 and 278
patents. The parties entered into the IPAA in conjunction with having entered
into a Master Purchase Agreement under which we purchased substantially all of
the assets of a division of Citizen in April 2002. Subsequent to that
transaction, Motorola challenged the validity of Citizen's assignment of its
rights under the License Agreement to us, which resulted in our litigation with
Motorola, Inc., which is described above (the "Motorola case"). Pending
resolution of the Motorola case, and in accordance with the terms of the IPAA,
we are withholding final payment of 1.4 billion yen ($12.6 million based on the
spot exchange rate at September 30, 2004).
In March 2004 Citizen submitted a Demand for Arbitration in the
International Chamber of Commerce ("ICC"), claiming breach of our obligation to
make the deferred payment of 1.4 billion yen. In May 2004 we filed our Answer to
Request for Arbitration, Counterclaim and Request for Abeyance of Proceedings.
In our Answer, we contend, among other things, that we do not have an obligation
to make the deferred payment due to (i) our inability to perfect the rights
assigned by Citizen under the License Agreement, and (ii) Citizen's breach of
its representations and warranties that it had all right and authority to assign
its rights under the License Agreement to us.
The ICC has confirmed an Arbitral Tribunal of three arbitrators. The
parties have executed Terms of Reference in accordance with Article 18 of the
ICC Rules of Arbitration, which outline the issues to be determined in the
dispute, and the procedural rules to be applied by the Arbitral Tribunal. We
have filed a motion to stay the ICC proceedings, pending the outcome of the
Motorola case, which motion is presently pending before the Arbitral Tribunal.
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
18
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 $61.6 million based on the spot exchange rate at September
30, 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. On May 18, 2004, the Paris Commercial Court of France declared that it
did not have jurisdiction over the matter. The Court of Appeal of Paris heard
the appeal regarding jurisdiction during October 2004, and a ruling is expected
in November 2004.
In response to the French 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. AME and ABS subsequently appealed that decision to
the Court of Appeals of Paris, which heard arguments in the matter on October 6,
2004. On November 3, 2004, the Court of Appeals of Paris affirmed the decision
of the Paris Commercial Court declaring that the dispute between the parties
should be resolved pursuant to the arbitration proceeding currently pending in
the United States District Court of the Eastern District of Pennsylvania.
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 Administrative Law Judge conducted an
evidentiary hearing during July and August of 2004 in Washington D.C. The
post-hearing briefing has been completed and an Initial Determination by the ITC
Administrative Law Judge is expected in mid-November.
Computer Software Dispute
During 2001, we filed a complaint against a computer software vendor and
other parties in the Pennsylvania Court of Common Pleas for Chester County
alleging claims of misrepresentation, negligent misrepresentation, breach of
contract, and professional malpractice. The defendants later asserted a
counterclaim for breach of contract against us. In June 2004, we reached
agreement with the defendants to a full and final settlement of all issues in
dispute. As a result of this settlement, we recorded a $3.4 million net gain in
other expense (income), net, during the three months ended June 30, 2004 and
nine months ended September 30, 2004.
19
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 and nine months ended
September 30, 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 subcontractors 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, Singapore 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, Inc., 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.
20
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. 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.
Notwithstanding the above, our customers' aggregate forecasts have
weakened considerably in connection with a greater level of uncertainty
regarding end-market demand. This trend is materially hindering our visibility
into future quarter revenue, the mix of that revenue, gross margin, capacity
utilization and the pricing environment. In the near term, we expect our margins
to remain under pressure due to the combined impact of pricing actions, excess
manufacturing capacity relative to demand, and absorption of costs associated
with our recent acquisitions. On the basis of current forecasts, we expect
fourth quarter of 2004 revenues to be 5% to 10% lower as compared to the third
quarter of 2004. We expect fourth quarter 2004 gross margin will be in the range
of 15% to 17%. We do not presently expect to achieve positive earnings for the
fourth quarter of 2004.
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, a raw material we have
purchased in significant volume for specific applications, 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
----- ----- ----- ------
(UNAUDITED) (UNAUDITED)
Net revenues ....................................... 100.0% 100.0% 100.0% 100.0%
Gross profit ....................................... 17.9 23.9 20.3 19.4
Operating income ................................... 4.9 11.2 7.0 5.7
Income (loss) before income taxes, equity investment
losses, minority interest and
discontinued operations ...................... (3.0) 2.5 0.9 (6.6)
Income (loss) from continuing operations ........... (4.6) 3.7 (0.1) (6.6)
21
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Net Revenues. Packaging and test net revenues increased 15.8% to $490.8
million in the three months ended September 30, 2004 from $423.8 million in the
three months ended September 30, 2003. This increase in net revenues was
principally attributed to an overall unit volume increase of 26.6%. The
increased volume was driven by a 17.0% increase for advanced packages and a
39.6% increase in our traditional packages. Partially offsetting the volume
increases, average selling prices for the three months ended September 30, 2004
declined approximately 5% as compared to average selling prices in the three
months ended September 30, 2003. This decrease in overall average selling prices
was driven by a 2% decrease in average selling prices for advanced packages and
a 15% decrease in average selling prices for traditional packages. Revenue from
our 2004 acquisitions (refer to Capital Expenditures and Acquisitions below)
accounted for 10.9% of our increase in net revenues for the three months ended
September 30, 2004.
