UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 0-30376
MIRAE CORPORATION
(Exact name of Registrant as specified in its charter)
Republic of Korea
(Jurisdiction of incorporation or organization)
#9-2, Cha Am-Dong,
Chun An, Chung Chong Nam-Do 330-200
Republic of Korea
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12 (b) of the Act.
Title of Name of Each Exchange
Each Class On Which Registered
- ----------------------------- ---------------------------
American Depositary Shares, The NASDAQ National Market
Common Stock par value (Won) The NASDAQ National Market*
100 per share
Securities registered or to be registered pursuant
to Section 12 (g) of the Act.
None
(Title of Class)
-----------------
Securities for which there is a reporting obligation pursuant
to Section 15 (d) of the Act.
None
(Title of Class)
-----------------
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.
Common Stock................................................124,637,500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No [ ]
Indicate by check mark which financial statement item the Registrant
has elected to follow.
Item 17 [ ] Item 18 |X|
--------------
* Not for trading, but only in connection with the registration of American
Depositary Shares.
Table of Contents
Page
CERTAIN TERMS AND CONVENTIONS................................................1
CURRENCIES AND EXCHANGE RATES................................................3
Forward-Looking Statements...................................................4
PART I...................................................................7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS........7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................7
ITEM 3. KEY INFORMATION..............................................7
A. Selected Financial Data.............................................7
B. Capitalization and Indebtedness.....................................8
C. Reasons for the Offer and Use of Proceeds...........................8
D. Risk Factors........................................................8
ITEM 4. INFORMATION ON THE COMPANY..................................18
A. History And Development............................................18
B. Business Overview..................................................19
C. Organizational Structure...........................................36
D. Property, Plant And Equipment......................................36
ITEM 5. Operating and Financial Review and Prospects................37
A. Operating Results..................................................38
B. Liquidity And Capital Resources....................................49
C. Research and Development, Patents and Licenses, Etc................50
D. Trend Information..................................................52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................52
A. Directors and Senior Management....................................52
B. Compensation.........................................................
C. Board Practice.....................................................55
D. Employees..........................................................56
E. Share Ownership....................................................56
ITEM 7. Major SHAREHOLDERS and Related Party Transactions...........57
A. Major Shareholders.................................................57
B. Related Party Transactions.........................................57
ITEM 8. Financial Information.......................................57
A. Consolidated Statements and Other Financial Information............57
B. Significant Changes................................................58
ITEM 9. THE OFFER AND LISTING.......................................58
ITEM 10. ADDITIONAL INFORMATION......................................59
A. Share Capital......................................................59
B. Articles of Incorporation and By-Laws..............................59
C. Material Contracts.................................................59
D. Exchange Controls..................................................59
E. Taxation...........................................................62
F. Dividends and Paying Agents........................................67
G. Statement by Experts...............................................67
H. Documents on Display...............................................67
I. Subsidiary Information.............................................67
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..68
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES......68
PART II.................................................................68
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.............68
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS........................68
A. Material Modifications to the Rights of Securities Holders.........68
B. Use of Proceeds....................................................68
ITEM 15. [reserved]....................................................
ITEM 16. [Reserved]..................................................69
PART III................................................................69
ITEM 17. FINANCIAL STATEMENTS........................................69
ITEM 18. FINANCIAL STATEMENTS........................................69
ITEM 19. EXHIBITS....................................................69
Forward-Looking Statements
This annual report includes "forward-looking statements." All statements,
other than statements of historical facts, included in this annual report that
address activities, events or developments which we expect or anticipate will
or may occur in the future are forward-looking statements. The words
"believe", "intend", "expect", "anticipate", "project", "estimate", "predict"
and similar expressions are also intended to identify forward-looking
statements.
These forward-looking statements address, among others, such issues as:
o future prices of and demand for our products,
o future earnings and cash flow,
o future plans and capital expenditures,
o expansion and other development trends of the semiconductor
industry,
o expansion and growth of our business and operations, and
o our prospective operational and financial information.
These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in particular circumstances. However, whether actual
results and developments will meet our expectations and predictions depends on
a number of risks and uncertainties which could cause actual results to differ
materially from our expectations, including the risks set forth in "Item 3-Key
Information-Risk Factors" and the following:
o fluctuations in prices of our products,
o potential acquisitions and other business opportunities,
o general economic, market and business conditions, and
o other risks and factors beyond our control.
Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements. We cannot assure you that
the actual results or developments anticipated by us will be realized or, even
if substantially realized, that they will have the expected effect on us or
our business or operations.
CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report
to:
o "Mirae," the "Company", "we," "our" and "us" are to Mirae
Corporation, a Republic of Korea limited liability company, except
where the context otherwise requires.
o "Korea" is to the Republic of Korea.
o ("Won") or "won" is to the currency of Korea.
o "US$" is to U.S. dollars, the currency of the United States of
America.
o "ADS" is to Mirae's American Depositary Shares.
o "ADR" is to Mirae's American Depositary Receipts.
o "Depositary" is to The Bank of New York, the depositary of the ADRs.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to the following
technical terms shall have the meanings set forth below:
o " ASIC " - Application specific integrated circuit, semiconductor
circuits specifically designed to suit a customer's particular
requirement.
o " Automatic test equipment " - Test systems tools used to measure
and ensure the functionality and performance of semiconductors in a
high-volume production environment.
o " BGA " - Ball grid array, a type of semiconductor package
containing ball-shaped terminal leads.
o " Bit " - The smallest units of information recognized by a digital
computer, a bit is a digit (1 or 0) used to represent one of two
states in the binary number system. The term "bit" is a contraction
of "binary digit."
o " Chip " - (1) Sem iconductor manufacturing: A piece of silicon on
which a large amount of circuitry is implanted. Also known as a die.
(2) PCB Assembly: a simple electronic device, not including IC.
o " Clean room " - An environment used in the manufacturing of
semiconductors and semiconductor manufacturing equipment, whose
humidity, temperature, and particulate levels are precisely
controlled.
o " CRT " - Cathode ray tube.
o " CSP " - Chip scale package, a type of semiconductor package.
o " DDR " - Dual data rate memory, a type of memory device.
o " Device " - Semiconductors, semiconductor packages, ICs and other
electronic components including registers, capacitors and
conductors.
o " Die " - A piece of semiconductor wafer containing the circuitry of
a single chip.
o " Die bonding " - The attachment of a die to the frame of a package
before wire bonding.
o " DIMM " - Dual in-line memory module, a type of memory module which
has memory devices placed on both sides of a PCB.
o " DIP " - Double in-line package, a type of IC packaging which has
two rows of leads extending at right angles from the base and has
standard spacings between leads and between rows of leads.
o " DRAMs " - Dynamic random access memory chips, the most popular
type of semiconductor memory chip. "Dynamic" means that the device's
memory cells need to be periodically recharged. Information, stored
in the memory cells in the form of Bits as a positive or negative
charge, is accessed randomly.
o " Etching " - Removal of thin films or layers from the wafer
surface.
o " IC " - Integrated circuit, an electronic circuit in which many
active or passive elements are fabricated and connected on a
continuous substrate.
o " Index time " - Average time needed by a test handler to change
testing trays.
o " Internet " - An open global network of interconnected commercial,
educational and governmental computer networks that utilize a common
communications protocol, TCP/IP.
o " LCD " - Liquid crystal display.
o " Lead frame " - The skeleton of the semiconductor chip to which the
die is bonded; after packaging the only visible parts are the
protruding metal pins.
o " Lead frame magazines " -Aluminum carriers used to transport lead
frames in their fragile state, before the dies are bonded onto them.
o " Logic chip " - A semiconductor device used for data manipulation
and control functions that require higher speeds than a
microprocessor can provide.
o " Mb " - Mega Bit. One million (or 1,048,576) bits as a unit of data
size or memory capacity.
o " Mechatronics " - An engineering field combining principles of
mechanical engineering and electrical engineering.
o " Memory chip " - A semiconductor device that stores data in
electronic form.
o " PCB " - Printed circuit boards.
o " QFP " - Quad flat package, ceramic or plastic chip carrier with
leads projecting down and away from all four sides of a square
package.
o " RAMbus " - RAMbus technology is a superscalar silicon technology
that narrows the data bus width without any decline in transmission
speed by using the PC buffer as a cache memory, thereby resulting in
a brighter bandwidth and transmission rate. The main advantage of
RAMbus DRAM is a performance speed of 800Mhz vs. 100-133Mhz for
current PC 100/133 Synchronous DRAMs. Accordingly, it is an
effective solution to the problem of bridging the growing speed
disparity between CPU and the main memory.
o " RIMM " - RAMbus in-line memory module, a type of memory module
which is used for RAMbus DRAMs.
o " Semiconductor " - A material, like silicon, whose properties lie
in between those of a conductor and an insulator. Through doping
(introducing impurities), it can be made slightly conductive or
slightly insulative. (Also see "chip.")
o " SIMM " - Single in-line memory module, a type of memory module
which is used in edge connector type sockets.
o " SIP " - Single in-line package, a type of IC package which is a
pin type using inserting method for production.
o " SMD placement system " - Surface mount device placement system for
PCB assembly equipment. SMD placement systems are robotic machines
used for high-speed and accurate placement of various electronic
devices onto PCBs.
o " SOP " - Small outline integrated circuit package, a type of IC
packaging.
o " Static random access memory (SRAM) " - An integrated circuit
memory that requires no constant refreshing or recharging and which
stores information for as long as power is applied to the computer.
SRAMs are much faster but more expensive than DRAMs.
o " Test handlers " - Specialized robotic machinery that form part of
the back-end equipment of the IC packaging and testing line. After
the micro-chips are packaged in their black protective container,
test handlers convey the devices to testing equipment, feed the
devices in and out of the testers and finally sort the devices
according to grading information received from the tester.
Generally, two test handlers work with one tester.
o " TFT " - Thin film transistor.
o " TFT-LCD " - Liquid crystal display creates images by changing
molecular arrays of liquid crystals, in which light and darkness is
generated and then an image is formed when electricity is supplied.
Liquid crystals of LCD are inserted between two thin glasses, and
are characterized as material, which lies in the middle of a gas and
solid. TFT-LCD falls in the category of active matrix LCD, rather
than passive, which means each picture cell can be independently
controlled for on and off switching activities, as a transistor
(switching element) is attached directly onto each picture cell.
This allows fast response and high resolution.
o " Throughput " - Product output quantity per unit of time.
o " TSOP " - Thin small outline package, a type of semiconductor
package which is widely used in a PCB.
o "UPH" - Units per hour, a measure of throughput.
o " Wafer " - Commonly, a slice of a semicrystal crystalline ingot
whose active surface has been processed into arrays of ICs.
o " ZIP " - Zigzag in-line package, a type of IC package which has its
leads placed on one side of the device.
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in won. Unless otherwise indicated,
all translations from won to US dollars have been made at a rate of (Won)
1,267 to US$ 1.00, the noon buying rate as certified for customs purposes by
the Federal Reserve Bank of New York (the "Noon Buying Rate") on December 31,
2000. We do not represent that won or US dollar amounts could be converted
into US dollars or won, as the case may be, at any particular rate, the rates
below or at all. On June 28, 2000, the Noon Buying Rate was (Won) 1,304 to US$
1.00.
The following table sets forth noon buying rate for US dollars in New
York City for cable transfers in won as certified for customs purposes by the
Federal Reserve Bank of New York for the periods indicated:
Noon Buying Rate
--------------------------------------------------
--------------------------------------------------
Period End Average(1) High Low
- ------
---------- -------------- -----------------------
(won per US$1.00)
1996............................................. 848 808 849 776
1997............................................. 1,695 988 1,960 846
1998............................................. 1,206 1,367 1,812 1,203
1999............................................. 1,136 1,188 1,243 1,125
2000............................................. 1,267 1,140 1,267 1,106
December 2000.................................... 1,267 ____ 1,267 1,184
January 2001..................................... 1,258 ____ 1,286 1,253
February 2001.................................... 1,255 ____ 1,270 1,234
March 2001....................................... 1,332 ____ 1,332 1,253
April 2001....................................... 1,319 ____ 1,369 1,299
May 2001......................................... 1,282 ____ 1,319 1,282
June 2001 (through June 28)...................... 1,304 ____ 1,305 1,285
- ----------
(1) Determined by averaging the rates on the last business day of each month during the relevant period.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable, but see "Item 6 -- Directors, Senior Management and
Employees -- Directors and Senior Management."
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The summary consolidated financial information set forth below should be
read in conjunction with, and is qualified in its entirety by reference to,
the Consolidated Financial Statements, as of and for the years ended December
31, 1998, 1999 and 2000, together with the notes thereto, which appear
elsewhere in this annual report. The Consolidated Financial Statements as of
and for the years ended December 31, 1998, 1999 and 2000 have been audited by
Ahn Kwon & Co., a member firm of Deloitte Touche Tohmatsu.
The Consolidated Financial Statements are prepared in accordance with
Korean GAAP, which differs in certain material respects from U.S. GAAP. See
Notes 28 and 29 of Notes to Consolidated Financial Statements.
Year ended December
31
1996 1997 1998 1999 2000 2000
WON WON WON WON WON US$
Consolidated ((Won) in millions and US$ in thousands, except per share data)
Statements of operations:
Korean GAAP:
Sales...................................... 45,402 61,523 17,014 45,681 146,099 115,311
.
Cost of sales(1)........................... 24,751 37,677 16,907 36,111 111,377 87,906
Gross profit............................... 20,651 23,846 107 9,570 34,722 27,405
Selling, general and administrative 3,141 5,879 7,328 19,988 27,233 21,486
expenses...................................
Operating income (loss).................... 17,510 17,967 (7,221) (10,418) 7,499 5,919
Other income............................... 949 5,400 14,299 14,603 12,809 10,109
Other expenses(2).......................... 764 1,055 2,833 9,601 20,173 15,921
Income (loss) before income taxes and
minority interest.......................... 17,695 22,312 4,245 (5,416) 135 107
Income tax expense (benefit)(3)............ 4,410 4,089 417 (5,396) (3,602) (2,843)
Income before minority interest............ 13,285 18,223 3,828 (20) 3,737 2,950
Minority interest in net loss (gain) of
consolidated -- 68 -- (216) 533 421
Subsidiaries...............................
Net income (loss).......................... 13,285 18,291 3,828 (236) 4270 3,371
Net income (loss) per share(4)............. 291 236 39 (2) 35 0.028
U.S. GAAP:(5)
Sales...................................... 17,700 76,750 19,619 51,358 143,643 113,372
.
Gross profit............................... 7,600 35,629 7,119 15,526 43,545 34,368
Operating income (loss).................... 1,691 25,585 (11,223) (11,163) (11,903) (9,395)
Net income (loss).......................... 2,466 22,355 2,888 (117) 9,290 7,332
Net income (loss) per share................ 54 288 29 (1) 77 61
As of December 31
--------------------------------------
1996 1997 1998 1999 2000 2000
WON WON WON WON WON US$
Consolidated ((Won) in millions and US$ in thousands) balance sheet:
Korean GAAP:
Cash and cash equivalents and
short-term financial instruments......... 10,529 41,012 35,133 20,137 35,338 27,891
Total assets............................ 56,022 127,000 178,267 181,221 379,172 299,267
Current liabilities..................... 11,704 14,228 11,049 23,413 39,982 31,557
Long-term liabilities................... 3,699 7,513 11,117 1,957 11,819 9,328
Total shareholders' equity.............. 40,619 105,082 156,101 155,851 327,371 258,382
U.S. GAAP:
Total assets............................ 65,265 132,582 180,089 172,743 356,154 281,099
Total liabilities....................... 35,160 30,676 32,171 26,779 68,053 53,711
Total shareholders' equity.............. 30,105 101,729 147,918 145,964 288,101 227,388
(1) Cost of sales includes product warranty costs incurred during the period.
For a discussion of differences in treatment of product warranty costs
between U.S. GAAP and Korean GAAP, see Note 28 of Notes to Consolidated
Financial Statements.
(2) Through 1998, other expenses includes amortization of deferred research
and development expense. For a discussion of changes in treatment of
research and development expense under Korean GAAP during the periods
shown, see Note 2 (i) of Notes to Consolidated Financial Statements. For
a discussion of differences in treatment of research and development
expense between U.S. GAAP and Korean GAAP, see Note 28 of Notes to
Consolidated Financial Statements.
(3) For a discussion of changes in treatment of deferred income taxes under
Korean GAAP during the periods shown, see Note 2 (q) of Notes to
Consolidated Financial Statements. For a discussion of differences in
treatment of deferred income taxes between U.S. GAAP and Korean GAAP, see
Note 28 of Notes to Consolidated Financial Statements.
(4) Net income per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of the
period.
(5) See Note 28 of Notes to Consolidated Financial Statements for
reconciliation to U.S. GAAP.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Risks Relating To Mirae Corporation
We are largely dependent upon the electronics, semiconductor and
semiconductor-related industries
The electronics, semiconductor and semiconductor-related industries are
highly cyclical, with wide fluctuations in product supply and demand, and are
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing, intense competition and
gross margin pressures. These industries periodically experience significant
downturns, often in connection with or in anticipation of declines in general
economic conditions, that in some cases have been prolonged. Our operations
have in the past and may in the future experience substantial fluctuations
from period to period as a consequence of such industry patterns, general
economic conditions affecting the timing of orders from customers and other
factors affecting capital spending. Since the third quarter of 1997, for
instance, excess global supply of DRAM chips and the financial crisis in Asia
and Korea have adversely affected customer demand for our products and,
consequently, our sales and results of operations. No assurance can be given
that any future downturn in the semiconductor and semiconductor-related
industries will not be as or more severe than in the past, or that our results
of operations or financial condition will not be materially and adversely
affected by such downturns or other developments in the semiconductor
industry.
Customer concentration may adversely affect our profitability
The semiconductor manufacturing industry in Korea is highly concentrated,
with a relatively small number of large semiconductor manufacturers accounting
for a substantial portion of the purchases of semiconductor test handling
equipment. We are heavily dependent on three major customers, Samsung
Electronics Co., Ltd. ("Samsung"), Hynix Semiconductor Co., Ltd. ("Hynix")
(formerly known as "Hyundai Electronics Co., Ltd.") and Hyundai Micro
Electronics Co., Ltd. ( "Hyundai Micro Electronics ") (formerly known as LG
Semicon Co., Ltd.). These three customers, each a member of a major Korean
conglomerate, accounted for a significant proportion of our consolidated sales
in the last several years.
In December 1999, we appointed Ryoko Sangyo Corporation ("Ryoko") as our
exclusive distributor of our SMD placement systems in Japan. For so long as
the Ryoko contract is in effect, we may not sell or distribute any of our SMD
placement systems in Japan other than through Ryoko.
Although part of our strategy includes expanding our domestic customer
base and increasing our exports to reduce our reliance on these customers,
they will likely remain important customers, and any negative financial impact
on these customers, the loss of any of these customers or a reduction in
orders or sales by any of these customers would have a material adverse effect
on our business, financial condition and results of operations.
Our products may become obsolete as a result of rapid technological
change in semiconductor-related industries
The semiconductor industry and the industry which provides equipment to
semiconductor manufacturers are subject to rapid technological change and new
product introductions and enhancements. Our ability to remain competitive will
depend in part upon our ability to develop new products and to introduce these
products at competitive prices and on a timely and cost-effective basis. Our
success in developing new and enhanced products depends upon a variety of
factors, including:
o timely and efficient completion of product design;
o timely and efficient implementation of manufacturing and assembly
processes;
o product performance; and
o effective sales and marketing.
Since new product development commitments must be made well in advance of
sales, we must anticipate both future demand and the technology that will be
available to supply that demand. Furthermore, introductions of new and complex
products typically involve a period in which we identify design, engineering
and reliability issues. While we believe that we have the technological
resources and abilities to identify these issues, manage technological
advances in the industry and, in many instances, improve upon that technology,
future improvements in semiconductor design, such as RAMbus DRAM, and in
manufacturing technology may reduce or eliminate the need for our products.
A number of our traditional handler models are not compatible with RAMbus
DRAM testers and, therefore, cannot be used by manufacturers or testers of
RAMbus DRAMs. If our newer products, including our new handlers that are
compatible with RAMbus DRAM testers, and our new business lines fail to
generate sufficient demand or otherwise fail to meet the design and testing
specifications of the market, any significant industry shift to RAMbus DRAM
testers would have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to increase our market share because certain of our
competitors are more established than we are in some of our key and
target markets
We are seeking to increase sales of our products in Korea, other Asian
markets, the United States and Europe. Since certain of our competitors
already operate in these key markets and have greater resources, we may not be
able to compete effectively for market share. If this happens, we may not be
able to increase or sustain sales in these markets.
Some of our major competitors have the following advantages:
o greater name recognition;
o more diversified product lines;
o larger customer bases; and
o significantly greater financial, technical and marketing resources.
As a result, as compared with Mirae, they may be able to:
o better withstand downturns in our key markets;
o adapt more quickly to new or emerging technologies or changes in
customer requirements; and
o market, sell and support their products more effectively.
Our new products and new business lines may not be successful
Our strategies entail expanding the range of our products, as well as
widening our customer base in the Asia-Pacific region, the United States and
Europe. Our ability to implement these strategies will depend upon our use of
our core competencies to develop new products and market them successfully
both in and outside of Korea. We have within the last year expanded our core
product offerings to include SMD placement systems, TFT-LCD handlers and
testers and Internet-related products and services. Lycos Korea, our joint
venture with Lycos, Inc., has developed a Korean language search and portal
site on the Internet, and through our subsidiary, SoftForum, we have developed
and have begun selling security solutions for on-line banking, trading and
electronic commerce. No assurance can be given that any of these products or
businesses or any future products or businesses developed by us will be
accepted by the market and be profitable or that we will be able to find
suitable markets with sufficient demand for our products. The failure of one
or more of these products or business lines will likely have a material
adverse effect on our business, results of operations and financial condition.
In addition, our Internet and software security solutions business lines are
completely new businesses for us and we may not have the necessary market
know-how or the operating and managerial experience to compete in these
business markets. See "Information on the Company -- Business Overview --
Internet Businesses and On-line Solutions".
We may have significant amounts of uncollected and uncollectable trade
accounts receivable
In order to penetrate new markets and build market share quickly, we have
offered longer payment periods to customers. We had total outstanding trade
accounts receivable of (Won) 65,098 million as of December 31, 2000. As a
percentage of sales, our accounts receivable increased primarily due to the
sales increase in SMD placement systems in 2000. In addition, the credit terms
on sales of our SMD placement systems were longer than the credit terms on
sales of semiconductor test handler products. Since we only commenced the sale
and marketing of SMD placement systems within the second half of 1999, we
provided our customers longer credit terms to penetrate the market. As a
result of such longer credit terms as well as the current weakness in the
markets in which we operate, we may experience significant uncollected and
uncollectable trade accounts receivable.
We may hold excess raw material and product inventories
We had inventories of (Won) 71,864 million as of December 31, 2000. The
significant increase in inventories as of December 31, 2000 was a result of
advance purchase of raw material inventories for the production of SMD
placement systems and advance maufacturing of SMD placement systems in order
to cut back on the time required for delivery to meet our projected customer
demand on a timely basis. We may misjudge the size of raw material and product
inventories needed and thereby hold excess and unusable inventories which may
be expensed as inventory valuation losses. Such excess inventories could have
a material adverse effect on our business, financial condition and results of
operations.
Market prices for our products may decline in the future
We anticipate that market prices for our main products may decline in the
future due to increased competition. We expect significant competition among
local and international companies, including from new entrants, may continue
to drive equipment prices lower. We also expect that there may be increases in
promotional spending by companies in our industry which would also contribute
to increasing movement of customers between competitors. Such increased
competition and the resulting decline of market prices for our products would
have a material adverse effect on our business, financial condition and
results of operations.
We have only limited experience in providing Internet products and
services and if we are unsuccessful, our operating results may be
significantly harmed
Our future success may be dependent on the success of our
Internet-related products and services. One of our key business strategies for
long-term growth is to establish a line of businesses based upon the delivery
of Internet-related products and services. If we are unable to successfully
establish and expand this business, we may lose market share to competitors
who are able to implement more effectively an Internet-based service business
model and the value our investments in these businesses may decline or be
eliminated completely.
The success of our Internet-related businesses depends on a variety of
factors, including:
o the quality and reliability of our Internet products and services
and our network infrastructure;
o our ability to develop new products and services superior to that of
our competitors;
o our ability to establish electronic commerce and licensing
relationships and other strategic alliances;
o our pricing policies and the pricing policies of our competitors;
o our ability to introduce new products and services before our
competitors;
o our ability to successfully advertise our products and services; and
o general economic trends.
No assurance can be given that any or all of the above factors will be
favorable for us.
The recent slowdown in the information technology industry may cause
bankruptcies or significant losses in some or all of our Internet-related
investments
We have made significant investments in Internet-related businesses.
Mirae holds a greater than 20% stake in five subsidiaries engaged in
Internet-related businesses. See "Information on the Company -- Business
Overview -- Internet Businesses and On-line Solutions". During 2000, we
sustained losses from several of our Internet-related investments. Due to the
difficult market conditions currently prevailing in the information technology
industry, there is a possibility that some of the Internet-related companies
in which we invested may continue to sustain a large amount of losses or
become bankrupt. In such case, the value of Mirae's equity in these
subsidiaries would decline, which would have a material adverse effect on our
business, financial condition and results of operations.
The Internet may not be adopted as a significant medium of commerce and
communication
As is typical in the case of a new and rapidly evolving industry
characterized by rapidly changing technology, evolving industry standards and
frequent new product and service introductions, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may affect the growth of Internet use. Despite
growing interest in the many commercial uses of the Internet, many individuals
and businesses have been deterred from purchasing Internet access services for
a number of reasons, including the existence or perception of, among other
things: inconsistent quality of service; lack of availability of
cost-effective, high-speed options; inability to integrate personal and
business applications on the Internet; inadequate protection of the
confidentiality of stored data and information moving across the Internet; a
perceived lack of security of personal and commercial data, such as credit
card numbers; and a lack of tools to simplify Internet access and use. These
factors may hinder the performance of our Internet-related investments and,
thus, have a negative impact on our business, financial condition and results
of operations.
The Internet industry's standards and technology are evolving
Our future success may depend upon our ability to enhance our existing
Internet-related products and services and to develop new products and
services that meet changing customer requirements. The Internet market is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. We
can give no assurance that we can successfully identify new opportunities and
develop and bring new Internet products and services to market in a timely
manner or that our products or services will be competitive and current. Also,
we can give no assurance that we will have the necessary resources to obtain
advances in technology necessary to remain competitive.
We also face the risk that fundamental changes may occur in the delivery
of Internet-related products and services. Currently, the Internet is accessed
primarily by computers and services are delivered by telephone lines. As the
Internet becomes accessible by screen-based telephones, television or other
consumer electronic devices or becomes deliverable through other means such as
coaxial cable or wireless transmission, we may have to develop new technology
or modify our existing technology to accommodate these developments. Our
pursuit of these technological advances, whether directly through internal
development or by third party license, may require substantial time and
expense and we can give no assurance that we will succeed in adapting our
Internet businesses to alternate access devices and conduits or that new
technologies will be available to us at all.
The announcement or introduction of new products or services by us or our
competitors and any change in industry standards could cause customers to
defer or cancel purchases of existing products or services, which could have a
material adverse effect on our business, financial condition and results of
operations. The failure by us to anticipate the prevailing standards, or the
failure of common standards to emerge, could have a material adverse effect on
our business and results of operations. In addition, services or technologies
developed by others could render our services or technology uncompetitive or
obsolete.
The Korean and Asian Internet industry is intensely competitive
The Korean and Asian Internet market is characterized by an increasing
number of entrants because the start-up costs are low. In addition, the
Internet industry is relatively new and subject to continuing definition and,
as a result, our competitors may better position themselves to compete in this
market as it matures. Many of our existing competitors, as well as a number of
potential competitors, have longer operating histories in the Internet market,
greater name recognition, larger customer bases and databases and
significantly greater financial, technical and marketing resources than we do.
Any of our present or future competitors may offer products and services that
provide significant performance, price, creative or other advantages over
those offered by us. We can provide no assurance that we will be able to
compete successfully against our current or future competitors in the Internet
market.
