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FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 000-29472
AMKOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
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23-1722724
(I. R. S. - Employer Identification No.)
1345 Enterprise Drive, West Chester, Pennsylvania 19380
(Address of principal executive officers)
(610) 431-9600
(Registrant's telephone number, including area 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 [ ]
The number of outstanding shares of the registrant's Common Stock as of
May 14, 1999 was 118,259,129.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1998 1999
----------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 227,587 $ 164,381
Short-term investments ............................................................. 1,000 53,475
Accounts receivable ................................................................ --
Trade, net of allowance for doubtful
accounts of $5,952 ........................................................... 109,243 120,754
Due from affiliates ............................................................. 25,990 5,058
Other ........................................................................... 5,900 2,734
Inventories ........................................................................ 85,628 84,080
Other current assets ............................................................... 16,687 20,021
----------- ---------
Total current assets ....................................................... 472,035 450,503
----------- ---------
PROPERTY, PLANT AND EQUIPMENT, net ................................................... 416,111 426,105
----------- ---------
INVESTMENTS .......................................................................... 25,476 24,897
----------- ---------
OTHER ASSETS:
Due from affiliates ................................................................ 28,885 29,317
Other .............................................................................. 61,090 60,860
----------- ---------
Total other assets ......................................................... 89,975 90,177
----------- ---------
Total assets ............................................................... $ 1,003,597 $ 991,682
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft ..................................................................... $ 13,429 $ 11,480
Short-term borrowings and current portion of
long-term debt .................................................................. 38,657 25,000
Trade accounts payable ............................................................. 96,948 100,326
Due to affiliates .................................................................. 15,722 19,220
Accrued expenses ................................................................... 77,004 58,336
Accrued income taxes ............................................................... 38,892 35,884
----------- ---------
Total current liabilities .................................................. 280,652 250,246
----------- ---------
LONG-TERM DEBT
14,846 13,119
----------- ---------
CONVERTIBLE SUBORDINATED NOTES ....................................................... 207,000 207,000
----------- ---------
OTHER NONCURRENT LIABILITIES ......................................................... 10,738 12,137
----------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock ....................................................................... 118 118
Additional paid-in capital ......................................................... 381,061 381,061
Retained earnings .................................................................. 109,738 128,663
Accumulated other comprehensive income ............................................. (556) (662)
----------- ---------
Total stockholders' equity ................................................. 490,361 509,180
----------- ---------
Total liabilities and stockholders' equity ................................. $ 1,003,597 $ 991,682
=========== =========
The accompanying notes are an integral part of these statements.
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AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1999
-------- --------
(UNAUDITED) (UNAUDITED)
NET REVENUES .......................................................... $371,733 $419,957
COST OF REVENUES -- including
purchases from ASI ................................................. 310,056 357,382
-------- --------
GROSS PROFIT .......................................................... 61,677 62,575
OPERATING EXPENSES:
Selling, general and administrative ................................. 28,715 30,106
Research and development ............................................ 2,057 2,251
-------- --------
Total operating expenses ......................................... 30,772 32,357
-------- --------
OPERATING INCOME ...................................................... 30,905 30,218
-------- --------
OTHER (INCOME) EXPENSE:
Interest expense, net ............................................... 9,522 1,635
Foreign currency (gain) loss ........................................ 2,747 306
Other expense, net .................................................. 4,089 1,622
-------- --------
Total other expense .............................................. 16,358 3,563
-------- --------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST ............................................... 14,547 26,655
PROVISION FOR INCOME TAXES ............................................ 5,050 7,730
MINORITY INTEREST ..................................................... 685 --
-------- --------
NET INCOME ............................................................ $ 8,812 $ 18,925
======== ========
PRO FORMA DATA (UNAUDITED):
Historical income before income taxes
and minority interest ............................................ $ 14,547
Pro forma provision for income taxes ................................ 4,222
--------
Pro forma income before minority
interest ......................................................... 10,325
Historical minority interest ........................................ 685
--------
Pro forma net income ............................................... $ 9,640
========
PER SHARE DATA:
Basic net income
per common share ................................................. $ .11 $ .16
======== ========
Diluted net income
per common share ................................................. $ .11 $ .16
======== ========
Basic pro forma net income
per common share ................................................. $ .12
========
Diluted pro forma net income
per common share ................................................. $ .12
========
Shares used in computing basic net income
per common share ...................................................... 82,610 117,860
======== ========
Shares used in computing diluted net income
per common share ...................................................... 82,610 133,713
======== ========
The accompanying notes are an integral part of these statements.
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AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
1998 1999
--------- ---------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 8,812 $ 18,925
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization ........................................................ 27,139 33,060
Provision for accounts receivable .................................................... 1,180 --
Provision for excess and obsolete inventory .......................................... 7,200 1,100
Deferred income taxes ................................................................ (3,419) 4,667
Equity (gain) loss of investees ...................................................... -- 500
Loss on sale of fixed assets and investments ......................................... 1,033 531
Minority interest .................................................................... 686 --
Changes in assets and liabilities excluding
effects of acquisitions
Accounts receivable .................................................................. (566) (11,511)
Proceeds from sale/(repurchase of) accounts
receivable ......................................................................... (11,000) (2,700)
Other receivables .................................................................... (1,843) 3,166
Inventories .......................................................................... 15,205 (1,052)
Due to/(from) affiliates, net ........................................................ 17,418 23,998
Other current assets ................................................................. 1,609 (4,162)
Other non-current assets ............................................................. (3,745) (4,344)
Accounts payable ..................................................................... (824) 6,078
Accrued expenses ..................................................................... 20,398 (17,168)
Accrued taxes ........................................................................ 7,684 (3,008)
Other noncurrent liabilities ......................................................... 23 590
--------- ---------
Net cash provided by operating activities ....................................... 86,990 48,670
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........................................... (33,685) (42,041)
Sale of property, plant and equipment ................................................ 57 --
Proceeds from sale / (purchase) of investments and collection/(issuance)
of notes receivable............................................................... 240 (52,502)
--------- ---------
Net cash used in investing activities ............................................ (33,388) (94,543)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank overdrafts and short-term
borrowings ........................................................................... (47,410) (9,922)
Proceeds from issuance of Anam USA, Inc. debt .......................................... 382,042 --
Payments of Anam USA, Inc. debt ........................................................ (429,675) --
Net proceeds from issuance of long-term debt ........................................... 3,358 --
Payments of long-term debt ............................................................. (10,845) (7,411)
--------- ---------
Net cash used in financing activities ............................................ (102,530) (17,333)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (48,928) (63,206)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 90,917 227,587
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 41,989 $ 164,381
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ............................................................................. $ 10,392 $ 1,279
Income taxes ......................................................................... $ 310 $ 6,096
The accompanying notes are an integral part of these statements.
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements and related disclosures as of
March 31, 1999 and for the three months ended March 31, 1999 and 1998 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 the opinion of management of the Company, 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 the
Company's latest annual report as of December 31, 1998 filed on Form 10-K with
the Securities and Exchange Commission. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
2. RISKS AND UNCERTAINTIES
The Company's future results of operations involve a number of risks
and uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from historical results
include, but are not limited to, dependence on the highly cyclical nature of
both the semiconductor and the personal computer industries, competitive pricing
and declines in average selling prices, dependence on the Company's relationship
with Anam Semiconductor, Inc. ("ASI") (see Note 8), reliance on a small group of
principal customers, timing and volume of orders relative to the Company's
production capacity, availability of manufacturing capacity and fluctuations in
manufacturing yields, availability of financing, competition, dependence on
international operations and sales, dependence on raw material and equipment
suppliers, exchange rate fluctuations, dependence on key personnel, difficulties
in managing growth, enforcement of intellectual property rights, environmental
regulations, fluctuations in quarterly operating results and results of ASI on
an equity basis, once we make the $150,000 investment in ASI (see Note 9).
3. CONCENTRATIONS OF CREDIT RISK
Financial instruments, for which the Company is subject to credit risk, consist
principally of accounts receivable, cash and cash equivalents and short-term
investments. With respect to accounts receivable, the Company has mitigated its
credit risk by selling primarily to well established companies, performing
ongoing credit evaluations and making frequent contact with customers.
During the first quarter of 1999, the Company has invested in high grade
municipal and commercial loans and preferred stocks for trading purposes
("Trading Securities"). These securities have underlying maturity dates in
excess of three months and accordingly have been classified as short-term
investments. As of March 31, 1999, the Company held approximately $53,500 in
Trading Securities. These investments are carried at fair market value based on
market quotes and recent offerings of similar securities.
The Company has mitigated its credit risk with respect to cash and cash
equivalents, as well as Trading Securities, through diversification of its
portfolio of holdings into various money market accounts, U.S. treasury bonds,
federal mortgage backed securities, and high grade municipal and commercial
loans and preferred stocks. At December 31, 1998, and March 31, 1999 the Company
maintained approximately $35,000 and $94,000 respectively, in high grade
municipal and commercial loans and preferred stocks, with the largest individual
investment balance of approximately $10,000 at each period end.
However, at December 31, 1998 and March 31, 1999, the Company maintained
approximately $29,303 and $7,855, respectively, in deposits and certificates of
deposits at foreign owned banks and $4,406 and
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
$15,885, respectively, in deposits at U.S. banks which exceeded federally
insured limits, of which, $12,455 was maintained in one bank at March 31, 1999.