Gross Profit. Gross profit decreased $13.6 million, to a gross profit of
$87.8 million in the three months ended September 30, 2004 from $101.4 million
in the three months ended September 30, 2003. Our cost of revenues consists
principally of costs of materials, labor and depreciation.
Gross margin decreased to 17.9% in the three months ended September 30,
2004 from 23.9% in the three months ended September 30, 2003. The decline of
6.0% is principally a result of average selling price erosion across our product
lines, which decreased gross margin by approximately 4%, unfavorable product mix
changes, which decreased gross margin by approximately 3%, and increased
inventory reserve charges, which decreased gross margin by approximately 1%.
These negative impacts on gross margin were partially offset by the favorable
impact from increased unit volumes. Gross margin for our 2004 acquisitions had
an immaterial impact on our change in consolidated gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.2 million, or 21.1%, to $53.2 million, or
10.8% of net revenues, in the three months ended September 30, 2004 from $44.0
million, or 10.4% of net revenues, in the three months ended September 30, 2003.
During the three months ended September 30, 2004, we experienced increased
litigation costs of $6.0 million over the prior year comparable period related
to our patent infringement and epoxy mold compound litigation matters (refer to
Item 1, Legal Proceedings). In addition, our selling, general and administrative
expenses increased approximately $3.2 million over the comparable prior year
period, as a result of (1) $3.9 million related to increased headcount,
compensation costs and general business activity to support our overall business
growth, (2) $2.3 million related to our 2004 acquisitions, (3) an increase in
executive termination benefits of $0.9 million and (4) the reversal of our 2004
bonus accrual due to lower than anticipated year to date operating results,
thereby offsetting the increase in selling, general and administrative expenses
by $3.9 million.
Research and Development. Research and development expenses increased $0.8
million to $8.7 million, or 1.8% of net revenues, in the three months ended
September 30, 2004 from $7.9 million, or 1.9% of net revenues, in the three
months ended September 30, 2003. The increase in our research and development
expenses was 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. This increase was partially offset by reduced corporate
research and development spending due to our current operating performance
results. 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.
Other Expense (Income). Other expense (income), net, increased $2.0
million, to $39.0 million, or 8.0% of net revenues, in the three months ended
September 30, 2004 from $37.0 million, or 8.7% of net revenues, in the three
months ended September 30, 2003. The net increase was primarily the result of a
$2.9 million increase in interest expense due to higher debt levels and an
unfavorable change related to foreign currency of $2.4 million. These items were
partially offset by $2.1 million of debt retirement costs and $1.2 million of
other losses incurred during the three months ended September 30, 2003 which did
not recur in the current quarter.
22
Income Taxes. During the third quarter of 2004, we recorded income tax
expense of $6.3 million related to continuing operations compared to an income
tax benefit of $6.9 million recorded for the three months ended September 30,
2003. The tax expense for the third quarter of 2004 included a tax provision of
$6.5 million recorded in connection with new guidance issued by tax authorities
relating to taxation of our operations.
During 2002, we recorded valuation allowances against the majority of our
deferred assets in certain jurisdictions. In 2003 and 2004, we again recorded
valuation allowances against deferred assets in certain jurisdictions. We will
resume the recognition of deferred tax assets when we return to sustained
profitability in certain jurisdictions. As of September 30, 2004, we had U.S.
net operating losses totaling $416.5 million expiring between 2021 and 2024.
Additionally, as of September 30, 2004, we had approximately $42.6 million of
non-U.S. net operating losses available for carryforward expiring through 2013.
We operate in and file income tax returns in various U.S. and non-U.S.
jurisdictions which are subject to examination by tax authorities. We are
currently under examination in the U.S. The tax returns for open years in all
jurisdictions in which we do business are subject to changes upon examination.
We believe that we have estimated and provided adequate accruals for the
probable additional taxes and related interest expense that may ultimately
result from examinations related to our transfer pricing and local attribution
of income resulting from significant intercompany transactions, including
ownership and use of intellectual property, in various U.S. and non-U.S.
jurisdictions. Our estimated tax liability is subject to change as examinations
of specific tax years are completed in the respective jurisdictions. We believe
that any additional taxes or related interest over the amounts accrued will not
have a material effect on our financial condition or results of operations, nor
do we expect that examinations to be completed in the near term would have a
material effect.
The American Jobs Creation Act of 2004 (the Act) was signed into law in
October 2004 and has several provisions for companies including a deduction
related to qualified production activities taxable income. Another provision of
the Act allows United States companies to repatriate foreign earnings at a
substantially reduced tax rate until October 2005. The Financial Accounting
Standards Board is currently reviewing the impact of the qualified production
activities deduction on deferred taxes and is expected to issue guidance in the
fourth quarter of 2004. Until this guidance is issued, the impact upon us
cannot be determined.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
Net Revenues. Packaging and test net revenues increased 26.5% to $1,448.0
million in the nine months ended September 30, 2004 from $1,144.9 million in the
nine months ended September 30, 2003. This increase in net revenues was
principally attributed to an overall unit volume increase of 44.6%. This
increase in volume was driven by a 37.9% increase for advanced packages and a
53.3% increase in our traditional packages. Partially offsetting the volume
increases, average selling prices for the nine months ended September 30, 2004
declined approximately 7% as compared to average selling prices in the nine
months ended September 30, 2003. This decrease in overall average selling prices
was driven by a 5% decrease in average selling prices for advanced packages and
a 13% decrease in average selling prices for traditional packages. Revenue from
our 2004 acquisitions accounted for 2.9% of our increase in net revenues for the
nine months ended September 30, 2004.