We may not be able to manage our growth into new products, new product
lines and new markets
Our diversification and expansion strategy may place strains on our
administrative, operational and financial resources and affect our
competitiveness. Such expansion will increase responsibilities placed upon
management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If we are unable
to effectively manage the expansion of our mechatronics product lines and the
integration of our Internet businesses and security solutions into our
operations, our business, financial condition and results of operations will
likely be adversely affected. Our diversification and expansion strategy may
also require that we hire additional administrative, sales and marketing
personnel, which would increase overall expenses and make it more difficult to
maintain our simplified decision-making process and relatively flat
organizational structure.
Our operating results may fluctuate due to the seasonality of our sales
of handlers, SMD placement systems and TFT-LCD handlers
Our business has been seasonal and our sales have typically been higher
in the second half of the year. In addition, our operating results may
fluctuate considerably from quarter to quarter. Changes in the nature or level
of customer orders or a particularly large customer order or customer
cancellation in any particular quarter could cause significant variations in
our revenues. For instance, for our handlers, our major customers typically
provide to us the specifications needed for their orders. Our success depends
upon our ability to mobilize our various divisions to manufacture products to
meet our customers' customization and volume demands in a timely and
cost-efficient manner and, if we are unable to do so, our results will be
adversely affected.
Typically, we deliver our products between 2? and 3? months after we
receive an order. During this time, customers may modify or cancel orders due
to their own changing technology or for various other reasons, including
economic downturns. The volume and timing of orders placed by our customers
varies due to fluctuations in demand for our products, the development of new
semiconductor devices, and other microeconomic and macroeconomic factors. In
addition, customers may misread the marketplace direction and incorrectly
indicate to us the future customization or volume demand for a particular
product. Changes in the volume of customer orders will have a material effect
on our profitability, in part because we have a significant amount of fixed
costs and the volume of customer orders affects the utilization rate of our
equipment, labor and other overhead costs.
Infringement of our intellectual property rights could negatively impact
our results of operations
Our success depends in part on our technology and our continuing right to
use our technology. We rely on a combination of contractual rights and patent,
copyright, trademark and trade secret laws to establish and protect
proprietary rights in our technology. If we are unable to establish or protect
these rights in the domestic and international markets in which we compete,
our competitors may be able to use our intellectual property to compete
against us in such markets. This could limit our growth and adversely affect
our operating results. The laws of certain countries in which our products are
distributed do not protect our products and intellectual property rights to
the same extent as the laws of the United States and Korea. Accordingly,
effective patent, copyright and trademark protection may be unavailable in
certain foreign countries.
As of December 31, 2000, we held 54 domestic patents and 11 overseas
patents in the United States, Japan and Taiwan. We have 255 domestic patents
pending and 81 overseas patents pending in the United States, Japan, Germany,
Taiwan, Italy, Singapore and Malaysia. At such date, we also held 30
registered trademarks. Some of our products and technologies are not covered
by any patents or pending patent applications, and we cannot assure you that
any of our pending or future patent applications will be issued or, if issued,
will cover the scope originally sought or offer meaningful protection.
Moreover, we cannot assure you that any of our pending or future trademark or
copyright applications will be issued, will cover the scope originally sought
or will offer meaningful protection. It is possible that no additional patents
will be issued to us or any of our affiliates. In addition, our issued patents
and trademarks may not prevent other companies from competing with us.
Furthermore, although we maintain confidentiality agreements with many of our
employees to limit disclosure or use of any information obtained as a result
of an employee's position with us, these employees may leave us or may be
terminated by us at any time, and no assurance can be given that an employee
will not misappropriate our proprietary information or that the Korean courts
will enforce our rights under the confidentiality agreements. We cannot
guarantee that any of the foregoing measures will discourage others from
misappropriating our technology or independently developing similar
technology.
We may in the future receive communications from third parties claiming
that we may be infringing on certain of such parties' patents and other
intellectual property rights. If necessary or desirable, we may seek licenses
under such patents or intellectual property rights. However, we cannot assure
you that we will obtain such licenses or that the terms of any offered
licenses will be acceptable to us. The failure to obtain a license from a
third party for technologies we use could cause us to incur substantial
liabilities or to suspend the manufacture or shipment of products or our use
of processes requiring the relevant technologies. Litigation could result in
significant expense, adversely affecting our sales of the challenged product
or technologies and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor.
We are controlled by a major shareholder
Chung Moon Soul, founder and former President, Chief Executive Officer
and Chairman of the Board of Directors of the Company, together with his
family members, directly and indirectly controls approximately 29.09% of our
outstanding common stock. See "Directors, Senior Managers and Employees --
Share Ownership". Accordingly, he may be able to influence the composition and
decisions of the Board of Directors and shareholder votes relating to certain
types of decisions and transactions, including those involving an actual or
potential change of control of the Company. In Korea, the rights of minority
shareholders and the fiduciary obligations of Directors and majority
shareholders may not be as extensive as those in the United States or
elsewhere, and your ability to assert any such rights may be limited. In
addition, Korean courts may not be willing to enforce judgments rendered
against the Company or any of its officers or Directors by courts outside of
Korea.
We rely on key personnel
Our success depends on our ability to attract and retain additional
highly qualified management, engineers and technical, marketing and sales
personnel. The process of hiring employees with the combination of skills and
attributes required to implement our strategy can be extremely competitive and
time-consuming. We may be unable to retain or integrate existing personnel or
identify and hire additional personnel. Although Mirae has "key man" life
insurance for all executive officers, the loss of the services of key
personnel (especially the unexpected death or disability of key personnel), or
the inability to attract additional qualified personnel, could have a material
adverse effect on our business, financial condition and results of operations.
We may be classified as a passive foreign investment company for United
States federal income tax purposes, which could result in negative tax
consequences to you
Since we presently hold a significant amount of short-term investments
and other passive assets, including cash, and we anticipate that we will
continue to hold a significant amount of passive assets, there is a
substantial risk that we will be classified as a passive foreign investment
company (a "PFIC") for United States federal income tax purposes. If we are
classified as a PFIC for the current or any future taxable year, a U.S. Holder
(as defined in "Additional Information -- Taxation--United States Federal
Income Tax Considerations") of ADSs or common stock generally would, upon
certain distributions by us with respect to the ADSs or common stock or upon a
disposition of the ADSs or common stock by the U.S. Holder, be treated as if
the distribution or gain had been recognized ratably over the U.S. Holder's
holding period for the ADSs or common stock during which we were a PFIC, and
the U.S. Holder would be liable for (i) tax thereon, computed at ordinary
income rates for any taxable year prior to the first taxable year in which we
are classified as a PFIC, and at the highest applicable rate in effect for the
U.S. Holder for each taxable year beginning with the first taxable year in
which we are classified as a PFIC (other than the current taxable year) and
(ii) an interest charge on the tax attributable to taxable years beginning
with the first taxable year in which we are classified as a PFIC (other than
the current taxable year). Certain aspects of this adverse tax treatment,
however, may be avoided by a U.S. Holder who makes a "mark-to-market"
election. See "Additional Information -- Taxation -- United States Federal
Income Tax Considerations" for a more detailed discussion of the United States
federal income tax consequences of our classification as a PFIC and the tax
consequences of the mark-to-market election. Each prospective investor is
urged to consult his or her tax advisor regarding the application and the
effect of the PFIC rules in connection with the purchase, ownership and
disposition of ADSs or common stock.
Becoming an investment company would preclude us from making subsequent
offerings
While we have made a number of investments in Internet-related companies and
expect to make additional investments, we believe we are not an investment
company as defined in the U.S. Investment Company Act of 1940, as amended, and
we do not intend to become an investment company. To the extent we acquire
additional investment securities as the result of which the value of our total
investment securities exceeds 40% of the value of our total assets (exclusive
of U.S. government securities and cash items) on an unconsolidated basis, we
could become an investment company. If, we became an investment company, we
would be precluded from raising additional capital in the United States.
Recent changes in Korean GAAP may adversely affect our financial results
See Note 2 of Notes to Consolidated Financial Statements for a discussion
of recent changes in Korean GAAP, including changes in the method of
accounting for research and development costs and deferred income taxes, that
have significantly affected our financial results us since 1998 and may
continue to affect us thereafter.
Risks Relating to the Korean and Asian Economic Environment
We are negatively affected by adverse economic conditions in Korea and
elsewhere in Asia
We are heavily dependent on sales of our products to Korean companies
and, as a result, adverse economic conditions in Korea and the financial
difficulties of other Korean companies have had a material adverse effect on
our business and are likely to continue to have such an effect for some period
of time.
Since early 1997, a number of developments have adversely affected the
Korean economy and Korean companies, including Mirae. Korean banks, financial
institutions and companies, including the conglomerates commonly known as
chaebols that dominate the Korean economy, several of which are our largest
customers, have struggled financially. A number of companies and financial
institutions have filed for corporate reorganization and protection from
creditors and some have gone into liquidation proceedings or have failed.
Korea's recent financial and economic difficulties have included:
o the depreciation of the won against the dollar and other currencies;
o interest rate fluctuations;
o reduced credit from foreign banks;
o reduced liquidity in the economy;
o volatile stock prices;
o reductions in Korea's foreign currency reserves (which have largely
been replenished);
o declines in credit ratings of Korea and Korean financial
institutions and companies; and
o higher unemployment.
The sharp economic downturn in Korea and elsewhere in Asia adversely
affected our business as the demand for our customers' products and our
products declined. Future economic downturns in Korea, elsewhere in Asia and
in our other markets could be detrimental to our business.
According to the Korean Development Institute ("KDI"), Korea's gross
domestic product ("GDP") contracted by 5.8% in 1998. Although we believe that
the Korean economy is recovering, as evidenced by subsequent data and
forecasts of the International Monetary Fund and KDI, no assurance can be
given as to if or when the economy will ultimately improve. Future
deterioration of economic conditions in Korea may have a significant impact on
the demand for our products and on our financial condition and results of
operations.
Beginning in mid-1997, the economic difficulties experienced by certain
Southeast Asian countries, such as Indonesia, Thailand and Malaysia,
exacerbated Korea's economic difficulties. More recently, the continuing
weakness of the Japanese economy and the volatility of the Japanese yen
against the dollar have increased the economic instability in Asia in general
and may hinder Korea's ability to recover from its own economic difficulties.
Future adverse developments in Southeast Asia, Japan and elsewhere could
worsen Korea's economic difficulties by affecting, among other things, Korean
financial institutions that have lent to borrowers in such countries, Korean
exporters that export to such countries, and Korean companies and financial
institutions that rely on credit from Japanese lenders. Any of these
developments could adversely affect demand for our products.
We may be negatively affected by the depreciation of the won and exchange
rate fluctuations
Depreciation and the volatility of the value of the won against the
dollar and other major foreign currencies in 1997 had a material adverse
effect on the results of operations of Korean companies, including Mirae, and
any depreciation and volatility of the value of the won in the future may
adversely affect our results of operations and the price of our shares and the
ADSs.
In the second half of 1997, the value of the won relative to the dollar
and other major currencies depreciated at an accelerated rate. As a result of
this sharp depreciation, the Government was forced to suspend its efforts to
support the value of the won, and on December 16, 1997, the Government allowed
the won to float freely. Such depreciation of the won relative to the dollar
increased the cost of imported goods and services and the won revenue needed
by Korean companies to service foreign currency-denominated debt. In the
second half of 1998, however, the won began to appreciate relative to the
dollar and other major foreign currencies. On December 31, 2000, the Noon
Buying Rate was (Won) 1,267.00 to US$ 1.00. Any change in the value of the won
relative to other major currencies may adversely affect the financial
condition and results of operations of Korean companies, particularly those
companies requiring or receiving foreign currencies and those companies with
large amounts of short- and long-term borrowings in foreign currencies. Since
we are heavily dependent on Korean companies for our sales, the adverse effect
of the depreciation of the won and of exchange rate fluctuations on certain of
our Korean customers has had, and may in the future have, a material adverse
impact on our business.
Fluctuations in the exchange rate between the won and the dollar will
also affect the dollar equivalent of the won price of our shares on the Korea
Stock Exchange and, as a result, will likely affect the market price of the
ADSs. The fluctuations also will affect the dollar conversion by the
Depositary of cash dividends, if any, paid in won on shares of common stock
represented by the ADSs.
We may be negatively affected by interest rate fluctuations
The developments described above also led to sharply higher domestic
interest rates and reduced opportunities for refinancing or refunding maturing
debts, as financial institutions in Korea sought to limit their lending and
increase their reserves for non-performing assets and securities valuation
losses. Average annual interest rates on three-year won-denominated,
non-guaranteed corporate bonds rose from 12.6% as of September 30, 1997 to
29.0% as of December 31, 1997. The rates have fallen from 1998 until the
present. Internationally, the spreads over United States Treasury Bonds on
benchmark dollar-denominated bonds issued by Korea and Korean financial
institutions and companies have also risen and fluctuated considerably, but
these rates have generally improved and stabilized since the second half of
1998. No assurance can be given, however, that Korean interest rates or rates
payable by Korean companies and financial institutions on their foreign
currency-denominated debt will not rise in the future.
Many of our large Korean customers, such as Samsung and Hynix carry
significant amounts of debt. As a result of the high domestic interest rates
in the last several years, these customers' debt service costs have increased
significantly and, as a result, their financial condition deteriorated and
capital expenditures, including purchases of our products, declined markedly.
If interest rates were to rise again, funding requirements needed by our
largest customers to make debt service payments would rise significantly and,
as a result, the financial condition and results of operations of these
companies would likely be adversely affected, including their ability and
willingness to make capital expenditures for mechatronics equipment. This
would likely have a material adverse effect on our sales, financial condition
and results of operations.
We may be negatively impacted should the Government discontinue economic
reform measures adopted in the wake of the Asian economic crisis
As a result of the severe financial and liquidity crises in Asia and in
Korea, the Government sought and obtained loans from the International
Monetary Fund, the World Bank and the Asia Development Bank in late 1997. In
exchange, the Government agreed to institute substantial economic initiatives
to address the structural weaknesses in the Korean economy, including, among
others, the following:
o implementing a policy requiring improved corporate governance;
o restructuring and recapitalizing the financial sector and making it
more transparent, market-oriented, better supervised and free from
political intervention;
o reforming the labor laws to enable corporations to lay-off workers
for business reasons;
o removing restrictions on foreign investment in the country;
o eliminating all cross-guarantees between member firms of chaebols;
o requiring the divestment of certain non-core business lines by
chaebols; and
o requiring significant reduction of debt levels.
No assurance can be given that the Government will continue to implement
the various reform programs, that further programs will not be needed or that
the Government will sustain the reforms already implemented. If the Government
is unable to fully integrate and sustain the reform programs, the
International Monetary Fund and other international lenders may withdraw their
financial support. Such developments would likely have an adverse effect on
the domestic economy, as well as on the financial condition, including
liquidity, of Korean companies, including Mirae.
Our business is subject to risks relating to North Korea
Relations between Korea and the Democratic People's Republic of Korea
("North Korea") have been tense over most of Korea's recent history. These
tensions have been heightened recently by certain events, including (i) North
Korea's intrusion in June 1999 over the northern boundary of Korea's
territorial waters, which resulted in a series of military clashes with Korea,
including an exchange of gunfire and the sinking of a North Korean vessel,
(ii) North Korea's wavering stance with regard to its compliance with the
Nuclear Non-Proliferation Treaty, and (iii) North Korea's firing in August
1998 of a mid-range ballistic missile which landed off the coast of Japan.
In June 1999, North Korea announced its intention to test launch
ballistic missiles which could hit target sites in Korea, Japan and the United
States. These countries warned North Korea to refrain from any and all current
and future plans to test launch medium- to long-range ballistic missiles in
the region, particularly over Japan, and have announced an intention to take
measures in response to any such missile test. No assurances can be given that
the level of tension with North Korea will not increase or change abruptly,
and any subsequent adverse impact on the Korean economy could negatively
affect Mirae's results of operations and the price of its common stock and the
ADSs.
Risks Relating to the ADSs
The Korea Stock Exchange is a volatile trading market which could affect
the price of our common stock and the ADSs
The principal trading market for our common stock is the Korea Stock
Exchange. The Korea Stock Exchange is a volatile market and considerably
smaller and less liquid than the securities markets in the United States. The
Korea Composite Stock Price Index ("KOSPI"), an index of all equities listed
on the Korea Stock Exchange, declined by 41.8% from 647.1 on September 30,
1997 to 376.3 on December 27, 1997, the last day of trading on the Korea Stock
Exchange in 1997. The KOSPI has since appreciated significantly, but, more
recently, declined again. Any decline in the KOSPI or large amounts of sales
of Korean securities by foreign investors and subsequent repatriation of the
proceeds of such sales could adversely affect the value of the won, the
foreign currency reserves held by financial institutions in Korea and the
ability of Korean companies to raise capital. Continued volatility of stock
prices in Korea may have a material adverse effect on our ability to raise
capital on the Korea Stock Exchange or elsewhere, and the price of our common
stock and ADSs could fluctuate substantially.
In addition, a disproportionately large percentage of the market
capitalization and trading volume of the Korea Stock Exchange is represented
by a small number of listed companies and conglomerates. Fluctuations in the
share prices of these companies can have a significant effect on the market
price of other listed companies, including the price of our common stock and,
consequently, the ADSs.
Liquidity of the ADSs may be limited
The ADSs were listed on The Nasdaq National Market on November 17, 1999
under the symbol "MRAE". An active market for our ADSs has not yet developed.
There can be no assurance that an active market will develop or, if such a
market does develop, that it will continue.
Volatility of The Nasdaq National Market may adversely affect the price
of the ADSs.
Certain stocks listed on The Nasdaq Stock Market have recently
experienced significant price and volume fluctuations and decreases which have
adversely affected the market price of our and other stocks listed on The
Nasdaq Stock Market without any regard to the underlying fundamentals of such
stocks. Recent fluctuations have been particularly acute for high technology
sector stocks. These broad market fluctuations, which may occur in the future,
as well as issues more specifically related to our business activities or
prospects, our financial performance, intellectual property, the semiconductor
and semiconductor related industries or the Internet industries, may continue
to adversely affect the market price of the ADSs.
Preemptive rights may be unavailable to holders of ADSs in certain
circumstances
The Commercial Code of Korea and our Articles of Incorporation require
us, with certain exceptions, to offer shareholders the right to subscribe for
new shares of our common stock in proportion to their existing ownership
percentage whenever new shares are issued. Under the deposit agreement (the
"Deposit Agreement") among the Company, the Depositary and all holders and
beneficial owners from time to time of the ADSs, if we offer or cause to be
offered any rights to subscribe for additional shares of our common stock or
any rights of any other nature, the Depositary, after consultation with us,
may (to the extent that the Depositary determines that it is lawful and
feasible) make such rights available to the holders of ADSs or dispose of such
rights on behalf of such holders and make the net proceeds available to them.
If the Depositary is unable to take such actions, it may allow the rights to
lapse with no consideration to be received by the holders of ADSs. The
Depositary is not required to make available any rights to subscribe for, or
to purchase, any securities unless and until a registration statement under
the U.S. Securities Act of 1933 (the "Securities Act") is in effect with
respect thereto or unless the offering and sale of such securities is exempt
from or not subject to the registration requirements of the Securities Act. We
are under no obligation to file a registration statement under the Securities
Act to enable holders of ADSs to exercise preemptive rights for shares of our
common stock underlying their ADSs, and no assurance can be given that such
registration statement would be filed. Holders of ADSs that are not entitled
to exercise preemptive rights for common stock underlying their ADSs may
suffer dilution of their interests in us.
Your ability to deposit shares into the depositary facility may be limited
Under current Korean laws and regulations, neither shares of our common
stock acquired in the open market nor shares withdrawn from the depositary
facility may be deposited or redeposited, as the case may be, in the
depositary facility without our consent. However, we have consented to any
deposit unless such deposit is prohibited by Korean law or violates our
Articles of Incorporation. No assurance can be given that the deposit of such
shares would always be permitted.
As a holder of ADSs, you will have fewer rights than a shareholder has
and you will have to act through the Depositary to exercise those rights
The rights of shareholders under Korean law to take actions, including
voting their shares, receiving dividends and distributions, bringing
derivative actions, examining the Company's accounting books and records and
exercising appraisal rights, are available only to holders of record. Since
the Depositary, through Korea Securities Depository (the "Custodian"), is the
holder of record of the shares underlying the ADSs, only the Depositary can
exercise those rights in connection with the deposited shares. The Depositary
will, if we ask it to, make efforts to vote the shares underlying your ADSs as
instructed by you and will pay to you the dividends and distributions
collected from us. However, in your capacity as an ADS holder, you will not be
able to bring a derivative action, examine the accounting books and records of
the company or exercise appraisal rights. Furthermore, we may not ask the
Depositary to solicit your instructions on how to vote. If you surrender your
ADSs and take delivery of the underlying shares, you can exercise all the
rights of a shareholder, including voting your shares. However, you may not be
informed of events affecting shareholders sufficiently in advance to withdraw
your shares and exercise your rights as a shareholder.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
Our legal and commercial name is Mirae Corporation. Our head office is
located at #9-2, Cha Am-Dong, Chun An, Chung Chong Nam-Do 330-200, Republic of
Korea and our telephone number is (8241) 559-8700. We have appointed MiRae
America Inc., 48119 Warm Springs Blvd., Fremont, California 94539, as our
agent in the United States of America for sales and customer service.
Mirae Corporation was founded as a sole proprietorship in 1983 and
incorporated as a limited liability company under the laws of Korea in
December 1990. Shares of our common stock were listed on the Korea Stock
Exchange on November 22, 1996 and our American Depositary Shares ("ADSs") were
listed on The Nasdaq National Market on November 17, 1999.
Since 1983, we have manufactured and sold lead frame magazines and
products related to machine tools, and, in 1989, we diversified into
manufacturing handlers primarily for sale to domestic semiconductor
manufacturers. Handlers are specialized robotic machines used to move devices
during the testing phase of the semiconductor manufacturing process. Since
1991, we have expanded our handler product line to include various models of
memory test handlers, memory module test handlers, non-memory test handlers
and burn-in sorters. While improving our handler product line, we developed a
strong research and development capability in our core competencies: precision
mechanism, intelligent control and machine vision. For the years ended
December 31, 1998, 1999, and 2000, sales of handlers accounted for 86.4%,
44.5%, and 29.9% of our total sales, respectively.
In 1998, we applied our process know-how and our core competencies to
design and develop advanced surface mount device placement systems ("SMD
placement systems"), machines which affix electronic devices onto printed
circuit Boards, and TFT-LCD handlers and testers, machines which handle and
test a new generation of flat panel displays. In 1999, we began to sell these
new product lines in and outside Korea. We believe that our handlers, SMD
placement systems and TFT-LCD handlers and testers are among the most advanced
in the industry. For the year ended December 31, 2000, SMD placement systems
became our major products, accounting for 48.8% of our total sales.
In addition, beginning in 1999, we expanded beyond our mechatronics and
semiconductor-related products by developing and offering Internet search and
portal services through our joint venture affiliate, Lycos Korea, Inc. ("Lycos
Korea"), security solutions for on-line banking, trading and electronic
commerce through our subsidiary, SoftForum Corporation ("SoftForum"), two-way
multimedia satellite portal services through our subsidiary, Mirae Online Co.,
Ltd., and B2P (Business to Professional) portal sites through our joint
venture affiliate, Korea Internet.com Co., Ltd. ("Korea Internet.com").
In July 1999, Lycos Korea, our joint venture with Lycos, Inc., launched a
Korean language search and portal site on the Internet. This site provides web
search and directory services, guides to online content, aggregated third
party content, and community and personalization features. In August and
September 1999, Lycos Korea introduced personal home page and e-mail services,
respectively, utilizing home-page solutions developed by Tripod, Inc., a
subsidiary of Lycos, Inc., and e-mail services developed by SoftForum. Since
that time, Lycos Korea has introduced and enhanced multimedia / entertainment
content and e-commerce services on the site. Through SoftForum, we intend to
capitalize on our research and development capabilities in software
development to license cryptographic technology in Korea for use in on-line
commercial transactions. We expect to continue to market SoftForum's
software-based products principally to government organizations, large
enterprises and financial institutions which need secure electronic
communications and which conduct transactions over a variety of transmission
protocols, including the Internet.
Our principal capital expenditure in 2000 was for the acquisition of a
new building and land in Seoul ((Won) 56,793 million ). We also made capital
expenditures of (Won) 7,970 million for machinery and supplies.
B. BUSINESS OVERVIEW
We believe that our principal products, i.e., handlers, SMD placement
systems and TFT-LCD handlers and testers, are among the most advanced and
efficient in the industry. We attribute this to our ability to combine our
core competencies in mechatronics with our process know-how in semiconductor
manufacturing and PCB assembly and inspection processes, together with our
software design expertise.
Core Competencies
Our core competencies are concentrated in three mechatronics disciplines:
precision mechanism, intelligent control and machine vision.
Precision Mechanism
Precision mechanism consists primarily of four sub-fields: structural
analysis and design, kinetic analysis and design, thermofluid analysis and
design, and tribology.
Structural Analysis
Structural analysis and design entails the development of mechanical
parts to achieve an optimized balance between high rigidity and low weight.
Kinetic Analysis
Kinetic analysis and design entails the analysis of the dynamic
characteristics of mechanical moving parts and their development to maximize
the speeds at which such parts operate and minimize the vibrations which
result from operating such parts at increasingly higher speeds.
Thermofluid Analysis
Thermofluid analysis and design entails the analysis of the effect of
temperature on certain materials, the study of the transmission of varying
temperatures through these materials and the methods used to control
temperature and its related effects.
Tribology
Tribology entails the study of the friction, wear and lubrication of
interacting surfaces in relative motion.
Intelligent Control
Intelligent control consists primarily of five sub-fields:
intelligent process planning, optimal motion planning, precision control, high
speed control architecture and power electronics technology.
Intelligent Process Planning
Intelligent process planning consists of the development of software
to manage certain manufacturing processes in order to derive optimal work flow
and process planning.
Optimal Motion Planning
Optimal motion planning consists of the development of software to
determine optimal task sequencing to minimize certain mechanical movements.
Precision Control
Precision control consists of the development of software to control
the position, velocity, temperature, vibration and force of mechatronic
machinery.
High Speed Control Architecture
High speed control architecture consists of the development of
microprocessors and application specific integrated circuits ("ASICs") based
hardware to control and maintain the accuracy of fast-moving components.
Power Electronics Technology
Power electronics technology is used to develop dedicated servo
amplifiers designed to drive linear or rotary motors for use in mechatronic
products. Dedicated servo amplifiers may achieve higher productivity at lower
costs than general purpose servo amplifiers.
Machine Vision
Machine vision consists primarily of three sub-fields: vision
processing, parallel processing architecture and the use of high precision
vision algorithms.
Vision Processing
Vision processing consists of the development of ASICs and supporting
hardware for image processing at high speed.
Parallel Processing
Parallel processing architecture consists of the development of
technology that enhances the speed and efficiency of multi-tasking.
High Precision Vision Algorithms
High precision vision algorithms are used to develop formulae to
calculate optimal positioning of items by taking into consideration such
factors as rotational angle and the center of gravity of particular
components, and to inspect the leads and balls of the electronic devices.
Process Know-How
In addition to our mechatronics core competencies, in order to
manufacture and improve upon our principal products, we require the know-how
and understanding of certain highly specialized engineering processes utilized
by our customers. We possess process know-how accumulated through experience
and research in areas such as semiconductor handling during the testing phase
and PCB assembly and inspection. We believe our core competencies, combined
with our know-how and understanding of these processes, will enable us to
adapt our handler products, SMD placement systems, and TFT-LCD handlers and
testers to meet evolving market demands.
Software Design Expertise
In addition to our core competencies, we design software to control a
variety of functions in our mechatronics products and have developed expertise
in the following three key areas:
o real-time control software: a software program needed to implement
control functions and to respond to signals in a synchronous manner;
o motion planning software: real-time operating system-based software
that plans the movement of each robotic mechanism to complete a
given task; and
o job planning software: a type of PC-based artificial intelligence
software for planning the most efficient way for the end user to
operate the production equipment.
While our mechatronics engineers develop algorithms and formulae, our
software engineers design software to implement these algorithms and formulae.
This permits real-time feedback from various sensors within our mechatronics
machines to be processed and used. The ability to develop algorithms, formulae
and related software is necessary to design our high-quality mechatronics
machines. The close working relationship of our control and software engineers
enables us to develop and implement our software more efficiently.