4. INVENTORIES
Inventories consist of raw materials and purchased components which are used
in the semiconductor packaging process. The Company's inventories are located at
its facilities in the Philippines or at ASI on a consignment basis. Components
of inventories follow:
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(unaudited)
Raw materials and purchased components ...................................... $77,351 $75,941
Work-in-process ............................................................. 8,277 8,139
------- -------
$85,628 $84,080
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, MARCH 31,
1998 1999
-------- --------
(unaudited)
Land .................................. $ 2,346 $ 2,346
Building and improvements ............. 142,252 145,304
Machinery and equipment ............... 534,314 571,587
Furniture, fixtures and other equipment 40,502 44,379
Construction in progress .............. 8,282 4,331
-------- --------
727,696 767,947
Less -- Accumulated depreciation
and amortization .................... 311,585 341,842
-------- --------
$416,111 $426,105
======== ========
6. 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. The following table presents a reconciliation of the Company's basic
and diluted earnings, weighted average shares and per share amounts for the
three months ended March 31, 1999 :
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Weighted
Earnings Avg. Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings Per Share - Three Months
Ended March 31, 1999
Basic earnings per share $18,925 117,860,000 $0.16
Impact of Convertible Notes 2,061 15,333,333
Dilutive effect of options -- 519,463
------- ----------- -----
Diluted earnings per share $20,986 133,712,796 $0.16
======= =========== =====
7. COMPREHENSIVE INCOME
In 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income includes all changes in
stockholders' equity during a period, except those resulting from investment by
and distributions to shareholders. Components of comprehensive income include
net income, changes in foreign currency translation adjustments and unrealized
holding gains/losses in marketable equity securities. Total comprehensive income
was $18,819 and $9,475 for the three months ended March 31, 1999 and 1998,
respectively.
8. RELATED PARTY TRANSACTIONS
In 1998 and the three months ended March 31, 1999, approximately 67%
and 65%, respectively, of the Company's packaging and test revenues, as well as
100% of the Company's wafer fabrication revenues, were derived from services
performed for the Company by ASI, a Korean public company in which certain of
the Company's principal stockholders hold a minority interest. By the terms of a
long-standing agreement, the Company has been responsible for marketing and
selling ASI's semiconductor packaging and test services, except to customers in
Korea to whom ASI has historically sold such services directly. During 1998, the
Company became responsible for marketing and selling ASI's semiconductor
packaging and test services to the majority of ASI's customers in Japan. The
Company has worked closely with ASI in developing new technologies and products.
Effective January 1, 1998, the Company entered into five-year supply agreements
with ASI giving the Company the first right to market and sell substantially all
of ASI's packaging and test services and the exclusive right to market and sell
all of the wafer output of ASI's new wafer foundry, both of which have
negotiable pricing terms. These agreements are cancellable by either party upon
five years prior written notice at any time after the fifth anniversary of the
effective date. The Company's business, financial condition and operating
results have been and will continue to be significantly dependent on the ability
of ASI to effectively provide the contracted services on a cost-efficient and
timely basis. The termination of the Company's relationship with ASI for any
reason, or any material adverse change in ASI's business resulting from
underutilization of its capacity, the level of its debt and its guarantees of
affiliate debt, labor disruptions, fluctuations in foreign exchange rates,
changes in governmental policies, economic or political conditions in Korea or
any other change could have a material effect on the Company's business,
financial condition and results of operations.
ASI's ability to continue to provide services to the Company will depend on
ASI's financial condition and performance. ASI currently has a significant
amount of debt relative to its equity, which debt the Company expects will
continue to increase in the forseeable future. ASI's business has been severely
affected by the economic crisis in Korea. In late 1997, the Republic of Korea
began to undergo a foreign currency liquidity crisis resulting in significant
adverse economic circumstances and significant depreciation in the value of the
Korea Won (Won or Won Symbol) against the U.S. dollar. ASI historically operated
with a
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
significant amount of debt relative to its equity. The economic crisis in Korea
led to sharply higher interest rates and significantly reduced opportunities for
refinancing maturing debts. Because ASI maintained a substantial amount of
short-term debt, its inability to refinance this debt created a liquidity crisis
for ASI.
As of December 31, 1998, ASI was contingently liable under guarantees in
respect to debt of certain affiliates in the aggregate amount of approximately
W668 billion. As of December 31, 1998, such guarantees included those in respect
of all of Anam USA Inc.'s, ASI's wholly owned financing subsidiary, debt
totaling approximately $225,000. Prior to the Initial Public Offering, the
Company met a significant portion of its financing needs through financing
arrangements provided by ASI. The Company currently does not depend on such
financing arrangements. In addition, if any relevant subsidiaries or affiliates
of ASI were to fail to make interest or principal payments or otherwise default
under their debt obligations guaranteed by ASI, ASI could be required under its
guarantees to repay such debt, which event could have a material adverse effect
on its financial condition and results of operations.
In response to this situation, in October 1998, ASI announced that it had
applied for and was accepted into the Korean financial restructuring program
known as 'Workout". The Workout program is the result of an accord among Korean
financial institutions to assist in the restructuring of Korean businesses and
does not involve the judicial system.
We expect the Workout to significantly improve the financial condition of
ASI. The Workout became effective in April 1999. The information setting forth
the details of the Workout is based on the exchange rate of W1,207.8 to $1.00
that was in effect as of December 31, 1998. The Workout contains the following
provisions:
- - The creditor financial institutions will allow ASI to defer repayment
on principal of ordinary loans until December 31, 2003. After December
31, 2003, ordinary loans with repayment terms will be payable through
readjustment of repayment schedules in effect on October 24, 1998. For
ordinary loans without repayment terms, the schedule to repay principal
amounts will be determined by ASI and the creditor financial
institutions at the end of such period.
- - The creditor financial institutions will allow ASI to defer repayment
of principal under capital leases until December 31, 1999, with
payments of principal to resume under a seven-year installment plan
thereafter.
- - The creditor financial institutions will allow ASI to defer the
maturity of its won-denominated debentures for an additional three-year
term after currently scheduled maturity dates.
- - The creditor financial institutions will allow ASI to make no interest
payments on ordinary loans until December 31, 1999. The creditor
financial institutions will add accrued interest to the principal
amounts of these loans every three months.
- - The creditor financial institutions will reduce interest rates on ASI's
remaining outstanding won-denominated ordinary loans to 10% or the
prime rate of each creditor financial institution, whichever is
greater. This would reduce ASI's weighted average interest rate from
12.9% before the Workout to 10.5% after the Workout.
- - The creditor financial institutions will give ASI a grace period until
December 31, 2003 against enforcement of guarantees made by ASI for
liabilities of ASI's affiliates. In addition, interest will not accrue
on guaranteed obligations during this period.
- - The creditor financial institutions will provide ASI a short-term loan
of W50 billion ($41,000) at the prime rate plus 1%, to be repaid with
proceeds from the sale of K4.
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
- - The creditor financial institutions may receive additional payments if
ASI's financial performance exceeds expectations.
- - For the duration of the Workout, the creditor financial institutions
will be entitled to vote the ASI shares owned by Mr. James Kim and his
family.
- - The creditor financial institutions will convert W250 billion
($208,000) of ASI debt held by creditor financial institutions into:
(1) W122.3 billion ($102,000) in equity shares of ASI, (2) W108.1
billion ($90,000) in five year non-interest bearing convertible debt
and (3) W19.6 billion ($16,000) in non-interest bearing loans provided
that we make a $150,000 equity investment in ASI. The conversion would
take place in installments over four years, with the first installment
to be made in October, 1999, at a conversion rate equal to W5,000 per
share, the par value of ASI's common stock. In order for the initial
conversion of debt to take place in accordance with the terms of the
Workout, ASI will have to undergo a series of corporate actions,
including a reverse stock split to bring the fair market value of its
equity shares to a price at least equal to the par value of such
shares. The conversion of ASI debt by the creditor financial
institutions would coincide with each installment of our equity
investment in ASI.
We have executed a letter with ASI committing to make the equity
investment in installations $41,000 in each of 1999, 2000 and 2001 and $27,000
in 2002. Our commitment to invest in ASI is subject to: (1) execution of a
definitive stock purchase agreement, (2) concurrent conversion of debt by the
creditor financial institutions, (3) the Workout remaining in effect and (4) the
supply agreements between our company and ASI remaining in effect. We would
purchase the ASI shares at W5,000 per share. Because our commitment is in U.S.
dollars, the number of shares we would purchase will vary based on the exchange
rate of Korean won to U.S. dollars.
Upon completion of the first installment of our equity investment in
ASI and conversion of debt by the creditor financial institutions, we expect the
relative equity ownership of ASI among the creditor financial institutions, the
Kim family and our company to be approximately 27%, 21% and 21% respectively,
subject to the creditor financial institutions' right to vote the Kim family's
stock for the duration of the Workout. Upon completion of all conversions of
debt by the creditor financial institutions and all installments of our equity
investment pursuant to the Workout, we expect the relative equity ownership of
ASI among the creditor financial institutions, the Kim family and our company to
be approximately 29%, 11% and 43%, respectively, subject to the creditor
financial institutions voting rights. Upon conversion of all of the convertible
debt issued to the creditor financial institutions, which would be permitted
beginning one year after the date of issuance of such debt, the ownership of ASI
among the creditor financial institutions, the Kim family and our company would
be approximately 43%, 9% and 34%, respectively, subject to the creditor
financial institutions' voting rights.
