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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 000-29472
AMKOR TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1722724
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1345 ENTERPRISE DRIVE
WEST CHESTER, PA 19380
(610) 431-9600
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of outstanding shares of the registrant's Common Stock as
of November 1, 2001 was 161,437,940.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net revenues .................................... $ 334,716 $ 648,576 $ 1,165,508 $ 1,750,423
Cost of revenues -- including purchases from ASI 346,355 469,518 1,087,351 1,316,739
----------- ----------- ----------- -----------
Gross profit .................................... (11,639) 179,058 78,157 433,684
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ........ 47,847 50,257 153,206 139,386
Research and development ................... 9,784 8,838 28,421 17,081
Amortization of goodwill and acquired
intangibles .............................. 21,214 20,179 63,699 41,633
----------- ----------- ----------- -----------
Total operating expenses ............... 78,845 79,274 245,326 198,100
----------- ----------- ----------- -----------
Operating income (loss) ......................... (90,484) 99,784 (167,169) 235,584
----------- ----------- ----------- -----------
Other expense (income):
Interest expense, net ...................... 37,904 36,787 123,110 81,644
Foreign currency loss (gain) ............... (1,071) 2,015 (6) 4,607
Other expense (income), net ................ 1,619 (613) 1,730 1,425
----------- ----------- ----------- -----------
Total other expense .................... 38,452 38,189 124,834 87,676
----------- ----------- ----------- -----------
Income (loss) before income taxes, equity in loss
of investees and minority interest ......... (128,936) 61,595 (292,003) 147,908
Provision (benefit) for income taxes ............ (24,498) 9,239 (55,481) 24,425
Equity in loss of investees ..................... (23,661) (7,185) (76,254) (10,220)
Minority interest ............................... (645) -- (1,473) --
----------- ----------- ----------- -----------
Net income (loss) ............................... $ (128,744) $ 45,171 $ (314,249) $ 113,263
=========== =========== =========== ===========
Per Share Data:
Basic net income (loss) per common share ... $ (0.80) $ 0.30 $ (2.02) $ 0.79
=========== =========== =========== ===========
Diluted net income (loss) per common share . $ (0.80) $ 0.28 $ (2.02) $ 0.75
=========== =========== =========== ===========
Shares used in computing basic net income
(loss) per common share .................. 160,581 151,831 155,594 143,744
=========== =========== =========== ===========
Shares used in computing diluted net income
(loss) per common share .................. 160,581 158,833 155,594 151,663
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
2
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 328,224 $ 93,517
Accounts receivable:
Trade, net of allowance for doubtful accounts of $2,126 and $2,426 242,390 301,915
Due from affiliates .............................................. 1,168 1,634
Other ............................................................ 9,183 6,465
Inventories .......................................................... 79,834 108,613
Other current assets ................................................. 48,289 36,873
----------- -----------
Total current assets ........................................ 709,088 549,017
----------- -----------
Property, plant and equipment, net ........................................ 1,476,609 1,478,510
----------- -----------
Investments ............................................................... 407,435 501,254
----------- -----------
Other assets:
Due from affiliates .................................................. 22,277 25,013
Goodwill and acquired intangibles, net ............................... 727,739 737,593
Other ................................................................ 177,437 101,897
----------- -----------
927,453 864,503
----------- -----------
Total assets ................................................ $ 3,520,585 $ 3,393,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ....................................................... $ 15,530 $ 25,731
Short-term borrowings and current portion of long-term debt .......... 161,772 73,586
Trade accounts payable ............................................... 122,407 133,047
Due to affiliates .................................................... 21,522 32,534
Accrued expenses ..................................................... 150,016 129,301
Accrued income taxes ................................................. 55,487 52,232
----------- -----------
Total current liabilities ................................... 526,734 446,431
Long-term debt ............................................................ 1,777,396 1,585,536
Other noncurrent liabilities .............................................. 63,389 46,483
----------- -----------
Total liabilities ........................................... 2,367,519 2,078,450
----------- -----------
Commitments and contingencies
Minority interest ......................................................... 7,383 --
----------- -----------
Stockholders' equity:
Preferred stock ...................................................... -- --
Common stock ......................................................... 162 152
Additional paid-in capital ........................................... 1,119,968 975,026
Retained earnings .................................................... 29,637 343,886
Receivable from stockholder .......................................... (3,276) (3,276)
Accumulated other comprehensive loss ................................. (808) (954)
----------- -----------
Total stockholders' equity .................................. 1,145,683 1,314,834
----------- -----------
Total liabilities and stockholders' equity .................. $ 3,520,585 $ 3,393,284
=========== ===========
The accompanying notes are an integral part of these statements.
3
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
------------- PAID-IN RETAINED FROM COMPREHENSIVE COMPREHENSIVE
SHARE AMOUNT CAPITAL EARNINGS STOCKHOLDER LOSS TOTAL INCOME
------ ------ ------- -------- ----------- ---- ----- ------
Balance at December 31, 1999 ...... 130,660 $ 131 $ 551,964 $ 189,733 $ (3,276) $ (811) $ 737,741
Net income ..................... -- -- -- 113,263 -- -- 113,263 $ 113,263
Unrealized losses on
investments, net of tax ..... -- -- -- -- -- (144) (144) (144)
------------
Comprehensive income ........... $ 113,119
============
Issuance of 20.5 million common
stock shares and 3.9 million
common stock warrants ....... 20,500 21 409,979 -- -- -- 410,000
Issuance of stock through
employee stock purchase plan
and stock options ........... 445 -- 5,477 -- -- -- 5,477
Debt conversion ................ 248 -- 3,460 -- -- -- 3,460
------- ------ ---------- --------- ---------- ------------ ----------
Balance at September 30, 2000 ..... 151,853 $ 152 $ 970,880 $ 302,996 $ (3,276) $ (955) $1,269,797
======= ====== ========== ========= ========== ============ ==========
Balance at December 31, 2000 ...... 152,118 $ 152 $ 975,026 $ 343,886 $ (3,276) $ (954) $1,314,834
Net income (loss) .............. -- -- -- (314,249) -- -- (314,249) $ (314,249)
Unrealized gains on
investments, net of tax ..... -- -- -- -- -- -- -- --
Cumulative translation
adjustment .................. -- -- -- -- -- 146 146 146
------------
Comprehensive loss ............. $ (314,103)
============
Issuance of stock for
acquisitions ................ 4,948 5 87,869 -- -- -- 87,874
Issuance of stock through
employee stock purchase plan
and stock options ........... 650 1 8,125 -- -- -- 8,126
Debt conversion ................ 3,716 4 48,948 -- -- -- 48,952
------- ------ ---------- --------- ---------- ------------ ----------
Balance at September 30, 2001 ..... 161,432 $ 162 $1,119,968 $ 29,637 $ (3,276) $ (808) $1,145,683
======= ====== ========== ========= ========== ============ ==========
The accompanying notes are an integral part of these statements.
4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) .............................................................. $ (314,249) $ 113,263
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ................................................ 328,920 227,075
Deferred debt issuance costs ................................................. 16,446 4,814
Debt conversion expense ...................................................... -- 272
Provision for accounts receivable ............................................ (300) --
Provision for excess and obsolete inventory .................................. 13,794 3,500
Deferred income taxes ........................................................ (69,656) 3,353
Equity in (income) loss of investees ......................................... 76,254 10,220
Loss on sale of fixed assets and investments ................................. 6,254 1,355
Minority interest ............................................................ 1,473 --
Changes in assets and liabilities excluding effects of acquisitions --
Accounts receivable .......................................................... 82,124 (82,628)
Repurchase of accounts receivable under securitization agreement ............. -- (71,500)
Other receivables ............................................................ (2,718) 1,141
Inventories .................................................................. 30,353 (12,453)
Due to/from affiliates, net .................................................. (7,810) 6,040
Other current assets ......................................................... (3,381) (19,237)
Other noncurrent assets ...................................................... 6,102 (9,766)
Accounts payable ............................................................. (21,080) 45,956
Accrued expenses ............................................................. (1,464) 45,414
Accrued income taxes ......................................................... 3,510 2,680
Other long-term liabilities .................................................. 5,843 10,462
----------- -----------
Net cash provided by operating activities .................................. 150,415 279,961
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment ..................................... (134,947) (402,317)
Acquisitions, net of cash acquired ............................................. (11,057) (17,702)
Acquisition of K1, K2 and K3, net of cash acquired ............................. -- (927,290)
Investment in ASI .............................................................. -- (459,000)
Proceeds from the sale of property, plant and equipment ........................ 1,105 --
Proceeds from the sale (purchase) of investments ............................... (257) 136,881
----------- -----------
Net cash used in investing activities ...................................... (145,156) (1,669,428)
----------- -----------
Cash flows from financing activities:
Net change in bank overdrafts and short-term borrowings ........................ 3,746 5,376
Net proceeds from issuance of long-term debt ................................... 750,486 1,028,203
Payments of long-term debt ..................................................... (532,636) (48,769)
Net proceeds from the issuance of 20.5 million common shares in a private equity
offering ..................................................................... -- 410,000
Proceeds from issuance of stock through employee stock purchase plan and stock
options ...................................................................... 8,126 5,477
----------- -----------
Net cash provided by financing activities .................................. 229,722 1,400,287
----------- -----------
Effect of exchange rate fluctuations on cash and cash equivalents ................. (274) --
----------- -----------
Net increase (decrease) in cash and cash equivalents .............................. 234,707 10,820
Cash and cash equivalents, beginning of period .................................... 93,517 98,045
----------- -----------
Cash and cash equivalents, end of period .......................................... $ 328,224 $ 108,865
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ..................................................................... $ 102,805 $ 66,396
Income taxes ................................................................. $ (195) $ 17,533
The accompanying notes are an integral part of these statements.