Mechatronics Products
Handlers
Since 1989, we have designed and manufactured over 30 different handler
models. As of December 31, 2000, we designed, manufactured and sold four types
of handlers: memory test handlers, memory module test handlers, non-memory
test handlers and burn-in sorters. In developing and manufacturing these
machines, we apply similar technology based on our core competencies and
software expertise.
The following table provides information about the thirteen handler
models manufactured by Mirae from 1998 to 2000.:
Products Specifications Market focus Year
Introduced
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Memory test handlers
MR5400.......................... 32/64 device parallel Pick-and-place type (TSOP, 1997
testing; 3,600 QFP); short test time;
UPH; cold to hot temperature
MR5500.......................... 32/64 device parallel Pick-and-place type (TSOP,_ 1998
testing; 7,200 BGA, CSP); very short test_
UPH; cold to hot temperature time; for fine pitch devices
MR5600.......................... 128/64 device parallel Pick-and-place type (TSOP 2000
testing; 7,200 I/II, TQFP, BGA, CSP);
UPH; tri-temperature control very short test time; for fine
pitch devices
Memory module test handlers
MR7200 ....................... 8 device parallel testing; Pick-and-place type_ 1998
4,200 UPH (SIMM, DIMM); short test_
time; mass production
MR7300 ....................... 8/16 device parallel Pick-and-place type_ 1998
testing; 1,000 (SIMM, DIMM, RIMM)
UPH; controlled ambient to
hot temperature
MR7400.......................... Two head design; 8/16 device Pick-and-place type_ 1999
parallel testing; 5,600 UPH (SIMM, DIMM);_
mass production
MR7500.......................... 16 device parallel testing; Pick-and-place type_ 2000
2,000 UPH; tri-temperature (SIMM, DIMM & 184 RIMM,
control DDR-DIMM
MR7600(1)....................... Customer Oriented Pick-and-place type_ 2000
Specification; (144/168/200/232 SIMM, DIMM &
Applicable to all types of 184 RIMM)
motherboards
Non-memory test handlers
MR1000 Series................... Power transistor test Vertical gravity type 1990
handling with laser marking
MR3000 Series................... High reliability; easy Vertical gravity type (DIP, 1997
maintenance;low price SIP, ZIP, SOP)
MR2600(1)....................... 4 device parallel testing; Pick-and-place type (QFP, 1998
4,800 UPH; hot temperature TQFP, PQFP, BGA, PGA)
control
Burn-in sorters
MR9200 ....................... Maximum throughput: 15,000 TSOP, BGA, CSP 2000
UPH
(1) As of June 26, 2001, we had no orders for our newly-developed MR7600 model and MR2600 model.
Memory Test Handlers
We began manufacturing memory test handlers in 1992, and are now one of
the leading manufacturers of memory test handlers in Korea. We based the
design of our initial memory test handler models on the standard vertical
gravity technology used by other test handler manufacturers. Building on our
core competencies and research and development capabilities, we have designed
and manufactured our own memory test handlers using pick-and-place technology
since 1995. Nearly all of our memory test handlers manufactured in the last
three years use pick-and-place technology. However, we also manufacture
vertical gravity models on special order from our customers.
We believe that our memory test handlers are among the most
technologically advanced in the industry. Each of our memory test handlers
includes a Microsoft Windows NT-based graphical user interface which provides
for easy set-up, status monitoring and productivity analysis. Depending on the
model, our memory test handlers can process up to 128 devices simultaneously
and offer a wide temperature control range. Our most advanced model, the
MR5600, features 7,200 (units) throughput per hour ("UPH"), and is designed to
handle high speed devices which require shorter test times, such as DDR and
RAMbus DRAM, which we expect manufacturers to begin to produce more widely in
the next several years. We believe that the MR5600 is among the fastest
pick-and-place memory test handlers currently available in the market.
Memory Module Test Handlers
We were one of the first companies to develop and manufacture memory
module test handlers, which we introduced in 1995. Since that time, we have
maintained our position as a leading producer. Memory modules are used to
expand memory functions in computers and other IC-related products by
combining multiple memory ICs and placing the combined devices onto
standardized PCBs. The assembled nature of the memory module, as well as
specific memory module tests, require specialized memory module test handler
design features.
Each of our memory module test handlers includes a Microsoft_ Windows
NT-based graphical user interface. In addition, each of our memory module test
handlers utilizes pick-and-place technology and, in the case of the MR7500,
offers a wide temperature control range. Depending on the design
specifications, our memory module test handlers can handle between two and 16
modules simultaneously and, in addition, can test under various temperature
conditions and offer vertical docking of loader trays. Our most advanced
memory module test handler, MR7600, can test and handle all types of
motherboards, and, therefore, it helps customers to test and handle modules
efficiently.
Non-Memory Test Handlers
We manufactured our first test handler for discrete device test handling
purposes in 1989. We have since developed test handlers for various non-memory
devices, including power and photo transistors, diodes and logic ICs. In 1998
and 1999, we manufactured two series and one model of non-memory test
handlers, the MR1000 series, the MR2500 series and the MR3000 series. The
MR1000 series of test handlers is used for handling power transistors and the
MR3000 series of test handlers is used for handling various types of packages
used in non-memory and logic devices. Since non-memory devices are often
heavier than memory devices and can be more easily dropped on the contact
point on a tester, both the MR1000 series and the MR3000 series consist of
vertical gravity type test handlers.
The MR2500 and MR2600 were developed for the logic IC test handler
market. The MR2500 is designed to process logic ICs at ambient temperatures
only, and utilizes pick-and-place technology similar to our memory test
handlers. Typically, logic IC testers perform more tests compared with memory
testers since the circuitry of a logic IC is typically more complex than the
circuitry of a memory device. Furthermore, there are more variations to the
packaging for and the functionality of logic ICs than there are for memory
devices. Consequently, index time is not as important as the easy adaptability
of logic IC test handlers to various packaging and functionality
characteristics of logic ICs. The logic IC test handler market is highly
competitive, though we believe it presents a potential growth opportunity for
us because it currently accounts for more than half of the global test handler
market. Since we finished the evaluation of market feasibility with our
low-end logic IC testers, MR2500 and MR2600, we decided to move more
aggressively into the logic IC test handler market this year. We are currently
developing new medium- and high-end logic IC test handler models.
Burn-in Sorters
We began manufacturing burn-in sorters in 1997. Our burn-in sorter, the
MR9200, is used in the extensive reliability screening and stress testing
procedure of ICs known as "burn-in." The burn-in process screens for early
failures by operating the IC at elevated voltages and temperatures of up to
125 degrees Celsius (257 degrees Fahrenheit) for periods typically ranging
from 12 to 48 hours. The MR9200 is a burn-in-board loading and unloading
handler. Before loading the devices into the burn-in-board, the MR9200
performs certain basic functional tests. Combining a linear motor system with
pick-and-place technology, the MR9200 is, we believe, one of the fastest
sorters available, with a maximum throughput of 15,000 UPH.
Sales and Marketing
In 1996, 1997 and 1998, our memory test handlers were our best selling
product by volume and value, accounting for 64%, 58% and 38% of our total
sales, respectively. For 1999, our non-memory test handlers were our best
selling product by volume, with sales of 47 units, and our memory test
handlers were our best selling product by value, accounting for 20% of our
total sales. For 2000, our memory test handlers again became our best selling
products both by volume and value.
The following table shows sales volume, average sales price and sales
value of the handlers manufactured and sold by Mirae for each of the periods
indicated:
Year ended December 31,
----------------------------------------------------------------------------------
1998 1999 2000
Average Average Average
Units sales Units sales Units sales
Model sold price Sales sold price Sales sold price Sales
- --------------------------------------------------------------------------------------------------------
(Average sales price in (Won) millions, sales in (Won) billions)
Memory test handlers. 34 192 6.5 40 228 9.1 73 272 19.9
Memory module test
handlers. 21 194 4.1 13 326 4.2 21 380 8.0
Non-memory test
handlers........... 14 50 0.7 47 47 2.2 34 82 2.8
Burn-in sorters....... -- -- -- -- -- -- 4 325 1.3
Handler components.... -- -- 3.3 -- -- 4.8 -- -- --
Total............ 69 14.6 100 20.3 132 32
Until 1998, we had focused our sales and marketing efforts for handlers
on the domestic market, with the vast majority of our sales being made to
Samsung and Hynix. However, as a result of the dramatic slowdown of the Korean
semiconductor industry in 1997, unit sales of handlers fell by 66%, from 203
units for the year ended December 31, 1997 to 69 units for the year ended
December 31, 1998. In 1999, sales of handlers increased from 69 to 100 units,
or by a 38.3% increase in volume compared with our sales in 1998. In order to
mitigate the decline in domestic sales volumes as compared with our sales
results in 1996 and 1997 and to reduce our dependence on the Korean
semiconductor industry, we redoubled our marketing efforts within Korea and
broadened our sales strategy to focus increasingly on sales opportunities
outside of Korea, specifically in the United States, Europe, Taiwan and
Singapore. We have increased our handler sales derived from exports from (Won)
1,180 million in 1996 to (Won) 1,350 million in 1997, (Won) 4,733 million in
1998, (Won) 8,858 million in 1999, and (Won) 43.8 billion, or 29.91% of total
sales, in 2000.
We expect that export sales of handlers will continue to create new
clients, particularly if the semiconductor market recovers, semiconductor
manufacturers shift their production from 64MB to 128MB and/or to 256MB DRAM
chips, or manufacturers shift their product portfolio from Sync. DRAM to
Rambus DRAM or DDR. We believe that these same factors would also increase
domestic demand for our products, since our largest Korean customers are also
major global semiconductor manufacturers. However, while domestic and export
sales of our handlers should increase if the semiconductor and related
industries recover, we would expect the proportion of our sales derived from
handlers (89.8%, 86.4% , 44.5% and 29.9% in 1997, 1998, 1999 and 2000,
respectively) to fall as we promote and market our SMD placement systems and
our Lycos Korea and SoftForum business lines. Another factor which we believe
affects our sales and marketing is the 8% duty payable on handlers imported
into Korea. See "Operating and Financial Review and Prospects -- Operating
Results--Taxation". In addition, Korean companies purchasing Korean
manufactured equipment for commercial use may qualify to receive a
dollar-denominated loan with which to purchase such equipment at a
preferential interest rate if the equipment meets certain criteria promulgated
under the Foreign Currency Credit Regulation. Each of Mirae's handlers meet
these criteria and we believe our domestic sales may benefit from this policy.
We market and distribute our handlers in the domestic market through a
direct sales force comprised of three employees based in Chun An city.
Domestic customers generally order a handler 2 1/2 to 3 1/2 months prior to
the required time of delivery, and are typically required to pay 30% of the
contract price at the time the contract is signed. Upon delivery, an
additional 60% of the contract price is due, while the remaining 10% is due
within 30 days after acceptance by the customer. Since we customize handlers
to our customers' design specifications, we do not ordinarily maintain a
significant inventory.
Outside of Korea, we market and distribute our handlers through our
overseas sales department which is headquartered at our offices in Chun An
city and consists of seven sales personnel. Furthermore, to enhance our
marketing in the United States and Europe, we established MiRae America, Inc.
in 2000. We also participate in trade shows, providing us with a forum for
product demonstrations and customer contact. In addition, we market our
handlers through non-exclusive distribution arrangements with various
international sales and support agents, including agents in Taiwan, Singapore,
Germany, France and the United States. These sales and support agents sold our
handlers to approximately 20 customers worldwide in 1999 and 2000.
Demand for back-end equipment is correlated to semiconductor demand and,
consequently, is similarly cyclical (although Mirae estimates that back-end
equipment demand fluctuations typically lag semiconductor demand fluctuations
by approximately six months). In 1998, 1999 and 2000, our primary market was
in back-end equipment, specifically handlers, and our sales results reflected
the slowdown in the semiconductor industry and, in particular, the back-end
equipment market. From the fourth quarter of 1999, however, the semiconductor
industry recovered and our sales results sharply increased. However, the
semiconductor industry has suffered low demand since the third quarter of
2000. No assurance can be given when any recovery of the semiconductor
industry will bring positive effect. During the economic slowdown, we applied
our process know-how, our system design capabilities and our core competencies
in back-end equipment to design and develop SMD placement systems and TFT-LCD
handlers and testers.
Customers
Our principal handler customers are Korean semiconductor manufacturers,
which collectively were responsible for more than 67.7%, 56.4% and 39.5% of
our handler sales in 1998, 1999 and 2000, respectively. Hynix (then called
Hyundai Electronics Co., Ltd.) was our largest customer in 1996 and 1997 and
our second largest domestic customer in 1998 and 1999, accounting for 63.3%,
76.7%, 7.1%, and 3.1% of handler sales, respectively. Samsung was our second
largest customer in 1996 and 1997 and our largest in 1998 and 1999, accounting
for 32.8%, 19.3%, 50.4% and 44.4% of handler sales, respectively. In 2000,
Hynix accounted for 9.0% of handler sales, while Samsung accounted for 24.1%
of handler sales.
As our export sales have increased, our customers have diversified and
non-Korean customers now represent a major portion of our handler sales. In
2000, export sales for North America, Europe and Asia were 20.4%, 34.0% and
45.7%, respectively. Our major foreign customers, Infineon Technologies AG and
King Yuan Electronics Co., Ltd. of Taiwan, accounted for 21.5% and 20.4% of
handler sales, respectively.
Our customer support team consists of sixteen product engineers who
repair and service handler products sold to our customers. Of the sixteen
support engineers, seven are located in Chun An city and are available to
provide support services to our international customers if necessary, eight
are located at various locales in Korea and one is based in Taiwan. Our
customer service team assists our customers and agents in resolving
installation and general function issues. Typically, we are able to deploy
service representatives to a customer's site in Korea within 24 hours. We
provide high quality service and support which contributes to our ability to
attract and retain key customers in Korea. Outside of Korea, after-sales
support is typically provided by our overseas agents whom we train. However,
we will send engineers from Korea to a customer's overseas facilities when we
deem it necessary. We cover the cost of servicing our handlers for the first
year of ownership pursuant to the terms of our standard product warranty.
Competition
The mechatronics markets are characterized by intense competition, rapid
technological and product changes, changing market requirements and
significant expenditures for product and market development. In the handler
market in particular, the principal competitive factors are throughput,
accuracy, reliability and price.
We believe that we are well positioned to compete in the test handler
market due to our primary competitive advantages, including (i) our
technological expertise stemming from our core competencies, (ii) our
established brand-name recognition in Korean and foreign markets, and (iii)
our research and product development, which we believe is among the most
advanced in the industry. We believe our ability to price our products
competitively is due principally to our core competencies, applied across our
mechatronics products, and our relatively flat organizational structure. There
can be no assurance, however, that we will be able to continue to compete in
our markets, that we will be able to expand our markets or that these markets
will continue to grow.
In the memory test handler market, we believe our primary competitors are
Advantest Corporation and Hitachi, Ltd. of Japan and Delta Design, Inc. of the
United States. In the memory module test handler market, we believe our
primary competitor is Yuil Semicon Co., Ltd. of Korea. With respect to our
burn-in sorter business, we believe we compete primarily against Todo
Seisakusho Ltd. of Japan and Juntech Co., Ltd. of Korea.
Seasonality
Our sales of test handlers tend to be concentrated in the fourth quarter,
because most overseas customers tend to place orders for them during the third
quarter due to the end of their fiscal year on the last day of September.
SMD Placement Systems
Mirae designs, manufactures and sells SMD placement systems, which are
robotic machines used for high-speed mounting of a broad range of electronic
devices, including ICs onto PCBs. We began manufacturing SMD placement systems
in March 1999 with the introduction of six SMD placement system models. We
introduced our seventh model, a dedicated IC placement system (the MPS-1050M),
in May 1999.
The following table provides details of the seven SMD placement system models
manufactured by Mirae in 2000:
Year
Products Specifications Market focus introduced
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Chip Mounter
MPS-1010 . 8 + 8 module heads High-end 1999
MPS-1020 . 8 module heads Upper Mid-range 1999
MPS-1030 . 6 module headss Mid-range 1999
Multi function Mounter
MPS-1010P.................. 8 + 6 module heads +1 High-end 1999
precision head
MPS-1010P.................. 8 + 6 module heads +1 High-end 1999
precision head
MPS-1020P.................. 6 module heads + 1 precision Mid-range 1999
head
MPS-1030P.................. 4 module heads+1precision Low- to mid-range 1999
head
MPS-1020QP 4 precision heads High-end 2000
IC placement system
MPS-1050M.................. IC placement dedicated -- 1999
machine
(4 precision heads)
Our SMD placement systems use an advanced form of pick-and-place
technology to place a wide variety of electronic components onto PCBs.
Depending on the model, our SMD placement systems may be equipped with single
or dual X-Y high speed, high precision gantries (robotic arms which
pick-and-place electronic components); up to two high speed module heads on
which up to eight nozzles can be affixed; and one or four precision heads. Our
high speed module heads feature system speeds (or tact times) of up to 0.096
seconds per chip and accuracy of 0.1mm for simple devices and 0.04 mm for
fine-pitch devices. Precision heads are used to mount precision devices with
packaging types including BGAs and QFPs and non-standard devices such as
connectors and capacitors.
Each of our SMD placement systems include a custom-designed linear motor
which provides instantaneous gantry acceleration of up to 4.5g (gravitational
acceleration), our vision system which permits vision processing at high
speeds, a Microsoft_ Windows-2_-based graphical user interface and
"intelligent" component feed subsystems which can reduce the mispicking of
parts and enhance placement reliability. While all of our SMD placement
systems can be configured to handle a wide range of electronic components, our
dedicated IC placement system, the MPS1050M, is particularly well-suited to
assemble memory modules and PCBs on which many ICs are placed because it is
equipped with four precision heads that can pick up to four memory devices
simultaneously and place each device one by one. Many of these technologies
have been adapted from the technologies which we have developed in our core
competencies and in the manufacturing of our handler products, and we believe
these technologies will enable us to produce and sell SMD placement systems
that are among the most advanced in the industry.
Upon the request of a customer, we can integrate into our SMD placement
systems our custom software system designed to manage the entire PCB assembly
process. Software used with our products is designed by our software engineers
and our research partners at Korea Advanced Institute of Science and
Technology. See "Operating and Financial Review and Prospects -- Research and
Development".
The following diagram illustrates the typical PCB assembly process:
[graphics omitted]
Our MPS1010 SMD placement system is designed for the high-speed, high-end
segment of the SMD placement system market, while our MPS1020 and MPS1030 SMD
placement systems are designed for the medium-speed, multifunctional and low-
to mid-range segment of the SMD placement system markets, respectively.
In 2000, MPS 1010 was our best selling product by volume and value,
accounting for 34.6% of our total sales of SMD placement systems. MPS 1030P
was our second-best selling product by value, accounting for 8.9% of our total
sales of SMD placement systems.
Year ended December 31, 2000
(Average sales price in (Won) millions, sales in
(Won) billions)
----------------------------------------------------------------------------------------
Model Units sold Average sales price Sales
-----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
MPS-1010 121 183 22.1
MPS-1010P 20 216 4.3
MPS-1020 4 126 0.5
MPS-1020P 46 133 6.1
MPS-1030 50 92 4.6
MPS-1030P 54 105 5.7
Others 73 117 8.7
Components 19.3
Total 71.3
Sales and Marketing
We first introduced our SMD placement systems in 1999 at the Nepcon trade
shows in the United States, Korea and China. Unlike our test handlers, our SMD
placement systems need not be custom-tailored to the design specifications of
our customers and, therefore, may be mass produced. We market and distribute
our SMD placement systems in Korea through a direct sales force comprised of
five employees based in the city of Bundang and six agents. At the time of
delivery and acceptance, customers are typically required to pay 20% of the
contract price. The balance (plus interest) is typically due in installments
over the course of the twelve months following delivery and acceptance.
Outside of Korea, we market and distribute our SMD placement systems
through arrangements with agents in various Asian countries, including KETECA
Singapore Pte. Ltd. in Singapore, Banner-Ever International Group Corp. in
Taiwan and China, and TS (Hong Kong) Corp. in Hong Kong. Our agency agreements
provide that an agent may only sell SMD placement systems manufactured by
Mirae. In December 1999, we entered into a three-year sales and distribution
agreement with Ryoko, a Japanese corporation. Under the terms of the contract,
we appointed Ryoko as our exclusive distributor in Japan of certain models of
our SMD placement systems and Ryoko agreed not to sell or distribute any
competing SMD placement systems.
Outside of Asia, our SMD placement systems were sold to customers in
North America, South America, Europe, Africa and Israel on an exclusive OEM
basis through Quad Systems Corporation ("Quad"). Our sales to Quad had been
governed by a three-year agreement, dated June 1, 1999, pursuant to which we
appointed Quad as our exclusive distributor of SMD placement systems in the
regions noted above. Quad was authorized to sell these products under its own
name, trademark or logo, and could not sell competing products manufactured by
any other supplier, other than SMD placement systems which Quad was
contractually obligated to distribute on behalf of its previous supplier.
However, Quad filed under Chapter 11 of the U.S. Bankruptcy Code on December
18, 2000 and Quad's bankruptcy is currently pending in the Federal Bankruptcy
Court for the Eastern District of Pennsylvania. Due to Quad's Chapter 11
situation, our sales in the U.S. and European markets were suspended after the
third quarter of 2000. Our unpaid accounts receivable from Quad total (Won)
5,066 million, and we provided an allowance for the entire amount of such
receivables as of December 31, 2000 by recording them as a loss in the "other
expenses" item in our 2000 financial accounts.
We are targeting potential Korean customers, including certain personal
computer and telecommunication manufacturers, PCB manufacturers and more than
300 small- to medium-sized PCB printing and manufacturing companies, through
our direct sales force and agents. We intend to market our SMD placement
systems, with a particular emphasis on export sales, by further developing new
and existing relationships with dealers and agents in and outside of Korea, as
well as by continuing to participate in trade shows. Since the market for SMD
placement systems is larger than that of test handlers, we believe that the
potential global market for our SMD placement systems is larger and less
volatile than that for our handlers.
Customers
While handlers are primarily purchased by major semiconductor
manufacturers, SMD placement systems are purchased by large and small
electronic manufacturers. Our principal customer for SMD placement systems in
1999 was Quad, to whom we delivered 37 units (at a value of (Won) 4.8
billion). In addition, we delivered 25 SMD placement systems to nine other
customers in 1999 (at an aggregate value of (Won) 5.0 billion). In 1999,
approximately (Won) 3.2 billion of sales of SMD placement systems were made to
domestic customers and approximately (Won) 6.6 billion in sales were exported
to international customers. In 2000, our export sales constituted 40.4% of
total sales. Our principal customers in the international market were
Banner-Ever International Group Corp. and Quad, accounting for 11.9% and 11.8%
of sales our SMD placement systems, respectively.
We maintain a team of fifty engineers at our facility in Bundang city,
where we maintain our research and development center as well as SMD placement
systems customer service and marketing divisions. The support team addresses
customers' telephone inquiries and also provides on-site service to customers
within Korea. We also send engineers outside of Korea to a customer's facility
when necessary. We have one customer support engineer stationed in Shanghai,
and we are considering staffing an engineer full-time in each of Shenzhen,
Singapore, Taiwan and Tokyo. We typically cover the repair and maintenance
costs of SMD placement systems sold directly by us or our agents in Asia for
the first year following sales pursuant to the terms of our standard product
warranty. Quad was solely responsible for the service and support of all our
SMD placement systems it sold.
Competition
With the exception of one Korean manufacturer, the domestic and
international markets for SMD placement systems are dominated by a number of
Japanese competitors, including Fuji Machine Manufacturing, Matsushita
Electric Industrial Co., Ltd., Yamaha Motor Co. Ltd. and Juki Corporation and,
in the United States, Universal Instruments Corporation. In addition, Siemens
AG produces a high-end SMD placement system utilizing pick-and-place
technology.
We believe our SMD placement systems have advantages over those produced
by certain other manufacturers primarily as a result of our having combined
our core competencies, such as advanced control hardware, machine vision and
linear motor design technologies, with our advanced real-time control
software-based robots. As a result, we believe we produce among the most
advanced SMD placement systems in the market, including one of the fastest
pick-and-place SMD placement systems available on the market. In addition, we
believe that our SMD placement systems yield among the highest tact times and
throughput in the industry among pick-and-place systems, require short
changeover times from one PCB board to another, provide users with a high
degree of flexibility in terms of the configuration and types of mounter heads
available and are easy to operate. We also believe the incorporation of our
PCB assembly support software into our SMD placement systems may attract new
customers due to the resulting ease of use and integrated process control
provided by such incorporation.
We intend to continue to price our SMD placement systems competitively.
In addition, we believe that domestic demand has been enhanced by the 8% duty
applicable to most SMD placement systems, and the 18% special duty applicable
throughout 2000 to certain low-end SMD placement systems imported into Korea,
including those which compete with the models we produce. See "Operating and
Financial Review and Prospects--Results of Operations--Taxation".
Seasonality
The order rate for our SMD placement systems tends to be lower in Asia
during the months of January, February, June and July.
TFT-LCD Handlers and Testers
Mirae began developing its TFT-LCD handler and tester products in 1994
with the production of the MR6520, and began to actively market additional
TFT-LCD handler and tester models in 1997. In 1999 and 2000, we manufactured
two different TFT-LCD handler models, the MC2410 and the MC2510, and one
TFT-LCD tester model, the MR6560.
Of the three testing phases in the TFT-LCD manufacturing process, the
array phase, the cell phase and the module phase, our TFT-LCD handlers are
used in the cell phase and our TFT-LCD testers are used in the module phase.
During the cell phase, liquid crystal is inserted into cut glass and various
tests are performed on the semi-finished panel. These tests are facilitated by
a TFT-LCD handler which automatically conveys a cell to a test site by
interfacing with a tester and, following the appropriate tests, transfers the
tested cell to a cassette. The cell encased in a cassette is carefully moved
to the manufacturing line and processed into a display module. During the
module phase, the major components of the TFT-LCD panel, which drives and
controls the display, are attached and tested. Our TFT-LCD module tester
inspects LCD displays for optical defects after the color cell construction
phase. The tester uses a high resolution camera and is driven by specialized
software developed in-house to quantitatively measure critical optical
qualities, such as contrast, luminance and color balance, and to precisely
locate various pixel defects.
While cathode ray tubes ("CRTs") are still commonly used in display
monitors, TFT-LCDs are incorporated in many notebook computers and are also
penetrating the desktop PC monitor market. We expect that as TFT-LCDs
increasingly replace CRTs, demand for TFT-LCDs and, consequently, for TFT-LCD
handling and testing equipment should increase. However, this shift in demand
may be largely dependent on price declines of TFT-LCD screens, as such screens
are significantly more expensive than a comparable CRT screen.
As of December 31, 2000, the market for our TFT-LCD handlers and testers
was comprised exclusively of domestic manufacturers of TFT-LCD screens. As we
have existing relationships with Korean semiconducter manufacturers who also
manufacture TFT-LCDs, we are focusing our marketing efforts on these customers
to strengthen our relationships and on other major individual producers of
TFT-LCDs in Korea, with frequent direct one-on-one sales contacts.
In 1999, we delivered four units of our MC2510 model and one unit of our
MC2410 model at an aggregate contract value of (Won) 1,960 million and (Won)
425 million, respectively. In 2000, we delivered 28 units of both models at
(Won) 11.2 billion.
In both the TFT-LCD handler and tester markets, our major competitors are
Micro Japan Corporation of Japan and Pyung Chang High Tech of Korea. We
believe that the advanced technology of our TFT-LCD handler and tester
products, including high throughput, competitive pricing and locally-based
support, will help us become competitive in the domestic TFT-LCD handler and
tester markets.
Lead Frame Magazines
Since 1983, Mirae has manufactured lead frame magazines (aluminum
carriers used to transport lead frames in their fragile state before dies are
bonded onto them). Lead frames are essentially the skeleton of the
semiconductor chip to which dies are bonded.
Our original product line was manufactured using cutting technology. However,
beginning in 1984, we switched from cutting to machine tool technology, as
machine tool technology, especially press-cutting, increases the uniformity
and precision of the finished lead frame magazines. We manufactured our lead
frames exclusively for the Korean domestic market. In 1997, 1998 and 1999, we
sold (Won) 4.1 billion, (Won) 2.2 billion and (Won) 3.5 billion of lead frame
magazines, representing approximately 6.7%, 12.8% and 7.6% of our sales in
these periods, respectively. Our principal customers were Samsung, Anam
Semiconductors & Technology Co., Ltd., ChipPAC, Inc. and Hynix.