The creditor financial institutions have the right to terminate or
modify the Workout if ASI does not fulfill the terms of the Workout, including
meeting certain financial targets. In addition, the creditor financial
institutions can modify the terms of the Workout upon agreement of creditor
financial institutions holding at least 75% of the debt restructured under the
Workout. If the creditor financial institutions subsequently terminate the
Workout, the creditor financial institutions could reinstate and enforce the
original terms of ASI's debt, including accelerating ASI's obligations and
pursuing ASI's guarantees of its affiliates' debt. If this were to occur, ASI's
and our businesses would be harmed.
There can be no assurance that ASI will be able to satisfy the terms of
the Workout Agreement. Any inability of ASI to comply with the terms of the
Workout Agreement, generate cash flow from operations sufficient to fund its
capital expenditures and other working capital and liquidity requirements could
have a material adverse effect on ASI's ability to continue to provide services
and otherwise fulfill its obligations to the Company.
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
In connection with its wafer foundry agreement with Texas Instruments, Inc.
("TI"), the Company and TI agreed to revise certain payment and other terms in
the Master Purchase Agreement entered into during 1998 ("Master Purchase
Agreement"). As part of this agreement, TI agreed to advance the Company $20,000
in June 1998 and an additional $20,000 in December, 1998, as prepayments of
wafer foundry services to be provided in the fourth quarter of 1998 and first
quarter of 1999, respectively. The Company recorded these amounts in accrued
expenses. The Company in turn advanced these funds to ASI as prepayments for
foundry service charges. The Company has fully offset the $20,000 advance made
in June 1998 against billings by ASI in the fourth quarter of 1998. The December
1998 advance is reflected in the current portion of Due from Affiliates as of
December 31, 1998. As of March 31, 1999, the December 1998 advance from TI and
the related advance to ASI have both been fully repaid.
9. THE ACQUISITION OF K4 AND INVESTMENT IN ASI - RECENT DEVELOPMENTS
On May 17, 1999 the Company purchased the assets of ASI's packaging and
test facility located in Kwangju, Korea ("K4"), excluding cash and cash
equivalents, notes and accounts receivables, intercompany accounts and existing
claims against third parties. The purchase price for K4 was $575,000 plus the
assumption of up to $7,000 of employee benefit liabilities. On May 6, 1999, the
Company completed a private placement to raise $625 million in senior and senior
subordinated notes. Through the offering, the Company sold $425 million of
senior notes and $200 million of senior subordinated notes. The senior notes
mature in May 2006 and have a coupon rate of 9.25%. The senior subordinated
notes mature in May 2009 and have a coupon rate of 10.50%. The Company is
required to pay interest semi-annually in May and November for all of the notes.
Subsequent to the purchase of K4 and payment of related offering costs, the
Company will have approximately $30.0 million of proceeds remaining for working
capital.
10. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," during the fourth quarter of 1998. The
Company has identified two reportable segments (packaging and test services and
wafer fabrication services) that are managed separately because the services
provided by each segment require different technology and marketing strategies.
Packaging and Test Services. Through its three factories located in the
Philippines as well as the four ASI factories in Korea, under contract, the
Company offers a complete and integrated set of packaging and test services
including IC packaging design, leadframe and substrate design, IC package
assembly, final testing, burn-in, reliability testing and thermal and electrical
characterization.
Wafer Fabrication Services. Through its wafer fabrication services division,
the Company provides marketing, engineering and support services of ASI's deep
submicron CMOS foundry, under a long-term supply agreement.
During each of the three-month periods ended March 31, 1998 and 1999, sales
to Intel Corporation accounted for approximately $74,000 of packaging and test
revenues. In addition, Texas Instruments, Inc. accounted for approximately
$11,000 and $5,000 of packaging and test revenues during the three months ended
March 31, 1998 and 1999, respectively, and accounted for 100% of wafer
fabrication revenues during each of the three-month periods ended March 31, 1998
and 1999.
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AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The accounting policies for segment reporting are the same as those for the
Company's Consolidated Financial Statements. The Company evaluates its operating
segments based on operating income. Summarized financial information concerning
the Company's reportable segments is shown in the following table.
PACKAGING WAFER
AND TEST FABRICATION TOTAL
-------- ----------- --------
Three months ended March 31, 1999:
Net Revenues ................... $350,520 $ 69,437 $419,957
Gross Profit ................... $ 55,637 $ 6,938 $ 62,575
Operating Income ............... $ 25,984 $ 4,234 $ 30,218
Three Months Ended March 31, 1998:
Net Revenues ................... $368,377 $ 3,356 $371,733
Gross Profit ................... $ 61,174 $ 503 $ 61,677
Operating Income ............... $ 32,565 $ (1,660) $ 30,905
The following supplementary information presents net revenues allocated
by product family for the packaging and test segment:
Net Revenues
For the Three Months Ended March 31,
------------------------------------
1998 1999
-------- --------
Traditional Leadframe $180,505 $128,290
Advanced Leadframe .. 85,832 88,331
Laminates ........... 81,780 117,424
Test and Other ...... 20,260 16,475
-------- --------
Consolidated ........ $368,377 $350,520
======== ========
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims incidental to the conduct of its
business. Based on consultation with legal counsel, management does not believe
that any claims, either individually or in the aggregate, to which the Company
is a party will have a material adverse effect on the Company's financial
condition or results of operations.
12. SUBSEQUENT EVENT
The Company entered into an agreement to acquire the outstanding shares of
Anam/Amkor Precision Machine Company, Inc. ("AAPMC"), an affiliate of ASI, for
$3,800. AAPMC supplies equipment used by the Company at its Philippine
operations. As an interim step, during April 1999, the Company assumed and paid
down $5,700 of AAPMC's debt. The Company anticipates that the acquisition will
be finalized during the second quarter of 1999.
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ITEM 2. 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: (1) statements regarding the
anticipated growth in the market for our products, (2) our anticipated capital
expenditures and financing needs, (3) our expected capacity utilization rates,
(4) our belief as to our future operating performance (5) the anticipated
results of the Workout, (6) statements regarding future won/dollar exchange
rates, (7) statements regarding the future of our relationship with ASI, (8) our
anticipated equity investment in ASI, (9) our plan to implement a Year 2000
compliance plan, and (10) other statements that are not historical facts.
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 "Factors that May Affect Operating Results." The following
discussion provides information and analysis of our results of operations for
the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998 and our liquidity and capital resources.
OVERVIEW
Beginning in 1997, a worldwide slowdown in demand for semiconductor devices
led to excess capacity and increased competition. As a result, significant price
declines have occurred in recent periods. From 1996 to 1998, we were 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. We cannot assure you that we will be able to offset any such
price declines in the future. You should read "Factors that May Affect Operating
Results -- Declining Average Selling Prices" for more information regarding
declining prices for our packages.
We depend on a small group of customers for a substantial portion of our
revenues. In the three months ended March 31, 1998 and the three months ended
March 31, 1999, we derived 37.0% and 33.3%, respectively, of our net revenues
from sales to five packaging and test customers, with 19.9% and 17.5% of our net
revenues, respectively, derived from sales to Intel Corporation. In addition,
during the three months ended March 31, 1998 and 1999, we derived 0.9% and 16.5%
of our net revenues respectively from wafer fabrication services, and we derived
all of these revenues from Texas Instruments.
Our cost of revenues consists principally of: (1) service charges paid to
ASI for packaging and test services performed for us, (2) costs of direct
material and (3) labor and other costs at our factories in the Philippines.
Service charges paid to ASI are set in accordance with our supply agreements
with ASI as described below. Our gross margins on sales of services performed by
ASI are lower than our gross margins on sales of services performed by our
factories in the Philippines, but we do not bear any of ASI's fixed costs. We
incur costs of direct materials used in packages that we and ASI produce for our
customers. Because a portion of our costs at our factories in the Philippines is
fixed, increases or decreases in capacity utilization rates can have a
significant effect on our gross profit. The unit cost of packaging and test
services generally decreases as fixed charges, such as depreciation expense on
our equipment, are allocated over a larger number of units produced.
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Relationship with ASI
Our gross margins are significantly affected by fluctuations in service
charges paid pursuant to our supply agreements with ASI. During the three months
ended March 31, 1998 and 1999, we derived approximately 66.2% and 71.1% of our
net revenues, respectively, and approximately 35.1%, and 53.5%, respectively,
of our gross profit from services performed for us by ASI. In addition, ASI
derives nearly all of its revenues from services sold by us. In January 1998, we
began marketing wafer fabrication services provided by ASI's new semiconductor
wafer foundry. As our revenues from wafer fabrication services have increased,
so has the percentage of revenue and gross profits associated with services
performed for us by ASI. The increase in percentage of services performed for
us by ASI is also due to decreasing sales and gross profits from sales of
traditional products assembled in the Company's Philippine operations.