5
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements and related disclosures as of
September 30, 2001 and for the three and nine months ended September 30, 2001
and 2000 are unaudited, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In our opinion, these financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the results for the interim periods. These financial statements
should be read in conjunction with our latest annual report as of December 31,
2000 filed on Form 10-K with the Securities and Exchange Commission. The results
of operations for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
Certain previously reported amounts have been reclassified to conform with
the current presentation.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These
standards change the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life created by business combinations accounted for
using the purchase method of accounting. Instead, goodwill and intangible assets
deemed to have an indefinite useful life would be subject to an annual review
for impairment. For existing acquisitions, the provisions of the new standards
will be effective for us in the first quarter of 2002. The new standards are
generally effective for business combinations for which the date of acquisition
is subsequent to June 30, 2001. We are in the process of quantifying the
anticipated impact of adopting the provisions of SFAS No. 142, which is expected
to be significant. Upon adoption, we will stop amortizing goodwill, including
goodwill associated with our investment in ASI accounted for under the equity
method of accounting. Based on the current levels of goodwill, this would reduce
amortization expense and, with respect to equity investees, it would reduce
equity in loss of investees, annually by approximately $80 million and $36
million, respectively.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
standard is required to be adopted by us beginning on January 1, 2003. In August
2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment and disposal of long-lived assets. This standard is required
to be adopted by us beginning on January 1, 2002. We are currently in the
process of evaluating the effect the adoption of these standards will have on
our consolidated results of operations, financial position and cash flows, if
any.
2. RISKS AND UNCERTAINTIES
Our future results of operations involve a number of risks and
uncertainties. Factors that could affect future operating results and cause
actual results to vary materially from historical results include, but are not
limited to, dependence on the highly cyclical nature of the semiconductor
industry, uncertainty as to the demand from our customers over both the long-and
short-term, competitive pricing and declines in average selling prices we
experience, our dependence on our relationship with Anam Semiconductor, Inc.
(ASI) for all of our wafer fabrication output, the timing and volume of orders
relative to our production capacity, the absence of significant backlog in our
business, fluctuations in manufacturing yields, the availability of financing,
our high leverage and the restrictive covenants contained in the agreements
governing our indebtedness, our competition, our dependence on international
operations and sales, our dependence on raw material and equipment suppliers,
exchange rate fluctuations, our dependence on key personnel, difficulties
integrating acquisitions, the enforcement of intellectual property rights by or
against us, our need to comply with existing and future environmental
regulations, the results of ASI as it impacts our financial results and
political and economic uncertainty resulting from terrorist activities.
6
3. ACQUISITIONS
Taiwan Semiconductor Corporation and Sampo Semiconductor Corporation. In
July 2001, we acquired, in separate transactions, Taiwan Semiconductor
Technology Corporation (TSTC) and Sampo Semiconductor Corporation (SSC) in
Taiwan. The combined purchase price was paid with the issuance of 4.9 million
shares of our common stock valued at $87.9 million based on our closing share
price two days prior to each acquisition, the assumption of $34.8 million of
debt and $3.7 million of cash consideration, net of acquired cash. Both
transactions have earn-out provisions that provide for additional purchase price
based in part on the results of each of the acquisitions. Based on the earn-out
provisions, we anticipate that we will be required to issue an additional 1.8
million shares in January 2002 and may pay additional cash consideration of
approximately $9.0 million in July 2002. The results of TSTC and Sampo have been
included in the accompanying consolidated financial statements since the
acquisition dates. Goodwill and acquired intangibles as of the acquisition date,
based on preliminary estimates of fair value, were $30.9 million. The acquired
intangibles, which consist principally of patent rights, are amortized on a
straight-line basis over 5 years. We do not expect that the final purchase price
allocation will differ significantly from the preliminary purchase price
allocation.
Amkor Iwate Corporation. In January 2001, Amkor Iwate Corporation commenced
operations with the acquisition of a packaging and test facility at a Toshiba
factory located in the Iwate prefecture in Japan. Amkor Iwate provides packaging
and test services to Toshiba's Iwate factory under a long-term supply agreement.
We currently own 60% of Amkor Iwate and Toshiba owns the balance of the
outstanding shares. By January 2004 we are required to purchase the remaining
40% of the outstanding shares of Amkor Iwate from Toshiba. The share purchase
price will be determined based on the performance of the joint venture during
the three-year period but cannot be less than 1 billion Japanese yen and cannot
exceed 4 billion Japanese yen. The results of Amkor Iwate have been included in
the accompanying consolidated financial statements since the date of
acquisition. Goodwill and acquired intangibles as of the acquisition date, based
on preliminary estimates of fair value, were $21.9 million and are being
amortized on a straight-line basis over 5 to 10 years. Acquired intangibles
include the value of acquired technology and of a workforce-in-place.
K1, K2 and K3. On May 1, 2000 we completed our purchase of ASI's three
remaining packaging and test factories, known as K1, K2 and K3, for a purchase
price of $950.0 million. In addition we made a commitment to make a $459.0
million equity investment in ASI. Pursuant to that commitment we made an equity
investment in ASI of $309.0 million on May 1, 2000. We fulfilled the remaining
equity investment commitment of $150.0 million in three installments of which
$30.0 million was invested on September 30, 2000, and $60.0 million was invested
on each of August 30, 2000 and October 27, 2000. We financed the acquisition and
investment with the proceeds of a $258.8 million convertible subordinated notes
offering, a $410.0 million private equity financing, $750.0 million of secured
bank debt and approximately $103 million from cash on hand. As of September 30,
2001, we invested a total of $500.6 million in ASI and owned 42% of the
outstanding voting stock. We report ASI's results in our financial statements
through the equity method of accounting.
The amount by which the cost of our investment exceeds our share of the
underlying assets of ASI as of the date of our investment is being amortized on
a straight-line basis over a five-year period. The amortization is included in
our consolidated statement of income within equity in income of investees. As of
September 30, 2001, the unamortized excess of the cost of our equity investment
in ASI above our share of the underlying net assets is $127.5 million.
The acquisition of K1, K2 and K3 was accounted for as a purchase.
Accordingly, the results of K1, K2 and K3 have been included in the accompanying
consolidated financial statements since the date of acquisition. Goodwill and
acquired intangibles as of the acquisition date were $555.8 million and are
being amortized on a straight-line basis over a 10 year period. Acquired
intangibles include the value of acquired patent rights and of a
workforce-in-place. The fair value of the assets acquired and liabilities
assumed was approximately $394 million for fixed assets, $9 million for
inventory and other assets, and $9 million for assumed liabilities.
7
Pro Forma Financial Information for Amkor
The pro forma information below assumes that the May 2000 acquisition of
K1, K2 and K3 occurred at the beginning of 2000. The pro forma adjustments
include a provision for amortization of goodwill and other identified
intangibles, an adjustment of depreciation expense based on the fair market
value of the acquired assets, interest expense on debt issued to finance the
acquisitions and income taxes related to the pro forma adjustments. The pro
forma results are not necessarily indicative of the results we would actually
have achieved if the acquisition had been completed as of the beginning of 2000,
nor are they necessarily indicative of future consolidated results.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
ACTUAL PRO FORMA
2001 2000
----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net revenues .................................. $ 1,165,508 $ 1,760,644
Income before income taxes and equity in income
(loss) of investees ........................ (292,003) 166,383
Net income (loss) ............................. (314,249) 131,628
Earnings per share:
Basic net income (loss) per common share ... (2.02) 0.83
Diluted net income (loss) per common share . (2.02) 0.80
The pro forma adjustments exclude the effects of our investments in ASI.
Had we included pro forma adjustments for the nine months ended September 30,
2000 related to our investments in ASI, pro forma net income would have been
$119.7 million and pro forma earnings per share on a diluted basis would have
been $0.73.
Financial Information for ASI
The following summary consolidated financial information was derived from
the consolidated financial statements of ASI. ASI's results of operation for the
nine months ended September 30, 2000, reflected their packaging and test
operations as discontinued operations. Net income for the nine months ended
September 30, 2000 includes a $436.8 million gain on sale of K1, K2 and K3,
which was eliminated for purposes of calculating our equity in income of ASI.
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
--------- ---------
(IN THOUSANDS)
SUMMARY INCOME STATEMENT INFORMATION FOR ASI
Net revenues ........................................................ $ 111,771 $ 247,938
Gross profit ........................................................ (60,201) 38,784
Loss from continuing operations ..................................... (118,650) (17,211)
Net income (loss) ................................................... (118,650) 461,353
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
(IN THOUSANDS)
SUMMARY BALANCE SHEET INFORMATION FOR ASI
Cash, including restricted cash and bank deposits ................... $ 102,390 $ 224,629
Current assets ...................................................... 163,793 303,486
Property, plant and equipment, net .................................. 691,235 793,850
Noncurrent assets (including property, plant and equipment) ......... 823,789 943,458
Current liabilities ................................................. 148,938 158,910
Total debt and other long-term financing (including current portion) 270,271 370,976
Noncurrent liabilities (including debt and other long-term financing) 197,779 326,708
Total stockholders' equity .......................................... 640,865 761,326
8
4. INVENTORIES
Inventories consist of raw materials and purchased components that are used
in the semiconductor packaging process.