In September 1999, we spun-off the manufacturing of this business segment
to a group of our employees in line with our strategy to outsource low
value-added, labor intensive production processes. However, we continued to
market lead frames under our name in 2000 and sold (Won) 4.7 billion of lead
frame magazines. From 2001, we expect that Nail System Co., Ltd., the spun-off
company manufacturing lead frame magazines, will be able to market their
products directly.
Raw Materials
We generally do not accumulate inventory of raw materials as we typically
commence production of our various mechatronic products only upon receipt of
confirmed orders from our customers. However, in 1999, we began to accumulate
raw material inventory required for the production of SMD placement systems in
order to meet our projected customer demand on a timely basis. Our principal
raw materials consist of:
o for handlers: servo motors, servo amplifiers and personal computers;
o for SMD placement systems: linear motors, servo amplifiers and
machine vision components; and
o for TFT-LCD handlers and testers: linear motors and various robotics
components.
With respect to our handlers and SMD placement systems, we typically use
between 22,000 and 24,000 component parts. Of these component parts, the
majority are fabricated by our suppliers (or their manufacturers) based on our
design specifications and instructions. The remaining component parts are
commodity goods that are available from a wide variety of suppliers. In 1999
and 2000, no supplier accounted for more than 10% of our raw materials costs.
In 1998, 1999 and 2000, approximately 50%, 60% and 65% of the raw
materials costs for our handlers, SMD placement systems, and TFT-LCD handlers
and testers were imported, respectively. In the future, we expect to purchase
many of these parts domestically to lower our raw materials costs.
As we have been paid in foreign currencies (primarily U.S. dollars and
Japanese yen) for many of our export products, we have been able to maintain
foreign currency balances with which to purchase imported raw materials.
Accordingly, we have not been adversely affected by exchange rate fluctuations
on the cost of such raw materials.
Manufacturing and Assembly
We outsource many of our basic assembly line functions to reduce total
fixed costs, particularly labor. Internally, separate engineering teams are
responsible for handlers, SMD placement systems, and TFT-LCD handlers and
testers, share technology and apply many of the same core competencies across
these product lines.
We have developed detailed procedures for production management. Our
three person development verification test team oversees production management
and technology, and is responsible for gathering customer feedback. Typically,
our manufacturing process includes four major stages: raw material inspection,
processing, assembly and final testing. After each stage, quality testing
takes place. Defective products or components are analyzed to assess the
defect and prevent recurrences in the future.
In connection with production management, we prepare a detailed manual
outlining the assembly and parts inspection process. By developing a detailed
standardized document, we can assure consistency in manufactured products and
easily train new employees. We then establish criteria for parts inspection
and final testing. We frequently update the criteria to reflect customer
input, as well as feedback collected throughout the manufacturing process, and
we believe that having detailed pre-set criteria makes inspection and testing
more efficient. Finally, we emphasize a rigorous final testing procedure. We
believe our commitment to quality management, for which we have received ISO
9001 certification for our handlers, results in higher levels of customer
satisfaction.
Background
The semiconductor manufacturing process involves two principal phases,
wafer processing (the "front-end") and assembly/test processing (the
"back-end"). Since the production costs associated with front-end processing
are high, manufacturers seek to minimize losses during back-end operations
from defective processing, and to maximize throughput and shorten the
time-to-market for semiconductors and other devices.
The back-end manufacturing process involves separating individual dies or
chips from the wafer, bonding each chip on a plated metal lead frame or other
carrier and connecting the chip onto external leads. The chips are then
encapsulated in an epoxy plastic, the leads are deflashed and tin-plated, the
devices are separated, and the leads are trimmed and formed. Throughout the
back-end process, devices are tested to ensure functionality, and sorted in
accordance with the test results.
The following diagram illustrates the back-end manufacturing process
flow:
[graphics omitted]
Different types of devices, such as linear ICs and logic ICs, memory and
individual transistors (discretes), and different types of packages require
different assembly and packaging and, therefore, different testing solutions.
Semiconductor manufacturers rely on a multiple-step testing and reliability
screening procedures to detect defects or weaknesses that may result at any
stage during the manufacturing process. The initial testing phase is typically
performed before the processed semiconductor wafer is cut into individual die.
After the die are packaged, a test for packaging defects is performed. Certain
devices then undergo an extensive reliability screening and stress testing
procedure known as "burn-in". The final testing phase involves the use of
automated test equipment -- or "testers" -- that evaluate numerous devices
simultaneously and perform a variety of tests at various temperatures.
Test handlers facilitate the testing process. Test handlers are
specialized robotic machines that (i) carry devices on loader trays to testing
equipment, (ii) feed devices into and remove devices from the testers once the
testing process is complete, and (iii) sort tested devices into bins based on
pre-programmed grading criteria. The grade received determines the type of
application for which a device may be used, with a higher grade allowing for
more sophisticated applications.
Test handlers use either "vertical gravity" or "pick-and-place"
technology to interface devices with a tester. Vertical gravity handlers
essentially drop devices onto the contact point of a tester. Pick-and-place
test handlers, which became the industry standard following the development of
the 64MB DRAM, use vacuum technology and are designed for linear processing of
a device to a contact point on a test handler.
Typically, test handlers are customized to meet the product
specifications designated by a customer to ensure proper operation with its
tester. A customer's specifications relate principally to the tester software
program and the tester interface software program to be used, the shape of the
interface board linking the tester to the test handler, the function, shape
and design of the individual device package, and the shape of the device
loader tray. The number of units processed per hour is dependent on the
operational specifications of a particular test handler, the speed of the
tester to which it is connected, and the type and number of devices being
tested. A test handler's index time which exceeds a tester's device test time
prevents a tester from sitting idle, thereby ensuring productivity of the
testing process.
Internet Businesses and On-line Solutions
In line with our corporate strategy of differentiating our product base
and entering new markets that we believe offer significant growth
opportunities, we began in 1999 to turn our attention to the formation of, and
investment in, companies and joint ventures that focus on the development of
Internet services in Korea. This new Internet strategy resulted in the
formation in March 1999 of Lycos Korea, now one of the leading Korean language
Internet portal sites, and the incorporation in March 1999 of our subsidiary
SoftForum, now a leading Korean provider of security solutions for on-line
banking, trading and electronic commerce. Since that time, we have further
positioned ourselves to become a leading provider of Internet-related services
in Korea by establishing other joint ventures and strategic alliances with,
and by making strategic investments in, Internet companies.
Lycos Korea
Lycos Korea was formed in March 1999 as a joint venture in which we and
Lycos, Inc. of the United States had an equal shareholding. In March 2000,
Lycos Korea issued an additional 3,122 shares worth an aggregate 13.5%
interest in Lycos Korea at (Won) 18 million per share. Of the 3,122 shares,
Lycos Korea sold 2,313 shares to Mirae Asset Venture Capital, and the balance
to Sumitomo Corporation, Singapore Telecom and Hikari Tsushin Capital.
Currently, Lycos, Inc. and Mirae each own a 43.25% shareholding in Lycos Korea
and operate Lycos Korea as a joint venture.
Lycos Korea offers a Korean language portal site on the Internet that
provides web search and directory services, guides to online content,
aggregated third party content, and community and personalization features.
Lycos Korea launched its Internet operation, www.lycos.co.kr, in July 1999 and
introduced free personal home page services in August 1999. Utilizing
solutions developed by Tripod, Inc., a subsidiary of Lycos, Inc., Lycos Korea
offers Internet users 12 megabytes of webspace on which to create personal
homepages and join interest-based on-line communities.
In addition to home page services, Lycos Korea offers a search engine
designed to effectively search information on the World Wide Web in Korean.
Lycos Korea also offers various content on its website. Services currently
offered by Lycos Korea include:
o Securities Information: users can obtain free-of-charge a variety of
securities information from the main page, including charts, news,
market status reports and stock recommendations as well as
information regarding composite indexes, KOSDAQ, KOSPI 200, futures,
increase ratios and shares/contracts traded. Users may also access
trend charts and MyStock (a real-time portfolio valuation service).
In addition, differentiated information is provided in conjunction
with Lycos Korea's partner securities companies (including LG
Securities, Kyobo Securities, Daishin Securities, Hyundai Securities
and Dongwon Securities).
o Chatting Service: an internet chat service allows real time on-line
communication. Lycos Korea commenced its chat service in December
1999.
o Games: users have free access to games such as Go, chess, o'mok and
others. Lycos Korea began to provide a comprehensive game platform
in December 1999.
o Real Estate: this service provides a variety of real estate
information and data, including prices for apartments using
appraisal factors such as geography, proximity to parks and views,
as well as comparisons of appraisal prices and market prices. Lycos
Real Estate is supplied by Ten Co., a specialized real estate
information supplier.
o Job Placement Center: users have access to an integrated employment
information site run jointly by Career Magazine (a professional
Internet employment agency) and Hankyung Disco (a specialized
employment agency owned by the newspaper, Korea Economic Daily),
providing job-related information supplied to Lycos Korea for a fee.
Additional features offered include "Search for Employment Hot
News," which allows users to find recent employment notices, a Lycos
Korea version of "Careeron," a webzine specializing in employment,
"Hankyung Enterprises Information," which includes current job
placement information for major Korean businesses, and "Employment
Guide", a job placement service.
o Lycos News: through cooperation with Moon-hwa Broadcasting
Corporation ("MBC"), one of three national Korean television
broadcasters, Lycos News provides a real-time news service on-line
in exchange for MBC's advertising Lycos Korea's web address on its
nightly news programs. Other contracted news content partners
include the Korea Economic Daily and the Yonhap News.
o Entertainment: Lycos Korea's entertainment service includes
providing users entertainment and educational information supplied
by I-Popcorn and the Daily Sports News.
o Automobiles: users may access information on domestic car sales
through Lycos Motor Service, provided in cooperation with Logos
CyberTec. Specific information, such as a car's features and colors,
as well general information, including the results of driving and
crash tests, is also available.
o Lycos One-Click: Lycos One-Click is an "Internet Auto-connection
Program" that can be installed on a PC for easy Internet access
including, for instance, allowing users instant access to all of
Lycos Korea's services, such as free homepages from Tripod, Lycos
Club, Lycos Mail and securities information. Internet access through
One-Click also offers users a translation feature that translates
Japanese into Korean.
o Lycos Mail: users have available a free encrypted e-mail service
utilizing SoftForum's security software solutions. Lycos Korea
launched this service in September 1999.
o Maps: users can locate specific destinations on maps based on
address, name or zip code. This services includes a search function
for finding the shortest route from one site to another, as well as
a function for locating hospitals, banks, restaurants, department
stores and other destinations.
o Lycos Korea Auction Site: users can access an auction site service
launched in January 2000 through a partnership with a local Internet
auction company.
Lycos Korea is currently developing additional services similar to those
offered by Lycos, Inc. and Lycos, Inc.'s subsidiaries in other countries,
including enhancements to its Internet search and e-mail services.
Lycos Korea generates revenue primarily through the sale of advertising
space. Additional revenue is received through commissions from electronic
commerce service providers, whose websites are accessed through hyperlinks on
Lycos Korea, and through "ad commerce", where advertisers pay Lycos Korea
commissions for revenue they earn as a result of their advertising on the
Lycos Korea search and portal site. As of March 31, 2000, registered members
for the Lycos/Tripod service in Korea had reached over two million users and
Lycos Korea's average page views per day was approximately 24 million.
Lycos Korea has entered into a number of advertising, sponsorship and
e-commerce agreements with companies in various industries, including LG
Securities, Hyundai Motor, Samsung Life Insurance, Korean Air, Dacom, Compaq
and OneClick, as well as Lotte and Samsung Cyber-Shopping Mall.
The Board of Lycos Korea is comprised of two representatives from each of
Lycos, Inc. and Mirae, with the Representative Director (or chairman)
appointed by Mirae. The Statutory Auditor is appointed by Lycos, Inc.
Currently, Mr. Jonghyun Ka is the Representative Director of Lycos Korea and
Mirae's former president, Mr. Chung Moon Soul, is a Director of Lycos Korea.
Pursuant to the terms of a license agreement between Lycos Korea and
Lycos, Inc. and a license agreement between Lycos Korea and Tripod, Inc.,
Lycos Korea is required to pay an annual royalty in the amount of 5% of its
gross revenues to Lycos, Inc. In exchange, Lycos, Inc. and Tripod, Inc. have
agreed to provide certain software and intellectual property related to the
provision of Lycos' web search engine and Tripod's homepage building and web
site community services. In addition, in May 1999, Mirae agreed to provide
Lycos Korea with a loan of up to (Won) 6.25 billion at an annual interest rate
equal to the higher of 8% or the bank overdraft rate. As of December 31, 2000,
(Won) 6.25 billion had been loaned to Lycos Korea and remains outstanding.
For the fiscal year ended July 30, 2000, Lycos Korea was operating at a
loss of (Won) 13,925 million. Its products and services generated sales of
(Won) 7,436 million.
SoftForum
SoftForum offers security solutions developed for on-line banking,
trading and electronic commerce. SoftForum was incorporated in March 1999 as a
subsidiary, 55.47% of which is now owned by Mirae, 27.58% of which is owned by
SoftForum employees, 9.28% of which is owned by Dongwon Venture Capital Co.,
Ltd. and 7.67% of which is owned by Mirae Asset Venture Capital. SoftForum's
security solutions provide secure trading and on-line banking between
financial institutions and end users, offering authentication technology and
secure technology for Internet websites and Internet transaction systems.
SoftForum offers products in five major areas: cryptographic technology,
certification authority ("CA"), public key infrastructure ("PKI"), user
authentication solutions and secure web mail. Our cryptographic technology
enables users to send and receive encrypted data. Our leading product offering
in this area is XecureWeb. CA is an electronic commerce solution which
generates electronic signatures and manages the electronic signatures on the
database for easy confirmation by a service provider. SoftForum's PKI security
package is a comprehensive security solution incorporating SoftForum's major
security applications, including cryptographic technology and CA solutions.
User authentication solutions, such as SoftForum's "OnceID" product, allow
users to identify themselves to a remote system via a password with a one-use
lifespan. SoftForum's web mail enables web users to exchange encrypted
e-mails.
SoftForum developed customized security solutions for electronic commerce
to be offered by Goldbank, one of the leading Korean cyber-shopping services,
and secure web mail for Lycos Korea. In addition, SoftForum has sold over
30,000 "OnceIDs" to several major Korean banks, and has sold its crytographic
technology, CA and PKI solutions to a wide variety of Korean financial and
quasi-governmental institutions including, in the case of its PKI solutions,
to three major commercial banks, Kookmin Bank, Hanvit Bank and ChoHung Bank,
and two investment trust companies, Daehan and Korea Investment Trust.
SoftForum is currently developing encryption solutions using wireless
technology for individual consumers, as well as for banks and financial
institutions and for business-to-business applications.
We believe that Internet and electronic commerce will continue to grow in
popularity in Korea, which may lead to increasing demand for SoftForum's
security solutions. While SoftForum licenses what we believe to be leading
security solution technology in Korea, there are at least ten competitors in
the Korean security solution market, particularly Samsung SDS Co., Ltd. And
Initech Co., Ltd.. We intend to continue to manage SoftForum by aggressively
marketing its products and services and by investing as much as 10% of
SoftForum's total sales into research and development.
In 2000, SoftForum's security solutions products and services generated
revenues of (Won) 9,560 million, more than double its sales of 4,195 million
in 1999, and a net income of (Won) 2,079 million.
Other Investments
Since the formation of Lycos Korea and SoftForum, we have invested an
additional (Won) 14.7 billion in a variety of Internet-related companies, and
have formed a number of strategic alliances. The most significant of these are
discussed below:
CyberBank Co. ("CyberBank"): In March 2000, Mirae acquired a 1.47% interest,
which was diluted to 1.36% after CyberBank issued an additional 55,022 shares
to Softbank Co. of Japan and Samsung. CyberBank develops personal data
assistants (PDAs) that combine a traditional PDA with mobile phone and
wireless Internet capabilities. Mirae has entered into a strategic alliance
with CyberBank and Telson Electronics Co., Ltd. ("Telson") in December 1999,
pursuant to which Telson agreed to manufacture the PDAs on an OEM basis, and
we agreed to market the product. This contract expired in December 2000, and
now Samsung manufactures the PDAs on an OEM basis. The PDAs will allow users
to access and view in color information on the World Wide Web in the same
format as on a personal computer, only miniaturized on a 640 x 480 mm TFT-LCD
screen. CyberBank won the Finalist award at COMDEX 2000.
Onnet Co., Ltd. ("On-net"): We currently have a 14.7% interest in On-net, a
Korean Internet company which provides community-based online services such as
clubs and message boards. On-net now provides Lycos Korea with Lycos Clubs,
Lycos Message Boards and Star4U services, each of which, we believe, has
strengthened the user loyalty base of Lycos Korea.
Java Game Co., Ltd. ("Java Game"): We currently have a 60% interest, in Java
Game, one of the first Java-based web-enabled game programming companies in
Korea. Java Game launched Lycos Korea's game site and marketed its application
service provider to Chosun Daily Newsapaper in 2000. In 2000, the company
generated revenues of (Won) 279 million and a net income of (Won) 9.9 million.
Korea Internet.com Co., Ltd. ("Korean Internet.com"): On January 3, 2000, we
signed a five-year joint venture agreement with US-based Internet.com
Corporation, a global leader in the provision of real-time news and
information resources for the Internet industry, to form Korean Internet.com
and launched its Korean version of this Internet news service and network
website in June 2000. Korea Internet.com is now the most prominent B2P
contents provider in Korea. We have a 47.9% interest. For 2000, the Company
reported net losses of (Won) 499 million and revenues of (Won) 99 million.
Intro System Co., Ltd. ("Intro System"): In December 1999, we purchased an
18.2% interest in Intro System, which has been diluted to 15.2% after the
issuance of additional shares. Intro System operates a number of cyber cafe
franchises throughout Korea.
Infinity Telecom Co., Ltd. ("Infinity Telecom"): In January 2000, we purchased
an 18% interest in Infinity Telecom, which has been diluted to 16.7% after the
issuance of additional shares. Infinity Telecom is a Korean Internet start-up
company concentrating on the development of voice recognition software for
text-speech and speech-text based services used in unified messaging services
(UMS). Infinity Telecom began as a research lab focusing on automatic speech
recognition and expanded into computer telephone integration. Infinity Telecom
is recognized in Korea for introducing personal UMS and is currently
developing enterprise communication software for corporate use that
incorporates the personal UMS service.
Nara Vision Co. ("Nara Vision"): In January 2000, we purchased a 17.4%
interest in Nara Vision, an Internet portal service provider and an
Internet-related software developer. We have incorporated Nara Vision's free
online e-mail service, Kebi, with the e-mail service provided by Lycos Korea.
Kebi is one of Korea's largest e-mail services.
Korea Internet Holdings Inc.("KIH"): In February 2000, we purchased a 20%
interest in KIH, a venture investment company which also provides management
consulting and business model development services.
Telefree Co., Ltd. ("Telefree"): In March 2000, we purchased a 2.6% interest
in Telefree, a voice-over Internet-phone solution provider. We incorporated
Telefree's service into Lycos Korea to offer free phone services over the
Internet.
Nethru, Inc.("Nethru"): In March 2000, we purchased a 19.7% interest in
Nethru, a data mining solution provider. Nethru was founded by researchers at
the Pohang Institute of Technology and develops innovative data mining
solutions.
Mirae Online, Co., Ltd. ("MOL"): In March 2000, we purchased a 79.9% interest
in MOL, which has been diluted to 64.78% after issuing additional shares. MOL
is a two-way satellite based data broadcasting service provider. MOL launched
its Internet broadbanding service in June 2000 and data broadcasting service
in November 2000. In 2000, MOL generated revenues of (Won) 112 million and net
losses of (Won) 3,461 million.
Stream Box, Inc. ("Stream Box"): In April 2000, we purchased a 5.2% interest
in Stream Box, a streaming video service provider specializing in media
contents search.
Neobill Co., Ltd. ("Neobill"): In May 2000, we purchased a 15.7% interest in
Neobill, which builds an Internet payment and billing system. We intend to
merge this service into e-security solutions of SoftForum.
C. ORGANIZATIONAL STRUCTURE
For a list of our significant subsidiaries, see "Item 10 -- Additional
Information -- Subsidiary Information".
D. PROPERTY, PLANT AND EQUIPMENT
We set forth below a description of each of our facilities:
Headquarters and the First Factory
Our headquarters for corporate administration, research and development,
and sales and marketing are located in Chun An, Korea. These premises, which
we own, consist of approximately 5,565 square meters of office space. Our
handlers, lead frame magazines, and TFT-LCD handlers and testers are
manufactured at this factory, which is adjacent to the headquarters building,
aggregating approximately 3,387 square meters, which we own.
The Second Factory
SMD placement systems are manufactured at our 14,678 square meter factory
in Chun An city. This factory, which we own, includes a 6,112 square meter
annex which was constructed to increase the production capacity of SMD
placement systems in 2000.
The Mirae Research Center
We conduct research and development for mechatronics-related technology
and products at our 7,748 square meter facility in Bundang city which we own.
Office Building for Internet Venture Companies
We have acquired 17,838 square meters of space in a building in Seoul,
Korea for use by our internet venture companies.
New Research Center
In April 2001 we broke ground on construction of a new 15,500 square
meter building located in Hwasung city, Korea which we plan to use as a
research center. We expect to make capital expenditures of (Won) 15 billion in
connection with the new research center. It is anticipated that construction
of the new research center will be completed by March 2002.
We also own approximately 33,000 square meters of land in Kiheung city,
which we acquired for possible construction in the future of an additional
research institute or other facility.
Our existing facilities have been adequate for our needs through the end
of 2000. We believe that any additional space we may need in the future will
be available on commercially reasonable terms.
ITEM 5. Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The Consolidated Financial Statements have been prepared in accordance with
Korean GAAP, which differs in certain significant respects from U.S. GAAP.
Notes 28 and 29 of Notes to Consolidated Financial Statements provide a
description of the significant differences between Korean GAAP and U.S. GAAP
as they relate to Mirae and provide a reconciliation to U.S. GAAP for
operating income (loss), net income (loss) and shareholders' equity.
Overview
We design and manufacture mechatronics machines, including the
high-precision robotic parts and software that control these robotic parts,
primarily for sale to the semiconductor manufacturing and PCB assembly
industries. Our product line consists of semiconductor test handlers and their
components, SMD placement systems, and TFT-LCD handlers and testers.
Historically, the vast majority of our revenues have been derived from the
sales of semiconductor test handlers and their components. In 1998 and 1999,
approximately 86.4% and 44.5%, respectively, of our sales were derived from
the sales of semiconductor test handlers. However, in 2000, only 29.9% of our
sales were derived from the sales of semiconductor test handlers, while 48.8%
of our sales were derived from the sales of SMD placement systems which we
began to sell and market in the second half of 1999.
Historically, our sales have been concentrated among a small number of
Korean customers, particularly Samsung, Hynix and Hyundai Micro Electronics.
In 1998, 1999 and 2000, 71.4%, 64.8% and 59.6%, respectively, of our total
sales were derived from domestic sales. We began in 1998 to market our
products in the international market resulting in higher profit margins and
our global sales have gradually increased since 1998.
Our sales and results of operations have depended in large part on the
level of capital expenditures by semiconductor manufacturers and electronic
manufacturers, which in turn depends on the current and anticipated market
demand for semiconductors and for products utilizing semiconductors and PCB
assemblies.
Demand for semiconductor devices and expenditures for related capital
equipment is cyclical, and is dependent on levels of demand worldwide for
computing and peripheral equipment, telecommunications devices, and automotive
and industrial components, as well as the production capacity of global
semiconductor manufacturers. Historically, changes in production capacity in
the semiconductor industry and in the demand for electronic systems have
resulted in pronounced periodic declines in the level of semiconductor sales
and significant fluctuations in prices and margins for semiconductor devices.
However, we believe that recent trends in the semiconductor industry,
including the development of new semiconductor applications and increased
semiconductor content as a percentage of total system cost, may contribute to
industry growth while ameliorating the cyclical variations experienced in the
past.
The cyclical variations in the supply and demand of DRAM chips and the
fluctuations in the electronic manufacturing industry have affected and will
continue to affect our sales and results of operations. Our pricipal means of
responding to these situations have been and will be as follows:
o we adopted a concerted marketing and export strategy focused beyond
our traditional Korean customer base;
o we expanded our mechatronics product line to include SMD placement
systems and TFT-LCD handlers and testers; and
o we will cut back on our investments in multimedia and
internet-related business areas and focus on maximizing the value of
our returns from current investments.
Future operating profits will depend on many factors, including the
reversal of the downturn in the semiconductor and electronic manufacturing
industry, our ability to successfully expand our product markets outside of
Korea, receipt, timing and shipment of orders, the introduction and industry
acceptance of our new non-memory semiconductor test handlers, SMD placement
systems and internet and software-based products, as well as the success of
our competitors. Results of operations for the periods discussed herein should
not be considered indicative of the results to be expected in any future
period, and fluctuations in operating results may also result in fluctuations
in the market price of our common stock and the ADSs.
A. OPERATING RESULTS
Our sales revenue in 2000 was more than double our sales revenue in 1999
mainly due to the sales increase of our new mechatronic machines, SMD
placement systems and TFT-LCD handlers. Until 1999, our sales had historically
been derived principally from the sales of semiconductor test handlers. We
began in the second half of 1999 to recognize sales revenue from the sale of
SMD placement systems and TFT-LCD handlers, which accounted for 48.8% and
7.6%, respectively, of our total sales revenue in 2000.
The following table sets forth certain information regarding our
financial performance for each of the years ended December 31, 1998, 1999 and
2000.
1998 1999 2000
(in (% of (in (% of (in (% of
millions total millions total millions total
of won) sales) of won) sales) of won) sales)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Sales . ................ (Won) 17,014 100.0% (Won) 45,681 100.0% (Won) 146,099 100.0%
.
Semiconductor test 14,693 86.4% 20,326 44.5% 43,754 29.9%
handlers
SMD placement systems. -- -- 9,861 21.6% 71,250 48.8%
TFT-LCD handlers
and testers........ -- -- 3,334 7.3% 11,166 7.6%
Lead frame magazines. 2,191 12.9% 3,451 7.6% 4,733 3.3%
Sales of raw material. -- -- 4,437 9.7% -- --
Security solutions.... 130 0.8% 4,240 9.3% 9,501 6.5%
Old model of LCD
testers and other..... -- -- 32 0.1% 5,695 3.9%
Cost of sales.............. 16,907 99.4% 36,111 79.1% 111,377 76.2%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Gross profit............... 107 0.6% 9,570 21.0% 34,722 23.8%
Selling, general and
administrative expenses
(Note 1)................ 7,328 43.1% 19,988 43.8% 27,223 18.6%
Operating income (loss).... (7,221) (42.4)% (10,418) (22.8)% 7,499 5.1%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Other income............... 14,299 84.0% 14,603 32.0% 12,809 8.8%
Other expense.............. 2,833 16.7% 9,601 21.0% 20,173 13.8%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Income (loss) before
income taxes and minority 4,245 25.0% (5,416) (11.9)% 135 0.1%
interest...................
Income tax expense 417 2.5% (5,396) (11.8)% (3,602) (2.5)%
(benefit)..................
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Net income before minority
interest................... 3,828 22.5% (20) 0.1% 3,737 2.6%
.
Minority interest in net
loss (gain) of
consolidated subsidiaries. -- -- (216) (0.5)% 533 0.4%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Net income (loss).......... 3,828 22.5% (236) (0.5)% 4,270 2.9%
===================================================================================
(Note 1) Until December 31, 1998, amortization of deferred research and
development costs was classified as other expense. Effective January
1, 1999, Korean GAAP was revised to require classification of the
amortization of deferred development costs and any incurred amount
of research and ordinary development expenses as manufacturing or
selling, general and administrative expenses depending on their
nature. For comparative purposes, research and development costs
previously classified as other expenses in the consolidated
financial statements for the years ended December 31, 1998 have been
reclassified to conform with the presentation of the consolidated
financial statements for the years ended December 31, 1999 and 2000.
These reclassifications did not have any effect on the reported
financial position of the Company and its subsidiaries as of
December 31, 1998, or their net income for the year then ended.