Gross Profit. Gross profit increased $72.2 million, to a gross profit of
$294.4 million in the nine months ended September 30, 2004 from $222.2 million
in the nine months ended September 30, 2003. Our cost of revenues consists
principally of costs of materials, labor and depreciation.
Gross margin increased to 20.3% in the nine months ended September 30,
2004 from 19.4% in the nine months ended September 30, 2003. The improvement of
0.9% is principally a result of increased unit volumes, which was partially
offset by average selling price erosion across our product lines and unfavorable
product mix changes. Gross margin for our 2004 acquisitions had an immaterial
impact on our change in consolidated gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $32.4 million, or 25.2%, to $161.0 million, or
11.1% of net revenues, in the nine months ended September 30, 2004 from $128.6
million, or 11.2% of net revenues, in the nine months ended September 30, 2003.
During the nine months ended September 30, 2004, we experienced increased
litigation costs of $15.6 million over the prior year comparable period related
to our patent infringement and epoxy mold compound litigation matters. In
addition, our selling, general and administrative expenses increased
approximately $16.8 million over the comparable prior year period, as a result
of (1) $17.6 million related to increased headcount, compensation costs and
general business activity to support our overall business growth, (2) $2.7
million related to our 2004 acquisitions, (3) an increase in executive
termination benefits of $0.9 million and (4) the reversal of our 2004 bonus
accrual due to lower than anticipated year to date operating results, thereby
offsetting the increase in selling, general and administrative expenses by $4.4
million.
Research and Development. Research and development expenses increased $4.8
million to $27.5 million, or 1.9% of net revenues, in the nine months ended
September 30, 2004 from $22.7 million, or 2.0% of net revenues, in the nine
months ended September 30, 2003. Our increase in our research and development
expenses was 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. This increase was partially offset by reduced corporate
research and development spending, which commenced in the third quarter of 2004,
due to our current operating performance results. Our research and development
efforts support our customers' needs for smaller packages and increased
functionality.
Other Expense (Income). Other expenses (income), net, decreased $53.3
million, to $87.8 million, or 6.1% of net revenues, in the nine months ended
September 30, 2004 from $141.1 million, or 12.3% of net revenues, in the nine
months ended September 30, 2003. The net decrease, or favorable change, was
primarily the result of debt retirement costs decreasing $29.7 million and gains
from ASI shares sales increasing $16.9 million during the nine months ended
23
September 30, 2004 over the comparable prior year period. Also contributing to
this decrease was a $3.4 million legal settlement gain related to our claims
against a software vendor incurred during the nine months ended September 30,
2004. In the comparable prior year period, a $5.7 million non-recurring loss
related to our ASI call options and $2.0 million of other non-recurring charges
were incurred. These items were partially offset by an unfavorable change
related to foreign currency of $5.3 million.
Equity Investment Gain (Loss). For the nine months ended September 30,
2004, we had less than $0.1 million of loss 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 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. During the nine months ended September 30, 2004, we recorded
income tax expense of $13.3 million related to continuing operations compared to
an income tax benefit of $6.1 million recorded during the nine months ended
September 30, 2003. The tax expense for the nine months ended September 30, 2004
includes a tax provision of $6.5 million recorded in connection with new
guidance issued by tax authorities relating to taxation of our operations,
offset by a non-recurring $2.8 million tax benefit as a result of a favorable
ruling in a foreign jurisdiction. Excluding these adjustments and the effect of
tax losses in the U.S. and certain foreign jurisdictions for which we do not
record a tax benefit, our effective tax rate for the full year 2004 is currently
projected to be 18.3%. For the nine months ended September 30, 2003, tax expense
reflected foreign tax expense of $11.8 million, net of $7.5 million current tax
benefit related to the loss from continuing operations. The $7.5 million tax
benefit was offset by $7.5 million of current tax expense from continuing
operations.
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 September 30, 2004 was $231.3 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 September 30,
2004 was reduced by $1.6 million related to outstanding letters of credit. With
the additional net proceeds of approximately $289 million from our October 2004
term loan transaction discussed further below under Debt Instruments and Related
Covenants, 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.
In the event we decide to consummate additional business combinations, we
may require additional cash and we cannot assure 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 nine months ended September 30, 2004 and 2003 were as
follows:
24
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
--------- ---------
(IN THOUSANDS)
Net cash provided by continuing operating activities .... $ 193,945 $ 100,009
Net cash used in continuing investing activities ........ (356,557) (95,365)
Net cash provided by continuing financing activities .... 81,515 8,455
Net cash provided by (used in) discontinued operations .. 111 13,633
Cash flows from continuing operating activities: Our cash flows from
continuing operating activities for the nine months ended September 30, 2004
increased $93.9 million to $193.9 million over the comparable prior year period.