We have committed to make the first installment of an equity investment
in ASI in the fourth quarter of 1999. When we make the investment, ASI's
financial results will affect our financial results because we will report
these results in our financial statements using the equity method of accounting.
You should read "Factors that May Affect Operating Results -- Dependence on
Relationship with ASI."
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
revenues for the periods indicated:
THREE MONTHS
ENDED
MARCH 31,
---------------------
1998 1999
------ ------
Net revenues ............................... 100.0% 100.0%
Cost of revenues ........................... 83.4 85.1
------ ------
Gross profit ............................. 16.6 14.9
------ ------
Operating expenses:
Selling, general and administrative ...... 7.7 7.2
Research and development ................. 0.6 0.5
------ ------
Total operating expenses .............. 8.3 7.7
------ ------
Operating income ........................... 8.3 7.2
------ ------
Other (income) expense:
Interest expense, net .................... 2.6 0.4
Foreign currency (gain) loss ............. 0.7 0.1
Other expense, net ....................... 1.1 0.4
------ ------
Total other expense ................... 4.4 0.9
------ ------
Income before income taxes and
minority interest ........................ 3.9 6.3
Provision for income taxes ................. 1.3 1.8
Minority interest .......................... 0.2 --
------ ------
Net income ................................. 2.4 4.5
Pro forma adjustment for income taxes ...... (0.2) --
------ ------
Pro forma net (loss) income ................ 2.6% 4.5%
====== ======
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Revenues. The Company's net revenues of $420.0 million for the first quarter
of 1999 increased $48.3 million or 13.0% compared to net revenues of $371.7
million in the first quarter of 1998. Due to a continued slowdown in the
semiconductor industry, which the Company believes has resulted in excess
packaging and test capacity and increased pricing pressures, packaging and test
revenues decreased 4.8% during the first quarter of 1999 compared to packaging
and test revenues in the first quarter of 1998. However, average selling prices
declined less in the first quarter of 1999 than the third and fourth quarter of
1998. As a result of competitive pressures and slow market conditions, the
Company anticipates only moderate growth in packaging and test revenues during
the second quarter of 1999. However, based on current non-binding customer
demand forecasts, the Company expects a strong increase in demand beginning in
the third quarter of 1999. The Company believes as market demand continues to
increase the rate of average selling price erosion should continue to slow. The
Company is currently making capital expenditures and investment in human
resources to meet the expected increase in demand. The Company's gross margins
could be negatively impacted in the short-term until the increase in demand
occurs.
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With the ASI semiconductor wafer foundry operating at near full capacity, the
Company's wafer fabrication business increased significantly since it began
operations in the first quarter of 1998. Wafer fabrication revenues in the first
quarter of 1999 were $69.4 million compared to $3.4 million in the first quarter
of 1998. During the first quarter of 1999 ASI was able to increase capacity at
its wafer foundry to 17,000 wafer starts per month, compared to the previous
capacity of 15,000 wafer starts per month. Despite the increased capacity,
decreasing average selling prices resulted in flat revenue in the first three
months of 1999 compared to revenues for the last three months of 1998. The
Company continues to be dependent upon one customer for all of its current wafer
fabrication revenues. Significant changes in demand from this customer until the
Company can attract additional customers, could result in significant
fluctuations in wafer fabrication revenues.
Gross profit. Gross profit for the first quarter of 1999 increased 1.5% to $62.6
million, or 14.9% of net revenues, from $61.7 million, or 16.6% of net revenues
in the first quarter of 1998. The change in gross margin percentage in the first
quarter of 1999 compared to the first quarter of 1998 is attributed to the
following:
- The significant amount of revenue contribution from wafer
fabrication services in the first quarter of 1999, which services
generally have lower gross margins than packaging and test
revenues. The Company had only minimal revenues from wafer
fabrication services in the first quarter of 1998.
- Factory costs which are predominantly fixed, combined with
decreased unit volumes and average selling prices for traditional
products resulted in lower gross margins relating to traditional
products assembled in the Company's Philippine operations. These
margins were improved by a one-time adjustment relating to
material purchase liabilities in the amount of $1.9 million.
- Change in the packaging and test supply agreement with ASI during
the second quarter of 1998 resulted in higher gross profits in the
first quarter of 1999 compared to the same period in 1998, which
combined with material cost reductions helped to offset other
factors which reduced gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first quarter of 1999 were $30.1 million, or
7.2% of net revenues, compared to $28.7 million, or 7.7% of net revenues, for
the first quarter of 1998. Increased selling, general and administrative
expenses in the first quarter of 1999 in comparison to the first quarter of
1998, relate to the increase in employee headcount and related costs, including
the P3 factory and wafer fabrication services division whose operations
increased significantly since the first quarter of 1998. Given the anticipated
increase in demand the Company does expect to experience increased selling,
general and administrative expenses over the next few quarters.
Research and Development Expenses. Research and development expenses were $2.3
million for the first quarter of 1999 compared to $2.1 million in the first
quarter of 1998.
Other (Income) Expense. Total other expense decreased to $3.6 million in the
first quarter 1999 compared to $16.4 million in the first quarter of 1998. The
declines in other expenses are due primarily to declines in net interest expense
in these periods. Proceeds received from the Company's initial public offering
in May 1998 were used to repay much of the Company's outstanding debt.
Additionally, the Company has accumulated a significant cash balance. For the
first quarter of 1999, net interest expense was $1.6 million compared to $9.5
million in the first quarter of 1998. Additionally, stabilization of the
exchange rate between the Philippine peso and the U.S. dollar resulted in
reduced foreign currency losses of $0.3 million in the first quarter of 1999
compared to $2.7 million during the same period in 1998. Other expense, net,
decreased to $1.6 million in the first quarter of 1999 from $4.1 million in the
first quarter of 1998. Other expense, net in the first quarter of 1998 included
non-recurring charges related to bank refinancing costs and the disposal of the
Company's interest in ASI in February 1998. Additionally, other expense, net was
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lower due to reduced outstanding balances under the Company's accounts
receivable securitization agreement during the first quarter of 1999.
Income Taxes. The Company's effective tax rate for the first quarter of 1999 and
1998 was 29.0% (after giving effect to the pro forma adjustment for income
taxes).
Minority Interest. Minority interest represented ASI's ownership in the
consolidated net income of Amkor/Anam Pilipinas, Inc. ("AAP"). Accordingly, the
Company recorded a minority interest expense in its consolidated financial
statements relating to the minority interest in the net income of AAP. In the
second quarter of 1998, the Company purchased ASI's 40% interest in AAP and, as
a result, the Company now owns substantially all of the common stock of AAP. The
acquisition of the minority interest resulted in the elimination of the minority
interest liability and in additional goodwill amortization of approximately $2.5
million per year.
LIQUIDITY AND CAPITAL RESOURCES
Our ongoing primary cash needs are for equipment purchases, factory
expansion and working capital. In addition, we have funded and will continue to
fund our interest in our Taiwan packaging and test joint venture out of
available cash.
Prior to our initial public offering, we met a significant portion of our
cash requirements from a combination of: (1) cash from operating activities, (2)
short-term and long-term bank loans, (3) financing obtained for our benefit by
AUSA, a wholly-owned financing subsidiary of ASI, and (4) financing from a trade
receivables securitization agreement. Because of the short-term nature of
certain of the AUSA loans, the flows of cash to and from AUSA under this
arrangement had been significant. At March 31, 1999, we had no outstanding
balances with AUSA. Net cash provided by operating activities in the three
months ended March 31, 1998 and March 31, 1999 were $87.0 million and $48.7
million, respectively. Net cash used in financing activities in the three months
ended March 31, 1998 and March 31, 1999 were $(102.5) million and $(17.3)
million, respectively.
We have invested significant amounts of capital to increase our packaging
and test services capacity. In the three months ended March 31, 1999, we made
capital expenditures of $42.0 million. We expect that we will need to increase
capital expenditures in 1999 to meet anticipated growth in demand. Giving effect
to the pending acquisition of K4, we intend to spend approximately $200 million
in capital expenditures in 1999, primarily for the expansion of our factories.
On May 17, 1999 we purchased the assets of ASI's newest and largest
packaging and test factory, K4, excluding cash and cash equivalents, notes and
accounts receivables, intercompany accounts and existing claims against third
parties. The purchase price for K4 was $575 million, plus the assumption of up
to $7 million of employee benefit liabilities. In conjunction with our purchase
of K4, on May 6, 1999, we completed a private placement to raise $625 million in
senior and senior subordinated notes. Through our offering, we sold $425 million
in senior notes and $200 million of senior subordinated notes. The senior notes
mature in May 2006 and have a coupon rate of 9.25%. The senior subordinated
notes mature in 2009, and have a coupon rate of 10.5%. The Company is required
to pay interest semi-annually in May and November for all of the notes.
Subsequent to the purchase of K4 and payment of related offering costs, the
Company will have approximately $30.0 million of notes offering proceeds
available for working capital.