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Raw materials and purchased components ............... $ 69,684 $ 99,570
Work-in-process ...................................... 10,150 9,043
---------- ----------
$ 79,834 $ 108,613
========== ==========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Land ................................................. $ 88,791 $ 80,048
Buildings and improvements ........................... 481,345 445,785
Machinery and equipment .............................. 1,661,073 1,506,774
Furniture, fixtures and other equipment .............. 91,821 79,691
Construction in progress ............................. 106,014 70,753
---------- ----------
2,429,044 2,183,051
Less -- Accumulated depreciation and amortization .... (952,435) (704,541)
---------- ----------
$1,476,609 $1,478,510
========== ==========
6. INVESTMENTS
Investments include equity investments in affiliated companies and
noncurrent marketable securities as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Equity investments under the equity method:
ASI (ownership of 42%) ............................ $ 402,495 $ 478,943
Other equity investments (20% - 50% owned)
Taiwan Semiconductor Technology Corporation ..... -- 17,488
Other ........................................... 820 664
---------- ----------
Total equity investments ...................... 403,315 497,095
Marketable securities classified as available for sale 4,120 4,159
---------- ----------
$ 407,435 $ 501,254
========== ==========
We evaluate our investments for impairment due to declines in market value
that are considered other than temporary. Such evaluation includes an assessment
of general economic and company-specific considerations. In the event of a
determination that a decline in market value is other than temporary, a charge
to earnings is recorded for the unrealized loss, and a new cost basis in the
investment is established. The current weakness in the semiconductor industry is
adversely affecting the demand for the wafer output from ASI's foundry and the
market value of ASI's stock as traded on the Korea Stock Exchange. We remain
committed to our long-term strategic relationship with ASI and continue to
explore opportunities to maximize the value of that investment. The carrying
amount of our investment in ASI reflects our long- term outlook for the foundry
industry. We will continue to monitor industry conditions and assess the
carrying value of this investment.
9
7. DEBT
Following is a summary of short-term borrowings and long-term debt:
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
(IN THOUSANDS)
Secured bank facility:
Term A loans, LIBOR plus 2.75% due March 2005 ............................... -- 297,500
Term B loans, LIBOR plus 4% due September 2005 .............................. 222,750 347,375
$100.0 million revolving line of credit, LIBOR plus 2% - 2.75% due March 2005 -- 80,000
9.25% Senior notes due May 2006 ................................................ 425,000 425,000
9.25% Senior notes due February 2008 ........................................... 500,000 --
10.5% Senior subordinated notes due May 2009 ................................... 200,000 200,000
5.75% Convertible subordinated notes due May 2003 .............................. -- 50,191
5.75% Convertible subordinated notes due May 2006 .............................. 250,000 --
5% Convertible subordinated notes due March 2007 ............................... 258,750 258,750
Other debt ..................................................................... 82,668 306
----------- -----------
1,939,168 1,659,122
Less -- Short-term borrowings and current portion of long-term debt ............ (161,772) (73,586)
----------- -----------
$ 1,777,396 $ 1,585,536
=========== ===========
In March 2001, June 2001 and September 2001, we amended the financial
covenants associated with the secured bank facilities. In connection with the
September 2001 amendment, the revolving line of credit was reduced from a $200
million commitment to $100 million, the interest rate on the Term B loans was
increased to LIBOR plus 4% and we prepaid $125 million of the Term B loans in
November 2001. We will expense approximately $4.0 million of deferred debt
issuance costs during the three months ended December 31, 2001 as a result of
the reduction of the revolving line of credit commitment and the prepayment of
the Term B loans.
In May 2001, we sold $250.0 million principal amount of our 5.75%
convertible subordinated notes due 2006 in a private placement. The notes are
convertible into Amkor common stock at a conversion price of $35.00 per share.
We used $122.0 million of the $243.0 million of the net proceeds of that
offering to repay amounts outstanding under the Term B loans of our secured bank
facility, and the balance of the net proceeds was available to be used for
general corporate and working capital purposes. In connection with the repayment
in May 2001 of the Term B loans, we expensed $2.3 million of unamortized
deferred debt issuance costs.
In May 2001, we called for the redemption of all of the 5.75% convertible
subordinated notes due May 2003. In anticipation of the redemption,
substantially all of the holders of the convertible notes opted to convert their
notes into Amkor common stock and, accordingly, $50.2 million of the convertible
notes were converted to 3.7 million of our common stock. In connection with the
conversion of the 5.75% convertible subordinated notes due May 2003, $1.2
million of unamortized deferred debt issuance costs was charged to additional
paid-in capital.
In February 2001, we sold $500.0 million principal amount of our 9.25%
senior notes due 2008 in a private placement. We used $387.5 million of the
$490.0 million of the net proceeds of that offering to repay amounts outstanding
under the Term A loans and revolving line of credit of our secured bank
facility, and the balance of the net proceeds was available to be used for
general corporate and working capital purposes. In connection with the repayment
in February 2001 of the Term A loans, we expensed $7.1 million of unamortized
deferred debt issuance costs.
Other debt as of September 30, 2001 included the financing related to Amkor
Iwate's acquisition of a packaging and test facility at a Toshiba factory
located in the Iwate prefecture in Japan and the debt assumed in connection with
the acquisition of Sampo Semiconductor Corporation in Taiwan. Interest expense
related to short-term borrowings and long-term debt is presented net of interest
income of $8.5 million and $11.9 million for the nine months ended September 30,
2001 and 2000, respectively, in the accompanying consolidated statements of
income.
In connection with our issuance of the 5.75% convertible subordinated notes
due 2006 in May 2001, we incurred debt issuance costs of $7.0 million. In
connection with our issuance of the 9.25% senior notes due 2008 and the
amendment to our secured bank facility in February 2001, we incurred debt
issuance costs of $11.0 million. The debt issuance costs have been deferred and
are being amortized over the life of the associated debt. Deferred debt issuance
costs are included, net of amortization, in other noncurrent assets in the
accompanying consolidated balance sheet and the related amortization expense is
included in interest expense in the accompanying consolidated statements of
income.
10
8. EARNINGS PER SHARE
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. As a result of the net loss for the three and nine
months ended September 30, 2001, potentially dilutive securities are excluded
from the diluted weighted average shares calculation for the three and nine
months ended September 30, 2001 because the result would be antidilutive. The
following table presents a reconciliation of basic and diluted earnings,
weighted average shares and per share amounts for the three and nine months
ended September 30, 2000:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------
WEIGHTED
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Basic earnings per share .. $ 45,171 151,831 $ 0.30
Impact of convertible notes 612 3,718
Dilutive effect of options
and warrants ........... -- 3,284
-------------- -------------- --------------
Diluted earnings per share $ 45,783 158,833 $ 0.28
============== ============== ==============
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------
WEIGHTED
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Basic earnings per share .. $ 113,263 143,744 $ 0.79
Impact of convertible notes 1,802 3,753
Dilutive effect of options
and warrants ........... -- 4,166
-------------- -------------- --------------
Diluted earnings per share $ 115,065 151,663 $ 0.75
============== ============== ==============
9. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," we have two reportable segments, packaging
and test services and wafer fabrication services. These segments are managed
separately because the services provided by each segment require different
technology and marketing strategies.
Packaging and Test Services. Through our factories located in the
Philippines, Korea, Japan, Taiwan and China, we offer a complete and integrated
set of packaging and test services including integrated circuit (IC) packaging
design, leadframe and substrate design, IC package assembly, final testing,
burn-in, reliability testing and thermal and electrical characterization.
Wafer Fabrication Services. Through our wafer fabrication services
division, we provide marketing, engineering and support services for ASI's wafer
foundry, under a long-term supply agreement.
We derived 71.4% and 84.1% of our wafer fabrication revenues from Texas
Instruments (TI) for the nine months ended September 30, 2001 and 2000,
respectively. Total net revenues derived from TI accounted for 8.6% and 14.3% of
our consolidated net revenues for the nine months ended September 30, 2001 and
2000, respectively. With the commencement of operations of Amkor Iwate and the
acquisition of a packaging and test facility from Toshiba, total net revenues
derived from Toshiba accounted for 14.7% of our consolidated net revenues for
the nine months ended September 30, 2001.
The accounting policies for segment reporting are the same as those for our
consolidated financial statements. We evaluate our operating segments based on
operating income. Summarized financial information concerning reportable
segments is shown in the following table. The "Other" column includes the
elimination of inter-segment balances and corporate assets which include cash
and cash equivalents, non-operating balances due from affiliates, investment in
equity affiliates and other investments.
11
PACKAGING WAFER
AND TEST FABRICATION OTHER TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
Three Months Ended September 30, 2001
Net Revenues ..................... $ 288,529 $ 46,187 $ -- $ 334,716
Gross Profit ..................... (15,992) 4,353 -- (11,639)
Operating Income (Loss) .......... (92,454) 1,970 -- (90,484)
Three Months Ended September 30, 2000
Net Revenues ..................... $ 548,873 $ 99,703 $ -- $ 648,576
Gross Profit ..................... 169,042 10,016 -- 179,058
Operating Income ................. 93,271 6,513 -- 99,784
Nine Months Ended September 30, 2001
Net Revenues ..................... $ 1,039,365 $ 126,143 $ -- $ 1,165,508
Gross Profit ..................... 66,069 12,088 -- 78,157
Operating Income ................. (172,321) 5,152 -- (167,169)
Nine Months Ended September 30, 2000
Net Revenues ..................... $ 1,480,485 $ 269,938 $ -- $ 1,750,423
Gross Profit ..................... 406,700 26,984 -- 433,684
Operating Income (Loss) .......... 218,710 16,874 -- 235,584
Total Assets
September 30, 2001 ............... $ 2,730,758 $ 39,976 $ 749,851 $ 3,520,585
December 31, 2000 ................ 2,732,733 46,231 614,320 3,393,284
The following presents property, plant and equipment, net based on the
location of the asset.