Our cash flows from 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 and increase in our
net long-term liabilities.
The primary contributors to cash flow from continuing operations for the
nine months ended September 30, 2004 were $161.5 million of cash flows provided
by continuing operations (adjusted for non-cash and non-operating items), a
decrease in accounts receivable of $39.7 million (primarily due to a Japanese
holiday occurring at the end of the prior year which then impeded cash
collections), an increase in other long-term liabilities of $17.6 million
(primarily due to a $15.3 million increase in our Korean severance liability)
and a $15.1 million increase in accrued expenses. These sources were primarily
offset by a $37.3 million increase in inventory levels. We believe that our
inventory increase is primarily due to an inventory build in the
microelectronics supply chain, stemming from weaker than anticipated end market
demand. Generally, we purchase raw materials in support of customer forecasts.
Cash flows from continuing investing activities: Our cash flows used in
continuing investing activities for the nine months ended September 30, 2004
increased by $261.2 million over the comparable prior year period, to $356.6
million, primarily due to a $219.9 million increase in capital expenditures from
$148.2 million in the nine months ended September 30, 2003 to $368.1 million in
the nine months ended September 30, 2004. In addition to cash used for capital
expenditures, we paid $63.5 million in cash during the nine months ended
September 30, 2004 related to business acquisitions (see below). These cash
outflows were offset by an increase of proceeds from our net sales of
investments and sales of fixed assets of $22.6 million.
The following business acquisitions, which are more fully discussed below
under Capital Expenditures and Acquisitions, occurred during the nine months
ended September 30, 2004:
- - 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.
- - In May 2004, we acquired certain assembly and test assets from
International Business Machines Corp. and Xin Development Co., Ltd. The
purchase price was valued at approximately $138.1 million, including
$117.0 million of short-term notes payable (net of a $4.6 million
discount).
- - In August 2004, we acquired approximately 93% of the capital stock of
Unitive, Inc. ("Unitive"), based in North Carolina, and acquired
approximately 60% of the capital stock of Unitive Semiconductor Taiwan
Corporation ("UST"). The total purchase price was comprised of $47.9
million, which included cash consideration due at closing of $31.6
million, $0.9 million of direct acquisition costs and $16.2 million (or
$15.4 million based on the discounted value) due one year after closing.
In addition, we assumed $24.9 million of debt and also now have contingent
earn-out provisions related to Unitive and UST (refer to further
discussion below under Capital Expenditures and Acquisitions).
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 a 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.
25
- - 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 nine months ended September 30, 2004
were $81.5 million, an increase of $73.0 million, as compared to $8.5 million of
inflows for the nine months ended September 30, 2003. In March 2004, we sold
$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. Overall, our debt borrowing activity, net of debt payments,
increased $79.2 million during the nine months ended September 30, 2004 from the
prior year period, accounting for the majority of our increase in cash inflows
from continuing financing activities for the nine months ended September 30,
2004. Proceeds from transactions with stockholders decreased $6.2 million during
the nine months ended September 30, 2004 from the prior year period.
DEBT INSTRUMENTS AND RELATED COVENANTS
Following is a summary of short-term borrowings and long-term debt:
SEPTEMBER 30, 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 3.5% due June 2007 .... -- --
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 $1.6 million... 248,407 --
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
Notes payable, net of unamortized discount of $2.2 million ....................... 135,535 --
Other debt ....................................................................... 56,855 35,725
----------- -----------
................................................................................... 1,915,719 1,679,372
Less -- Short-term borrowings and current portion of long-term debt .............. (171,174) (28,665)
----------- -----------
$ 1,744,545 $ 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 nine months ended
2004, interest expense payable in cash was $105.3 million.
In October 2004, we entered into a new $300.0 million term loan credit
facility with a group of institutional lenders. The term loan bears interest at
a rate of LIBOR plus 450 basis points and matures in October 2010. We intend to
use the net proceeds of approximately $289 million from the term loan for
working capital and general corporate purposes. As the term loan transaction was
completed subsequent to September 30, 2004, the proceeds are not included in the
above debt table.
In June 2004, we entered into a new $30.0 million senior secured revolving
credit facility (the "Facility"). The Facility, which is available through June
2007, replaced our prior $30.0 million secured revolving line of credit which
was scheduled to mature on October 31, 2005. The maximum annual capital
expenditures, minimum EBITDA and minimum daily liquidity financial covenants
that were conditions of the previous revolving credit facility have been
eliminated under this new Facility.
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
26
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 entitled the purchasers, within 210 days from the
original issuance, to exchange their notes for registered notes with
substantially identical terms as the original notes. We filed a registration
statement with the Securities and Exchange Commission for the exchange of the
notes, and the exchange was completed in July 2004.
Notes payable, net, consists of $120.1 million (net of a $1.5 million
unamortized debt discount), which is due in the fourth quarter of 2004, related
to our May 2004 acquisition from IBM and $15.5 million (net of a $0.7 million
unamortized debt discount) related to our acquisition of Unitive, which is due
in the first quarter of 2006.
Other debt as of September 30, 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 majority maturing in 2004. As of September 30, 2004, the foreign debt
has interest rates ranging from 0.6% to 8.18%. These debt instruments do not
include significant financial covenants.