We have executed a letter with ASI committing to make an equity investment
in ASI in installments of $41 million in each of 1999, 2000 and 2001 and $27
million in 2002. Our commitment to invest in ASI is subject to: (1) execution of
a definitive stock purchase agreement, (2) concurrent conversion of debt by the
creditor financial institutions, (3) ASI's Workout remaining in effect and (4)
the supply agreements between
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our company and ASI remaining in effect. We would purchase the ASI shares at
W5,000 per share. Because our commitment is in U.S. dollars, the number of
shares we would purchase will vary based on the exchange rate of Korean won to
U.S. dollars.
At March 31, 1999, our debt consisted of $25.0 million of borrowings
classified as current liabilities, $13.1 million of long-term debt and capital
lease obligations and $207.0 million of 5 -3/4% convertible subordinated notes
due 2003. At March 31, 1999, we had $81.3 million in borrowing facilities with a
number of domestic and foreign banks, of which $56.3 million remained unused.
Certain of the agreements with our banks require compliance with certain
financial covenants, contain other restrictions and are collateralized by our
assets. These facilities are typically revolving lines of credit and working
capital facilities that are renewable annually and bear interest at rates
ranging from 9% to 14%. We intend to repay a substantial portion of the amounts
outstanding under these facilities in the first half of 1999. Long-term debt and
capital lease obligations outstanding have various expiration dates through
April 2004 and bear interest at rates ranging from 5.8% to 13.8%.
Under the terms of our trade receivables securitization agreement, a
commercial financial institution is committed to purchase, with limited
recourse, all right, title and interest in up to $100 million in eligible
receivables, as defined in the agreement.
We believe that our existing cash balances, cash flow from operations, and
available equipment lease financing will be sufficient to meet our projected
capital expenditures, working capital and other cash requirements for at least
the next twelve months. We may require capital sooner than currently expected.
We cannot assure you that additional financing will be available when we need it
or, if available, that it will be available on satisfactory terms. In addition,
the terms of the senior and senior subordinated notes, recently sold by us,
significantly reduce our ability to incur additional debt. Failure to obtain any
such financing could have a material adverse effect on our company.
Foreign Currency Translation Gains and Losses
Our subsidiaries in the Philippines maintain their accounting records in
U.S. dollars. All sales, the majority of all bank debt and all significant
material and fixed asset purchases of such subsidiaries are denominated in U.S.
dollars. As a result, the exposure of our subsidiaries in the Philippines to
changes in the Philippine peso/ U.S. dollar exchange rate relates primarily to
certain receivables and advances and other assets offset by payroll, pension and
local liabilities. To minimize our foreign exchange risk in the Philippines, we
selectively hedge our net foreign currency exposure through short-term forward
exchange contracts. To date, our hedging activity has been immaterial.
YEAR 2000 ISSUES
We have been actively engaged in addressing Y2K issues. These issues occur
because many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
State of Readiness
To manage our Y2K compliance program, we have divided our efforts into five
program areas:
- - Computing systems, including computer hardware and software;
- - Manufacturing equipment;
- - Facilities;
- - External utilities; and
- - Supply chain, including equipment/inventory vendors, freight forwarders
and other vendors.
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For each of these program areas, we are using a five-step approach:
- - Ownership: creating awareness, assigning tasks, providing structured
feedback and updates;
- - Inventory: listing items to be assessed for Y2K readiness;
- - Initial Assessment: prioritizing the inventoried items and assessing
their Y2K readiness, including validation with vendors, and testing
where appropriate;
- - Risk Assessment: evaluating initial assessments and developing action
and contingency plans; and
- - Corrective Action Deployment: implementing corrective actions,
verifying implementation, finalizing and executing contingency plans.
We have implemented a process to monitor and maintain our Y2K compliance. As
of March 31, 1999, we had completed the Ownership and Inventory steps for all
program areas. We provide structured feedback and progress updates to our senior
management on an ongoing basis.
To date, the Initial Assessment and Risk Assessment phases are essentially
complete and we have completed significant portions of our corrective action
deployments. The remaining items, most of which are presently on-order, should
be deployed on schedule, within the second quarter of 1999. The status for each
program area is as follows:
- - Computing Systems: With a few exceptions, we believe that our technical
infrastructure, including servers, communications equipment, personal
computers, operating systems and standard software are Y2K compliant.
We will replace our older personal computers through the end of 1999 as
part of our normal upgrade and expansion plans. We have substantially
completed all program steps with respect to our technical
infrastructure and software applications, and see no barriers to
reaching our second quarter 1999 objective.
- - Manufacturing Equipment: We have inventoried all manufacturing
equipment and have contacted vendors to ascertain the status of their
Y2K compliance. We plan to implement vendor recommended actions for
every piece of equipment. Our packaging operations have completed the
Risk Assessment and Corrective Action Deployment steps. Our test
operations have completed the Initial Assessment and Risk Assessment
steps for all equipment and related systems. We have determined that
certain test equipment is not Y2K compliant and will require upgrades
which are scheduled for the second quarter of 1999. ASI has assessed
its wafer fabrication operations and are in the process of supplier
negotiations for the required upgrades.
- - Facilities: We have completed the assessment phase for all of our
factories and significant office facilities. We completed Corrective
Action Deployment during the first quarter of 1999. The deployment of
remaining upgrades is on-target for the second quarter of 1999.
- - External Utilities: We are currently assessing the Y2K readiness of
both public and private utilities in Korea and the Philippines. These
utilities include electricity, telecommunications, water, sewer, gas
and key airports used to transport products and supplies. We are
developing contingency plans for all utilities, regardless of their Y2K
readiness. The first version of all overseas contingency plans are
expected to be completed during the second quarter of 1999.
- - Supply Chain: We have completed the inventory and initial assessment of
our supply chain, with particular attention to direct material
suppliers. All but one critical direct material supplier has been
subject to a Y2K compliance audit, and all are part of a continuing
review and re-scoring. We are also reviewing the readiness of
freight forwarders, equipment manufacturers, local suppliers, banks,
and service providers. The initial versions of contingency plans for
critical suppliers were completed during the first quarter, and are
reviewed and updated periodically. The company is also monitoring the
readiness and contingency planning process of its key customers.
In addition, because ASI is our most significant vendor, we have conducted
regular reviews as to the status of their Y2K compliance program. We believe
that ASI has a similar Y2K program. Unless discussed otherwise above, we believe
that ASI has achieved a similar level of completion and believe that ASI is on
target to meet our timing deadlines.
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Costs to Address Y2K Issues
We have highly-automated manufacturing equipment and systems. Such equipment
incorporates personal computers, embedded processors and related software to
control activity scheduling, inventory tracking, statistical analysis and
automated manufacturing. We have devoted a significant portion of our Y2K
efforts on internal systems to prevent disruption to manufacturing operations.
We are evaluating the estimated costs to address Y2K issues using our actual
experience. Based on available information, we believe that we will be able to
manage our Y2K transition without any material long-term adverse effect on our
business or results of operations. We have executed our Y2K compliance effort
within the normal operating budgets of our internal engineering, information
technology, purchasing and other departments. We attribute a small number of
projects directly to Y2K issues, and most software upgrades have been covered
within our software maintenance contracts. We attribute the majority of our
historical and projected costs to resolve Y2K issues to the upgrade of equipment
in our test operations. We will capitalize such costs. We have incurred $1
million of expenses related to Y2K issues through 1998 and are projecting $2
million of expenses in 1999.
Risks of Y2K Issues and Contingency Plans
We continue to assess the Y2K issues relating to our computing systems,
manufacturing equipment, facilities and external utilities and our supply chain.
Currently, we believe that our largest Y2K risk is that entities beyond our
control upon which we are dependent, including external utilities and our supply
chain, fail to adequately address their Y2K issues. We have designed our Y2K
planning process to mitigate worst-case disruptions which could delay product
delivery. We are scheduled to complete our Risk Assessment step during the
second quarter of 1999 and will continue to update our contingency plans
throughout 1999 as circumstances dictate.
Based on currently available information, we do not believe that the Y2K
issues discussed above will have a material long-term adverse impact on our
financial condition or results of operations. However, we cannot assure you that
we will not be affected by such issues. In addition, we cannot assure you that
the failure of any material supplier, utility provider, customer or other third
party with whom we deal to ensure Y2K compliance will not have a material
adverse effect on our financial condition or results of operations.
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FACTORS THAT MAY AFFECT OPERATING RESULTS
In addition to the factors discussed elsewhere in this form 10-Q and in the
Company's Report on Form 10-K for the year ended December 31, 1998 and the
Company's other reports filed with the Securities and Exchange Commission, the
following are important factors which could cause actual results or events to
differ materially from those contained in any forward looking statements made by
or on behalf of the Company.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results have varied significantly from period to period. A
variety of factors could materially and adversely affect our revenues, gross
profit and operating income, or lead to significant variability of quarterly or
annual operating results. These factors include, among others, the cyclical
nature of both the semiconductor industry and the markets addressed by end-users
of semiconductors, the short-term nature of its customers' commitments, timing
and volume of orders relative to our production capacity, changes in capacity
utilization, evolutions in the life cycles of customers' products, rescheduling
and cancellation of large orders, rapid erosion of packaging selling prices,
availability of manufacturing capacity, allocation of production capacity
between our facilities and those of ASI, fluctuations in package and test
service charges paid to ASI, changes in costs, availability and delivery times
of labor, raw materials and components, effectiveness in managing production
processes, fluctuations in manufacturing yields, changes in product mix, product
obsolescence, timing of expenditures in anticipation of future orders,
availability of financing for expansion, changes in interest expense, the
ability to develop and implement new technologies on a timely basis, competitive
factors, changes in effective tax rates, the loss of key personnel or the
shortage of available skilled workers, international political or economic
events, currency and interest rate fluctuations, environmental events, and
intellectual property transactions and disputes. Unfavorable changes in any of
the above factors may adversely affect our business, financial condition and
results of operations. In addition, we increase our level of operating expenses
and investment in manufacturing capacity based on anticipated future growth in
revenues. If our revenues do not grow as anticipated and the Company is not able
to decrease its expenses, our business, financial condition and operating
results would be materially and adversely affected.