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
(IN THOUSANDS)
Property, Plant and Equipment, net
United States ....................................................... $ 89,392 $ 84,351
Philippines ......................................................... 505,085 579,619
Korea ............................................................... 741,200 813,983
Taiwan .............................................................. 93,934 --
Japan ............................................................... 38,314 174
China ............................................................... 8,150 --
Other foreign countries ............................................. 534 383
----------- -----------
$ 1,476,609 $ 1,478,510
=========== ===========
10. COMMITMENTS AND CONTINGENCIES
Amkor is involved in various claims incidental to the conduct of our
business. Based on consultation with legal counsel, we do not believe that any
claims, either individually or in the aggregate, to which the company is a party
will have a material adverse effect on our financial condition or results of
operations.
We are disputing certain amounts due under a technology license agreement
with a third party. To date, this dispute has not involved the judicial systems.
We remit to the third party our estimate of amounts due under this agreement.
Depending on the outcome of this dispute, the ultimate payable by us, as of
September 30, 2001, could be up to an additional $13.7 million. The third party
is not actively pursuing resolution to this dispute and we have not accrued the
potential additional amount.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the federal securities laws, including but not limited to statements
regarding: (1) the condition of the industry in which we operate, including
demand and selling prices for our services, (2) our anticipated capital
expenditures and financing needs, (3) our belief as to our future operating
performance, (4) statements regarding the future of our relationship with ASI
and (5) other statements that are not historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology. Because such statements include risks and uncertainties,
actual results may differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth in the following discussion as well as in "Risk Factors that May Affect
Future Operating Performance." The following discussion provides information and
analysis of our results of operations for the three and nine months ended
September 30, 2001 and our liquidity and capital resources. You should read the
following discussion in conjunction with our consolidated financial statements
and the related notes, included elsewhere in this quarterly report as well as
the reports we file with the Securities and Exchange Commission.
INDUSTRY AND BUSINESS OUTLOOK
Amkor is the world's largest independent provider of semiconductor
packaging and test services. The company has built a leading position through:
(i) one of the industry's broadest offerings of packaging and test services,
(ii) expertise in the development and implementation of packaging and test
technology, (iii) long-standing relationships with customers, and (iv) advanced
manufacturing capabilities. We also market the wafer fabrication output provided
by a foundry owned by Anam Semiconductor, Inc. (ASI). The semiconductors that we
package and test for our customers are ultimately components in communications,
computer, industrial, consumer, automotive and military systems.
Our business is tied to market conditions in the semiconductor industry,
which is highly cyclical. Based on industry estimates, from 1978 through 2000,
there were 10 years when semiconductor industry growth was 10% or less and 13
years when growth was 19% or greater. The historical trends in the semiconductor
industry are not necessarily indicative of the results of any future period. The
strength of the semiconductor industry is dependent primarily upon the strength
of the computer and communications systems markets. Since 1970, the
semiconductor industry declined in 1975, 1985, 1996, 1998 and most recently
beginning in the fourth quarter of 2000 and continuing through 2001. The
expected continued weakness in the semiconductor industry is causing industry
analysts to forecast a decline in the semiconductor industry for 2001 of an
estimated 34% and little or no growth for 2002. Our customers have reduced their
forecasts as a result of the broad weakness in the semiconductor industry,
uncertainty about end market demand, and excess inventory across the
semiconductor industry supply chain. The significant uncertainty throughout the
industry is hindering the visibility throughout the supply chain and that lack
of visibility makes it difficult to forecast the end of the weakness in the
semiconductor industry. The weaker demand is expected to continue to adversely
impact our results in 2001 and into 2002.
During the current industry downturn, our business strategy has been to
move forward with geographic diversification, invest in next-generation
technology, and enhance our financial flexibility. We commenced operations in
Japan in connection with our joint venture with Toshiba, constructed an assembly
and test facility in China and consummated two acquisitions in Taiwan. We
continue to evaluate additional acquisition and investment opportunities.
Although we have significantly reduced our capital expenditure plans, we are
committed to investing in new technologies primarily to support the development
of our Flip Chip, System-in-Package and high-end BGA capabilities. We raised
$500.0 million of 9.25% senior notes due 2008 and $250.0 million of 5.75%
convertible subordinated notes due 2006. Of the combined net proceeds of $733.0
million, we used $509.5 million to repay amortizing term loans. With the
repayment of the term loans, we eliminated $70.0 million in principal payments
due in 2001. The balance of the net proceeds supports our expansion efforts and
general corporate and working capital purposes. Our cash and cash equivalent
balance as of September 30, 2001 was $328.2 million. During November 2001 we
used $125 million of our cash to prepay amounts outstanding under our Term B
loans.
During the second half of the year ended December 31, 2000, we
significantly increased our operating costs to service the demand we were
experiencing and expecting. Beginning in 2001, we implemented numerous cost
reduction initiatives as a significant part of our financial strategy to
partially mitigate the impact of the industry downturn on our results of
operations and cash flows. Our cost reduction efforts included reducing our
worldwide headcount, reducing compensation levels, shortening work schedules,
improving factory efficiencies, negotiating cost reductions with our vendors and
closing non-critical manufacturing support facilities. We reduced our
13
headcount in the Philippines and Korea by approximately 2,300 employees or 11%
from the employment levels at September 30, 2000. Labor costs, excluding
one-time severance costs, in the Philippines and Korea were reduced by $26.8
million or 42% for the three months ended September 30, 2001 as compared with
the three months ended September 30, 2000. We reduced our administrative
headcount, excluding the effects of acquisitions, by 20% from the employment
levels at September 30, 2000. We estimate that for the three months ended
September 30, 2001we reduced our factory operating costs, excluding
depreciation, materials and the impact of acquisitions and expansions, by an
estimated $47 million as compared with the three months ended September 30,
2000. Additionally, we estimate that for the three months ended September 30,
2001we reduced our U.S. based administrative overhead by an estimated $4 million
as compared with the three months ended September 30, 2000.
Prices for packaging and test services and wafer fabrication services have
declined over time. Historically we have been able to partially offset the
effect of price declines by successfully developing and marketing new packages
with higher prices, such as advanced leadframe and laminate packages,
negotiating lower prices with our material vendors, and driving engineering and
technological changes in our packaging and test processes which resulted in
reduced manufacturing costs. We cannot assure you that we will be able to offset
any such price declines in the future.
The weakness in the semiconductor industry is also adversely affecting the
demand for the wafer output from ASI's foundry. Beginning in the fourth quarter
of 2000 and continuing into 2001, demand for wafers deteriorated significantly.
Historically we derived a substantial portion of our wafer fabrication service
revenues from Texas Instruments. Wafers sales to Texas Instruments for the nine
months ended September 30, 2001 decreased 60.4% as compared with the nine months
ended September 30, 2000. We expect, as a result of the weaker demand for the
wafer output from ASI's foundry, our wafer fabrication services results and
ASI's operating results will continue to be adversely impacted in 2001 and into
2002. ASI's results impact us through our recording of our share of their
results in accordance with the equity method of accounting.
OVERVIEW OF OUR HISTORICAL RESULTS
Financial Impact of Our Acquisition of K1, K2 and K3 and Investment in ASI on
Our Results of Operations
Historically we performed packaging and test services at our factories in
the Philippines and subcontracted for additional services with ASI which
operated four packaging and test facilities in Korea. In May 1999, we acquired
K4, one of ASI's packaging and test facilities, and in May 2000 we acquired
ASI's remaining packaging and test facilities, K1, K2 and K3. With the
completion of our acquisition of K1, K2 and K3, we no longer depend upon ASI for
packaging or test services, but we continue to market ASI's wafer fabrication
services.
There was not a significant change in our revenues as a result of the
acquisition of K1, K2 and K3, because we historically sold substantially all of
the output of those facilities. Our gross margins on sales of services performed
by ASI were set in accordance with supply agreements with ASI and were generally
lower than our gross margins of services performed by our factories in the
Philippines. Effective with our May 2000 acquisition of K1, K2 and K3, we no
longer pay service charges to ASI for packaging and test services. Our gross
margins were favorably impacted by the termination of the supply agreement, but
such favorable impact was partially offset by the additional operating costs
that were previously borne by ASI for K1, K2 and K3 and the amortization of
$555.8 million of goodwill and acquired intangibles over a 10-year period.
Our interest expense increased due to the total debt we incurred to finance
the $950.0 million acquisition of K1, K2 and K3 and our $459.0 million
investment in ASI. Our overall effective tax rate decreased due to a 100% tax
holiday for seven years, with an anticipated expiration in 2006, on K1, K2 and
K3's results of operations. Upon the expiration of the 100% tax holiday, we will
have a 50% tax holiday for three additional years. As of September 30, 2001, we
owned 42% of ASI's outstanding voting stock and we report ASI's results in our
financial statements through the equity method of accounting.
14
Financial Impact of Our Joint Venture with Toshiba Corporation
As of January 1, 2001, Amkor Iwate Corporation commenced operations with
the acquisition of a packaging and test facility at a Toshiba factory located in
the Iwate prefecture in Japan. Amkor Iwate provides packaging and test services
to Toshiba's Iwate factory under a long-term supply agreement. We currently own
60% of Amkor Iwate and Toshiba owns the balance of the outstanding shares.
Within three years we are required to purchase the remaining 40% of the
outstanding shares of Amkor Iwate from Toshiba. The share purchase price will be
determined based on the performance of the joint venture during the three-year
period but cannot be less than 1 billion Japanese yen and cannot exceed 4
billion Japanese yen.
The results of Amkor Iwate have been included in the accompanying
consolidated financial statements since January 2001. Our revenues increased as
a result of the packaging and test services performed by Amkor Iwate for Toshiba
under the supply agreement. Gross margins as a percentage of net revenues were
negatively impacted given the terms of the supply agreement provide for gross
margins lower than our historical gross margins on services performed by our
other factories. Operating expenses increased as a result of the additional
administrative expenses incurred by Amkor Iwate and the amortization of $21.9
million of goodwill and acquired intangibles over 5 to 10 years. Interest
expense increased as a result of the debt incurred to finance the purchase of
the packaging and test assets from Toshiba.