Pursuant to the indentures governing our senior and senior subordinated
notes, Unitive, a domestic subsidiary acquired in August 2004, and Unitive's
domestic subsidiary, are required to guarantee the debt obligations under our
senior and senior subordinated notes. The guarantees were put in place on
October 29, 2004. At September 30, 2004, Unitive and its domestic subsidiary
had total assets of $36.8 million, of which $16.6 million was comprised of
goodwill. At September 30, 2004, Unitive and its domestic subsidiary had total
liabilities of $11.1 million.
CAPITAL EXPENDITURES AND ACQUISITIONS
Our first, second and third quarter 2004 capital expenditures were $170.8
million, $123.8 million and $73.4 million, respectively, and we have budgeted
capital expenditures of approximately $32 million for the remainder of 2004.
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.
In May 2004, we acquired certain assembly and test assets from
International Business Machines Corp. and Waigaoqiao Free Trade Zone Xin
Development Co., Ltd. The acquired assets included a test operation located in
Singapore (primarily test equipment and workforce), a 950,000 square foot
building and associated 50-year land use rights located in China, and other
intangible assets. The 950,000 square foot facility will not be operational
during 2005. These assets were acquired for the purposes of increasing our
assembly and test capacity. The purchase price was valued at approximately
$138.1 million, including $117.0 million of short-term notes payable (net of a
$4.6 million discount). The short-term notes payable, and interest thereon of
$4.6 million, is expected to be paid during the fourth quarter of 2004.
In August 2004, we acquired approximately 93% of the capital stock of
Unitive, Inc., based in North Carolina , and approximately 60% of the capital
stock of Unitive Semiconductor Taiwan Corporation, a Taiwan-based joint venture
between Unitive and various Taiwanese investors. Unitive and UST are providers
of wafer level technologies and services for flip chip and wafer level packaging
applications. The total purchase price was comprised of $47.9 million, which
included cash consideration due at closing of $31.6 million, $0.9 million of
direct acquisition costs and $16.2 million (or $15.4 million based on the
discounted value) due one year after closing. In addition, we assumed $24.9
million of debt. Both transactions include provisions for contingent,
performance-based earn-outs which could increase
27
the value of the transactions. Related to Unitive, the maximum earn-out is $55.0
million. Related to UST, we currently estimate the value of the earn-out to be
approximately $0 to $2 million. The earn-outs will be paid approximately one
year after closing, of which the Unitive earn-out may be paid in either cash or
stock, at our option. We also retain an option to acquire the remaining interest
of approximately 40% of UST for a maximum of $18.0 million, which expires 18
months after closing. However, if UST meets certain production-related goals
prior to the expiration of the 18 month call option period, at the option of the
minority interest holders we would be required to purchase the remaining
interest of approximately 40% of UST for a maximum of $18.0 million. The results
of Unitive and UST operations are included in our consolidated statement of
income beginning on their dates of acquisition, August 19, 2004 and August 20,
2004, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet guarantees or other off-balance sheet
arrangements as of September 30, 2004.
OTHER CONTINGENCIES
We refer you to Item 1. Legal Proceedings for a discussion of our
contingencies related to our mold compound litigation, patent-related litigation
and other litigation matters. We are currently a party to these various legal
proceedings. 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
results in the period in which the ruling occurs. The estimate of the potential
impact from the legal proceedings, discussed under Item 1, on our financial
position or overall results of operations could change in the future.
In addition, on October 12, 2004, we announced that the Securities and
Exchange Commission ("SEC") is conducting an informal inquiry into trading in
the securities of Amkor Technology, Inc. We believe that the inquiry relates to
transactions in our securities by certain individuals, which may include certain
insiders, during 2004. In connection with the informal inquiry, we have received
requests from the SEC to voluntarily produce documents and other relevant
information concerning these matters, and we are cooperating with these
requests. The SEC has advised us that the inquiry should not be construed as
either an indication by the SEC that any violations of law have occurred, or as
an adverse reflection upon any person, entity or security.
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,
- valuation of inventory.
During the nine months ended September 30, 2004, there have been no
significant changes in our 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.
28
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, the
level of demand for our products and services by our customers and end-market
customers, 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.
As discussed previously under Our Expectations Regarding Future Business
Conditions, our visibility into the fourth quarter of 2004 diminished. If
industry conditions deteriorate, we could sustain significant losses in the
future, which could materially impact our business, including our liquidity.
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. In addition to the above regarding our
visibility into the fourth quarter of 2004, you should refer to the Risk Factors
that were included in the Form 8-K that we filed on October 13, 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 September 30, 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 September 30, 2004... $(3,526) $ 2,473 $ 1,353 $(3,429) $(1,339)
As of December 31, 2003.... $(3,269) $ 3,954 $(2,041) $ 3,718 $ 315
29
INTEREST RATE RISKS
Our company has interest rate risk with respect to our debt. As of
September 30, 2004, we had a total of $1,915.7 million of debt of which 98.5%
was fixed rate debt and 1.5% 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
September 30, 2004, but which had been reduced by $1.6 million related to
outstanding letters of credit at September 30, 2004. 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 September 30, 2004.