Our gross margins have experienced, and may continue to experience,
severe fluctuation and downward pressure as a result of a number of
interrelated factors associated with the markets in which we operate.
o We have diversified into SMD placement systems and TFT-LCD handlers
and successfully launched new models of such products in the
domestic market during 2000. As a result of the successful market
launch of new SMD placement systems and TFT-LCD handlers, our
earnings structure has been less vulnerable to the semiconductor
sales cycle than it had been prior to 1999. However, since we only
commenced the sale and marketing of SMD placement systems and
TFT-LCD handlers in the second half of 1999, and because we applied
price discounting policies to such sales in order to penetrate the
market, our gross profit margins on these products were not as high
as the gross profit margins on our semiconductor test handlers.
o We have invested (Won) 15.3 billion into 15 multimedia and
internet-related companies since 1999. We have strategically
invested 71.1% of such amount, including indirect investments, into
content and service related companies which subsequently entered
into exclusive or first-right contracts to provide content and
services to Lycos Korea and SoftForum. Lycos Korea and SoftForum
have successfully executed private placements and expanded their
market shares during 2000. Lycos Korea, a company for electronic
commerce and portal sites on the Internet, incurred a net loss of
(Won) 22.216 billion in 2000 due to the slowdown in the Internet
advertising market. SoftForum, a company for software-based
securities solutions, earned a net profit of (Won) 2,020 million in
2000.
o In order to reduce our exposure to pricing pressures in the domestic
market from both international and domestic competitors, we have
expanded our sales in North America, Europe and Asia where we
realize higher profit margins. Our foreign sales increased to 40.4%
of our total sales in 2000 from 28.6% in 1998. On December 18, 2000,
Quad Systems Co., an OEM contractor of our SMD placement systems in
North America and Europe, filed under Chapter 11 of the U.S.
Bankruptcy Code. As a result, we have had to reestablish our
distribution channel of SMD placement systems in North America and
Europe.
o Virtually all of our handler products are subject to life cycles
which generally range from 18 to 24 months. During that time, the
price of each product typically has declined as the product is
replaced by newer models with improved performance specifications.
If new products are not introduced on a regular basis to replace
older models, our overall gross margins will experience downward
pressure as the gross margins on the older models decline.
o Our semiconductor test handlers, SMD placement systems and TFT-LCD
handlers come with a one year product warranty. As we expense
warranty costs as incurred rather than provide for estimated costs
at the time of sale, recognition of warranty costs usually lags
behind the sale of our products by approximately one year. Our
domestic semiconductor test handler customers have historically
focused on front-end manufacturing processes and do not have the
facilities or expertise necessary to maintain and repair their
back-end equipment. When they experience difficulties with one of
our handler products, we have often provided complementary
after-sales service even if the problem is not expressly covered by
the terms of the product warranty. The costs incurred in providing
these services are booked as product warranty expenses. We do not
intend to provide similar non-warranty related services for which we
receive no compensation in respect of our SMD placement systems and
TFT-LCD handlers and testers.
Our semiconductor test handler business has in the past also been
affected by the semiconductor manufacturing cycle of domestic semiconductor
manufacturers. These manufacturers typically set their budgets during the
fourth quarter, order new testing and handler equipment in the subsequent
first and second quarters and take delivery in the second half of the year.
Year ended December 31, 2000 compared with year ended December 31, 1999
Sales
Sales revenue for the year ended December 31, 2000 increased by (Won)
100,418 million, or 219.8%, to (Won) 146,099 million, compared to (Won) 45,681
million for the year ended December 31, 1999. The increase in sales was
primarily the result of an increase in sales of SMD placement systems which we
began to sell and market in 1999. Sales revenue derived from sales of SMD
placement systems for the year ended December 31, 2000 increased to (Won)
71,250 from (Won) 9,861 million for the year ended December 31, 1999. Unit
sales of SMD placement systems increased from 61 in 1999 to 368 in 2000.
Sales revenues derived from sales of semiconductor handlers and
components also increased by (Won) 23,428 million, or 115.3%, to (Won) 43,754
million for the year ended December 31, 2000, with unit sales increasing from
100 to 138. Revenues derived from sales of TFT-LCD handlers and testers
increased by (Won) 7,832 million, or 235%, to (Won) 11,166 million for the
year ended December 31, 2000.
In addition, through the operations of our subsidiary, SoftForum, we
recognized revenues of (Won) 9,501 million from sales of software-based
securities solutions for on-line banking, trading and electronic commerce for
the year ended December 31, 2000, compared to (Won) 4,240 million for the year
ended December 31, 1999.
Sales to our top three customers, Samsung, King Yuhan Electronics and
Hynix, accounted for (Won) 36,947 million of our revenues for the year ended
December 31, 2000. Sales to our top three customers in 1999, Samsung, EEMS
Italia and Quad, accounted for (Won) 21,679 million of our sales.
The proportion of export sales revenues compared to total sales revenues
increased to 40.4% for the year ended December 31, 2000, from 35.2% for the
year ended December 31, 1999.
Cost of Sales
The principal components of cost of sales are raw material costs, labor
costs, depreciation expenses, research and development costs, and outsourced
manufacturing fees. Cost of sales for the year ended December 31, 2000 was
(Won) 111,377 million, which represented an increase of 208.4% over cost of
sales of (Won) 36,111 million for the year ended December 31, 1999. The
increase in cost of sales was primarily due to higher sales volume during the
period.
Gross Profit
Gross profit increased to (Won) 34,722 million for the year ended
December 31, 2000 from (Won) 9,570 million for the year ended December 31,
1999. Gross profit ratio to sales increased to 23.8% in 2000 from 21.0% in
1999. The increase in gross profit and gross profit to sales ratio was
primarily due to higher sales volume and higher export sales to total sales
ratio during the period. Unit fixed costs decrease as sales volume increases.
Accordingly, our gross profit to sales ratio increased as sales volume,
especially sales of semiconductor test handlers and their components which
have higher gross profit ratios, increased. Moreover, since export prices are
higher than domestic prices, our gross profit to sales ratio increased as the
proportion of exports compared to total sales increased for the year ended
December 31, 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by (Won) 7,235
million, or 36.2%, to (Won) 27,223 million in 2000, from (Won) 19,988 million
in 1999.
Selling, general and administrative expenses increased primarily as a
result of a (Won) 3,120 increase in sales commissions, from (Won) 291 million
to (Won) 3,411 million, paid to sales and support agents on export sales of
test handlers and on domestic sales of SMD placement systems.
Selling, general and administrative expenses also increased due to a
(Won) 1,480 million increase in depreciation, in connection with additions to
our building, furniture and fixtures in recent years, and a (Won) 1,236
million increase in advertising expenses, from (Won) 1,449 million in 1999 to
(Won) 2,685 million in 2000, in connection with our international efforts to
market our semiconductor test handlers and components, SMD placement systems
and TFT-LCD handlers and testers in the United States, Asia and Europe.
Furthermore, salaries increased by (Won) 3,189 million, from (Won) 2,731
million in 1999 to (Won) 5,920 million in 2000, as a result of general salary
increases and the hiring of additional white collar employees to focus on
general sales and marketing of our SMD placement systems and international
sales of our semiconductor test handlers. In addition, as a result of our
sales efforts on our software-based securities solutions for on-line banking,
trading and electronic commerce through the operations of our subsidiary,
SoftForum, our selling, general and administrative expenses increased by (Won)
1,830 million, from (Won) 841 million in 1999 to (Won) 2,671 million in 2000.
The increase in selling, general and administrative expenses was offset
in part by a (Won) 6,544 decrease in research and development expense, from
(Won) 10,008 million in 1999 to (Won) 3,464 million in 2000, due to a change
in accounting treatment in connection with expensing manufacturing-related
research and development expense to manufacturing cost rather than expensing
to selling, general and administrative expenses.
Operating Income
Operating income for the year ended December 31, 2000 was (Won) 7,499
million, which represented an increase of (Won) 17,917 million from our
operating loss of (Won) 10,418 million for the year ended December 31, 1999.
The increase in operating income resulted primarily from the increase in sales
in 2000, as compared to 1999.
Other Income
Other income consists primarily of interest income, gains on disposals
and valuation of marketable securities, foreign exchange and translation
gains, and miscellaneous income. Other income decreased by (Won) 1,794
million, or 12.3%, to (Won) 12,809 million in 2000 from (Won) 14,603 million
in 1999.
Other income decreased primarily due to a (Won) 3,949 million decrease in
interest income, from (Won) 10,497 million in 1999 to (Won) 6,548 million in
2000. The main reason for such decrease in interest income was the interest
rate decrease in 2000 compared to 1999. The range of interest rates in 1999
was 8% to 20% while the average interest rate in 2000 was stable around 7%.
Moreover, we kept the proceeds from issuance of our ADSs in 2000 in foreign
currency deposits which bore only 5~6% interest. Gain on disposal and
valuation of marketable securities also decreased by (Won) 1,608 million, from
(Won) 3,334 million in 1999 to (Won) 1,726 million in 2000. Our cash and cash
equivalents, short-term financial instruments and interest-bearing marketable
securities as of December 31, 1998, 1999 and 2000 were (Won) 89,640 million,
(Won) 33,229 million and (Won) 44,198 million, respectively.
The decrease in other income was offset in part by a (Won) 2,434 million
increase in foreign exchange and translation gains.
Other Expenses
Other expenses consists primarily of interest expense, provision for
accounts receivable regarding which we anticipate there may be significant
difficulty in collecting ("Doubtful Accounts") and equity in losses of
affiliates. Other expenses increased by (Won) 10,572 million, from (Won) 9,601
million in 1999 to (Won) 20,173 million in 2000. Other expenses increased
primarily due to an equity in losses of an affiliate, Lycos Korea, of (Won)
9,664 million for the year ended December 31, 2000.
Other expenses also increased due to a (Won) 4,851 million increase in
provision for Doubtful Accounts from (Won) 215 million in 1999 to (Won) 5,066
million in 2000. In October 2000, we converted (Won) 5,066 million of trade
receivables due from Quad into long-term loans. On December 18, 2000, Quad
filed under Chapter 11 of the U.S. Bankruptcy Code and we expensed the entire
amount of (Won) 5,066 million due from Quad into "other expense" as a
provision for Doubtful Accounts.
Other expenses in 2000 also included (Won) 2,616 million of interest
expense, (Won) 844 million of valuation loss on inventories, and (Won) 670
million of foreign currency exchange and translation losses.
Income Taxes
Although our income taxes payable for the year ended December 31, 2000
were (Won) 2,151 million, we had an income tax benefit of (Won) 3,602 million
due to deferred income taxes primarily resulting from accrued, partially
utilized tax credits for technology and human resource development and capital
investments.
Net Income
Net income for the year ended December 31, 2000 was (Won) 4,270 million,
which represented a (Won) 4,506 million increase over 1999 when net losses
were (Won) 236 million.
Year ended December 31, 1999 compared with year ended December 31, 1998
Sales
Sales for the year ended December 31, 1999 increased by (Won) 28,667
million, or 168.5%, to (Won) 45,681 million, compared to (Won) 17,014 million
for the year ended December 31, 1998. Our sales of handlers and components
increased 38.3%, from (Won) 14,693 million in the year ended December 31, 1998
to (Won) 20,326 million for the year ended December 31, 1999, with unit sales
increasing from 69 to 100. This increase in sales of handlers and components
included sales to EEMS Italia in the amount of (Won) 3,705 million. EEMS
Italia was a new handler customer.
The increase in sales for the year ended December 31, 1999 also reflected
sales of our then new SMD placement systems and TFT-LCD handler and testers,
totaling (Won) 9,861 million and (Won) 3,334 million, respectively. In
addition, through the operations of our subsidiary, SoftForum, we began
selling our software-based securities solutions for on-line banking, trading
and electronic commerce and, for the year ended December 31, 1999, recognized
sales of (Won) 4,240 million. Having completed the initial production ramp-up
and marketing efforts related to these products in the first half of 1999,
sales of our new mechatronics and software-based security solutions products
were primarily made during the second half of 1999.
Sales for the year ended December 31, 1999 included the sale through June
30, 1999 of (Won) 4,437 million of SMD placement system components to 21st
Century Tech. Co., Ltd. ("21st Century"). 21st Century assembles and
manufactures semi-finished SMD placement systems with components purchased
from us and other domestic suppliers. We then purchase semi-finished SMD
placement systems from 21st Century, make further manufacturing adjustments,
including the final calibration of parts and the addition of our software
programs, and sell the finished products to our customers. Prior to January 1,
1999, we had no sales to 21st Century, and for the six months ended June 30,
1999, we booked sales to 21st Century at our cost plus a 10% margin. U.S. GAAP
does not permit the recognition of sales revenues where a commitment exists on
the part of a seller for future performance. Since at the time we sold the
components to 21st Century we were committed to purchase the semi-finished SMD
placement systems from 21st Century, U.S. GAAP would not have permitted the
recognition of these sales. Effective July 1, 1999, we amended our contract
with 21st Century so that delivery of components to them for processing is not
accounted for as a sale and so that the subsequent redelivery to us is not
accounted for as a purchase. Rather, components that are delivered to 21st
Century are accounted for as work in progress on our balance sheet. Under the
amended contract, instead of selling raw materials and repurchasing SMD
placement system components, we pay 21st Century a manufacturing service fee
at the time semi-finished SMD placement systems are delivered to us by 21st
Century. This fee is accounted for as a cost of goods sold.
Sales to our top three customers (other than 21st Century), Samsung, EEMS
Italia and Quad, accounted for (Won) 21,679 million of our sales for the year
ended December 31, 1999. Sales to our top three customers in 1998, Samsung,
Perfect Dynasty and IBM Italia, accounted for (Won) 12,096 million of our
sales. Our top three customers historically, Hynix, Samsung and Hyundai Micro
Electronics accounted for (Won) 13,847 million of our sales for the year ended
December 31, 1999 and (Won) 10,901 million of sales for the year ended
December 31, 1998.
Cost of Sales
Our cost of sales for the year ended December 31, 1999 was (Won) 36,111
million, which represented an increase of 113.6% over cost of sales of (Won)
16,907 million for the year ended December 31, 1998. The increase in cost of
sales was primarily due to cost of sales of our new mechatronic products of
(Won) 7,614 million and cost of sales of our security solutions through
SoftForum of (Won) 2,631 million. Cost of sales also included the cost of
components and materials sold to 21st Century of approximately (Won) 4,034
million. As a result of our amending our contract with 21st Century, the cost
of components and materials delivered to 21st Century are no longer recognized
as cost of sales. However, the manufacturing service fees paid to 21st Century
are included in cost of sales. In the second half of 1999, manufacturing
service fees paid to 21st Century were (Won) 368 million.
Our total cost of sales also increased due to a (Won) 816 million
increase in the cost of sales of our handlers and components, from (Won)
15,472 million for the year ended December 31, 1998 to (Won) 16,288 million
for the year ended December 31, 1999. The increase was primarily due to an
increase in volume of sales of handlers from 69 to 100 units. The increase in
the cost of sales of our handlers and components was offset in part by the
(Won) 2,023 million decrease in product warranty expense which was incurred
for the year ended December 31, 1999 as compared to 1998. The higher product
warranty expense incurred in 1998 was due to large sales volumes of test
handlers and their components in 1996 and 1997, particularly of the MR5300.
Gross Profit
Our gross profits increased to (Won) 9,570 million for the year ended
December 31, 1999 from (Won) 107 million for the year ended December 31, 1998.
Our gross margins increased from 0.6% in 1998 to 21.0% in 1999. Gross margins
increased primarily as a result of an increase in sales of our handlers and
components and a decrease in product warranty expense as explained above. The
increase was also due to initial sales of our new SMD placement systems,
TFT-LCD handlers and testers and our security solutions products sold through
SoftForum, as well as sales of SMD placement system components to 21st Century
in the first half of 1999, which exceeded by approximately 10% the cost of
components and materials sold to 21st Century during this period. Of the 403
million in gross profits related to sales of SMD placement system components
to 21st Century, only (Won) 318 million in gross profits on sales of SMD
placement systems fabricated using the semi-finished SMD placement systems
from 21st Century would have been recognized, had our accounting policies been
in line with U.S. GAAP since January 1, 1999. The remaining (Won) 85 million
included in our gross profit for the year ended December 31, 1999 was related
to components that were processed by 21st Century and included in SMD
placement systems which were not sold during 1999. This amount would not be
recognized under U.S. GAAP. As discussed above, U.S. GAAP does not permit the
recognition of such gross profit until sales of finished SMD placement systems
incorporating the related semi-finished SMD placement system components that
had been re-purchased from 21st Century are made.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by (Won) 12,660
million, or 172.8%, to (Won) 19,988 million in 1999, from (Won) 7,328 million
in 1998. Selling, general and administrative expenses increased primarily as a
result of an increase in research and development expense.
Research and development expense increased by (Won) 7,927 million, from
(Won) 2,081 million in 1998 to (Won) 10,008 million in 1999. This increase
reflected accounting changes under Korean GAAP for research and development
that became effective January 1, 1999, pursuant to which research and ordinary
development costs are no longer deferred, while development costs related to
new product development and future benefit continued to be deferred and
amortized over a period of five years. In addition, amortization of deferred
development costs is to commence when the related revenue or benefit is first
recognized, whereas, previously, deferred research and development costs were
amortized beginning in the period such costs were incurred. Under prior Korean
GAAP treatment, research and development expense for the year ended December
31, 1999 would have been (Won) 4,748 million. In 1998, research and
development expense was deferred and amortized over five years. The increase
in research and development costs for the year ended December 31, 1999, which
were mainly incurred during the first half of the year before commercial
manufacturing and sales began, was also due to costs associated with the
production ramp-up of our SMD placement systems.
Selling, general and administrative expenses also increased due to a
(Won) 538 million increase in commissions paid to our international sales and
support agents on export sales of test handlers, a (Won) 748 million increase
in depreciation, in connection with additions to our building, furniture and
fixtures in recent years, and a (Won) 1,204 million increase in advertising
expenses, from (Won) 245 million in 1998 to (Won) 1,449 million in 1999, in
connection with our international efforts to market our handlers and
components, SMD placement systems and TFT-LCD handlers and testers in the
United States, Asia and Europe. Furthermore, salaries increased by (Won) 735
million as a result of general salary increases and the hiring of additional
white collar employees to focus on general sales and marketing of our SMD
placement systems and international sales of our handlers. In addition, as a
result of our sales efforts on our software-based securities solutions for
on-line banking, trading and electronic commerce through the operations of our
subsidiary, SoftForum, our selling, general and administrative expenses for
the year ended December 31, 1999 increased by (Won) 730 million.
Operating Loss
Our operating loss for the year ended December 31, 1999 was (Won) 10,418
million, which represented an increase of 44.3% from our operating loss of
(Won) 7,221 million for the year ended December 31, 1998. The increase in
operating losses resulted primarily from the increase in selling, general and
administrative expenses in 1999, as compared to 1998, but was offset in part
by the increase in gross profit.
Other Income
Other income consisted primarily of interest income, gains on disposals
and valuation of marketable securities, foreign exchange and translation
gains, and miscellaneous income. Other income increased by (Won) 304 million,
or 2.1%, to (Won) 14,603 million in 1999 from (Won) 14,299 million in 1998.
Other income increased primarily as a result of a (Won) 497 million
increase in miscellaneous income. Miscellaneous income increased from (Won)
158 million to (Won) 655 million primarily as a result of (Won) 204 million in
rental income in 1999 we received for leasing part of our new research center
in Bundang city and a (Won) 133 million increase in commission income for
services provided by our employees to Lycos Korea.
Other Expenses
Other expenses consisted primarily of an impairment charge, interest
expense, donations and loss from valuation of inventories. Other expenses
increased by (Won) 6,768 million, from (Won) 2,833 million in 1998 to (Won)
9,601 million in 1999. Other expenses increased primarily due to loss from
impairment of deferred research and development costs. In March 2000, we made
a decision to discontinue one of our research and development projects related
to front-end semiconductor production equipment manufacturing. As a result,
related research and development project costs of (Won) 3,859 million were
written off effective as of December 31, 1999.
Other expenses also increased due to a (Won) 1,995 million increase in
interest expense from (Won) 1,043 million in 1998 to (Won) 3,038 million in
1999, which resulted from an increase in average outstanding short-term and
long-term debt, although there were no outstanding borrowings as of December
31, 1999. In December 1999, we made repayments on our short-term borrowings
totaling (Won) 40,000 million. These funds which were repaid during the week
of December 27, 1999, were used for the construction and extension of our
second factory building in Chun An city in the second half of 1998 and in
1999, and to retire (Won) 9,600 million in long-term borrowings. Approximately
(Won) 25,000 million of these funds were invested in marketable securities. In
conjunction with the early retirement of long-term borrowings, a penalty of
(Won) 540 million was paid and recorded as other expenses.
Income Taxes
Although our income taxes payable for the year ended December 31, 1999
was (Won) 89 million, we had an income tax benefit of (Won) 5,396 million due
to deferred income taxes primarily resulting from accrued, partially utilized
tax credits for technology and human resource development and capital
investments.
Net Loss
For the year ended December 31, 1999, we had a net loss of (Won) 236
million, compared to net income of (Won) 3,828 million for the year ended
December 31, 1998. The net loss in 1999 resulted from the foregoing factors, a
provision for equity in losses of our affiliate, Lycos Korea, of (Won) 35
million, net of tax effect of (Won) 15 million and the minority interest in
net gain of our subsidiary, SoftForum, of (Won) 216 million, net of tax effect
of (Won) 38 million.
U.S. GAAP Reconciliation
Our Consolidated Financial Statements are prepared in accordance with
Korean GAAP, which differs in certain significant respects from U.S. GAAP. The
principal differences between Korean GAAP and U.S. GAAP as they relate to
Mirae include:
o research and development costs are expensed under U.S. GAAP, while
development costs are deferred and amortized over a period not to
exceed 20 years under Korean GAAP (although we have elected to defer
and amortize such costs over five years);
o the setting aside, at the time a product is sold, of a percentage of
the sale proceeds for expected product warranty related expenses
under U.S. GAAP, while under Korean GAAP, warranty related
expenditures are included as incurred in manufacturing costs, which
are allocated between cost of sales and inventories, and such
amounts included in inventories are charged to cost of sales as the
related inventories are sold;
o under Korean GAAP, a parent company is required to account for sales
of stock by a subsidiary as an equity transaction to be included in
capital surplus, while under U.S. GAAP, a parent company may elect
income statement or equity transaction treatment depending on
certain criteria being met and so long as such election is applied
consistently and on a prospective basis for all subsidiary stock
transactions;
o under Korean GAAP, depreciation for six months is recorded for any
asset placed in service during the second half of the year in
accordance with Korean tax law, while under U.S. GAAP, depreciation
expenses start to accrue from the month the related assets are
deployed into service;
o whereas U.S. GAAP recognizes deferred income taxes, under Korean
GAAP, no deferred income taxes were provided through 1998;
o the charging of stock issuance costs to shareholders' equity under
U.S. GAAP, as opposed to the capitalization and amortization of
stock issuance costs over a period not to exceed three years under
Korean GAAP for financial years ending prior to January 1, 1999;
o Under U.S. GAAP, the realization of deferred tax assets depends on
an objectively verifiable estimate of future income which is
commonly based on pretax accounting income (losses) of the current
and immediate two preceding years. Under Korean GAAP, no such
practice has evolved;
o Under Korean GAAP, product warranty expenditures are included as
incurred in manufacturing costs, which are allocated between cost of
sales and inventories. Under U.S. GAAP, warranty costs are accrued
at the time of sale based on historical experience and expected
future costs;
o Korean GAAP permits all entities to exclude the volatility factor in
estimating the value of their stock options, which results in
minimizing the measurement. Under U.S. GAAP, public entities are not
permitted to exclude the volatility factor in estimating the value
of their stock options;
o Under Korean GAAP, gain on disposal of investments in common stock
of subsidiary incurred from a transaction between the Company and
its subsidiary's employees, which should be included in capital
surplus, is measured based on the actual selling price and the
carrying value of such investment. Under U.S. GAAP, however, if the
actual selling price differs from the fair value of the investment
and the difference between the fair value and the actual selling
price should be recorded as an employee benefits expense; and
o Under previous Korean GAAP, minority interest in equity of
consolidated subsidiaries was presented as a separate item from
shareholders' equity. Effective January 1, 2000, Korean GAAP was
changed to require that minority interest in equity of consolidated
subsidiaries be included in shareholders' equity. Under U.S. GAAP,
minority interest is presented as a separate item from shareholders'
equity.
For a discussion of these and other significant differences between
Korean GAAP and U.S. GAAP, see Notes 28 and 29 of Notes to Consolidated
Financial Statements. For a discussion of the Company's blank check
arrangements, see Note 21 of Notes to Consolidated Financial Statements.
Sales, cost of sales, gross profit, operating expenses, operating loss,
net income (loss) and shareholders' equity under U.S. GAAP as of and for the
years ended December 31, 1998, 1999 and 2000 are as follows (in millions of
Korean won):
1998 1999 2000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Sales....................................... (Won) 19,619 (Won) 51,358 (Won) 143,643
Cost of sales............................... 12,500 35,832 100,098
Gross profit................................ 7,119 15,526 43,545
Operating expenses.......................... 18,342 26,689 55,448
Operating loss.............................. (11,223) (11,163) (11,903)
Net income (loss)........................... 2,888 (117) 9,290
Shareholders' equity........................ 147,918 145,964 288,101
Year ended December 31, 2000 compared with year ended December 31, 1999
Sales
Sales for the year ended December 31, 2000 increased by (Won) 92,285
million, or 179.7%, to (Won) 143,643 million, compared to (Won) 51,358 million
for the year ended December 31, 1999. The increase in sales was primarily the
result of an increase in sales of SMD placement systems which commenced sales
and marketing in 1999. Sales, with unit sales increasing from 61 to 368, of
SMD placement systems for the year ended December 31, 2000 was (Won) 71,250
million while sales for the year ended December 31, 1999 was (Won) 9,861
million.
Sales of semiconductor test handlers and components also increased by
(Won) 13,164 million, or 43.2%, to (Won) 43,604 million for the year ended
December 31, 2000. Sales of TFT-LCD handlers and testers increased by (Won)
5,527 million, or 166%, to (Won) 8,861 million for the year ended December 31,
2000.
In addition, through the operations of our subsidiary, SoftForum, we
recognized sales of (Won) 9,501 million of software-based securities solutions
for on-line banking, trading and electronic commerce for the year ended
December 31, 2000, compared to (Won) 4,240 million for the year ended December
31, 1999.
Cost of Sales
The principal components of cost of sales under U.S.GAAP are raw material
costs, labor costs, depreciation expenses, product warranty costs, outsourced
manufacturing fees and valuation loss on inventories. Cost of sales for the
year ended December 31, 2000 was (Won) 100,098 million, which represented an
increase of 179.4% over cost of sales of (Won) 35,832 million for the year
ended December 31, 1999. The increase in cost of sales was primarily due to
higher sales volume during the period.
Gross Profit
Gross profit increased to (Won) 43,545 million for the year ended
December 31, 2000 from (Won) 15,526 million for the year ended December 31,
1999. The increase in gross profit was primarily due to higher sales volume.
Despite the relatively large sales volume which increased 179.7%, gross profit
ratio to sales slightly increased to 30.3% in 2000 from 30.2% in 1999 because
the sales in 2000 were comprised of a relatively larger proportion of SMD
placement systems sales. The sales proportion of SMD placement systems
increased to 49.6% in 2000 from 19.2% in 1999. The gross profit ratio of SMD
placement systems, which we began to sell during the second half of 1999, is
lower than for semiconductor test handlers.
Operating Expenses
The principal components of our operating expenses under U.S. GAAP are
selling, general and administrative expenses, sales commissions and research
and development costs. Operating expenses increased by (Won) 28,759 million,
or 107.8%, to (Won) 55,448 million in 2000 from (Won) 26,689 million in 1999.
During March 2000, we sold 16,000 shares of common stock in SoftForum,
our subsidiary, to SoftForum's employees at a price of (Won) 30,000 per share
(par value (Won) 5,000 per share). Then, on March 29, 2000, SoftForum issued
and sold 46,000 additional shares at a price of (Won) 350,000 per share. As a
result of such sale and issuance, we recognized (Won) 5,120 million of
operating expenses as employee benefits.