Financial Impact of Our Acquisitions of Taiwan Semiconductor Corporation and
Sampo Semiconductor Corporation
In July 2001, we acquired, in separate transactions, Taiwan Semiconductor
Corporation (TSTC) and Sampo Semiconductor Corporation (SSC) in Taiwan. The
results of TSTC and Sampo have been included in the accompanying consolidated
financial statements since the acquisition dates. Our results of operations were
not significantly impacted by these acquisitions. In accordance with the new
accounting standards related to purchase business combinations and goodwill, we
recorded intangible assets, principally goodwill, of $30.9 million as of the
acquisition date that is nonamortizable.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Net revenues .................................. 100.0% 100.0% 100.0% 100.0%
Gross profit .................................. (3.5) 27.6 6.7 24.8
Operating income (loss) ....................... (27.0) 15.4 (14.3) 13.5
Income (loss) before income taxes and equity in
income (loss) of investees ............... (38.5) 9.5 (25.1) 8.4
Net income (loss) ............................. (38.5) 7.0 (27.0) 6.5
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Net Revenues. Net revenues decreased $313.9 million, or 48.4%, to $334.7
million in the three months ended September 30, 2001 from $648.6 million in the
three months ended September 30, 2000. Packaging and test net revenues decreased
47.4% to $288.5 million in the three months ended September 30, 2001 from $548.9
million in the three months ended September 30, 2000. Wafer fabrication net
revenues decreased 53.7% to $46.2 million in the three months ended September
30, 2001 from $99.7 million in the three months ended September 30, 2000.
The decrease in packaging and test net revenues, excluding the impact of
acquisitions, was primarily attributable to a 47.4% decrease in overall unit
volumes in the three months ended September 30, 2001 compared to the three
months ended September 30, 2000. This overall unit volume decrease was driven by
a 40.9% unit volume decrease for advanced leadframe and laminate packages and a
52.4% decrease in our traditional leadframe business as a result of a broad
based decrease in demand for semiconductors. Average selling prices across all
product lines eroded by approximately 20% for the three months ended September
30, 2001 as compared to the three months ended September 30, 2000. Partially
offsetting the decrease in overall unit volumes and average selling price
erosion was the benefit of $58.5 million in net revenues for the three months
ended September 30, 2001 related to acquisitions which were completed since
January 1, 2001.
15
The decrease in wafer fabrication net revenues was primarily attributed to
a 49.9% decrease in sales to Texas Instruments in the three months ended
September 30, 2001 as compared with the three months ended September 30, 2000.
Texas Instrument's demand for our services declined as a result of the
utilization of excess inventory supply by them and their customers and a
decline in end market demand for cellular phones.
Gross Profit. Gross profit decreased $190.7 million, or 106.5%, to a
negative gross profit of $11.6 million, or 3.5% of net revenues, in the three
months ended September 30, 2001 from a gross profit of $179.1 million, or 27.6%
of net revenues, in the three months ended September 30, 2000. Our cost of
revenues consists principally of costs of materials, labor and depreciation.
Because a substantial portion of our costs at our factories is fixed,
significant increases or decreases in capacity utilization rates have a
significant effect on our gross profit.
Gross margins as a percentage of net revenues were negatively impacted by:
- Decreasing unit volumes in 2001, which drove a higher manufacturing
cost per unit as a result of our factories' substantial fixed costs;
- Average selling price erosion across our product lines;
- Packaging and test services performed by Amkor Iwate under a long-term
supply agreement with Toshiba that provides for gross margins lower
than our historical gross margins on services performed by our other
factories; and
- Costs incurred to close certain manufacturing support facilities in
the Philippines.
The negative impact on gross margins was partially offset by:
- Cost reduction initiatives implemented principally in the first and
second quarter of 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $2.5 million, or 4.8%, to $47.8 million, or
14.3% of net revenues, in the three months ended September 30, 2001 from $50.3
million, or 7.7% of net revenues, in the three months ended September 30, 2000.
The decrease in these costs was due to:
- Reduced compensation related expenses; and
- Reduced administrative expenses as a result of cost reduction
initiatives.
The decrease in selling, general and administrative expenses was partially
offset by:
- Increased costs related to the commencement of operations of Amkor
Iwate in Japan as well as our operations in China and the acquisitions
in Taiwan.
Research and Development. Research and development expenses increased $1.0
million to $9.8 million, or 2.9% of net revenues, in the three months ended
September 30, 2001 from $8.8 million, or 1.4% of net revenues, in the three
months ended September 30, 2000. Our research and development efforts support
our customers' needs for smaller packages and increased functionality. We
continue to invest our research and development resources to continue the
development of our Flip Chip interconnection solutions, our System-in-Package
technology, that uses both advanced packaging and traditional surface mount
techniques to enable the combination of technologies in a single package, and
our Chip Scale packages that are nearly the size of the semiconductor die.
Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles increased $1.0 million to $21.2 million
from $20.2 million in the three months ended September 30, 2000 principally as a
result of our January 2001 acquisition of Amkor Iwate.
Other (Income) Expense. Other expenses, net increased $0.2 million, to
$38.5 million, or 11.5% of net revenues, in the three months ended September 30,
2001 from $38.2 million, or 5.9% of net revenues, in the three months ended
September 30, 2000.
Income Taxes. Our effective tax rate in the three months ended September
30, 2001 and the three months ended September 30, 2000 was 19% and 15%,
respectively. The increase in the effective tax rate in 2001 was due to
operating losses in jurisdictions with higher corporate income tax rates. The
tax returns for open years are subject to changes upon final examination.
Changes in the mix of income
16
from our foreign subsidiaries, expiration of tax holidays and changes in tax
laws and regulations could result in increased effective tax rates for us in the
future.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the three months ended September 30,
2001 of $14.8 million compared to our share of their income in the three months
ended September 30, 2000 of $0.3 million. Our earnings also included the
amortization of the excess of the cost of our investment above of our share of
the underlying net assets of $8.9 million and $7.5 million in the three months
ended September 30, 2001 and the three months ended September 30, 2000,
respectively. Our investment in ASI increased to 42% as of October 2000 from 40%
as of September 2000, 38% as of May 2000 and 18% as of October 1999.
Nine months ended September 30, 2001 Compared to Nine months ended September 30,
2000
Net Revenues. Net revenues decreased $584.9 million, or 33.4%, to $1,165.5
million in the nine months ended September 30, 2001 from $1,750.4 million in the
nine months ended September 30, 2000. Packaging and test net revenues decreased
29.8% to $1,039.4 million in the nine months ended September 30, 2001 from
$1,480.5 million in the nine months ended September 30, 2000. Wafer fabrication
net revenues decreased 53.3% to $126.1 million in the nine months ended
September 30, 2001 from $269.9 million in the nine months ended September 30,
2000.
The decrease in packaging and test net revenues, excluding the impact of
acquisitions, was primarily attributable to a 35.5% decrease in overall unit
volumes in the nine months ended September 30, 2001 compared to the nine months
ended September 30, 2000. This overall unit volume decrease was driven by a
34.9% unit volume decrease for advanced leadframe and laminate packages and a
35.9% decrease in our traditional leadframe business as a result of a broad
based decrease in demand for semiconductors. Average selling prices across all
product lines eroded by approximately 15% for the nine months ended September
30, 2001 as compared to the nine months ended September 30, 2000. Partially
offsetting the decrease in overall unit volumes and average selling price
erosion was the benefit of $167.4 million in net revenues related to
acquisitions which were completed since January 1, 2001.
The decrease in wafer fabrication net revenues was primarily attributed to
a 60.4% decrease in sales to Texas Instruments in the nine months ended
September 30, 2001 as compared with the nine months ended September 30, 2000.
Texas Instrument's demand for our services declined as a result of the
utilization of excess inventory supply by them and their customers and a
decline in end market demand for cellular phones.
Gross Profit. Gross profit decreased $355.5 million, or 82.0%, to $78.2
million, or 6.7% of net revenues, in the nine months ended September 30, 2001
from $433.7 million, or 24.8% of net revenues, in the nine months ended
September 30, 2000. Our cost of revenues consists principally of costs of
materials, labor and depreciation. Because a substantial portion of our costs at
our factories is fixed, significant increases or decreases in capacity
utilization rates have a significant effect on our gross profit.
Gross margins as a percentage of net revenues were negatively impacted by:
- Decreasing unit volumes in 2001, which drove a higher manufacturing
cost per unit as a result of our factories' substantial fixed costs;
- Average selling price erosion across our product lines; and
- Packaging and test services performed by Amkor Iwate under a long-term
supply agreement with Toshiba that provides for gross margins lower
than our historical gross margins on services performed by our other
factories.
The negative impact on gross margins was partially offset by:
- The favorable impact of the termination of our supply agreement with
ASI effective with our May 2000 acquisition of K1, K2 and K3. Such
favorable impact was partially offset by the additional operating
costs that were previously borne by ASI for K1, K2 and K3; and
- Cost reduction initiatives implemented principally in the first and
second quarter of 2001 for which significant benefits were not
realized until the second quarter of 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.8 million, or 9.9%, to $153.2 million, or
13.1% of net revenues, in the nine months ended September 30, 2001 from $139.4
million, or 8.0% of net revenues, in the nine months ended September 30, 2000.
The increase in these costs was due to:
17
- Increased costs related to the commencement of operations of Amkor
Iwate in Japan as well as our operations in China and the acquisitions
in Taiwan;
- Increased costs related to our Korean factories primarily as a result
of the assumption of the general and administrative expenses of K1, K2
and K3 following our acquisition in May 2000; and
- Increased headcount and related personnel costs within our worldwide
sales, engineering support and System-in-Package groups that were
partially offset by our cost reduction initiatives in the first and
second quarters of 2001.