DECLINING AVERAGE SELLING PRICES--THE SEMICONDUCTOR INDUSTRY PLACES DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS.
Historically, prices for our packaging and test services have declined over
time. Beginning in 1997, a worldwide slowdown in demand for semiconductor
devices led to excess capacity and increased competition. As a result, price
declines in 1998 accelerated more rapidly. We expect that average selling prices
for our packaging and test services will continue to decline in the future. If
we cannot reduce the cost of our packaging and test services to offset a decline
in average selling prices, our future operating results could be harmed.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND ELECTRONIC PRODUCTS
INDUSTRIES--WE OPERATE OUR BUSINESS IN VOLATILE INDUSTRIES, AND INDUSTRY
DOWNTURNS HARM OUR PERFORMANCE.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Because our business is and will continue to be
dependent on the requirements of semiconductor companies for independent
packaging, test and wafer fabrication services, any future downturn in the
semiconductor industry or any other industry that uses a significant number of
semiconductor devices, such as the personal computer industry, could have a
material adverse effect on our business. For example, our operating results for
1998 were adversely affected by downturns in the semiconductor market.
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DEPENDENCE ON RELATIONSHIP WITH ASI--OUR BUSINESSES ARE CLOSELY RELATED AND
FINANCIAL DIFFICULTIES FACED BY ASI MAY AFFECT OUR PERFORMANCE.
Our business depends on ASI providing semiconductor packaging and test
services and wafer fabrication services on a cost effective and timely basis.
During the three months ended March 31, 1999, we derived approximately 65% of
our packaging and test net revenues from services performed for us by ASI, and
100% of our wafer fabrication net revenues from services performed for us by
ASI.
If ASI were to significantly reduce or curtail its operations for any
reason, or if our relationship with ASI were to be disrupted for any reason, our
business would be harmed. We may not be able to identify and qualify alternate
suppliers quickly, if at all. In addition, we currently have no other third
party suppliers of packaging and test services and no other qualified third
party suppliers of wafer fabrication services. Our factories in the Philippines
would be able to fill only a small portion of the resulting shortfall in
packaging and test capacity and none of the shortfall in wafer fabrication
capacity.
ASI is currently in weak financial condition and has a significant
amount of debt relative to its equity. In 1998, the report of ASI's independent
auditors on the consolidated financial statements of ASI included explanatory
paragraphs regarding: (1) the significant effect of the Korean economy on ASI's
operations caused in part by currency volatility in the Asia Pacific region, (2)
the filing of an application for reorganization by Anam Engineering and
Construction Co., Ltd., a subsidiary of ASI, which is still pending and (3)
ASI's participation in a financial restructuring program ASI has negotiated with
its creditor financial institutions. This program is known as the "Workout." The
Workout became effective in April 1999. The Workout includes significant debt
repayment from the proceeds from the sale of K4, reduction of interest rates,
extension of debt maturities, further reduction of debt by conversion of debt to
equity and a moratorium until December 31, 2003 on ASI's obligations on
guarantees of its affiliates' debt. As a result of the Workout, we expect ASI's
financial position to improve significantly. The Workout requires a third party
foreign investor to commit to invest $150.0 million in equity of ASI during the
next four years. We have executed a letter with ASI committing to this equity
investment. When we make the first installment of our equity investment in ASI,
ASI's financial results will affect our financial results because we will report
these results in our financial statements using the equity method of accounting.
It is not certain whether the Workout will be sufficient to enable ASI
to continue to provide services to our company at current levels or to obtain
funds for capital expansion. In addition, the Workout requires ASI to meet
certain performance thresholds on an ongoing basis. We cannot assure you that
ASI will be able to meet its performance thresholds. If ASI does not meet these
performance thresholds, the creditor financial institutions have the right to
modify or terminate the Workout. In addition, the creditor financial
institutions can modify the terms of the Workout upon agreement of creditor
financial institutions holding at least 75% of the debt restructured under the
Workout. If the creditor financial institutions subsequently terminate the
Workout, the creditor financial institutions could reinstate and enforce the
original terms of ASI's debt, including accelerating ASI's obligations and
pursuing ASI's guarantees of its affiliates' debt. If this were to occur, ASI's
and our businesses would be harmed.
POTENTIAL CONFLICTS OF INTEREST WITH ASI--MEMBERS OF THE KIM FAMILY OWN
SUBSTANTIAL PORTIONS OF, AND HAVE ACTIVE MANAGEMENT ROLES IN, BOTH OUR COMPANY
AND ASI. THIS COULD LEAD TO CONFLICTS OF INTEREST IN OUR BUSINESS DEALINGS WITH
ASI.
Mr. James Kim, the founder of our company and currently our Chairman,
Chief Executive Officer and largest shareholder, is the eldest son of Mr. H. S.
Kim, the founder of ASI. Mr. H. S. Kim is currently the honorary Chairman and a
Director of ASI. Since January 1992, in addition to his other responsibilities,
Mr. James Kim has served as Chairman and a director of ASI. The Kim family,
which collectively owned approximately 40.7% of the outstanding common stock of
ASI as of February 1, 1999, significantly influences the management of ASI. Mr.
James Kim and members of his family beneficially own approximately 65.8% of our
outstanding common stock.
Following our equity investment in ASI, our company will own a
substantial percentage of ASI's outstanding common stock. In addition, the
Workout provides for the conversion of a portion of ASI's debt to equity. Both
our investment in ASI and the conversion of debt to equity will substantially
decrease the Kim family's ownership in ASI. Furthermore, through December 31,
2003, the creditor financial institutions will be entitled to vote the ASI
shares owned by Mr. James Kim and his family. Even though the Kim family's
ownership of ASI will be reduced and the voting rights in their ASI shares
assigned to the creditor financial institutions, we believe that the Kim family
will continue to exercise significant influence over our company
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and ASI and its affiliates.
ABSENCE OF BACKLOG--OUR NET REVENUES IN ANY QUARTER DEPEND ON OUR CUSTOMERS'
DEMAND FOR PACKAGING AND TEST SERVICES IN THAT QUARTER, AND WE MAY NOT BE ABLE
TO ADJUST COSTS QUICKLY IF OUR CUSTOMERS' DEMAND DIPS SUDDENLY.
Our packaging and test business does not typically operate with any
material backlog. We expect that in the future our packaging and test net
revenues in any quarter will continue to be substantially dependent upon our
customers' demand in that quarter. None of our customers have committed to
purchase any amount of packaging or test services or to provide us with binding
forecasts of demand for packaging and test services for any period. In addition,
our customers could reduce, cancel or delay their purchases of packaging and
test services. Because a large portion of our costs is fixed and our expense
levels are based in part on our expectations of future revenues, we may be
unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
CUSTOMER CONCENTRATION--WE GENERATE A LARGE PERCENTAGE OF OUR NET REVENUES FROM
A SMALL GROUP OF CUSTOMERS WHO HAVE NO MINIMUM PURCHASE OBLIGATIONS.
We depend on a small group of customers for a substantial portion of
our net revenues. In 1996, 1997 and 1998, and the three months ended March 31,
1999, we derived 39.2%, 40.1%, 35.3% and 33.3%, respectively, of our net
revenues from sales to our five largest packaging and test customers, with
23.5%, 23.4%, 20.6% and 17.5% of our net revenues, respectively, derived from
sales to Intel Corporation. In addition, during 1998 and the three months ended
March 31, 1999, we derived 7.4% and 16.5% of our net revenues, respectively,
from wafer fabrication services, and we derived all of these revenues from Texas
Instruments, Inc. ("Texas Instruments"). Our ability to maintain close,
satisfactory relationships with these customers is important to the ongoing
success and profitability of our business. We expect that we will continue to be
dependent upon a small number of customers for a significant portion of our
revenues in future periods.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS--WE DEPEND ON OUR FACTORIES IN
KOREA AND THE PHILIPPINES. MANY OF OUR CUSTOMERS' OPERATIONS ARE ALSO LOCATED
OUTSIDE OF THE U.S.
We provide packaging and test services through our three factories
located in the Philippines. We source additional packaging and test services
from four factories located in Korea and owned by ASI, including K4, pursuant to
a supply agreement with ASI. We also source wafer fabrication services from a
wafer foundry located in Korea and owned by ASI. In addition, many of our
customers' operations are located outside the U.S. The following are risks
inherent in doing business internationally:
- - regulatory limitations imposed by foreign governments;
- - fluctuations in currency exchange rates;
- - political risks;
- - disruptions or delays in shipments caused by customs brokers or
government agencies;
- - unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers;
- - difficulties in staffing and managing foreign operations; and
- - potentially adverse tax consequences resulting from changes in tax
laws.