A (Won) 4,873 increase in commissions, which resulted from an increase in
sales, contributed to an increase in operating expenses. Most of the
commission expenses are sales commissions which were paid to sales and support
agents on export sales of semiconductor test handlers and on domestic sales of
SMD placement systems.
Operating expenses also increased due to a (Won) 1,480 million increase
in depreciation, in connection with additions to our building, furniture and
fixtures in recent years, and a (Won) 1,236 million increase in advertising
expenses, from (Won) 1,449 million in 1999 to (Won) 2,685 million in 2000, in
connection with our international efforts to market our semiconductor test
handlers and components, SMD placement systems and TFT-LCD handlers and
testers in the United States, Asia and Europe. Furthermore, salaries increased
by (Won) 3,189 million as a result of general salary increases and the hiring
of additional white collar employees to focus on general sales and marketing
of our SMD placement systems and international sales of our semiconductor test
handlers.
Operating Loss
As a result of the foregoing factors, operating losses increased to (Won)
11,903 million in 2000 from (Won) 11,163 million in 1999.
Net Income
For the year ended December 31, 2000, we had net income of (Won) 9,290
million under U.S. GAAP, compared to net losses of (Won) 117 million for the
year ended December 31, 1999. In 2000, we experienced a significant U.S. GAAP
increase in other income which primarily resulted from (Won) 33,350 of sales
of stock in our subsidiaries and (Won) 6,548 million of interest income. We
also experienced significant U.S. GAAP increases in other expenses in 2000,
comprised mainly of (Won) 7,229 million of equity in losses of our
subsidiaries and (Won) 13,670 of decreases in tax benefits.
Year ended December 31, 1999 compared with year ended December 31, 1998
Sales
Sales for the year ended December 31, 1999 increased by (Won) 31,739
million, or 161.8%, to (Won) 51,358 million, compared to (Won) 19,619 million
for the year ended December 31, 1998. Sales of handlers and their components
increased by 76%, from (Won) 17,298 million in 1998 to (Won) 30,440 million in
1999, primarily due to higher sales volumes which increased from 70 to 139
units. Sales in 1999 included sales to EEMS Italia of handlers and their
component parts in the amount of (Won) 3,705 million. EEMS Italia was a new
handler customer.
The increase in sales in 1999 also reflected sales of our new SMD
placement systems and TFT-LCD handler and testers, totaling (Won) 9,861
million and (Won) 3,334 million, respectively. In addition, through the
operations of our subsidiary, SoftForum, we began selling our software-based
securities solutions for on-line banking, trading and electronic commerce and,
in 1999, we recognized (Won) 4,240 million of SoftForum sales. Having
completed the initial production ramp-up and marketing efforts of these
products in the first half of 1999, sales of our new mechatronics and
software-based security solutions products were primarily made during the
second half of 1999.
Cost of Sales
The principal components of our cost of sales under U.S. GAAP are raw
material costs, labor costs, depreciation expense, product warranty costs and
loss on valuation of inventories. Our cost of sales in 1999 was (Won) 35,832
million, which represented an increase of 186.7% over cost of sales of (Won)
12,500 million in 1998. The increase in cost of sales was also due to cost of
sales of our new mechatronic products of (Won) 8,598 million and cost of sales
of our security solutions through SoftForum of (Won) 2,691 million.
In addition, the cost of sales in 1999 partially increased due to a (Won)
380 million increase in product warranty costs, from (Won) 308 million in 1998
to (Won) 688 million in 1999. The increase in product warranty costs resulted
from an increase in sales.
Gross Profit
Gross profit increased by (Won) 8,407 million, or 118.1%, to (Won) 15,526
million in 1999 from (Won) 7,119 million in 1998. Gross margin decreased, from
36.3% in 1998 to 30.2% in 1999, as a result of a decrease in the average unit
price for handlers sold in 1999.
Operating Expenses
The principal components of our operating expenses under U.S. GAAP are
selling, general and administrative expenses and research and development
costs. Operating expenses increased by (Won) 8,347 million, or 45.5%, to (Won)
26,689 million in 1999 from (Won) 18,342 million in 1998. The increase was
primarily due to a (Won) 3,869 million increase in research and development
costs, a (Won) 538 million increase in commissions paid to our international
sales and support agents on export sales of test handlers, a (Won) 501 million
increase in depreciation, in connection with additions to our building,
furniture and fixtures in recent years, and a (Won) 1,204 million increase in
advertising expenses in connection with our international efforts to market
our handlers and components, SMD placement systems and TFT-LCD handlers and
testers in the United States, Asia and Europe. Furthermore, salaries increased
by (Won) 735 million as a result of general salary increases and the hiring of
additional white collar employees to focus on general sales and marketing of
our SMD placement systems and international sales of our handlers. In
addition, as a result of our sales efforts on our software-based securities
solutions for on-line banking, trading and electronic commerce through the
operations of our subsidiary, SoftForum, our selling, general and
administrative expenses in 1999 increased by (Won) 730 million.
Operating Loss
As a result of the foregoing factors, operating losses increased to (Won)
11,163 million in 1999 from (Won) 11,223 million in 1998.
Trend analysis of U.S. GAAP warranty cost
Warranty costs based on U.S. GAAP were (Won) 308 million, (Won) 688
million and (Won) 1,856 million for the years ended December 31, 1998, 1999
and 2000, respectively. The relatively large warranty cost under U.S. GAAP for
the year ended December 31, 2000, as compared to other periods, resulted from
an increase in sales volume in 2000.
Taxation
We have benefited from, and may continue to benefit from, certain tax
benefits as set forth below:
o The Korean tax code provides for various special tax credits for
expenses related to the development of technology and human
resources and capital investments. In 1998, 1999 and 2000, we
benefited by (Won) 377 million, (Won) 114 million and (Won) 2,861
million, respectively, from such credits. Such tax credits can be
carried forward for a period of four to seven years from the date of
accrual. As of December 31, 2000, we had (Won) 7,345 million in tax
credit carry forwards expiring between 2004 and the end of 2007. For
U.S. GAAP purposes, a valuation allowance was placed on deferred tax
assets resulting from these credits.
o In 1999, SoftForum, one of our subsidiaries, received a special tax
credit applicable to small- and medium sized venture companies of 96
million. The special tax credit equals 50% of income taxes payable.
SoftForum can carry forward this special tax credit up to 2003.
o Korean customs duty laws provide for the imposition of a general
duty of 8% on certain equipment imported for use in the sector of
the economy in which we operate. As a result, in the domestic market
our semiconductor test handlers, SMD placement systems and TFT-LCD
handlers and testers benefit from a competitive price advantage
compared to similar products imported into Korea. Korean customs
duty laws also provide for the imposition of a special duty of 18%
on medium-speed general gantry type SMD placement systems with test
times slower than 0.1 seconds per chip. The imposition of this
special duty will be applied until December 31, 2001 and it is not
known whether it will be extended or renewed.
B. LIQUIDITY AND CAPITAL RESOURCES
We have traditionally met our working capital and capital requirements
principally from cash provided by operations, while addressing the remainder
of our requirements primarily through the issuance of common stock and short-
and long-term borrowings.
Net cash used by operating activities in 2000 was (Won) 62,537 million as
compared to net cash used by operating activities in 1999 of (Won) 21,020
million and net cash provided by operating activities in 1998 of (Won) 12,375
million. The use of cash was primarily due to the increase in accounts
receivable and inventories which resulted from the market penetration our of
new products, including SMD placement systems and TFT-LCD handlers and
testers. The decrease in 1999 compared to 1998 was due primarily to the
decrease in net income, increase in accounts receivable and inventories which
resulted from the launch of new products.
Cash and cash equivalents, short-term financial instruments and
marketable securities as of December 31, 1998 and 1999 were (Won) 89,640
million (50.3% of total assets) and (Won) 33,229 million (18.3% of total
assets), respectively. As of December 31, 2000, we had cash and cash
equivalents, short-term financial instruments and marketable securities of
(Won) 44,198 million (11.7% of total assets). Short-term financial instruments
are comprised of time deposits and financial instruments readily convertible
into cash within one year. Marketable securities are primarily comprised of
Korean debt unit trusts. The increase for the year ended December 31, 2000 was
primarily due to the issuance of American Depositary Shares("ADSs") which
resulted in cash-inflow of (Won) 128,118 million. The decrease for the year
ended December 31, 1999 was due to the repayment of short-term and long-term
debts of (Won) 14,789 million and the decrease in net income and increase in
expenditures resulting from the commencement of production of SMD placement
systems, including, in particular, the purchase of raw materials, accumulation
of work-in-progress and the purchase of manufacturing equipment for the
expansion to the second factory in Chun An.
Cash provided from financing activities in 1998 was (Won) 50,269 million
and cash used in financing activities in 1999 was (Won) 14,365 million. Cash
provided in financing activities in 2000 was (Won) 147,436 million. In 2000,
cash of (Won) 128,118 million was provided from financing activities as a
result of an issuance of 7,475,000 ADSs representing 14,950,000 shares of
common stock at US$8.04 per share, or US$16.08 per ADS. The decrease in 1999
as compared to 1998 was primarily due to an issuance of common stock in 1998
of (Won) 50,456 million and the net decrease of short-term and long-term debts
of (Won) 14,789 million.
Our capital expenditures for the year ended December 31, 1999 were (Won)
20,976 million, compared with (Won) 15,960 million for the year ended December
31, 1998. For the year ended December 31, 1999, we spent (Won) 20,976 million
in connection with the construction of the extension to our second factory in
Chun An and for the purchase of equipment necessary for the ramp-up in
production of SMD placement systems. For the year ended December 31, 2000, we
spent (Won) 70,545 million in connection with the purchase of an office
building in Seoul and other equipment, most of which relates to such building
in Seoul (i.e. repair and interior construction).
As of December 31, 1999 and 2000, we had no short-term or long-term
indebtedness. As of December 31, 2000, we had two lines of credit with Korea
Exchange Bank in the amounts of (Won) 3,000 million and (Won) 6,250 million. A
certain portion of our land and buildings is pledged as collateral for such
credit lines with Korea Exchange Bank.
Traditionally, the functional currency for our operations has been the
Korean won. We believe that with anticipated increases in sales from overseas,
our liquidity may be affected by exchange rate fluctuations. However, for the
periods referred to above, there have been no material operating trends or
effects on liquidity as a result of fluctuations in currency exchange rates.
We had total outstanding trade accounts receivable of (Won) 65,098
million, (Won) 15,482 million and (Won) 4,396 million as of December 31, 2000,
1999 and 1998, respectively. As a percentage of sales, trade accounts
receivable increased in 2000 primarily due to the sales increase in SMD
placement systems, from (Won) 9,861 million in 1999 to (Won) 71,250 million in
2000. In addition, the credit terms on sales of SMD placement systems were
longer than the credit terms on sales of semiconductor test handler products.
Since we only commenced the sale and marketing of SMD placement systems within
the second half of 1999, we provided our customers longer credit terms to
enhance our ability to penetrate the market.
We had inventories of (Won) 71,864 million, (Won) 30,019 million and
(Won) 6,698 million as of December 31, 2000, 1999 and 1998, respectively. The
significant increase in inventories as of December 31, 2000 was a result of
the advance purchase of raw material inventory for the production of SMD
placement systems and advance maufacturing of SMD placement systems in order
to meet our projected customer demands on a timely basis.
At December 18, 2000, Quad filed under Chapter 11 of the U.S. Bankruptcy
Code. As of December 31, 2000, we had trade accounts receivable totaling (Won)
5,066 million due from Quad and we cannot presently determine the collectable
amount of such receivables. We provided an allowance for the entire amount of
such receivables as of December 31, 2000, which was recorded as a loss in
other expenses.
In the future, we may need to raise additional funds to develop new and
enhanced products, to fund our newer Internet-related businesses and to
respond to competitive pressures. Such funds, if necessary, would be raised
through additional equity or debt financing or credit facilities, although no
assurance can be given that we will be able to obtain such financing or
facilities on satisfactory terms. We also plan for additional sales of stock
in our subsidiaries in the near future as part of our business strategy.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Research and Development
The semiconductor equipment industry is subject to rapid technological
change. We believe that continued and timely development and introduction of
new and enhanced products is essential for us to maintain our competitive
position.
Mirae's research and product development activities focus on developing
new generations of mechatronics equipment and software, and on advancing our
core competencies and current system features relating primarily to accuracy,
reliability and flexibility. Research and development for mechatronics
products is principally undertaken at the Mirae Research Center in Bundang
city, where we concentrate on product development and technology advancements.
At our head office in Chun An city, we employ additional engineers whose
primary responsibility is application engineering, including customization of
our mechatronics products based on specific customer requirements and
investigation of new manufacturing processes and materials. Lycos Korea and
SoftForum independently undertake research and development activities at their
respective facilities in Seoul. As we develop most of our essential technology
in-house, we do not license outside technology and, consequently, are not
obligated to pay royalty fees. As of December 31, 2000, we employed 187
research engineers, 9 of whom held doctorates and 78 of whom held master's
degrees.
Our research engineers share ideas and information with different product
groups. We believe this has contributed to our development of new products and
advancement of existing products. For instance, much of the essential robotics
technology in our SMD placement systems, particularly linear motor
engineering, intelligent control, software and feeder mechanics, is derived
from our expertise in designing our handlers.
Mirae has strategic relationships with Seoul National University and
Korea Advanced Institute of Science and Technology, conducting joint product
development projects and testing activities. In return for the developmental
assistance provided by both of these organizations, Mirae pays the associated
research fees. Patents granted and other intellectual property developed as a
result of these relationships are held solely by Mirae. These collaborative
efforts have resulted in the development of a number of software solutions and
products, including linear motor design software and its control technology
(which we developed with Seoul National University) and PCB assembly support
software for SMD placement systems (which we developed with Korea Advanced
Institute of Science and Technology). Six months are typically required to
produce a prototype from product design to sample engineering. We believe our
product development times may contribute to our ability to maintain our
competitive position in the global marketplace. If product cycles become
shorter due, for instance, to the rapid pace of technological advancements, we
believe that our research and development capabilities may help us maintain
our competitive position in the marketplace.
Historically, we have placed high strategic importance on fostering our
research and development expertise. As a result, our aggregate research and
development expenditures for the four years ended December 31, 1997, 1998,
1999 and 2000 amounted to (Won) 6.6 billion, (Won) 13.1 billion, (Won) 17.0
billion and (Won) 19.9 billion, respectively. Over the next several years, we
plan to direct up to 15% of our sales to research and development
expenditures, though this percentage may vary depending upon our financial
results in any given year.
Intellectual Property
We generally rely upon patent, copyright, trademark and trade secret laws
to protect and maintain our proprietary rights for our technology and
products. We have filed for and/or obtained numerous Korean and international
patents relating to various aspects of our handlers, SMD placement systems and
TFT-LCD handlers and testers, after assessing the patent rights of our
competitors in and outside of Korea. We expect to file additional patent
applications as we deem appropriate to protect our technology and products. As
of December 31, 2000, we held 54 domestic patents with expiration dates
between May 2007 and May 2016, as well as four overseas patents in the United
States, both with expiration dates of February 2016, five patents in Japan,
with expiration dates between February 2016 and September 2018, and two
patents in Taiwan, with an expiration date of March 2016. We have 255 domestic
patents pending and 81 overseas patents pending in the United States, Japan,
Germany, Taiwan, Italy, Singapore and Malaysia. In Korea, we also hold 61
registered utility models, 36 registrations of designs and 30 registered
trademarks. We cannot be sure that our patent applications will result in the
issuance of patents, or that any issued patents will provide commercially
significant protection to our technology.
To help protect our intellectual property rights in particular, and our
engineering and software expertise more generally, many of our agreements with
our employees, consultants and strategic partners contain confidentiality
provisions that prohibit disclosure of our proprietary information.
Generally, litigation, which can be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights,
or to enforce any patent issued to us, in either case, in judicial or
administrative proceedings. Korea's intellectual property legal framework is
similar to that of the United States. However, a broader array of items may be
protected as intellectual property in the United States, and a Korean court
may apply a less strict enforcement regime and award a smaller amount of
damages as compared to a United States court. In addition, an adverse outcome
in any litigation could subject us to significant liabilities to third
parties, require us to obtain licenses from third parties, or require us to
cease product sales and possibly alter the design of the products. Not all
licenses required under third-party patents or proprietary rights may be
available on acceptable terms. In addition, the laws of certain countries may
not protect our intellectual property. We know of no pending, threatened or
actual infringement of any of our intellectual property rights, nor do we
believe that we have infringed on the intellectual property rights of any
third party.
D. TREND INFORMATION
See "Item 5 -- Operating and Financial Review and Prospects -- Operating
Results".
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
As of December 31, 2000, our Board of Directors consisted of nine
Directors. On January 3, 2001, two of our Directors, including the Chairman of
the Board of Directors, resigned. Our current Board of Directors consists of
seven Directors, three of whom are independent (or "outside") non-executive
Directors. The functions and duties conferred on the Board of Directors
include:
o convening shareholders' meetings and providing reports at the
shareholders' meetings;
o implementing the resolutions of the shareholders' meetings;
o determining our business plans and investment plans;
o formulating our annual budget and final accounts;
o formulating our proposals for dividend and bonus distributions and
for the increase or reduction of capital; and
o exercising other powers, functions and duties as conferred by our
Articles of Incorporation and By-laws.
Our Board of Directors has the ultimate responsibility for the management
of our affairs. Under our Articles of Incorporation, our Board must consist of
at least three but not more than ten Directors, and at least one but not more
than two Statutory Auditors. The term of office for Directors is three years
but may be extended to the close of the ordinary general meeting of
shareholders convened in the last fiscal year ending during such term. Our
Articles of Incorporation preclude cumulative voting.
In February 1998, in order to enhance the transparency of the management
of companies listed on the Korea Stock Exchange and to provide increased
investor protection, the Korea Stock Exchange enacted a regulation requiring
all listed companies to appoint the greater of one outside Director or
one-fourth (1/4) or more of the total number of Directors as outside
Directors. If a listed company fails to comply with this requirement, its
common stock may be de-listed from the Korea Stock Exchange. Pursuant to
amendments promulgated on January 21, 2000 to the Korean Securities and
Exchange Act of 1962, as amended ("Korean Securities and Exchange Act"),
certain companies listed on the Korea Stock Exchange to be designated by a
Presidential Decree will be required to appoint one-half (?) or more, but in
any event, no fewer than three, of the total number of Directors as outside
Directors. Because the Presidential Decree has not yet been issued, we do not
know whether we will be required to appoint additional outside Directors.
There are no family relationships among the Directors or senior managers of
Mirae.
Directors
The following table provides certain information about the members of our
Board of Directors as of December 31, 2000 and June 29, 2001.
Year appointed
Name Age As Director Position held
- ---- --------- ----------------- --------------------------------------------------
- ---- --------- ----------------- --------------------------------------------------
Chung Moon Soul 62 1990 President, Chief Executive Officer, Chairman of
the
Board of Directors and Representative Director.
Resigned on January 3, 2001.
Baek Jung Kyu 50 1990 Representative Director and Senior Executive Vice
President of Operations. Resigned on January 3,
2001.
Koh Kwangill 43 1998 Executive Vice President of SMD Placement Systems
Division, Head of Mirae Research Center and
Director.
Chang Dae Hoon 52 1999 Senior Executive Vice President of Sales,
Manufacturing and Raw Materials. Appointed Chief
Executive Officer and
Chairman of the Board
of Directors on January
4, 2001.
Kwon Soon Do 43 1999 Director, Chief Accounting Officer and Chief
Financial Officer.
Kwon Kook Jung 59 2000 Director.
Lee Kwang Hyung 46 1999 Outside Director.
Jung Hyun Kyo 45 1999 Outside Director.
Lee Ho Gun 59 2000 Outside Director.
The principal occupation, employment and education histories of the
members of our Board are as follows:
Chung Moon Soul is the founder of Mirae and served as President since its
inception in 1983 and as Chief Executive Officer, Chairman of the Board of
Directors and Representative Director since its incorporation in 1990. He
received a B.A. in Religious Philosophy from the Wonkwang University. Mr.
Chung resigned on January 3, 2001.
Baek Jung Kyu joined Mirae in 1983 as a Section Chief and was appointed Senior
Executive Vice President of Operations in 1997 and elected Representative
Director in 1999. Before joining Mirae, Mr. Baek worked at Jeongbong Precision
Co. from 1974 to 1980 in various positions including mechanical engineer and
at Kukje Jeon Gwang Sa Co. as an engineer. Mr. Baek graduated from Jeonju
Technical High School. Mr. Baek resigned on January 3, 2001.
Koh Kwangill joined Mirae in 1997 as Executive Vice President and Head of
Mirae Research Center and was elected Director in 1998. Prior to joining
Mirae, Mr. Koh worked at LG Industrial Electronics Co. from 1989 to 1997 in
various positions including research and development manager. Mr. Koh also
worked at Goldstar Co. Research Institution from 1983 to 1985 as a researcher
and at Korea Electronic and Communication Research Institute from 1982 to 1983
as a researcher. Mr. Koh received a B.S. and M.S. in Electrical Engineering
from Seoul National University and a Ph.D. from University of Pittsburgh.
Chang Dae Hoon joined Mirae in 1999 as Senior Executive Vice President and was
appointed as a Director in October 1999. Prior to joining Mirae, Mr. Chang was
General Manager for Teradyne Korea Co. from 1988 to 1996. Mr. Chang also
worked at Korea Semiconductor Co. from 1975 to 1978 in various positions
including as a test engineer and at LG Semicon Co. as a general manager. Mr.
Chang received a B.S. in Electrical Engineering from Korea University. Mr.
Chang is currently also a Director at AIO Microservice Inc., Testech Co. and
Lycos Korea. Mr. Chang was elected as CEO and Chairman of the Board of
Directors of Mirae on January 4, 2001.
Kwon Soon Do joined the Company as Chief Accounting Officer and Chief
Financial Officer in 1999 and was elected as Director in March 2000. He was
employed at Ssangyong Oil and Refinery Co. from 1982 to 1999, during which
time he held various positions, including serving as an internal auditor. Mr.
Kwon received a B.B.A. from Korea University. Mr. Kwon is the Representative
Director of Java Game Co., Ltd., one of Mirae's new subsidiaries.
Kwon Kook Jung was elected as a Director in March 2000. Mr. Kwon Kook Jung has
served as Mirae's auditor since March 1997. Mr. Kwon is a certified public
accountant. Mr. Kwon received his B.B.A. from Chun Buk University.
Lee Kwang Hyung was elected as an outside Director in 1999. He is a professor
at Korea Advanced Institute of Science and Technology. Mr. Lee received a B.S.
in Industrial Engineering from Seoul National University and a Ph.D. from
Institut National Sciences Appliques de Lyon in Computer Science.
Jung Hyun Kyo was elected as an outside Director in October 1999. He is a
professor at Seoul National University. Mr. Jung received a B.E., M.E. and
Ph.D. from Seoul National University in Electrical Engineering.
Lee Ho Gun was elected as an outside Director in March 2000. He is the Chief
Executive Officer of BC Card Corporation. Mr. Lee received his L.L.B. from
Seoul National University and M.S. from Kyunghee University in Tax Management.
Senior Managers
The following table sets forth the age and position held by the senior
managers of Mirae as of the date of this annual report.
Year appointed
Name Age to current position Position held
- ----
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Shin Han Chul 48 1997 Executive Vice President of Sales and Research.
Bae Yoon Hee 49 1997 Managing Director of Production.
Lee Ho Sang 46 1998 Director of Semiconductor Equipment Sales
Division.
Beom Hee Rak 42 1997 Director of R&D.
The principal occupation, employment and education histories of the
senior managers are as follows:
Shin Han Chul joined Mirae in 1997 as Executive Vice President. Before
joining Mirae, Mr. Shin worked at Teradyne Korea Co. from 1985 to 1997 as a
Director. From 1979 to 1985, Mr. Shin served as Section Chief at Samsung
Semiconductor Co.. Mr. Shin received a B.S. in Electrical Engineering from
Hanyang University.
Bae Yoon Hee joined Mirae in 1997 as Managing Director of Production.
Before joining Mirae, Mr. Bae worked at AMK Co. from 1994 to 1997 as a
Director. From 1987 to 1994 Mr. Bae served as a general manager at LTX Korea
Co..
Lee Ho Sang joined Mirae in 1998 as Director of our Semiconductor
Equipment Sales Division. Mr. Lee previously worked at SK Corporation from
1980 to 1998 as a general manager. Mr. Lee received a B.A. in German language
from Seoul National University.
Beom Hee Rak joined Mirae in 1997 as Director of R&D. Prior to joining
Mirae, Mr. Beom worked at LG Electronics Co. R&D Center and at the R&D Center
of LG Industrial Systems Co. as a general manager. Mr. Beom received a Ph.D.
in Mechanics from KAIST (Korea Advanced Institute of Science & Technology ).
B. COMPENSATION
Directors' and Senior Managers' Compensation
We pay our Directors salaries and bonuses as determined by shareholder
resolutions. For the year ended December 31, 2000, the aggregate compensation
(salaries, bonuses and allowances) paid and accrued to all Directors and
senior managers was approximately (Won) 682 million and the aggregate amount
set aside for all Directors and senior managers for pension, retirement and
similar benefits in kind was approximately (Won) 934 million. The foregoing
amounts do not include amounts expended by us for automobiles made available
to our Directors and senior managers, expenses reimbursed to Directors and
senior managers (including business travel expenses and professional and
business association dues and expenses) and other benefits commonly reimbursed
or paid by companies in Korea.
Stock Options Granted to Employees, Directors and Senior Managers
On March 25, 2000, in accordance with the approval of our shareholders,
Mirae granted stock options to our employees, representing 2,052,000 common
shares of the Company, at an exercise price of (Won) 8,018 per share, which
shall become exercisable on March 25, 2003. There was no purchase price for
the stock options and all of the options expire on March 24, 2008. However, a
certain portion of the stock options representing 1,083,000 common shares was
cancelled during the year ended December 31, 2000 and accordingly, the
outstanding stock options as of December 31, 2000 represented 969,000 common
shares. When the length of employment is less than two years after the grant
of stock options, the Company may cancel the stock options awarded. Upon
exercise of stock options, in accordance with the sole discretion of the Board
of Directors, the Company may (i) grant newly issued common stock, (ii) grant
treasury stock or (iii) grant the net difference in exercise price and market
price with either cash or treasury stock.
As described in Note 2(u) of the Notes to Consolidated Financial
Statements, the Company adopted the fair value based method of accounting for
the stock option compensation plan, in which fair value is determined using
the Black-Scholes option-pricing model, without considering a volatility
factor in estimating the value of its stock options, as permitted under Korean
GAAP. Under these accounting policies, compensation cost is measured at (Won)
1,528 million and is recognized over a two year service period. Such
compensation cost for the year ended December 31, 2000 of (Won) 588 million
was recognized.
The pro forma consolidated net income and consolidated net income per
common share for the year ended December 31, 2000 would have been (Won) 3,662
million and (Won) 30, respectively, assuming the Company had considered a
volatility factor in estimating the value of its stock options.
In addition, the weighted average fair value of options granted during
the year ended December 31, 2000 was (Won) 1,577 per share when the volatility
factor was not considered in estimating the value of the stock options, and
(Won) 3,935 per share when the volatility factor was considered. The fair
value of the stock option grant was estimated based on the following
assumptions for the year ended December 31, 2000: dividend yield of 18.5%,
expected volatility of 64.25%, risk-free interest rate of 8.65%, and expected
life of four years.
List of Stock Option Awards to Directors and Senior Managers
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Name Stock Options*
---- -------------
Chang Dae Hoon..................................... 100,000
Koh Kwangill....................................... 100,000
Baek Jung Kyu...................................... 50,000
Shin Han Chul...................................... 50,000
Kwon Soon Do....................................... 50,000
Kwon Kook Jung..................................... 50,000
Bae Yoon Hee....................................... 50,000
Beom Hee Rak....................................... 50,000
Lee Ho Sang........................................ 50,000
Lee Kwang Hyung.................................... 10,000
Jung Hyun Kyo...................................... 10,000
* all stock options are for our common shares.