Research and Development. Research and development expenses increased $11.3
million to $28.4 million, or 2.4% of net revenues, in the nine months ended
September 30, 2001 from $17.1 million, or 1.0% of net revenues, in the nine
months ended September 30, 2000. Increased research and development expenses
resulted from the acquisition of the packaging and test research and development
group within ASI related to the K1, K2 and K3 transaction. Our research and
development efforts support our customers' needs for smaller packages and
increased functionality. We continue to invest our research and development
resources to continue the development of our Flip Chip interconnection
solutions, our System-in-Package technology, that uses both advanced packaging
and traditional surface mount techniques to enable the combination of
technologies in a single package, and our Chip Scale packages that are nearly
the size of the semiconductor die.
Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles increased $22.1 million to $63.7 million
from $41.6 million in the nine months ended September 30, 2000 principally as a
result of our May 2000 acquisition of K1, K2 and K3 and to a lesser extent our
January 2001 acquisition of Amkor Iwate.
Other (Income) Expense. Other expenses, net increased $37.2 million, to
$124.8 million, or 10.7% of net revenues, in the nine months ended September 30,
2001 from $87.6 million, or 5.0% of net revenues, in the nine months ended
September 30, 2000. The net increase in other expenses was primarily a result of
an net increase in interest expense of $41.5 million. The increased interest
expense resulted from the financing related to our May 2000 acquisition of K1,
K2 and K3 and our investment in ASI and our 2001 financing activities which are
more fully detailed in our discussion of "Liquidity and Capital Resources." Net
interest expense for the nine months ended September 30, 2001 also included $9.4
million of unamortized deferred debt issuance costs expensed in
connection with the repayment in February and May 2001 of term loans outstanding
under our secured bank facility. Other expenses were favorably impacted by a
change in foreign currency gains and losses of $4.6 million for the nine months
ended September 30, 2001 as compared with the corresponding period in the prior
year.
Income Taxes. Our effective tax rate in the nine months ended September 30,
2001 and the nine months ended September 30, 2000 was 19.0% and 16.5%,
respectively. The increase in the effective tax rate in 2001 was due to
operating losses in jurisdictions with higher corporate income tax rates. The
tax returns for open years are subject to changes upon final examination.
Changes in the mix of income from our foreign subsidiaries, expiration of tax
holidays and changes in tax laws and regulations could result in increased
effective tax rates for us in the future.
Equity in Loss of Investees. Our earnings included our share of losses in
our equity affiliates, principally ASI, in the nine months ended September 30,
2001 of $49.7 million compared to our share of their income in the nine months
ended September 30, 2000 of $5.8 million. Our earnings also included the
amortization of the excess of the cost of our investment above of our share of
the underlying net assets of $26.6 million and $16.1 million in the nine months
ended September 30, 2001 and the nine months ended September 30, 2000,
respectively. Our investment in ASI increased to 42% as of October 2000 from 40%
as of September 2000, 38% as of May 2000 and 18% as of October 1999.
18
LIQUIDITY AND CAPITAL RESOURCES
The continued weakness in demand in 2001 for packaging, test and wafer
fabrication services adversely affected our results and cash flows from
operations and we expect that our results and cash flows from operations will
continue to be adversely impacted into 2002. We have undertaken, and may
continue to undertake, a variety of measures to reduce our operating costs
including reducing our worldwide headcount, reducing compensation levels,
shortening work schedules, improving factory efficiencies, negotiating cost
reductions with our vendors and closing non-critical manufacturing facilities.
Our ongoing primary cash needs are for debt service, primarily interest,
equipment purchases, and working capital. Additionally, we may require cash to
consummate business combinations to diversify our geographic operations and
expand our customer base.
As a result of the adverse impact on our cash flows caused by the decline
in demand for our products and services, net cash provided by operating
activities for the three months ended March 31, 2001, June 30, 2001 and
September 30, 2001 were $73.2 million, $61.0 million and $16.2 million,
respectively. Comparatively, the net cash provided by operating activities for
the three months ended March 31, 2000, June 30, 2000 and September 30, 2000 were
$70.1 million, $89.1 million and $120.8 million, respectively. Net cash used in
investing activities during the nine months ended September 30, 2001 and 2000
was $145.2 million and $1,669.4 million, respectively. Net cash provided by
financing activities during the nine months ended September 30, 2001 and 2000
was $229.7 million and $1,400.3 million, respectively. Our cash and cash
equivalents balance as of September 30, 2001 was $328.2 million, and we have
$100 million available from our revolving line of credit.
The reduced levels of operating cash flow required us to renegotiate our
existing bank debt covenants. In March 2001, June 2001 and September 2001, we
amended the financial covenants associated with the secured bank facilities. In
connection with the September 2001 amendment, the revolving line of credit was
reduced from a $200 million commitment to $100 million, the interest rate on the
Term B loans was increased to LIBOR plus 4% and we prepaid $125 million of the
Term B loans in November 2001 from cash on hand. If the weakness in the
semiconductor industry and for our services continues, we can not give assurance
that we will be able to remain in compliance with our financial covenants. In
the event of default, we may not be able to cure the default or obtain a waiver,
and our operations could be significantly disrupted and harmed. In general,
covenants in the agreements governing our existing debt, and debt we may incur
in the future, may materially restrict our operations, including our ability to
incur debt, pay dividends, make certain investments and payments and encumber or
dispose of assets. In addition, financial covenants contained in agreements
relating to our existing and future debt could lead to a default in the event
our results of operations do not meet our plans. A default under one debt
instrument may also trigger cross-defaults under our other debt instruments. An
event of default under any debt instrument, if not cured or waived, could have a
material adverse effect on us.
During this industry downturn, our business strategy has been in part to
enhance our financial flexibility. We raised $500.0 million of 9.25% senior
notes due 2008 and $250.0 million of 5.75% convertible subordinated notes due
2006. Of the combined net proceeds of $733.0 million, we used $509.5 million to
repay amortizing term loans. With the repayment of the term loans, we eliminated
$70.0 million in principal payments due in 2001. The balance of the net proceeds
supports our expansion efforts and general corporate and working capital
purposes. In May 2001 holders of the 5.75% convertible subordinated notes due
May 2003, as a result of our intent to redeem, converted $50.2 million of their
notes into 3.7 million shares of our common stock. We now have, and for the
foreseeable future will continue to have, a significant amount of indebtedness.
As of September 30, 2001, we had a total of $1,939.2 million debt and had
available to us a $100.0 million revolving line of credit under which no amounts
were drawn. Our indebtedness requires us to dedicate a substantial portion of
our cash flow from operations to service payments on our debt principally
interest. For the nine months ended September 30, 2001, interest expense payable
in cash was $115.2 million.
As a result of the current business conditions, we have significantly
reduced our capital expenditure plans. We expect to spend approximately $150.0
million and $100.0 million in total capital expenditures in 2001 and 2002,
respectively, primarily to support the development of our Flip Chip,
System-in-Package and high-end BGA capabilities. Our secured bank facility
restricts our future capital expenditures to $25.0 million per quarter for five
quarters beginning with the quarter ending December 31, 2001. During the nine
months ended September 30, 2001 and 2000, we made capital expenditures of $134.9
million and $402.3 million, respectively. During the year ended December 31,
2000 we made capital expenditures of $480.1 million principally in connection
with the construction of our P4 facility in the Philippines, added capacity in
our other factories in the Philippines and Korea and constructed a new research
and development facility in the U.S.
Our business strategy during the current industry downturn and previously
has been to diversify our operations geographically. In July 2001, we acquired,
in separate transactions, Taiwan Semiconductor Technology Corporation (TSTC) and
Sampo Semiconductor Corporation (SSC) in Taiwan. The combined purchase price was
paid with the issuance of 4.9 million shares of our common stock valued at $87.9
million, the assumption of $34.8 million of debt and $3.7 million of cash
consideration, net of acquired cash. Both transactions have earn-out provisions
that provide for additional purchase and we anticipate that we will be required
to issue an
19
additional 1.8 million shares in January 2002 and may pay additional cash
consideration of approximately $9.0 million in July 2002. In January 2001, Amkor
Iwate Corporation commenced operations and acquired from Toshiba a packaging and
test facility located in the Iwate prefecture in Japan financed by a short-term
note payable to Toshiba of $21.1 million and $47.0 million in other financing
from a Toshiba affiliate. We currently own 60% of Amkor Iwate and Toshiba owns
40% of the outstanding shares which within three years we are required to
purchase. The share purchase price will be determined based on the performance
of the joint venture during the three-year period but cannot be less than 1
billion Japanese yen and cannot exceed 4 billion Japanese yen. In May 2000 we
completed our purchase of ASI's remaining three packaging and test factories,
known as K1, K2 and K3 for a purchase price of $950.0 million. In connection
with our acquisition of K1, K2 and K3 we made an additional equity investment in
ASI of $459.0 million.
We believe that our existing cash balances, available credit lines, cash
flow from operations and available equipment lease financing will be sufficient
to meet our projected capital expenditures, debt service, working capital and
other cash requirements for at least the next twelve months. We may require
capital sooner than currently expected. We cannot assure you that additional
financing will be available when we need it or, if available, that it will be
available on satisfactory terms. In addition, the terms of the secured bank
facility, senior notes and senior subordinated notes significantly reduce our
ability to incur additional debt. Failure to obtain any such required additional
financing could have a material adverse effect on our company.
20
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
In addition to the factors discussed elsewhere in this form 10-Q and in our
report on Form 10-K for the year ended December 31, 2000 and our 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 Amkor.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND ELECTRONIC PRODUCTS
INDUSTRIES -- WE OPERATE IN VOLATILE INDUSTRIES, AND INDUSTRY DOWNTURNS HARM OUR
PERFORMANCE.