SEPTEMBER 30,
------------------------------------------------------
(IN THOUSANDS) FAIR
2004 2005 2006 2007 2008 THEREAFTER TOTAL VALUE
-------- ------ -------- -------- -------- ---------- ---------- ----------
Long-term debt:
Fixed rate debt $147,535 $4,942 $240,911 $148,847 $471,086 $873,958 $1,887,279 $1,673,477
Average interest rate 7.6% 4.7% 5.7% 5.0% 9.2% 8.2% 7.8%
Variable rate debt $ 23,639 $ 510 $ 2,041 $ 818 $ 572 $ 860 $ 28,440 $ 28,440
Average interest rate 0.7% 2.5% 2.5% 2.5% 2.6% 2.6% 1.0%
EQUITY PRICE RISKS
Our outstanding 5.75% convertible subordinated notes due 2006 and 5.0%
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 5.0% 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 third 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 September 30, 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
30
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 controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
EPOXY MOLD COMPOUND LITIGATION
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 (refer to discussion of October 14, 2004 Sumitomo Bakelite settlement
agreement discussed below). 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 and amended our cross-claims against
Sumitomo Bakelite to reflect Fujitsu's new claims against us. The parties
engaged in extensive 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 Northern District Court
granted a stay of the action pending before it in favor of the action pending in
the Santa Clara Superior Court, where discovery has continued. 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 Superior Court held a hearing on our motions to dismiss on
May 4, 2004 and granted dismissal of some of Fujitsu's and Cirrus Logic's claims
against us. Fujitsu filed a second amended complaint in the Superior Court on or
about June 18, 2004; Cirrus Logic filed a first amended cross-complaint on or
about the same date. On July 19, 2004, we filed motions to dismiss certain
claims asserted in the new complaints. At a hearing on August 24, 2004, the
Superior Court denied our motion with respect to Fujitsu's claims, and granted
our motion with respect to Cirrus Logic's claims. Cirrus Logic and Sumitomo
Bakelite answered Fujitsu's second amended complaint on or about September 13
and 23, 2004, respectively, by generally denying all liability and asserting
affirmative defenses. We filed a cross-complaint against Sumitomo Bakelite on
October 1, 2004, asserting claims for breaches of warranties and
indemnification; Sumitomo Bakelite filed an answer generally denying all
liability and asserting affirmative defenses. We answered Fujitsu's second
amended complaint on October 13, 2004, generally denying all liability and
asserting affirmative defenses. On or about October 4, 2004, Cirrus Logic filed
its second amended complaint. We filed a motion to dismiss Cirrus Logic's second
amended complaint on November 2, 2004; the motion is scheduled for hearing by
the Court on November 23, 2004. Fact discovery is nearing completion, with
expert discovery to follow. A trial in this matter is set to begin on May 2,
31
2005. We intend to deny all liability, defend ourselves vigorously, pursue our
cross-claims against Sumitomo Bakelite, and 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 and 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 and, on or about June 7, 2004, ChipPAC filed a request for
dismissal of its cross-complaint against us which the Court granted on June 14,
2004. On or about July 30, 2004, Atmel filed a third amended cross-complaint,
which asserted no new claims against us. We answered Atmel's third amended
cross-complaint on August 27, 2004 by denying all liability and asserting
affirmative defenses; other defendants' responsive pleadings remain outstanding.
All parties are currently conducting written discovery and have completed some
physical plant inspection discovery. No trial date has been set. We intend to
deny all liability, defend ourselves vigorously, pursue our cross-claims against
Sumitomo Bakelite, and seek judgment in our favor in due course.
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 denied all liability in
this matter and also asserted a cross-complaint against Sumitomo Bakelite.
Sumitomo Bakelite has denied any liability. The parties have completed fact
discovery and most expert discovery. On March 30, 2004, the Court denied our
motion for summary judgment against Philips' claims. Maxtor and Philips reached
a settlement of Maxtor's claims against Philips on or about April 28, 2004 in
which, reportedly, Philips agreed to pay Maxtor $24.8 million. We, Philips and
Sumitomo Bakelite thereafter appeared to reach resolution of Philips' claims
against us on April 29, 2004, pursuant to which we agreed to pay Philips $1.5
million 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. However, the Court subsequently determined that Philips did not
knowingly agree to the terms of the settlement that all three parties had
affirmed in open court, set aside the settlement and ordered the parties to a
further settlement conference that was held on July 9, 2004. That conference did
not result in a renewed settlement. On July 16, 2004, we filed a petition for a
writ of mandate to the California Court of Appeal, seeking to overturn the
Superior Court's decision not to enforce the parties' settlement agreement of
April 29, 2004. The Court of Appeal denied our writ petition on August 19, 2004.
On August 27, 2004, we filed a petition for review to the California Supreme
Court which was denied on October 13, 2004. On October 14, 2004, we and Sumitomo
Bakelite reached a settlement agreement whereby Sumitomo Bakelite will indemnify
us for any damages awarded to Philips in excess of $3.5 million. In exchange, we
dismissed our cross-claims against Sumitomo Bakelite. Trial of this matter
before a jury began on October 18, 2004 and is expected to continue through
November 2004. We intend to deny all liability, defend ourselves vigorously, and
seek judgment in our favor in due course.