C. BOARD PRACTICE
Audit and Other Committees
Pursuant to the rules of The Nasdaq National Market, our Board of
Directors established an Audit Committee in November 1999 to review Mirae's
financial reporting, administrative systems and internal control systems and
structure. The Audit Committee also reviews Mirae's policies relating to the
avoidance of conflicts of interest. Our Audit Committee members are Mr. Kwon
Kook Jung, Mr. Lee Kwang Hyung, Mr. Jung Hyun Kyo and Mr. Lee Ho Gun. Pursuant
to an amendment to the Korean Commercial Code, effective as of December 31,
1999, certain companies may establish an Audit Committee in lieu of a
statutory auditor. In addition, pursuant to the January 2000 amendments to the
Korean Securities and Exchange Act, certain companies listed on the Korea
Stock Exchange, which will be designated by Presidential Decree, will be
required to establish an Audit Committee. In each case, the Audit Committee
must consist of three or more members, two-thirds or more being outside
Directors.
Expiration of Current Directorship Terms
The following table sets forth the dates of expiration of the
directorship terms of our current Directors.
Name Date
Kwon Kook Jung.......................... March 25, 2002
Lee Kwang Hyung......................... March 25, 2002
Chang Dae Hoon.......................... October 5, 2002
Jung Hyun Kyo........................... October 5, 2002
Kwon Soon Do............................ March 25, 2003
Lee Ho Gun.............................. March 25, 2003
Koh Kwangill............................ March 25, 2004
D. EMPLOYEES
Employees
Competition for technical personnel in our industry is intense. We
believe that we have been successful in recruiting qualified employees, and
that our future success depends in part on our continued ability to hire,
assimilate and retain qualified personnel.
We maintain a retirement plan, as required by Korean labor law, pursuant
to which an employee terminating his or her employment after one year or more
of service is entitled to receive a lump-sum payment based on length of
service and average monthly compensation over the employee's final three
months. We have an employee stock ownership association through which members
may, with certain exceptions, purchase up to an aggregate of 20% of any shares
of Mirae offered publicly in Korea. As of December 31, 2000, our employees did
not own any shares of our common stock through the employee stock ownership
association.
Our employees do not belong to any labor unions. We have not been subject
to any strikes or other labor disturbances that have interfered with our
operations, and we believe that our relations with our employees are good.
The following table sets forth the number of our employees by department
as of December 31, 2000.
Number of
Employees
Management & Administration....................... 150
Research & Development............................ 187
Manufacturing..................................... 152
Sales & Marketing................................. 32
Total........................................ 521
In 2000, Lycos Korea employed 150 people, of which 60 were employed in
research and development, 40 in sales and marketing, and 50 in management and
administration. SoftForum employed 83 people, of which 40 were employed in
research and development, 12 in sales and marketing, and 31 in management and
administration.
E. SHARE OWNERSHIP
The following table sets forth the ownership of our common shares by our
Directors and senior managers:
Number of shares issued and Percentage
Shareholder outstanding ownership(2)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Chung Moon Soul................... 36,257,062(1) 29.09%
Koh Kwangill*
(1) Includes 34,229,414 (27.46%) held by Chung Moon Soul, 1,453,392 (1.17%)
held by Yang Boon Soon (wife), 229,847 (0.18%) held by Chung Eun Kyoung
(daughter), 114,803 (0.09%) held by Chung Eun Hee (daughter), 114,803
(0.09%) held by Chung Jin Man (son) and 114,803 (0.09%) held by Chung Ki
Won (son) (collectively, the "Chung Family").
(2) Includes the 1,634,000 shares of stock held in treasury by the Company. *
Beneficially owns less than one percent of our common shares.
For information regarding ownship of stock options to acquire our common
shares which are held by our Directors and senior managers, please refer to "
- -- Stock Options Granted to Employees, Directors and Senior Managers".
ITEM 7. Major SHAREHOLDERS and Related Party Transactions
A. MAJOR SHAREHOLDERS
To the best of our knowledge, our only major shareholder (i.e.,
shareholder beneficially owning five percent (5%) or more of our common
shares) is Mr. Chung Moon Soul, our Chairman of the Board and Chief Executive
Officer until January 3, 2001. For a description of Mr. Chung's shareholdings,
please see "Directors, Senior Management and Employees -- Share Ownership".
B. RELATED PARTY TRANSACTIONS
o In May 1999, Mirae agreed to provide Lycos Korea with a loan of up
to (Won) 6.25 billion pursuant to the Joint Venture Agreement
between Mirae and Lycos, Inc. which established Lycos Korea. The
maturity date of this loan is May 28, 2019 and the interest rate is
the overdraft interest rate prescribed by Korean law (11% in 2000).
The full amount of principal and interest due on this loan remained
unpaid as of June 29, 2001.
o Lycos Korea currently leases office space from Mirae. In connection
with such lease, Lycos Korea provided Mirae with a guarantee deposit
of (Won) 4,000 million in November 2000. Prior to providing the
guarantee deposit, Lycos Korea paid monthly rental fees to Mirae
which totaled (Won) 113 million in 2000.
o SoftForm currently leases office space from Mirae. In connection
with such lease, SoftForum provided Mirae with a guarantee deposit
of (Won) 4,500 million in October 2000. Prior to providing the
guarantee deposit, SoftForum paid a monthly rental fee to Mirae of
(Won) 11.7 million totaling (Won) 35 million.
o Mirae Online Co., Ltd. ("MOL") currently leases office space from
Mirae. In connection with such lease, MOL provided Mirae with a
guarantee deposit of (Won) 420 million in June 2000 and, in
addition, continues to pay monthly rental fees of (Won) 9.2 million.
Rental fee revenues received by Mirae from MOL totaled (Won) 64.5
million in 2000.
o Mirae purchased a vehicle from MOL at a price of (Won) 12 million
and Mirae sold personal computers to MOL at a total price of (Won)
99 million during 2000.
ITEM 8. Financial Information
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See page F-1 to F-52 following Item 19.
Legal Proceedings
Our exclusive distributor for SMD placement systems in North America,
South America, Europe, Africa and Israel, Quad Systems Corporation ("Quad"),
is currently subject to proceedings under Chapter 11 of the U.S. Bankruptcy
Code before the Federal Bankruptcy Court for the Eastern District of
Pennsylvania. As a major creditor of Quad, we are an interested party actively
participating in such proceedings.
Dividend Distribution Policy
Our Board of Directors will determine the payment of dividends, if any,
with respect to our shares on a per share basis. Any final dividend for a
financial year shall be subject to shareholders' approval. The Board may
declare interim and special dividends at any time under general authorization
by a shareholders' ordinary resolution. A decision to declare or to pay any
dividends in the future, and the amount of any dividends, will depend on our
results of operations, cash flows, financial condition, the payment by our
subsidiaries of cash dividends to us, future prospects and other factors which
our Directors may determine are important.
B. SIGNIFICANT CHANGES
None.
ITEM 9. THE OFFER AND LISTING
Not Applicable, except for Item 9A and Item 9C.
Shares of our common stock are traded in Korea on the Korea Stock
Exchange. Our American Depositary Shares (ADSs) are listed on The Nasdaq
National Market under the symbol "MRAE".
Each ADS represents two shares of our common stock. ADRs evidencing ADSs
are issued by The Bank of New York, as Depositary.
The table below shows the high and low closing prices (in won and
dollars, as applicable) and the average daily volume of trading activity on
the Korea Stock Exchange for our common stock since January 1, 1998 and on The
Nasdaq National Market for our ADSs since November 17, 1999. With respect to
our common stock, the share prices and average daily trading volume have been
adjusted to reflect a 50-for-one stock split effected on March 2, 1998.
(KSE figures in won, NASDAQ figures in US$)
- ----------------- ------------------------------------- ---------------------------------------
Year KSE NASDAQ
- ----------------- ------------------------------------- ---------------------------------------
- ----------------- --------------------- --------------- ------------------ --------------------
High Low High Low
- ----------------- --------------------- --------------- ------------------ --------------------
- ----------------- --------------------- --------------- ------------------ --------------------
2000 11,300 1,260 23.00 1.063
- ----------------- --------------------- --------------- ------------------ --------------------
- ----------------- --------------------- --------------- ------------------ --------------------
1999 11,300 3,050 16.75 15.00
- ----------------- --------------------- --------------- ------------------ --------------------
- ----------------- --------------------- --------------- ------------------ --------------------
1998 6,940 1,840
- ----------------- --------------------- --------------- ------------------ --------------------
- ----------------- --------------------- --------------- ------------------ --------------------
1997 4,860 1,880
- ----------------- --------------------- --------------- ------------------ --------------------
- ----------------- --------------------- --------------- ------------------ --------------------
1996 5,790 1,484
- ----------------- --------------------- --------------- ------------------ --------------------
- ---------- --------- ------------------------------------- ---------------------------------------
Year Quarter KSE NASDAQ
- ---------- --------- ------------------------------------- ---------------------------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
High Low High Low
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
2000 1 11,300 5,660 23.00 10.00
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
2 6,990 2,755 11.75 5.00
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
3 5,100 2,410 8.75 4.125
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
4 2,860 1,260 5.00 1.063
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
1999 1 5,450 3.050
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
2 6,500 4,360
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
3 8,550 5,060
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
4 11,300 5,760 16.75 15.00
- ---------- --------- ------------------- ----------------- ---------------- ----------------------
- ------------------ ------------------------------------- -----------------------------------------
Month KSE NASDAQ
- ------------------ ------------------------------------- -----------------------------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
High Low High Low
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2001, 5 1,940 1,675 2.80 2.60
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2001,4 1,970 1,590 3.00 2.125
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2001,3 1,920 1,500 2.875 1.750
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2001,2 2,200 1,720 3.391 2.625
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2001,1 2,580 1,270 3.625 1.875
- ------------------ --------------------- --------------- ------------------ ----------------------
- ------------------ --------------------- --------------- ------------------ ----------------------
2000,12 1,990 1,260 3.313 1.063
- ------------------ --------------------- --------------- ------------------ ----------------------
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. ARTICLES OF INCORPORATION AND BY-LAWS
Incorporated by reference to the information in our registration
statement on Form F-1 (Registration No. 333-11390), to which our Articles of
Incorporation and By-laws were filed as exhibits.
C. MATERIAL CONTRACTS
See "Item 7-Major Shareholders and Related Party Transactions-Related
Party Transactions."
D. EXCHANGE CONTROLS
General
Prior to April 1, 1999, investments in Korean securities by non-residents
and issuance of securities outside of Korea by Korean companies were regulated
by the Foreign Exchange Management Act and the Presidential Decrees and
regulations thereunder (collectively the "Foreign Exchange Management Laws").
On April 1, 1999, the Foreign Exchange Management Laws were abolished and the
Foreign Exchange Transaction Act and the Presidential Decree and regulations
thereunder (collectively, the "Foreign Exchange Transaction Laws") were
enacted. Under the Foreign Exchange Transaction Laws, many restrictions on
foreign exchange transactions have been deregulated and many currency and
capital transactions have been liberalized. Although non-residents may invest
in Korean securities only to the extent specially allowed by such laws or
otherwise permitted by the Minister of Finance and Economy, many approval
requirements have become more lenient. However, the Government has instituted
certain measures to curb capital flight and international money laundering
which may result from liberalization of capital transfer. The Financial
Supervisory Commission ("FSC") also has adopted, pursuant to its authority
under the Korean Securities and Exchange Act, regulations that restrict
investment by foreigners (as defined therein) in Korean securities and
regulate issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, if the Government deems that
certain emergency circumstances, including, but not limited to, sudden
fluctuations in interest rates or exchange rates, extreme difficulty in
stabilizing the balance of payment or a substantial disturbance in the Korean
financial and capital markets, are likely to occur, it may impose any
necessary restrictions such as requiring foreign investors to obtain prior
approval from the Minister of Finance and Economy ("MOFE") for the acquisition
of Korean securities or for the repatriation of interest, dividends or sales
proceeds arising from Korean securities or from disposition of such
securities.
Government Review of Issuance of ADRs
In order for the Company to offer for purchase common stock held in
treasury in the form of ADSs or issue common stock represented by the ADSs in
an amount exceeding $30 million, the Company is required to file a prior
report of such offer or issuance with the MOFE. No further Korean government
approval is necessary for the initial offering and issuance of the ADSs.
In order for a depositary to receive any existing common stock from
holders of such common stock (other than from the Company) for the purpose of
issuance of depositary receipts representing such common stock, the Depositary
would be required to obtain the Company's consent. The Company has agreed that
it will consent to any deposit if the deposit will not violate applicable law.
No assurance can be given that the Company will always grant such consent.
Therefore, a holder of ADRs who surrenders ADRs and withdraws common stock may
not be permitted subsequently to deposit such common stock and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Under the Korean Securities and Exchange Act, any person whose direct or
beneficial ownership of common stock (whether in the form of common stock or
ADSs), certificates representing the right to subscribe for common stock and
certain equity-related debt securities such as convertible bonds, bonds with
warrants and certain exchangeable bonds (collectively, the "Equity
Securities"), together with any Equity Securities beneficially owned by
certain related persons or by any person acting in concert with such person,
accounts for 5% or more of the aggregate of the total issued shares of common
stock and those other Equity Securities issued by the Company, is required to
report the status of such holdings to the FSC and the Korea Stock Exchange
within five business days after reaching the 5% ownership interest. Moreover,
any change in the ownership interest subsequent to such report which equals or
exceeds 1% of the aggregate of the total issued shares of common stock and
those other Equity Securities issued by the Company is required to be reported
to the FSC and the Korea Stock Exchange within five business days from the
date of such change.
Violation of such reporting requirements may subject a person to criminal
sanctions such as fines or imprisonment and may result in a loss of voting
rights with respect to the ownership of Equity Securities exceeding 5%.
Furthermore, the FSC may issue an order to dispose of such non-reported Equity
Securities.
Restrictions Applicable to ADSs
No Korean governmental approval is necessary for the sale and purchase of
the ADSs in the secondary market outside Korea or for the withdrawal of common
stock underlying the ADSs and the delivery inside Korea of such common stock
in connection with such withdrawal, provided that a foreigner who intends to
acquire such common stock must obtain an Investment Registration Card from the
Financial Supervisory Service as described below. The acquisition of such
common stock by a foreigner must be reported by the foreigner or his standing
proxy in Korea immediately to the Governor of the Financial Supervisory
Service.
Persons who have acquired common stock as a result of the withdrawal of
common stock underlying the ADSs may exercise all shareholder rights without
any further governmental approval.
Restrictions Applicable to Common Stock
As a result of amendments to the Foreign Exchange Transaction Laws and
FSC regulations (together, the "FSC Rules") adopted in connection with the
stock market opening from January 1992 and thereafter, foreigners are
permitted to invest, with certain exceptions and subject to certain procedural
requirements, in all shares of Korean companies unless prohibited by specific
laws. Foreign investors may trade shares listed on the Korea Stock Exchange or
registered on the Korea Securities Dealers Association Automated Quotation
system (the "KOSDAQ") only through the Korea Stock Exchange or through the
KOSDAQ except in certain limited circumstances, including odd-lot trading of
shares, acquisition of shares ("Converted Shares") by exercise of warrant,
conversion right under convertible bonds or withdrawal right under depositary
receipts issued outside of Korea by a Korean company, acquisition of shares as
a result of exercising allocable conversion rights attached to certain
eligible domestic convertible bonds issued by listed companies, acquisition of
shares as a result of inheritance, donation, bequest or exercise of
shareholders' rights (including preemptive rights or rights to participate in
free distributions and receive dividends). Odd-lot trading of shares outside
the Korea Stock Exchange or the KOSDAQ must involve a licensed securities
company in Korea as the other party. Foreigners are prohibited from engaging
in margin transactions with respect to shares which are subject to a foreign
ownership limit.
The FSC Rules require a foreign investor who wishes to invest in shares
on the Korea Stock Exchange or the KOSDAQ (including Converted Shares) to
register its identity with the Financial Supervisory Service prior to making
any such investment; provided, however, that such registration requirement
does not apply to foreign investors who acquire Converted Shares with the
intention of selling such Converted Shares within three months from the date
of acquisition thereof. Upon registration, the Financial Supervisory Service
will issue to the foreign investor an Investment Registration Card which must
be presented each time the foreign investor opens a brokerage account with a
securities company. Foreigners eligible to obtain an Investment Registration
Card include foreign nationals (who are individuals with residence abroad for
six months or more), foreign governments, foreign municipal authorities,
foreign public institutions, international financial institutions or similar
international organizations, corporations incorporated under foreign laws and
any person in any additional category designated by the decree of the MOFE.
All Korean branches of a foreign corporation as a group are treated as a
separate foreigner from the head office of the foreign corporation. However, a
foreign corporation or a depositary issuing depositary receipts may obtain one
or more Investment Registration Cards in its name in certain circumstances as
described in the relevant regulations.
Upon a foreign investor's purchase of shares through the Korea Stock
Exchange or the KOSDAQ, no separate report by the investor is required because
the Investment Registration Card system is designed to control and oversee
foreign investment through a computer system. However, a foreign investor's
acquisition or sale of shares outside the Korea Stock Exchange or the KOSDAQ
(as discussed above) must be reported by the foreign investor or his standing
proxy to the Governor of the Financial Supervisory Service at the time of each
such acquisition or sale; provided, however, that a foreign investor must
ensure that any acquisition or sale by it of shares outside the Korea Stock
Exchange or the KOSDAQ, in the case of trades in connection with a tender
offer, odd-lot trading of shares, or trades in which the counterpart is a
securities company, is reported to the Governor of the Financial Supervisory
Service by the securities company engaged to facilitate such transaction. A
foreign investor must appoint one or more standing proxies from among the
Korea Securities Depository, foreign exchange banks (including domestic
branches of foreign banks), securities companies (including domestic branches
of foreign securities companies), investment management companies and
internationally recognized foreign custodians to exercise shareholders'
rights, place an order to sell or purchase shares or perform any matters
related to the foregoing activities if the foreign investor does not perform
these activities himself. However, a foreign investor may be exempted from
complying with these standing proxy rules with the approval of the Governor of
the Financial Supervisory Service in cases deemed inevitable by reason of
conflict between laws of Korea and the home country of such foreign investor.
Certificates evidencing shares of Korean companies must be kept in
custody with an eligible custodian in Korea. Only foreign exchange banks
(including domestic branches of foreign banks), securities companies
(including domestic branches of foreign securities companies), the Korea
Securities Depository, investment management companies and internationally
recognized foreign custodians are eligible to act as a custodian of shares for
a foreign investor. A foreign investor must ensure that his custodian deposits
such shares with the Korea Securities Depository. However, a foreign investor
may be exempted from complying with this deposit requirement with the approval
of the Governor of the Financial Supervisory Service in circumstances where
such compliance is made impracticable, including cases where such compliance
would contravene the laws of the home country of such foreign investor.
Under the FSC Rules, with certain exceptions, all foreign investors may
acquire shares of a Korean company without being subject to any foreign
investment ceiling. As one such exception, certain designated public
corporations are subject to a 40% ceiling on acquisitions of shares by
foreigners in the aggregate. Of the Korean companies listed on the Korea Stock
Exchange, Korea Electric Power Corporation has been so designated. The FSC may
increase or decrease these percentages if it deems necessary for the public
interest, protection of investors or industrial policy. There currently is no
foreign investment ceiling that applies to our shares. Furthermore, an
investment by a foreign investor of not less than 10% of the outstanding
shares of a Korean company is defined as a direct foreign investment under the
Foreign Investment Promotion Law, which is, in general, subject to report to
the Ministry of Commerce, Industry and Energy or a foreign exchange bank.
Under the Foreign Exchange Transaction Laws, a foreign investor who
intends to acquire shares must open a foreign currency account and a won
account exclusively for stock investments ("Foreign Currency Account" and "Won
Account", respectively). No approval is required for remittance into Korea and
deposit of foreign currency funds in the Foreign Currency Account. Foreign
currency funds may be transferred from the Foreign Currency Account at the
time required to place a deposit for, or settle the purchase price of, a stock
purchase transaction to a Won Account opened at a securities company. Funds in
the Foreign Currency Account may be remitted abroad without any governmental
approval.
Dividends on common stock are paid in won. No governmental approval is
required for foreign investors to receive dividends on, or the won proceeds of
the sale of, any such shares to be paid, received and retained in Korea.
Dividends paid on, and the won proceeds of the sale of, any such shares held
by a non-resident of Korea must be deposited either in a Won account with the
investor's securities company or his Won Account. Funds in the investor's Won
Account may be transferred to his Foreign Currency Account or withdrawn for
local living expenses up to certain limitations. Funds in the Won Account may
also be used for future investment in shares or for payment of the
subscription price of new shares obtained through the exercise of preemptive
rights.
In 1995, certain designated securities companies were allowed to open
Foreign Currency Accounts and Won Accounts with foreign exchange banks
exclusively for accommodating foreign investors' stock investments in Korea.
Through such accounts, these designated securities companies may enter into
foreign exchange transactions on a limited basis, such as conversion of
foreign currency funds and won funds, either as a counterpart to or on behalf
of foreign investors, without such investors having to open their own accounts
with foreign exchange banks.
The Korean Securities and Exchange Act was amended several times from
January 1997 through March 2001 to internationalize the systems for issuing
and distributing securities and the systems for mergers and acquisitions of
businesses, to enhance the autonomy of the securities industry through
deregulation and to strengthen the independence of auditors and the protection
of minority shareholders. The amendments made the tender offer requirements
more specific by requiring a tender offer where the purchaser and the persons
who have a special relationship with the purchaser will hold 5% or more of the
total issued and outstanding shares concerned as a result of the purchase of
the shares outside the Korea Stock Exchange or the KOSDAQ from a certain
number of persons, enhanced the rights of minority shareholders, repealed
certain limitations for the acquisition of its own shares by a listed company,
permitted stock splits by companies of shares listed on the Korea Stock
Exchange or registered with the KOSDAQ with a par value of not less than (Won)
100 and permitted the payment of interim dividends by companies listed on the
Korea Stock Exchange or registered with the KOSDAQ if provided for in their
articles of incorporation. In addition, to strengthen the protection of
shareholders, the amendments also include the requirement that companies
listed on the Korea Stock Exchange and companies exceeding a certain size that
are registered with the KOSDAQ appoint a certain minimum number of outside
directors to their boards, and companies listed on the Korea Stock Exchange or
registered with the KOSDAQ that exceed a certain size are required to maintain
an audit committee.
E. TAXATION
Korean Taxation
The following is a summary of the principal Korean tax consequences to owners
of ADSs that are non-resident individuals or non-Korean corporations without a
permanent establishment in Korea to which the relevant income is attributable
("non-resident holders"). The statements regarding Korean tax laws set forth
below are based on the laws in force and as interpreted by the Korean taxation
authorities as of the date hereof. This summary is not exhaustive of all
possible tax considerations which may apply to a particular investor and
prospective investors are advised to satisfy themselves as to the overall tax
consequences of the acquisition, ownership and disposition of common stock,
including specifically the tax consequences under Korean law, the laws of the
jurisdiction of which they are resident, and any tax treaty between Korea and
their country of residence, by consulting their own tax advisors.
Taxation of Dividends
For the purpose of Korean taxation of distributions made on common stock
represented by ADSs, a non-resident holder will be treated as the owner of the
common stock represented by such ADS. Dividends paid (whether in cash or in
shares) to a non-resident holder are generally subject to withholding tax at a
rate of 27.5% (which includes a 10% local tax) or such lower rate as is
applicable under a treaty between Korea and such non-resident holder's country
of tax residence. Such tax is required to be deducted from such dividends and
only the net amount is paid to the non-resident holder of the common stock. In
order to obtain a reduced rate of withholding tax pursuant to an applicable
tax treaty, the non-resident holder must submit to the Company, prior to the
dividend payment date, such evidence of tax residence as may be required by
the Korean tax authorities. Evidence of tax residence may be submitted to the
Company through the Depositary. Excess taxes withheld are not automatically
recoverable even if the non-resident holder subsequently produces evidence
that it was entitled to have taxes withheld at a lower rate.
Under the income tax treaty between the United States and Korea (the
"U.S.-Korea Tax Treaty"), the maximum rate of withholding on dividends paid to
U.S. residents eligible for treaty benefits generally is 15% (10% if the
recipient of the dividends has owned at least 10% of the outstanding shares of
the voting stock of the Company and certain other conditions are satisfied)
which does not include withholding of local tax. If local withholding tax is
included, the maximum rate of withholding is generally 16.5%. A beneficial
owner of ADSs or common stock generally will be entitled to benefits under the
U.S.-Korea Tax Treaty if it (i) is an individual U.S. resident, a U.S.
corporation, or a partnership, estate or trust to the extent its income is
subject to taxation in the United States as the income of a U.S. resident;
(ii) is not also a resident of Korea for purposes of the U.S.-Korea Tax
Treaty; (iii) is not subject to an anti-treaty shopping article that applies
in limited circumstances; and (iv) does not hold ADSs or common stock in
connection with the conduct of business in Korea through a permanent
establishment or the performance of independent personal services in Korea
through a fixed base.
Distributions of free shares representing a transfer of certain capital
reserves or asset revaluation reserves into paid-in capital may be subject to
Korean tax.
Taxation of Capital Gains
In the absence of any applicable treaty, a non-resident holder will
generally be subject to Korean taxation on capital gains realized on a sale of
ADSs or of common stock acquired as a result of a withdrawal of common stock
underlying ADSs. However, capital gains earned by a non-resident without a
permanent establishment in Korea from the sale of shares listed on the Korea
Stock Exchange or registered with the KOSDAQ of a Korean company (such as the
common stock or ADSs) may be exempt from Korean withholding tax if the
non-resident seller, together with certain of its related parties, did not own
or has not owned 25% or more of the total issued and outstanding shares of the
company at any time during the year of the transfer date and during the five
years before the year within which the transfer occurs. Under the Special Tax
Treatment Control Law, capital gains earned by a non-resident holder (whether
or not they have a permanent establishment in Korea) from the transfer outside
Korea of securities issued outside Korea by a Korean company which are
denominated in a foreign currency or satisfy certain criteria established by
the Ministry of Finance and Economy are exempt from Korean taxation. The
Korean tax authorities have issued a tax ruling confirming that depositary
receipts (which would include the ADSs) are deemed to be securities issued
outside Korea by the issuer of the underlying stock. Further, capital gains
earned by a non-resident from the transfer of stocks issued by a Korean
company are also exempt from Korean taxation if sold through the NASDAQ.
Under the U.S.-Korea Tax Treaty, capital gains realized by holders who
are residents of the United States eligible for treaty benefits upon the
disposition of common stock or ADSs generally will not be subject to Korean
taxation, so long as the common stock or ADSs are not effectively connected
with a permanent establishment or, in the case of an individual holder, a
fixed base maintained by the holder in Korea and the holder is not present in
Korea for 183 days or more during the taxation year.
Capital gains with respect to the sale of ADSs, or common stock which
were acquired by a non-resident holder as a result of a withdrawal, would be
calculated based on the acquisition cost to such holder of the ADSs
representing such common stock, although there are no specific Korean tax
provisions or rulings on this issue. In the absence of the application of a
tax treaty which exempts or reduces the rate of tax on capital gains, capital
gains which are subject to Korean tax will be subject to tax at the lesser of
(i) 11% of the gross realization proceeds or (ii) (subject to the production
of satisfactory evidence of the acquisition cost of the ADSs) 27.5% of the
gains made (the excess of the gross realization proceeds over the non-resident
holder's acquisition cost for the ADRs (including any transaction charges,
commissions, fees or taxes paid at the time of the acquisition or
disposition)).
The purchaser or, in the case of the sale of common stock on the Korea
Stock Exchange or through a licensed securities company in Korea, the licensed
securities company, is required under Korean law to withhold the applicable
amount of Korean tax from the sales price in an amount equal to 11% of the
gross realization proceeds and to make payment thereof to the relevant Korean
tax authority, unless the seller establishes its entitlement to an exemption
or lower rate of taxation under an applicable tax treaty or produces
satisfactory evidence of its acquisition cost for the ADSs. In order to obtain
the benefit of an exemption or reduced rate of tax pursuant to a tax treaty, a
non-resident holder must submit to the purchaser or the securities company (or
through the Depositary), as applicable, prior to or at the time of payment,
such evidence of tax residence of the seller as the Korean tax authorities may
require in support of its claim for treaty protection. Excess taxes withheld
are not automatically recoverable even if the non-resident holder subsequently
produces evidence that it was entitled to have taxes withheld at the lower
rate.
Inheritance Tax and Gift Tax
Korean inheritance and gift taxes are imposed upon (a) all assets
(wherever located) of the deceased if at the time of his death he was
domiciled in Korea and (b) all property located in Korea which passes on at
the time of his death (irrespective of the domicile of the deceased).