Our business is tied to market conditions in the semiconductor industry, which
is highly cyclical. Because our business is, and will continue to be, dependent
on the requirements of semiconductor companies for independent packaging, test
and wafer fabrication services, any downturn in the semiconductor industry or
any other industry that uses a significant number of semiconductor devices, such
as the personal computer and telecommunication devices industries, could have a
material adverse effect on our business.
CONDITIONS IN THE SEMICONDUCTOR INDUSTRY HAVE WEAKENED SIGNIFICANTLY AND COULD
REMAIN WEAK OR WORSEN -- WE HAVE BEEN, AND MAY CONTINUE TO BE, AFFECTED BY THESE
TRENDS.
The semiconductor industry has weakened significantly recently and conditions
are expected to remain weak during 2001 and into 2002. The significant
uncertainty throughout the industry related to market demand is hindering the
visibility throughout the supply chain and that lack of visibility makes it
difficult to forecast the end of the weakness in the semiconductor industry.
There can be no assurance that overall industry conditions will not weaken
further or last longer than we currently expect, or what impact such a further
or prolonged weakening would have on our business.
FLUCTUATIONS IN OPERATING RESULTS -- OUR OPERATING RESULTS MAY VARY
SIGNIFICANTLY AS A RESULT OF FACTORS THAT WE CANNOT CONTROL.
Our operating results have varied significantly from period to period. Many
factors could materially and adversely affect our revenues, gross profit and
operating income, or lead to significant variability of quarterly or annual
operating results. These factors include, among others:
- the cyclical nature of both the semiconductor industry and the markets
addressed by end-users of semiconductors,
- the short-term nature of our customers' commitments, timing and volume
of orders relative to our production capacity,
- changes in our capacity utilization,
- evolutions in the life cycles of our customers' products,
- rescheduling and cancellation of large orders,
- erosion of packaging selling prices,
- fluctuations in wafer fabrication service charges paid to ASI,
- changes in costs, availability and delivery times of raw materials and
components and changes in costs and availability of labor,
- fluctuations in manufacturing yields,
- changes in product mix,
- timing of expenditures in anticipation of future orders,
- availability and cost of financing for expansion,
- ability to develop and implement new technologies on a timely basis,
- competitive factors,
- changes in effective tax rates,
- 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.
21
DECLINING AVERAGE SELLING PRICES -- THE SEMICONDUCTOR INDUSTRY PLACES DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS.
Historically, prices for our packaging and test services and wafer fabrication
services have declined over time. 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 and wafer fabrication
services to offset a decline in average selling prices, our future operating
results could suffer.
HIGH LEVERAGE AND RESTRICTIVE COVENANTS -- OUR SUBSTANTIAL INDEBTEDNESS COULD
MATERIALLY RESTRICT OUR OPERATIONS AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We now have, and for the foreseeable future will have, a significant amount of
indebtedness. In addition, despite current debt levels, the terms of the
indentures governing our indebtedness do not prohibit us or our subsidiaries
from incurring substantially more debt. If new debt is added to our consolidated
debt level, the related risks that we now face could intensify.
Covenants in the agreements governing our existing debt, and debt we may incur
in the future, may materially restrict our operations, including our ability to
incur debt, pay dividends, make certain investments and payments, and encumber
or dispose of assets. In addition, financial covenants contained in agreements
relating to our existing and future debt could lead to a default in the event
our results of operations do not meet our plans. A default under one debt
instrument may also trigger cross-defaults under our other debt instruments. An
event of default under any debt instrument, if not cured or waived, could have a
material adverse effect on us. Our substantial indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital
expenditures, research and development and other general corporate
requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to service interest and principal payments on our debt;
- limit our flexibility to react to changes in our business and the
industry in which we operate;
- place us at a competitive disadvantage to any of our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds.
RELATIONSHIP WITH ASI -- OUR BUSINESS PERFORMANCE CAN BE ADVERSELY AFFECTED BY
ASI'S FINANCIAL PERFORMANCE OR A DISRUPTION IN THE WAFER FABRICATION SERVICES
ASI PROVIDES TO US.
We report ASI's financial results in our financial statements, and if ASI
encounters financial difficulties, our financial performance could suffer. As of
September 30, 2001 we owned approximately 42% of ASI's outstanding voting stock.
Accordingly, we report ASI's financial results in our financial statements
through the equity method of accounting. If ASI's results of operations are
adversely affected for any reason (including as a result of losses at its
consolidated subsidiaries and equity investees), our results of operations will
suffer as well. Financial or other problems affecting ASI could also lead to a
complete loss of our investment in ASI. Our wafer fabrication business may
suffer if ASI reduces its operations or if our relationship with ASI is
disrupted.
Our wafer fabrication business depends on ASI providing wafer fabrication
services on a timely basis. If ASI were to significantly reduce or curtail its
operations for any reason, or if our relationship with ASI were to be disrupted
for any reason, our wafer fabrication business would be harmed. We may not be
able to identify and qualify alternate suppliers of wafer fabrication services
quickly, if at all. In addition, we currently have no other qualified third
party suppliers of wafer fabrication services and do not have any plans to
qualify additional third party suppliers.
The weakness in the semiconductor industry is also adversely affecting the
demand for the wafer output from ASI's foundry. Beginning in the fourth quarter
and continuing into 2001, demand for wafers deteriorated significantly. We
expect, as a result of the weaker demand for the wafer output from ASI's
foundry, our wafer fabrication services results and ASI's operating results will
continue to be adversely impacted in 2001 and into 2002.
ABSENCE OF BACKLOG -- WE MAY NOT BE ABLE TO ADJUST COSTS QUICKLY IF OUR
CUSTOMERS' DEMAND FALLS SUDDENLY.
Our packaging and test business does not typically operate with any material
backlog. We expect that in the future our 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 has committed to purchase any significant
amount of packaging or test services or to provide us with binding forecasts of
demand for packaging and test services for any future period. In addition, our
customers could reduce, cancel or delay their purchases
22
of packaging and test services. Because a large portion of our costs is fixed
and our expense levels are based in part on our expectations of future revenues,
we may be unable to adjust costs in a timely manner to compensate for any
revenue shortfall.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- WE DEPEND ON OUR FACTORIES IN
THE PHILIPPINES, KOREA, JAPAN, TAIWAN AND CHINA. MANY OF OUR CUSTOMERS'
OPERATIONS ARE ALSO LOCATED OUTSIDE OF THE U.S.
We provide packaging and test services through our factories located in the
Philippines, Korea, Japan, Taiwan and China. We also source wafer fabrication
services from ASI's wafer fabrication facility in Korea. Moreover, many of our
customers' operations are located outside the U.S. The following are some of the
risks inherent in doing business internationally:
- regulatory limitations imposed by foreign governments;
- fluctuations in currency exchange rates;
- political risks;
- disruptions or delays in shipments caused by customs brokers or
government agencies;
- unexpected changes in regulatory requirements, tariffs, customs,
duties and other trade barriers;
- difficulties in staffing and managing foreign operations; and
- potentially adverse tax consequences resulting from changes in tax
laws.
DIFFICULTIES INTEGRATING ACQUISITIONS -- WE FACE CHALLENGES AS WE INTEGRATE NEW
AND DIVERSE OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR
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.
In order to manage our growth, we must continue to implement additional
operating and financial systems and controls. For example, we currently are in
the process of implementing a new management enterprise resource planning
system. If we fail to successfully implement such systems and controls in a
timely and cost-effective manner as we grow, our business and 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, we will be
required to increase the number of qualified engineers and other employees at
our existing factories, as well as factories we may acquire. Competition for
qualified employees is intense, and our business could be adversely affected by
the loss of the services of any of our existing key personnel. We cannot assure
you that we will continue to be successful in hiring and properly training
sufficient numbers of qualified personnel and in effectively managing our
growth. Our inability to attract, retain, motivate and train qualified new
personnel could have a material adverse effect on our business.
RISKS ASSOCIATED WITH OUR WAFER FABRICATION BUSINESS -- OUR WAFER FABRICATION
BUSINESS IS SUBSTANTIALLY DEPENDENT ON TEXAS INSTRUMENTS.
Our wafer fabrication business depends significantly upon Texas Instruments. An
agreement with ASI and Texas Instruments requires Texas Instruments to purchase
from us at least 40% of the capacity of ASI's wafer fabrication facility, and
under certain circumstances, Texas Instruments has the right to purchase from us
up to 70% of this capacity. From time to time, Texas Instruments has failed to
meet its minimum purchase obligations, and we cannot assure you that Texas
Instruments will meet its purchase obligations in the future. As a result of the
weakness in the semiconductor industry, Texas Instruments and our other
customers' demand for the output of ASI's wafer foundry has decreased
significantly in 2001 and it is expected that demand will remain weak into 2002.
Texas Instruments did not meet the minimum purchase commitment throughout the
nine months ended September 30, 2001. Texas Instruments has made certain
concessions to us to partially mitigate the shortfall in demand. 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 only cover 0.25 micron and 0.18 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.
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DEPENDENCE ON MATERIALS AND EQUIPMENT SUPPLIERS -- OUR BUSINESS MAY SUFFER IF
THE COST OR SUPPLY OF MATERIALS OR EQUIPMENT CHANGES ADVERSELY.
We obtain from various vendors the materials and equipment required for the
packaging and test services performed by our factories. We source most of our
materials, including critical materials such as leadframes and laminate
substrates, from a limited group of suppliers. Furthermore, we purchase all of
our materials on a purchase order basis and have no long-term contracts with any
of our suppliers. Our business may be harmed if we 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 processes and package design technologies. The need
to develop and maintain advanced packaging and wafer fabrication capabilities
and equipment could require significant research and development and capital
expenditures in future years. In addition, converting to new package designs or
process methodologies could result in delays in producing new package types or
advanced wafer designs that could adversely affect our ability to meet customer
orders.