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
32
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 filed
a motion to dismiss Maxim's amended complaint which the Court granted in full on
July 6, 2004. Maxim filed a second amended complaint on or about August 5, 2004.
We filed a motion to dismiss the second amended complaint on September 7, 2004.
The Court is scheduled to hear that motion on November 9, 2004. If necessary, we
intend to deny all liability to Maxim, defend ourselves vigorously, file
cross-claims against Sumitomo Bakelite and/or Sumitomo Plastics, and seek
judgment in our favor in due course. 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 in lieu
of opposing those motions to dismiss. 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 and Fairchild filed a third amended
complaint on or about April 15, 2004. We filed a motion to dismiss Fairchild's
third amended pleading which the Court granted in part and denied in part on
June 15, 2004. On or about July 15, 2004, Fairchild filed its Fourth Amended
Complaint. The Court granted our motion to dismiss certain of Fairchild's claims
at a hearing on September 21, 2004. On October 7, 2004, we filed an answer to
the remaining claims in Fairchild's fourth amended complaint, denying liability
generally and asserting affirmative defenses. We also filed a cross-complaint
against Sumitomo Bakelite on October 7, 2004 seeking indemnification for its
breaches of warranties. Written discovery is ongoing and no trial date has been
scheduled. We intend to deny all liability, defend ourselves vigorously, pursue
our cross-claims against Sumitomo Bakelite, and seek judgment in our favor in
due course.
Other Epoxy Mold Compound Matter
In August 2004, we received an indemnification demand from one of our
customers for alleged damages related to the Sumitomo Bakelite molding compound.
The amount of damages claimed to date is $2.5 million, but the demand indicates
that there may be future claims as well without specifying any amount. We have
denied liability in this matter and will defend ourselves accordingly, as
necessary.
OTHER LITIGATION
Amkor Technology, Inc. v. Motorola, Inc.
In August 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 in September 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 the Supreme
Court of Delaware. The appeal was argued in March 2004. In May 2004, the Supreme
Court reversed the Superior Court's decision, and remanded for further
development of the factual records. A trial date has been set for May 5, 2005.
We believe we will prevail on the merits at the Superior Court level.
33
In addition, should Motorola prevail, 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.
Citizen Watch Co. Ltd. v. Amkor Technology, Inc.
We entered into an intellectual property assignment agreement ("IPAA")
with Citizen Watch Co., Ltd. ("Citizen") with an effective date of March 28,
2002, pursuant to which Citizen assigned to us (i) its rights under a Patent
License Agreement dated January 25, 1996 between Motorola and Citizen (the
"License Agreement") and (ii) Citizen's interest in U.S. Patents the 133 and 278
patents. The parties entered into the IPAA in conjunction with having entered
into a Master Purchase Agreement under which we purchased substantially all of
the assets of a division of Citizen in April 2002. Subsequent to that
transaction, Motorola challenged the validity of Citizen's assignment of its
rights under the License Agreement to us, which resulted in our litigation with
Motorola, Inc., which is described above (the "Motorola case"). Pending
resolution of the Motorola case, and in accordance with the terms of the IPAA,
we are withholding final payment of 1.4 billion yen ($12.6 million based on the
spot exchange rate at September 30, 2004).
In March 2004 Citizen submitted a Demand for Arbitration in the
International Chamber of Commerce ("ICC"), claiming breach of our obligation to
make the deferred payment of 1.4 billion yen. In May 2004 we filed our Answer to
Request for Arbitration, Counterclaim and Request for Abeyance of Proceedings.
In our Answer, we contend, among other things, that we do not have an obligation
to make the deferred payment due to (i) our inability to perfect the rights
assigned by Citizen under the License Agreement, and (ii) Citizen's breach of
its representations and warranties that it had all right and authority to assign
its rights under the License Agreement to us.
The ICC has confirmed an Arbitral Tribunal of three arbitrators. The
parties have executed Terms of Reference in accordance with Article 18 of the
ICC Rules of Arbitration, which outline the issues to be determined in the
dispute, and the procedural rules to be applied by the Arbitral Tribunal. We
have filed a motion to stay the ICC proceedings, pending the outcome of the
Motorola case, which motion is presently pending before the Arbitral Tribunal.
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 $61.6 million based
on the spot exchange rate at September 30, 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. On May 18, 2004, the Paris Commercial Court
of France declared that it did not have jurisdiction over the matter. The Court
of Appeal of Paris heard the appeal regarding jurisdiction during October 2004,
and a ruling is expected in November 2004.
In response to the French 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. AME and ABS subsequently appealed that decision to
the Court of Appeals of Paris, which heard arguments in the matter on October 6,
2004. On November 3, 2004, the Court of Appeals of Paris affirmed the decision
of the Paris Commercial Court declaring that the dispute between the parties
should be resolved pursuant to the arbitration proceeding currently pending in
the United States District Court of the Eastern District of Pennsylvania.
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
34
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 Administrative Law Judge conducted an
evidentiary hearing during July and August of 2004 in Washington D.C. The
post-hearing briefing has been completed and an Initial Determination by the ITC
Administrative Law Judge is expected in mid-November.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Amkor Technology, Inc.'s Annual Meeting of Stockholders held on July
29, 2004, the following proposals were adopted by the margins indicated.