In addition to the risks listed above, our operations in Korea and the
Philippines are subject to certain country-specific risks described below.
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Risks Associated with Our Operations in Korea
Historically, we have derived a significant percentage of our net
revenues from sales of services performed for us by ASI in Korea. Our operations
in Korea following the acquisition of K4 and ASI's operations are subject to
risks inherent to operating in Korea. While our revenues in Korea will be
denominated in U.S. dollars, our labor costs and some of our operating costs
will be denominated in won. Substantially all of ASI's revenues and a
significant portion of its debt and capital lease obligations are denominated in
U.S. dollars, while its labor and some operating costs are denominated in won.
Fluctuations in the foreign exchange rate will affect both our company's and
ASI's financial results. When we make the first installment of our equity
investment in ASI and report ASI's results in our financial statements using the
equity method of accounting, our financial results will be further affected by
foreign exchange fluctuations.
Beginning in late 1997 and continuing into 1998, Korea experienced
severe economic instability as well as devaluation of the Korean won relative to
the U.S. dollar. The exchange rate as of December 31, 1996 was W884 to $1.00
as compared to W1,415 to $1.00 as of December 31, 1997 and W1,207 to $1.00
as of December 31, 1998. The depreciation of the won relative to the U.S. dollar
has increased the cost of importing goods and services into Korea. In addition,
the value in won of Korea's public and private sector debt denominated in U.S.
dollars and other foreign currencies has also increased significantly. These
developments in turn led to sharply higher domestic interest rates and reduced
opportunities for refinancing or refunding maturing debts. As a result of these
difficulties, financial institutions in Korea have limited their lending in
particular to highly leveraged companies. Future economic instability in Korea
could have a material adverse effect on our company's and ASI's business and
financial condition.
Relations between Korea and the Democratic People's Republic of Korea
("North Korea") have been tense over most of Korea's history. Incidents
affecting relations between the two Koreas continually occur. If the level of
tensions with North Korea increases or changes abruptly, both our company's and
ASI's businesses could be harmed.
Risks Associated with Our Operations in the Philippines
Although the political situation and the general state of the economy
in the Philippines has stabilized in recent years, each has historically been
subject to significant instability. Most recently, the devaluation of the
Philippine peso relative to the U.S. dollar beginning in July 1997 led to
economic instability in the Philippines. Any future economic or political
disruptions or instability in the Philippines could have a material adverse
effect on our business.
Because the functional currency of our operations in the Philippines is
the U.S. dollar, we have recently benefited from cost reductions relating to
peso-denominated expenditures, primarily payroll costs. We believe that any
future devaluations of the Philippine peso will eventually lead to inflation in
the Philippines, which could offset any savings achieved to date.
RISKS ASSOCIATED WITH OUR ACQUISITION OF K4--THE ACQUISITION OF K4 REPRESENTS A
MAJOR COMMITMENT OF OUR CAPITAL AND MANAGEMENT RESOURCES.
Our acquisition of K4 will require our management to devote a
significant portion of its resources to the maintenance and operation of a
factory in Korea. We do not have experience in owning and operating a business
in Korea. It may take time for us to learn how to comply with relevant Korean
regulations, including tax, environmental and employee laws. During the
transition period in which we will integrate K4 into our company, our management
may not have adequate time and attention to devote to other aspects of our
business, and those parts of our business could suffer. In addition, we will
rely on ASI to provide us with financial, human resources and other
administrative services pursuant to a transition services agreement. If ASI
terminates this agreement or fails to provide us with the services we require to
operate K4, our ability to operate K4 profitably could be adversely affected.
We plan to retain and integrate up to 1,700 Korean employees currently
working at K4 into our workforce, and we may face cultural difficulties until we
learn how to interact with these new employees. If our K4 employees become
dissatisfied working for a U.S. company, they may leave us. If we cannot find
new employees to replace departing ones, our K4 operations could suffer.
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MANAGEMENT OF GROWTH--WE FACE CHALLENGES AS WE INTEGRATE NEW AND DIVERSE
OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR EXPANSION
PLANS.
We have experienced, and may continue to experience, growth in the
scope and complexity of our operations and in the number of our employees. This
growth has strained our managerial, financial, manufacturing and other
resources. Future acquisitions may result in inefficiencies as we integrate new
operations and manage geographically diverse operations.
Although we believe our current controls are adequate, in order to
manage our growth, we must continue to implement additional operating and
financial controls and hire and train additional personnel. We have been
successful in hiring and properly training sufficient numbers of qualified
personnel and in effectively managing our growth. However, we cannot assure you
that we will be able to continue to do so in the future. If we fail to: (1)
properly manage growth, (2) improve our operational, financial and management
systems as we grow or (3) integrate new factories and employees into our
operations, our financial performance could be materially adversely affected.
Our success depends to a significant extent upon the continued service
of our key senior management and technical personnel, any of whom would be
difficult to replace. In addition, in connection with our expansion plans, our
company and ASI will be required to increase the number of qualified engineers
and other employees at our respective factories in the Philippines and Korea.
Competition for qualified employees is intense, and our business could be
adversely affected by the loss of the services of any of our existing key
personnel. Our inability to attract, retain and motivate qualified new personnel
could have a material adverse effect on our business.
RISKS ASSOCIATED WITH OUR WAFER FABRICATION BUSINESS--OUR WAFER FABRICATION
BUSINESS IS SUBSTANTIALLY DEPENDENT ON TEXAS INSTRUMENTS.
Our wafer fabrication business, which commenced operations in January
1998, depends significantly upon Texas Instruments. An agreement with ASI and
Texas Instruments (the "Texas Instruments Manufacturing and Purchasing
Agreement") requires Texas Instruments to purchase from us at least 40% of the
capacity of ASI's wafer foundry, and under certain circumstances, Texas
Instruments has the right to purchase from us up to 70% of this capacity. Texas
Instruments' orders in the first half of 1998 were below required minimum
purchase commitments due to market conditions and issues encountered by Texas
Instruments in the transition of its products to new technology. We cannot
assure you that Texas Instruments will meet its purchase obligations in the
future. If Texas Instruments fails to meet its purchase obligations, our
company's and ASI's businesses could be harmed.
Texas Instruments has transferred certain of its complementary metal
oxide silicon ("CMOS") process technology to ASI, and ASI is dependent upon
Texas Instruments' assistance for developing other state-of-the-art wafer
manufacturing processes. In addition, ASI's technology agreements with Texas
Instruments (the "Texas Instruments Technology Agreements") only cover .25
micron and .18 micron CMOS process technology. Texas Instruments has not granted
ASI a license under Texas Instruments' patents to manufacture semiconductor
wafers for third parties. Moreover, Texas Instruments has no obligation to
transfer any next-generation technology to ASI. Our company's and ASI's
businesses could be harmed if ASI cannot obtain new technology on commercially
reasonable terms or ASI's relationship with Texas Instruments is disrupted for
any reason.
DEPENDENCE ON MATERIALS AND EQUIPMENT SUPPLIERS--OUR BUSINESS MAY SUFFER IF THE
COST OR SUPPLY OF MATERIALS OR EQUIPMENT ADVERSELY CHANGES.
We obtain from vendors the materials and equipment required for both
the packaging and test services performed by our factories and the packaging
and test services performed for us by ASI. We source most of our materials,
including critical materials such as leadframes and laminate substrates, from a
limited group of suppliers. Furthermore, we purchase all of our materials on a
purchase order basis and have no long-term contracts with any of our suppliers.
Our business may be harmed if we cannot obtain materials and other supplies
from our vendors: (1) in a timely manner, (2) in sufficient quantities, (3) in
acceptable quality and (4) at competitive prices.
RAPID TECHNOLOGICAL CHANGE--OUR BUSINESS WILL SUFFER IF WE CANNOT KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY.
The complexity and breadth of both semiconductor packaging and test
services and wafer fabrication are rapidly changing. As a result, we expect
that we will need to offer more advanced package designs and new wafer
fabrication technology in order to respond to competitive industry conditions
and customer requirements. Our success depends upon the ability of our company
and ASI to develop and implement new manufacturing process and package design
technologies. The need to develop and maintain advanced packaging and wafer
fabrication capabilities and equipment could require significant research and
development and capital expenditures in future years. In addition, converting
to new package designs or process methodologies could result in delays in
producing new package types or advanced wafer designs that could adversely
affect our ability to meet customer orders.
Technological advances also typically lead to rapid and significant
price erosion and may make our existing products less competitive or our
existing inventories obsolete. If we cannot achieve advances in package design
and wafer fabrication technology or obtain access to advanced package designs
and wafer fabrication technology developed by others, our business could suffer.
COMPETITION--WE MUST COMPETE AGAINST LARGE AND ESTABLISHED COMPETITORS IN BOTH
THE PACKAGING AND TEST SEGMENT AND THE WAFER FABRICATION BUSINESS.