Technological advances also typically lead to rapid and significant price
erosion and may make our existing products less competitive or our existing
inventories obsolete. If we 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 COMPETE AGAINST ESTABLISHED COMPETITORS IN BOTH THE PACKAGING
AND TEST BUSINESS AND THE WAFER FABRICATION BUSINESS.
The independent semiconductor packaging and test market is very competitive.
This sector is comprised of 13 principal companies. We face substantial
competition from established packaging and test service providers primarily
located in Asia, including companies with significant manufacturing capacity,
financial resources, research and development operations, marketing and other
capabilities. These companies also have established relationships with many
large semiconductor companies that are current or potential customers of our
company. On a larger scale, we also compete with the internal semiconductor
packaging and test capabilities of many of our customers.
The 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. If we cannot compete successfully
in the future against existing or potential competitors, our operating results
would suffer.
ENVIRONMENTAL REGULATIONS -- FUTURE ENVIRONMENTAL REGULATIONS COULD PLACE
ADDITIONAL BURDENS ON OUR MANUFACTURING OPERATIONS.
The semiconductor packaging process uses chemicals and gases and generates
byproducts that are subject to extensive governmental regulations. For example,
we produce liquid waste when silicon wafers are diced into chips with the aid of
diamond saws, then cooled with running water. Federal, state and local
regulations in the United States, as well as environmental regulations
internationally, impose various controls on the storage, handling, discharge and
disposal of chemicals used in our manufacturing processes and on the factories
we occupy.
Increasingly, public attention has focused on the environmental impact of
semiconductor manufacturing operations and the risk to neighbors of chemical
releases from such operations. In the future, applicable land use and
environmental regulations may: (1) impose upon us the need for additional
capital equipment or other process requirements, (2) restrict our ability to
expand our operations, (3) subject us to liability or (4) cause us to curtail
our operations.
24
PROTECTION OF INTELLECTUAL PROPERTY -- WE MAY BECOME INVOLVED IN INTELLECTUAL
PROPERTY LITIGATION.
As of October 31, 2001, we held 111 U.S. patents, we had 250 pending patents and
we were preparing an additional 24 patent applications for filing. In addition
to the U.S. patents, we held 475 patents in foreign jurisdictions. We expect to
continue to file patent applications when appropriate to protect our proprietary
technologies, but we cannot assure you that we will receive patents from pending
or future applications. In addition, any patents we obtain may be challenged,
invalidated or circumvented and may not provide meaningful protection or other
commercial advantage to us.
We may need to enforce our patents or other intellectual property rights or 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 us, we could be required to:
- discontinue the use of certain processes;
- cease the manufacture, use, import and sale of infringing products;
- pay substantial damages;
- develop non-infringing technologies; or
- acquire licenses to the technology we had allegedly infringed.
Our business, financial condition and results of operations could be materially
and adversely affected by any of these negative developments.
In addition, Texas Instruments has granted ASI very limited licenses under
certain 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 our customers or
customers of ASI with respect to semiconductor wafers purchased from us or ASI.
Such customers and others could in turn subject us 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.
As of October 31, 2001, Mr. James Kim and members of his family beneficially
owned approximately 48% of our outstanding common stock. Mr. James Kim's family,
acting together, will substantially control all matters submitted for approval
by our stockholders. These matters could include:
- the election of all of the members of our Board of Directors;
- proxy contests;
- approvals of transactions between our company and ASI or other
entities in which Mr. James Kim and members of his family have an
interest, including transactions which may involve a conflict of
interest;
- mergers involving our company;
- tender offers; and
- open market purchase programs or other purchases of our common stock.
STOCK PRICE VOLATILITY
The trading price of our common stock has been and is likely to continue to be
highly volatile and could be subject to wide fluctuations in response to factors
such as:
- actual or anticipated quarter-to-quarter variations in operating
results;
- announcements of technological innovations or new products and
services by Amkor or our competitors;
- general conditions in the semiconductor industry;
- changes in earnings estimates or recommendations by analysts;
- developments affecting ASI; and
- or other events or factors, many of which are out of our control.
25
In addition, the stock market in general, and the Nasdaq National Market and the
markets for technology companies in particular, have experienced extreme price
and volume fluctuations. This volatility has affected the market prices of
securities of companies like ours for that have often been unrelated or
disproportionate to the operating performance. These broad market fluctuations
may adversely affect the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our company is exposed to market risks, primarily related to foreign
currency and interest rate fluctuations. In the normal course of business, we
employ established policies and procedures to manage the exposure to
fluctuations in foreign currency values and changes in interest rates.
Foreign Currency Risks
Our company's primary exposures to foreign currency fluctuations are
associated with transactions and related assets and liabilities denominated in
Philippine pesos, Korean won and Japanese yen. The objective in managing these
foreign currency exposures is to minimize the risk through minimizing the level
of activity and financial instruments denominated in pesos, won and yen.
At September 30, 2001, the peso-based financial instruments primarily
consisted of cash, non-trade receivables, deferred tax assets and liabilities,
non-trade payables, accrued payroll, taxes and other expenses. Based on the
portfolio of peso-based assets and liabilities at September 30, 2001, a 20%
increase in the Philippine peso to U.S. dollar exchange rate would result in a
decrease of approximately $3.7 million, in peso-based net assets.
At September 30, 2001, the won-based financial instruments primarily
consisted of cash, non-trade receivables, non-trade payables, accrued payroll,
taxes and other expenses. Based on the portfolio of won-based assets and
liabilities at September 30, 2001, a 20% increase in the Korean won to U.S.
dollar exchange rate would result in a decrease of approximately $4.0 million,
in won-based net assets.
At September 30, 2001, the yen-based financial instruments primarily
consisted of cash, non-trade receivables, accrued payroll taxes, debt and other
expenses. Based on the portfolio of yen-based assets and liabilities at
September 30, 2001, a 20% decrease in the Japanese yen to U.S. dollar exchange
rate would result in an increase of approximately $17.2 million, in yen-based
net liabilities.
Interest Rate Risks
Our company has interest rate risk with respect to our long-term debt. As
of September 30, 2001, we had a total of $1,939.2 million debt of which 86% was
fixed rate debt and 14% was variable rate debt. Our variable rate debt
principally consisted of short-term borrowings and amounts outstanding under our
secured bank facilities that included term loans and a $100.0 million revolving
line of credit of which no amounts were drawn as of September 30, 2001. The
fixed rate debt consisted of senior notes, senior subordinated notes,
convertible subordinated notes and foreign debt. Changes in interest rates have
different impacts on our fixed and variable rate portions of our debt portfolio.
A change in interest rates on the fixed portion of the debt portfolio impacts
the fair value of the instrument but has no impact on interest incurred or cash
flows. A change in interest rates on the variable portion of the debt portfolio
impacts the interest incurred and cash flows but does not impact the fair value
of the instrument. The fair value of the convertible subordinated notes is also
impacted by the market price of our common stock.
The table below presents the interest rates, maturities and fair value of
our fixed and variable rate debt as of September 30, 2001.
YEAR ENDING DECEMBER 31,
------------------------------------------------------------
FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Long-term debt:
Fixed rate debt ..... $ 3,557 $ 14,589 $ 15,784 -- -- $1,633,750 $1,667,680 $1,247,952
Average interest rate 4.0% 4.0% 4.0% 8.2% 8.1%
Variable rate debt .. $ 146,269 $ 2,560 $ 20,586 $ 55,056 $ 41,914 $ 5,103 $ 271,488 $ 271,488
Average interest rate 6.0% 6.4% 6.5% 6.5% 6.5% 5.0% 5.5%
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Equity Price Risks
Our outstanding 5.75% convertible subordinated notes due 2006 and 5%
convertible subordinated notes due 2007 are convertible into common stock at
$35.00 per share and $57.34 per share, respectively. We intend to repay our
convertible subordinated notes upon maturity, unless converted. If investors
were to decide to convert their notes to common stock, our future earnings would
benefit from a reduction in interest expense. If we induced such conversion, our
earnings could include an additional charge.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 10, 2001, we issued 3.2 million shares of our common stock to the
stockholders of Sampo Semiconductor Corporation (SSC) in connection with our
acquisition of SSC. The shares were issued in reliance in part on Rule 506
promulgated under the Securities Act of 1933, as amended (the "Securities Act")
and in part in reliance on Regulation 903 promulgated under the Securities Act,
based on representations that all of the stockholders of SSC who received our
common stock were either accredited investors or non-U.S. persons. On July 26
2001, we issued 1.7 million shares of our common stock to the stockholders of
Taiwan Semiconductor Corporation (TSTC) in connection with our acquisition of
TSTC. The shares were issued in reliance on Section 4(2) of the Securities Act,
based on the fact that the shares were issued to no more than 15 stockholders of
TSTC in a private transaction not involving any general solicitation.
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 Amendment No. 2 to the amended and restated credit agreement dated as
of March 30, 2001 between the Registrant and the Initial Lenders and
Initial Issuing Banks and Salomon Smith Barney, Inc., Citicorp USA,
Inc. and Deutsche Banc Alex. Brown, Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges
(b) REPORTS ON FORM 8-K
We filed with the Securities and Exchange Commission the following reports
on Form 8-K during the quarterly period ended September 30, 2001:
Current Report on Form 8-K dated July 24, 2001 (filed July 26, 2001) related
to a press release dated July 24, 2001 announcing our financial results for the
second quarter ended June 30, 2001.
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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.
By: /s/ KENNETH T. JOYCE
-------------------------------------------------
Kenneth T. Joyce
Chief Financial Officer
(Principal Financial, Chief Accounting Officer and
Duly Authorized Officer)
Date: November 14, 2001
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