1. To elect a Board of Directors to hold office until the next Annual Meeting
of Stockholders or until their respective successors have been elected or
appointed.
NUMBER OF SHARES
VOTED FOR WITHHELD
----------- ---------
James J. Kim ........... 155,423,759 766,585
John N. Boruch ......... 155,422,409 767,935
Winston J. Churchill.... 152,510,752 3,679,592
Thomas D. George ....... 152,986,803 3,203,541
Gregory K. Hinckley..... 155,863,165 327,179
Juergen Knorr .......... 155,201,322 989,022
John B. Neff ........... 155,409,403 780,941
James W. Zug ........... 155,396,387 793,957
2. To ratify the appointment of the accounting firm of PricewaterhouseCoopers
LLP as registered public accountants for the company for the current year.
Votes totaled 155,957,026 for, 182,788 against and 50,530 abstain.
ITEM 5. OTHER INFORMATION
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
2.1 Stock Purchase Agreement, dated as of July 19, 2004, by and among Amkor
Technology, Inc., Unitive, Inc., certain of the Stockholders of Unitive,
Inc., certain Option Holders of Unitive, Inc., Onex American Holdings II
LLC as the Onex Stockholder Representative, David Rizzo as the MCNC
Stockholder Representative, Thomas Egolf as the TAT Stockholder
Representative, Kenneth Donahue as the Additional Indemnifying Stockholder
Representative, and, with respect to Article VIII and Article X thereof
only, U.S. Bank National Association. (1)
2.2 Stock Purchase Agreement, dated as of June 3, 2004, by and among Amkor
Technology,
35
Inc., Unitive Semiconductor Taiwan Corporation and Certain Shareholders of
Unitive Semiconductor Taiwan Corporation, along with Letter Agreement
dated July 9, 2004 regarding Amendment to Stock Purchase Agreement and
Loan Agreement by and among Amkor Technology, Inc., Unitive Semiconductor
Taiwan Corporation and Sellers' Representative on Behalf of each Seller.
(1)
3.1 Certificate of Incorporation. (3)
3.2 Certificate of Correction to Certificate of Incorporation. (4)
3.3 Restated Bylaws. (4)
10.1 $30,000,000 Credit Agreement, dated as of June 29, 2004, among Amkor
Technology, Inc., as borrower, the Lenders and Issuers parties thereto and
Citicorp North America, Inc., as agent for the Lenders and the Issuers.
(2)
10.2 Guaranty, dated as of June 29, 2004, by Guardian Assets, Inc. (2)
10.3 Pledge and Security Agreement, dated as of June 29, 2004, among Amkor
Technology, Inc. and Guardian Assets, Inc., in favor of Citicorp North
America, Inc., as agent. (2)
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.
(1) Incorporated by reference to the Company's report on Form 8-K filed
September 3, 2004.
(2) Incorporated by reference to the Company's report on Form 8-K filed July
9, 2004.
(3) Incorporated by reference to the Company's Registration on Form S-1 filed
October 6, 1997 (File No. 333-37235).
(4) Incorporated by reference to the Company's Registration on Form S-1 filed
April 8, 1998, as amended on August 26, 1998 (File No. 333-49645).
(b) REPORTS ON FORM 8-K
We filed or furnished the following reports on Form 8-K with the
Securities and Exchange Commission during the quarterly period ended September
30, 2004:
Current Report on Form 8-K dated and filed July 1, 2004 related to a press
release dated July 1, 2004 announcing its revised guidance for the second
quarter of 2004 and certain other information.
Current Report on Form 8-K dated June 29, 2004 (filed July 9, 2004)
announcing that it entered into a new $30.0 million senior secured revolving
credit facility on June 29, 2004.
Current Report on Form 8-K dated and filed July 15, 2004 announcing that
its settlement with Koninklijke Philips Electronics on pending litigation
involving allegedly defective epoxy mold compound manufactured by Sumitomo
Bakelite has been set aside by the California Superior Court.
Current Report on Form 8-K dated and filed July 27, 2004 related to a
press release dated July 27, 2004 announcing our financial results for the three
and six months ended June 30, 2004 and certain other information.
Current Report on Form 8-K dated and filed August 27, 2004 related to a
press release dated August 25, 2004 announcing that Bruce Freyman, Amkor's then
President and Chief Operating Officer, resigned from Amkor and announcing that
John Boruch, Vice Chairman of Amkor, was appointed President and Chief Operating
Officer.
36
Current Report on Form 8-K dated August 19, 2004 (filed September 3, 2004)
related to a press release dated August 24, 2004 announcing its acquisition of
approximately 93.0% of the capital stock of Unitive Inc., a Delaware corporation
on August 19, 2004 and the acquisition of approximately 60.0% of the capital
stock of Unitive Semiconductor Taiwan Corporation on August 20, 2004.
Current Report on Form 8-K dated September 29, 2004 (filed September 30,
2004) related to a press release dated September 29, 2004 announcing that its
third quarter financial results are expected to be lower than prior guidance.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AMKOR TECHNOLOGY, INC.
By: /s/ KENNETH T. JOYCE
--------------------------------------------------
Kenneth T. Joyce
Chief Financial Officer
(Principal Financial, Chief Accounting Officer and
Duly Authorized Officer)
Date: November 9, 2004
37