The independent semiconductor packaging and test market is very
competitive. This sector is comprised of approximately 40 companies, and
approximately 15 of these had sales of $100 million or more in 1998. We face
substantial competition from established packaging and test service providers
primarily located in Asia, including companies with significant manufacturing
capacity, financial resources, research and development operations, marketing
and other capabilities. Such companies have also established relationships with
many large semiconductor companies that are current or potential customers of
our company. On a larger scale, we also compete with the internal semiconductor
packaging and test capabilities of many of our customers.
The independent wafer fabrication business is also highly competitive.
Our wafer fabrication services compete primarily with independent semiconductor
wafer foundries, including those of Chartered Semiconductor Manufacturing,
Inc., Taiwan Semiconductor Manufacturing Company, Ltd. and United
Microelectronics Corporation. Each of these companies has significant
manufacturing capacity, financial resources, research and development
operations, marketing and other capabilities and has been operating for some
time. Many of these companies have also established relationships with many
large semiconductor companies that are current or potential customers of our
company.
ENVIRONMENTAL REGULATIONS--FUTURE ENVIRONMENTAL REGULATIONS COULD PLACE
ADDITIONAL BURDENS ON THE MANUFACTURING OPERATIONS OF OUR COMPANY OR ASI.
The semiconductor packaging process uses chemicals and gases and
generates byproducts that are subject to extensive governmental regulations. For
example, we produce liquid waste when silicon wafers are diced into chips with
the aid of diamond saws, then cooled with running water. Federal, state and
local regulations in the United States, as well as environmental regulations in
Korea and the Philippines, impose various controls on the storage, handling,
discharge and disposal of chemicals used in our company's and ASI's
manufacturing processes and on the factories occupied by our company and ASI. We
believe that our activities, as well as those of ASI, conform to present
environmental and land use regulations applicable to our respective operations.
Increasingly, however, public attention has focused on the
environmental impact of semiconductor manufacturing operations and the risk to
neighbors of chemical releases from such operations. In the future, applicable
land use and environmental regulations may: (1) impose upon our company or ASI
the need for additional capital equipment or other process requirements, (2)
restrict our company's or ASI's ability to expand our respective operations, (3)
subject our company or ASI to liability or (4) cause our company or ASI to
curtail our respective operations.
PROTECTION OF INTELLECTUAL PROPERTY--WE MAY BECOME INVOLVED IN INTELLECTUAL
PROPERTY LITIGATION.
We currently hold 43 U.S. patents, and we also have 89 pending patents.
We expect to continue to file patent applications when appropriate to protect
our proprietary technologies, but we cannot assure you that we will receive
patents from pending or future applications. However, we believe that our
continued success depends primarily on factors such as the technological skills
and innovation of our personnel rather than on our patents. In addition, any
patents we obtain may be challenged, invalidated or circumvented and may not
provide meaningful protection or other commercial advantage to us.
We may need to enforce our patents or other intellectual property
rights or to defend our company against claimed infringement of the rights of
others through litigation, which could result in substantial cost and diversion
of our resources. If we fail to obtain necessary licenses or if we face
litigation relating to patent infringement or other intellectual property
matters, our business could suffer.
Although we are not currently a party to any material litigation, the
semiconductor industry is characterized by frequent claims regarding patent and
other intellectual property rights. If any third party makes a valid claim
against our company or ASI, our company or ASI could be required to: (1)
discontinue the use of certain processes, (2) cease the manufacture, use, import
and sale of infringing products, (3) pay substantial damages, (4) develop
non-infringing technologies or (5) acquire licenses to the technology we had
allegedly infringed. Our business, financial condition and results of operations
could be materially and adversely affected by any of these negative
developments.
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In addition, Texas Instruments has granted ASI very limited licenses
under the Texas Instruments Technology Agreements, including a license under
Texas Instruments' trade secret rights to use Texas Instruments' technology in
connection with ASI's provision of wafer fabrication services. However, Texas
Instruments has not granted ASI a license under Texas Instruments' patents to
manufacture semiconductor wafers for third parties. Furthermore, Texas
Instruments has reserved the right to bring infringement claims against
customers of our company or customers of ASI with respect to semiconductor
wafers purchased from our company or ASI. Such customers and others could in
turn subject our company or ASI to litigation in connection with the sale of
semiconductor wafers produced by ASI.
CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN DETERMINE THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
Mr. James Kim and members of his family beneficially own approximately
65.8% of our outstanding common stock. Mr. James Kim's family, acting together,
will therefore effectively control all matters submitted for approval by our
stockholders. These matters could include:
o the election of all of the members of our Board of Directors;
o proxy contests;
o approvals of transactions between our company and ASI or other entities in
which Mr. James Kim and members of his family have an interest;
o mergers involving our company;
o tender offers; and
o open market purchase programs or other purchases of our common stock.
See "Principal Stockholders" for additional information concerning
ownership of our common stock.
YEAR 2000 COMPLIANCE--OUR BUSINESS MAY SUFFER IF OUR YEAR 2000 ("Y2K")
COMPLIANCE PROGRAM FAILS TO RESOLVE ALL Y2K ISSUES.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have implemented a Y2K compliance program to address possible Y2K
issues that may affect our business, and we are involved in the implementation
of a similar Y2K compliance program for ASI. We believe that these programs are
on target to bring our company and ASI into Y2K compliance. However, if these
compliance programs are not successful, or if we encounter unexpected problems,
our business could be harmed. Our operations could also be harmed if any
material supplier, utility provider, customer or other third party with whom we
deal fails to address its own Y2K issues.
For information about the current status of our Y2K readiness and
potential costs, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
ENFORCEABILITY OF JUDGMENTS IN FOREIGN JURISDICTIONS
Since a large portion of our assets are located outside the U.S., any
judgments obtained in the U.S. against us, including judgments with respect to
the payment of principal, premium, interest, offer price, redemption price or
other amounts payable under the Senior Notes Indenture or the Senior
Subordinated Notes Indenture, may be not collectible within the U.S. If holders
of Senior Notes or holders of Senior Subordinated Notes intend to enforce a
judgment obtained in the U.S. against our company's assets located outside the
U.S., they may be subject to additional procedures which would not be required
for enforcement of such judgment in the U.S.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative
disclosures in 1999. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended December 31, 1998.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) and (c)
On May 13, 1999, we issued $425.0 million of principal of 9-1/4% Senior Notes
due 2006 (the "Senior Notes") and $200.0 million of principal of 10-1/2% Senior
Subordinated Notes due 2009 (the "Senior Subordinated Notes") to a group of
initial purchasers led by S.G. Cowen & Company, BT Alex. Brown, NationsBanc
Montgomery Securities LLC, BancBoston Robertson Stephens and Prudential
Securities. The Senior Notes and Senior Subordinated Notes were issued in
reliance on Rule 144A promulgated under the Securities Act of 1933, as amended.
Both the Senior Notes and the Senior Subordinated Notes are senior in right of
payment to the Company's Common Stock and 5-3/4% Convertible Subordinated Notes
due 2003 (the "Convertible Notes"). In the event that we fail to pay the
principal of or interest on the Senior Notes or the Senior Subordinated Notes,
we may not be permitted to pay interest or principal on the Convertible Notes.
In the event that we shall default in a non-payment obligation under the Senior
Notes or the Senior Subordinated Notes, the holders of the Senior Notes or the
Senior Subordinated Notes may have the right to block payments of principal or
interest under the Convertible Notes for a period of time. In addition, the
Senior Notes and the Senior Subordinated Notes restrict our ability to pay
dividends on our Common Stock, repurchase Common Stock and redeem the
Subordinated Notes.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
4.1 Indenture dated as of May 13, 1999 and form of Senior Note.
4.2 Indenture dated as of May 13, 1999 and form of Senior
Subordinated Note.
10.1 Purchase Agreement between Amkor Technology Inc. and certain
initial purchasers named therein, dated May 6, 1999.
10.2 Senior Notes Registration Rights Agreement, dated as of
May 6, 1999.
10.3 Senior Subordinated Notes Registration Rights Agreement, dated
as of May 6, 1999.
27.1 Financial Data Schedule.
- ------------
(b) We filed the following reports on form 8-K during the quarter ended March
31, 1999:
Pursuant to a report dated and filed on January 20, 1999, we filed a
press release issued on January 20, 1999 announcing an agreement with Anam
Semiconductor, Inc. to acquire Anam's K4 semiconductor packaging and test
facility located in Kwangju, Korea.
Pursuant to a report dated January 28, 1999 and filed on February 2,
1999, we filed a press release issued on January 28, 1999 announcing that our
Board of Directors named John B. Neff a director of our company.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THERETO DULY AUTHORIZED.
Amkor Technology, Inc.
(Registrant)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Frank J. Marcucci Chief Financial Officer and Secretary (Principal May 14, 1999
- ------------------------------------- Financial, Chief Accounting Officer and Duly
Frank J. Marcucci Authorized Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.1 Indenture dated as of May 13, 1999 and form of Senior Note.
4.2 Indenture dated as of May 13, 1999 and form of Senior
Subordinated Note.
10.1 Purchase Agreement between Amkor Technology Inc. and certain
initial purchasers named therein, dated May 6, 1999.
10.2 Senior Notes Registration Rights Agreement, dated as of
May 6, 1999.
10.3 Senior Subordinated Notes Registration Rights Agreement, dated
as of May 6, 1999.
27.1 Financial Data Schedule.