It is unclear whether ADSs will be deemed to be located in Korea for
Korean inheritance and gift tax purposes. However, the Korean tax authorities
have interpreted that shares and bonds issued by Korean corporations,
wheresoever held, are deemed for inheritance and gift tax purposes to be
located in Korea. According to such interpretation, American Depositary
Shares, including the ADSs, which are held outside of Korea and represent
shares issued by Korean corporations, shall be subject to Korean inheritance
or gift tax at the rate of 10% to 50%, provided that the value of such ADSs is
greater than amounts specified under Korean law.
Securities Transaction Tax
No securities transaction tax is payable on transfers of ADSs. The
transfer of common stock generally will be subject to a securities transaction
tax at the rate of 0.15% when traded on the Korea Stock Exchange, and 0.3%
when traded on the KOSDAQ. In addition, an agriculture and fishery special tax
shall apply at the rate of 0.15% of the sale price of the common stock when
traded on the Korea Stock Exchange. The transfer of common stock off the Korea
Stock Exchange and the KOSDAQ will, however, be subject to a securities
transaction tax at the rate of 0.5% and such transfer will not be subject to
an agriculture and fishery special tax.
Tax Treaties
Each non-resident holder should consult his tax advisor regarding whether
he is entitled to the benefit of a tax treaty with Korea. It is the
responsibility of the party claiming the benefits of a tax treaty in respect
of dividend payments or capital gains to submit to the Company through the
Depositary, the purchaser or the securities company, as applicable, a
certificate as to his residence. In the absence of sufficient proof, the
Company, the purchaser or the securities company, as applicable, must withhold
tax at the normal rates.
At present, Korea has not entered into any tax treaties regarding inheritance
or gift tax.
United States Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders (as
defined below) who purchase common shares or ADSs of Mirae. This summary is
based upon existing United States federal income tax law, which is subject to
change, possibly with retroactive effect. This summary does not discuss all
aspects of United States federal income taxation which may be important to
particular investors in light of their individual investment circumstances,
such as investors subject to special tax rules, including: financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
and, except as described below, non-U.S. Holders, or to persons that will hold
common shares or ADSs as part of a straddle, hedge, conversion, or
constructive sale transaction for United States federal income tax purposes or
that have a functional currency other than the United States dollar, all of
whom may be subject to tax rules that differ significantly from those
summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold their common shares or ADSs as "capital assets" (generally, property held
for investment) under the United States Internal Revenue Code. Each
prospective investor is urged to consult its tax advisor regarding the United
States federal, state, local, and foreign income and other tax considerations
of the purchase, ownership, and disposition of common shares or ADSs.
For purposes of this summary, a U.S. Holder is a beneficial owner of
common shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation, partnership or other entity created in or organized
under the laws of, the United States or any State or political
subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated as a
United States person, for United States federal income tax purposes,
on the previous day and elected to continue to be so treated.
A beneficial owner of the common shares or ADSs that is not a U.S.
Holder is referred to herein as a "Non-U.S. Holder."
A foreign corporation will be treated as a "passive foreign investment
company" (a "PFIC"), for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50%
or more of its assets are passive. Mirae presently believes that it is not a
PFIC and does not anticipate becoming a PFIC. This is, however, a factual
determination made on an annual basis and is subject to change. The following
discussion assumes that Mirae will not be subject to treatment as a PFIC for
United States federal income tax purposes.
U.S. Holders
For United States federal income tax purposes, a US Holder of an ADS will
be treated as the owner of the proportionate interest of the common shares
held by the depositary that is represented by an ADS and evidenced by such
ADS. Accordingly, no gain or loss will be recognized upon the exchange of an
ADS for the holder's proportionate interest in the common shares. A U.S.
Holder's tax basis in the withdrawn common shares will be the same as the tax
basis in the ADS surrendered therefor, and the holding period in the withdrawn
common shares will include the period during which the holder held the
surrendered ADS.
Dividends
Any cash distributions paid by Mirae out of earnings and profits, as
determined under United States federal income tax principles, will be subject
to tax as ordinary dividend income and will be includible in the gross income
of a U.S. Holder upon receipt. Cash distributions paid by Mirae in excess of
its earnings and profits will be treated as a tax-free return of capital to
the extent of the U.S. Holder's adjusted tax basis in its shares or ADSs, and
after that as gain from the sale or exchange of a capital asset. Dividends
paid in won will be includible in income in a United States dollar amount
based on the United States dollar - won exchange rate prevailing at the time
of receipt of such dividends by the depositary, in the case of ADSs, or by the
U.S. Holder, in the case of common shares held directly by such U.S. Holder.
Dividends received on common shares or ADSs will not be eligible for the
dividends received deduction allowed to corporations.
Dividends received on common shares or ADSs will be treated, for United
States federal income tax purposes, as foreign source income. A U.S. Holder
may be eligible, subject to a number of complex limitations, to claim a
foreign tax credit in respect of any foreign withholding taxes imposed on
dividends received on common shares or ADSs. U.S. Holders who do not elect to
claim a foreign tax credit for foreign income tax withheld may instead claim a
deduction, for United States federal income tax purposes, in respect of such
withholdings, but only for a year in which the U.S. Holder elects to do so for
all creditable foreign income taxes. In certain circumstances, a U.S. Holder
may not claim a foreign tax credit (and instead may claim a deduction) for
foreign taxes imposed on the payment of a dividend if the U.S. Holder:
o has not held the common shares or ADSs for at least 16 days in the
30-day period beginning 15 days before the ex-dividend date, during
which it is not protected from risk of loss;
o is obligated to make payments related to the dividends; or
o subject to the promulgation of future United States Treasury
regulations that are anticipated to be retroactively applied, holds
the common shares or ADSs in an arrangement in which the expected
economic profit of the U.S. Holder is insubstantial compared to the
value of the foreign tax credit expected to be obtained as a result
of the arrangement.
In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
ADSs. Accordingly, the analysis of the creditability of foreign withholding
taxes could be affected by future actions that may be taken by the United
States Treasury.
A distribution of additional shares of Mirae's stock to U.S. Holders with
respect to their common shares or ADSs that is pro rata to all Mirae's
shareholders may not be subject to United States federal income tax. The tax
basis of such additional shares will be determined by allocating the U.S.
Holders' adjusted tax basis in the common shares or ADSs between the common
shares or ADSs and the additional shares, based on their relative fair market
values on the date of distribution.
Sale or Other Disposition of common shares or ADSs
A U.S. Holder will recognize capital gain or loss upon the sale or other
disposition of common shares or ADSs in an amount equal to the difference
between the amount realized upon the disposition and the U.S. Holder's
adjusted tax basis in such common shares or ADSs, as each is determined in
U.S. dollars. Any capital gain or loss will be long-term if the common shares
or ADSs have been held for more than one year and will generally be United
States source gain or loss. The claim of a deduction in respect of a capital
loss, for United States federal income tax purposes, may be subject to
limitations.
PFIC Considerations
If Mirae were to be classified as a PFIC in any taxable year, a U.S.
Holder would be subject to special rules generally intended to reduce or
eliminate any benefits from the deferral of United States federal income tax
that a U.S. Holder could derive from investing in a foreign company that does
not distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the common shares or ADSs may be subject to tax at ordinary income
tax rates on (i) any gain recognized on the sale of the common shares or ADSs
and (ii) any "excess distribution" paid on the common shares or ADSs
(generally, a distribution in excess of 125% of the average annual
distributions paid by Mirae in the three preceding taxable years). In
addition, a U.S. Holder may be subject to an interest charge on such gain or
excess distribution.
Non-U.S. Holders
An investment in common shares or ADSs by a Non-U.S. Holder will not give
rise to any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of common
shares or ADSs by such person is treated as effectively connected
with the conduct of a trade or business by such person in the United
States as determined under United States federal income tax law; or
o in the case of gains recognized on a sale of common shares or ADSs
by an individual, such individual is present in the United States
for 183 days or more during the relevant year and certain other
conditions are met.
In order to avoid back-up withholding on dividend payments made in the
United States, a Non-U.S. Holder of the common shares or ADSs may be required
to complete, and provide the payor with, an Internal Revenue Service Form W-8,
or other documentary evidence, certifying that such holder is an exempt
foreign person.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We filed with the Securities and Exchange Commission in Washington, D.C.
a Registration Statement on Form F-1 (Registration No. 333-11390) under the
Securities Act in connection with the ADSs offered in Mirae's global offering.
The Registration Statement contains exhibits and schedules. Any statement in
this annual report about any of our contracts or other documents is not
necessarily complete. If the contract or document is filed as an exhibit to
the Registration Statement, the contract or document is deemed to modify the
description contained in this annual report. You must review the exhibits
themselves for a complete description of the contract or documents.
You may inspect and copy our registration statements, including their
exhibits and schedules, and the reports and other information we file with the
Securities and Exchange Commission in accordance with the Exchange Act at the
public reference facilities maintained by the Securities and Exchange
Commission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington,
D.C. 20549 and at the regional offices of the Securities and Exchange
Commission located at 7 World Trade Center, 13th Floor, New York, N.Y. 10048
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may also inspect the registration statements, including their
exhibits and schedules, at the office of the New York Stock Exchange, Wall
Street, New York, New York 10005. Copies of such material may also be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may
obtain information regarding the Washington D.C. Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330 or by
contacting the Securities and Exchange Commission over the internet at its
website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Other than MiRae America, Inc., a California corporation, Mirae has a
shareholding interest in 17 subsidiaries, all of which are Korean
corporations. Set forth below is a list of such subsidiaries and Mirae's
percentage of shareholding interest in them.
Name Percentage of
Ownership
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
MR Tech Town Co................................... 100.00
Mirae Online, Co., Ltd............................ 64.78
Java Game Co., Ltd................................ 59.98
SoftForum Corporation............................. 55.47
MiRae America, Inc................................ 50.00
Korea Internet.com Co., Ltd...................... 47.94
Lycos Korea, Inc.................................. 43.25
Korea Internet Holdings, Inc...................... 20.00
Nethru, Inc....................................... 19.73
Nara Vision Co.................................... 17.40
Infinity Telecom Co., Ltd......................... 16.70
Intro System Co., Ltd............................. 15.16
Onnet Co., Ltd.................................... 14.70
Neobill Co., Ltd.................................. 15.7
Stream Box Inc.................................... 5.2
Telefree Co., Ltd. ............................... 2.57
CyberBank Co..................................... 1.36
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates and foreign
currency exchange rates which may adversely affect our results of operations
and financial condition. We seek to minimize the risks from these interest
rate and foreign currency exchange rate fluctuations through our regular
operating and financing activities. We do not use financial instruments for
trading or other speculative purposes and have not used derivative instruments
to manage these risks.
Equity Risk
As of December 31, 2000, we did not hold any investment assets such as
equity unit trusts or mutual funds which are comprised of equity securities.
Interest Rate Risk
As of December 31, 2000, we held interest-bearing Korean debt unit trusts
comprised of Government, public and corporate bonds with a fair market value
of approximately (Won) 6,329 million. The unit trusts bear interest at
variable rates and generally have maturities of less than one year. The
weighted average yield rate of the unit trusts was 6.55% for the year ended
December 31, 2000. These unit trusts are not traded over any organized
exchange in Korea, but are traded over-the-counter primarily by securities
firms, investment trust companies and investment management companies.
Fluctuations in the net asset value of these investments will fluctuate with
changes in the value of the underlying securities.
Foreign Currency Exchange Rate Risk
As a consequence of the growing emphasis on our overseas businesses, our
operations and reported financial results and cash flows are exposed to the
risks associated with fluctuations in the exchange rate between the Korean won
and other major world currencies. In 1998, 1999 and 2000, sales outside of
Korea comprised 28.6%, 35.2% and 40.4%, respectively, of our total sales. As
currency exchange rates change, translation of the statements of operations of
our international sales into won affects year-on-year comparability.
Historically, we have not hedged currency translation risks.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II.......
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
A. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS
None.
B. USE OF PROCEEDS
The following use of proceeds information relates to the registration
statement on Form F-1 (Registration No. 333-11370) filed by us in
connection with the global offering of our ADSs. The details of the
global offering are as follows:
o Title of Securities: American Depositary Shares, each representing
two common shares, par value 100 (Won) per share, in our share
capital.
o Effective Date: The effective date of the registration statement on
Form F-1 (Registration No. 0-30376) registering 14,950,000 shares
underlying the ADSs was February 16, 2000.
o Closing Date: The closing date for the global offering was February
22, 2000.
o Managing underwriters: The managing underwriters for the global
offering were UBS AG acting through its division Warburg Dillon Read
and Dongwon Securities Co., Ltd.
o Aggregate Amount Registered: The aggregate amount registered was
7,475,000 ADSs.
o Amount Sold: 7,475,000 ADSs (representing 14,950,000 shares of our
common stock).
o Aggregate Offering Price of Amount Sold: The aggregate offering
price of amount sold was US$ 120,198,000.
o Aggregate Underwriting Discount: The aggregate underwriting discount
and commissions paid to the underwriters by us were approximately
US$ 5,226,000.
o Other Offering Expenses: The aggregate offering expenses other than
underwriting discount and commissions paid by us were approximately
US$ 1,133,900.
o Aggregate Net Offering Proceeds to Us: Aggregate net offering
proceeds to us from the sale of our common shares registered
pursuant to the registration statement were approximately US$
113,838,100.
As of December 31, 2000, we have used approximately US$70 million
from the net offering proceeds for operational, sales and marketing
expenses, US$16 million for research and development of new products and
US$12 million for the development of Internet-related businesses. We plan to
use the balance in 2001 to fund further research and development of new
products.
ITEM 15. [reserved]
ITEM 16. [Reserved]
PART III......
ITEM 17. FINANCIAL STATEMENTS
Not applicable
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed as
part of this annual report.
ITEM 19. EXHIBITS
(a) The following consolidated financial statements, together with the report
of Ahn Kwon & Co., a member firm of Deloitte Touche Tohmatsu, on the
annual financial statements referred to below, are filed as part of this
annual report:
Page
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Index to Consolidated Financial Statements..................................................... F-1
Independent Auditors' Report................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998, 1999 and 2000............................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and
2000........................................................................................ F-6
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000............................................................ F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and
2000........................................................................................ F-8
Notes to the Consolidated Financial Statements................................................. F-10
(b) Documents filed as exhibits to this annual report:
1.1 Articles of Incorporation of Mirae Corporation, incorporated by
reference to Exhibit 3.1 to Amendment No.1 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission on February 4, 2000 (File No. 333-11390).
1.2 By-laws of Mirae Corporation, incorporated by reference to Exhibit
3.2 to Amendment No.1 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission on February 4,
2000 (File No. 333-11390).
Index to Consolidated Financial Statements
Page
Independent auditors' report........................................... F-2
Consolidated balance sheets as of December 31, 1998,
1999 and 2000....................................................... F-4
Consolidated statements of operations for the years ended
December 31, 1998, 1999 and 2000.................................... F-6
Consolidated statements of shareholders' equity
for the years ended December 31,
1998, 1999 and 2000................................................ F-7
Consolidated statements of cash flows for the years
ended December 31, 1998, 1999 and 2000.............................. F-8
Notes to Consolidated Financial Statements............................. F-10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Mirae Corporation
We have audited the accompanying consolidated balance sheets of Mirae
Corporation (the "Company") and its subsidiaries as of December 31, 1998,
1999 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended (all expressed
in Korean won). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in Korea and the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Mirae Corporation and
its subsidiaries at December 31, 1998, 1999 and 2000, and the results of
their operations, the changes in their shareholders' equity, and their cash
flows for the years then ended, in conformity with financial accounting
standards generally accepted in Korea ("Korean GAAP").
Our audits also comprehended the translation of the Korean won amounts
into U.S. dollar amounts and, in our opinion, such translation has been
made in conformity with the basis stated in Note 2(a) to the consolidated
financial statements. Such U.S. dollar amounts are presented solely for the
convenience of readers outside of Korea.
As described in Note 25 to the accompanying consolidated financial
statements, on December 18, 2000, Quad Systems Corporation ("Quad"), one of
the Company's major customers, filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code of the
Uoited States of America. Before Quad filed the voluntary petition for
reorganization under Chapter 11, on September 29, 2000, the Company entered
into an agreement with Quad to convert the Company's trade receivables to
long-term loans and accordingly, the Company reclassified those receivables
to long-term loans in the accompanying consolidated financial statements.
As of December 31, 2000, the outstanding balance of such loans totaled
approximately (Won) 5,066 million and the Company provided an allowance for
the entire amount of the loans, which was recorded as a loss in other
expense.
As discussed in Note 2 to the accompanying consolidated financial
statements, the Company's change in its accounting policies in 1999 was
made in accordance with revised Korean GAAP, effective as of January 1,
1999. Under revised Korean GAAP, research and ordinary development costs
may no longer be deferred and amortization of deferred development costs
related to new product development with future benefit is to commence when
the related revenue is first recognized. Revised Korean GAAP also requires
the adoption of deferred income tax accounting. The effect of such
accounting changes resulted in a decrease in the Company's retained
earnings as of January 1, 1999 of (Won) 234 million and a decrease in the
net loss for the year ended December 31, 1999 of (Won) 2,059 million.
Financial accounting standards generally accepted in Korea vary in
certain respects from accounting principles generally accepted in the
United States of America. Application of accounting principles generally
accepted in the United States of America would have affected the
determination of net income (loss) for the years ended December 31, 1998,
1999 and 2000 and the determination of shareholders' equity and financial
position as of December 31, 1998, 1999 and 2000 to the extent summarized in
Notes 28 and 29 to the consolidated financial statements.
Without qualifying our opinion, we draw attention to Note 27 of the
accompanying consolidated financial statements. The operations of the
Company and its subsidiaries have been significantly affected, and may
continue to be affected for the foreseeable future, by the general adverse
economic conditions in the Republic of Korea and in the Asia Pacific
region. The ultimate effect of these significant uncertainties on the
consolidated financial position of the Company and its subsidiaries as of
the balance sheet dates cannot presently be determined and accordingly, no
adjustments have been made in the accompanying consolidated financial
statements related to such uncertainties.
Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu)
Seoul, Korea
April 20, 2001
MIRAE CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000 2000
------------------------------------------------
(In millions of Korean won) (In
thousands-
ASSETS of U.S.
dollars)
(Note 2)
Current assets:
Cash and cash equivalents (Note 2 and 10)......... (Won) 359 (Won) 3,336 (Won) 34,914 $ 27,556
Short-term financial instruments (Notes 2 and 10). 34,774 16,801 424 335
Marketable securities (Note 2).................... 54,507 13,092 8,860 6,993
Accounts receivable-trade, net (Notes 2, 10 and 19).. 4,396 15,482 65,098 51,380
Accounts receivable-other......................... 5 269 1,293 1,021
Inventories (Notes 2, 3 and 22)................... 6,698 30,019 71,864 56,720
Accrued interest income........................... 1,934 219 137 108
Advance payments and other (Note 6)............... 2,774 8,576 3,633 2,866
------- ------ ------- -------
Total Current Assets.......................... 105,447 87,794 186,223 146,979
------- ------ ------- -------
Non-current assets:
Property, plant and equipment-net (Notes 2, 8
and 22)........................................ 43,732 59,819 120,969 95,477
Intangible assets-net (Note 2)
Research and development costs.................. 8,326 8,574 14,440 11,397
Other........................................... 206 140 633 500
Investment securities (Notes 2 and 5)............. 3,613 5,109 30,578 24,134
Long-term and restricted bank deposits (Note 4)... 9,378 525 290 229
Guarantee deposits, net (Note 2).................. 3,992 4,896 4,894 3,863
Deposits for severance indemnities
(Notes 2 and 4)................................. 270 42 7 6
Long-term loans and other (Notes 2, 6 and 7)...... 3,303 8,857 7,375 5,819
Deferred income tax assets (Note 17).............. -- 5,465 13,763 10,863
------- ------ ------- -------
Total Non-Current Assets...................... 72,820 93,427 192,949 152,288
------- ------ ------- ---------
Total assets.................................. (Won) 178,267 (Won) 181,221 (Won) 379,172 $ 299,267
============= ============= ============= =========
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade (Note 10)................ (Won) 1,373 (Won) 15,539 (Won) 15,265 $ 12,048
Short-term borrowings............................ 5,189 -- 3,500 2,762
Accounts payable--other.......................... 1,925 2,033 4,997 3,944
Income taxes payable............................. 50 89 2,151 1,698
Advance receipts from customers.................. 446 3,011 1,316 1,039
Dividends payable (Note 13)...................... 1,837 2,161 1,846 1,457
Guarantee deposits payable (Note 7).............. -- 347 7,300 5,762
Accrued expenses and other....................... 229 233 3,607 2,847
---------- ---------- -------- ---------
Total Current Liabilities.................... 11,049 23,413 39,982 31,557
---------- ---------- -------- ---------
Long-term liabilities:
Long-term borrowings (Note 9).................... 9,600 -- -- --
Long-term guarantee deposits payable (Note 7) -- -- 8,831 6,970
Accrued severance indemnities, net (Note 2)...... 1,517 1,957 2,988 2,358
---------- ---------- -------- ---------
Total Long-Term Liabilities.................. 11,117 1,957 11,819 9,328
---------- ---------- -------- ---------
Total Liabilities............................ 22,166 25,370 51,801 40,885
---------- ---------- -------- ---------
Commitments and contingencies (Note 21)
Shareholders' equity:
Capital stock
Common stock-par value (Won) 100 per share;
issued and outstanding 108.1 million shares,
108.1 and 123.0 million shares as of
December 31, 1998, 1999 and 2000,
respectively (Note 11)........................ 10,969 10,969 12,464 9,837
Capital surplus:
Additional paid-in capital (Note 11).......... 115,225 116,334 276,609 218,318
Retained earnings:
Appropriated (Note 12)........................ 25,769 25,911 28,020 22,115
Unappropriated (Note 12)...................... 8,981 6,208 4,838 3,818
Capital adjustments:
Treasury stock (Notes 2 and 14)................ (4,843) (4,843) (4,843) (3,822)
Stock options (Notse 2 and 24) 588 464
Minority interest in equity of
consolidated subsidiaries (Note 2)............ -- 1,272 9,695 7,652
---------- ---------- -------- ---------
Total Shareholders' Equity.................. 156,101 155,851 327,371 258,382
---------- ---------- -------- ---------
Total liabilities and shareholders'
equity..................................... (Won) 178,267 (Won) 181,221 (Won) 379,172 $ 299,267
============= ============= ============= =========
See accompanying Notes to Consolidated Financial Statements.
MIRAE CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000 2000
------- ------- -------- -------
(In millions of Korean won) (In thousands
of U.S.
dollars)
(Note 2)
Sales (Notes 15, 19 and 20)................. (Won) 17,014 (Won) 45,681 (Won) 146,099 $ 115,311
Cost of sales............................... 16,907 36,111 111,377 87,906
------- ------ ------- -------
Gross profiGross profit..................... 107 9,570 34,722 27,405
Selling, general and administrative
expenses (Note 16)........................ 7,328 19,988 27,223 21,486
------- ------ ------- -------
Operating income (loss) (Note 20)........... (7,221) (10,418) 7,499 5,919
------- ------ ------- -------
Other income :
Interest income........................... 10,037 10,497 6,548 5,168
Gain on disposal and valuation of
marketable securities.................... 3,777 3,334 1,726 1,362
Foreign exchange and translation
gains (Note 2).......................... 193 117 2,551 2,013
Reversal of allowance for doubtful
accounts................................ 134 -- -- --
Other..................................... 158 655 1,984 1,566
------- ------ ------- -------
14,299 14,603 12,809 10,109
------- ------ ------- -------
Other expenses :
Interest expense.......................... 1,043 3,038 2,616 2,065
Donations................................. 127 538 514 406
Amortization of deferred charges
(Note 2)................................ 210 -- -- --
Foreign exchange and translation
losses (Note 2)......................... 441 196 670 529
Loss on disposal and valuation of
marketable securities................... -- 213 402 317
Loss from valuation of inventories........ 289 723 844 666
Provision for doubtful other accounts..... 607 215 5,066 3,998
Loss from impairment of deferred research
and developments costs (Note 2).......... -- 3,859 -- --
Equity in losses of affiliate
(Notes 2 and 5)......................... -- 50 9,664 7,627
Other (Note 9)............................ 116 769 397 313
------- ------ ------- -------
2,833 9,601 20,173 15,921
------- ------ ------- -------
Income (loss) before income taxes and
minority interest......................... 4,245 (5,416) 135 107
Income tax expense (benefit)
(Notes 2 and 17).......................... 417 (5,396) (3,602) (2,843)
------- ------ ------- -------
Income (loss) before minority interest ..... 3,828 (20) 3,737 2,950
------- ------ ------- -------
Minority interest in net loss (gain)
of consolidated subsidiaries............... -- (216) 533 421
------- ------ ------- -------
Net income (loss)........................... (Won)3,828 (Won)(236) (Won)4,270 $ 3,371
======= ====== ======= =======
Weighted average number of common stock 98 108 121 121
outstanding (in millions of shares)......... ======= ====== ======= =======
Net income (loss) per share (note 18)
(In Korean won and U.S. dollars)............ (Won)39 (Won)(2) (Won)35 $ 0.028
======= ====== ======= =======
See accompanying Notes to Consolidated Financial Statements.
MIRAE CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000 2000
------- ------- -------- --------
(In millions of Korean won) (In thousands
of U.S.
dollars)
(Note 2)
Balance, January 1, 1998.................. 8,775 66,986 33,240 (3,919) - 177 105,259
Issuance of common stock (Note 11)....... 2,194 48,262 - - - - 50,456
Treasury stock transactions (Notes 2 and
14).................................... - (23) (481) (924) - - (1,428)
Cash dividends (Note 13)................. - - (1,837) - - - (1,837)
Decrease in minority interest in equity
of consolidated subsidiaries........... - - - - - (177) (177)
Net income............................... - - 3,828 - - - 3,828
--------- -------- -------- ------- ------- ------- --------
Balance, December 31, 1998................ 10,969 115,225 34,750 (4,843) - - 156,101
Additional issuance by consolidated .....
subsidiary to outside entity (Note 11).. - 1,205 - - - - 1,205
Offset of unamortized stock issuance
costs .................................. - (96) - - - - (96)
Cash dividends (Note 13)................. - - (2,161) - - - (2,161)
Cumulative effect on prior years of
change in accounting policy
(Notes 2 and 17)....................... - - (234) - - - (234)
Increase in minority interest in equity
of consolidated subsidiaries........... - - - - - 1,272 1,272
Net loss................................. - - (236) - - - (236)
-------- ------- -------- ------- ------ ------- ---------
Balance, December 31, 1999............... 10,969 116,334 32,119 (4,843) - 1,272 155,851
Issuance of ADSs (Note 11)............... 1,495 126,623 - - - - 128,118
Additional issuance by consolidated.....
subsidiary to outside entity (Note 11).. - 9,024 - - - - 9,024
Additional issuance by equity
method-affiliate to outside entity
(Note 11)............................... - 24,628 - - - - 24,628
Stock compensation plans (Notes 2 and 24). - - - - 588 - 588
Cash dividends (Note 13).................. - - (1,846) - - - (1,846)
Effect on prior year of reapplying the ...
equity method (Notes 2 and 5)............ - - (1,685) - - - (1,685)
Increase in minority interest in equity of
consolidated subsidiaries................ - - - - - 8,423 8,423
Net income................................ - - 4,270 - - - 4,270
-------- ------- -------- -------- ------ ------- --------
Balance, December 31, 2000................ 12,464 276,609 32,858 (4,843) 588 9,695 327,371
======== ======= ======== ======== ====== ======= =========
(In thousands of U.S. dollars) (Note 2)
Balance, December 31, 1999............... $8,657 $91,819 $25,350 ($3,822) $- $1,004 $123,008
Issuance of ADSs (Note 11)............... 1,180 99,939 - - - - 101,119
Additional issuance by consolidated
subsidiary to outside entity (Note 11).. - 7,122 - - - - 7,122
Additional issuance by equity
method-affiliate to outside
entity (Note 11)....................... - 19,438 - - - - 19,438
Stock compensation plans (Notes 2 and 24).. - - - - 464 - 464
Cash dividends (Note 13)................... - - (1,457) - - - (1,457)
Effect on prior year of reapplying the
discontinued equity method (Notes
2 and 5)................................ - - (1,330) - - - (1,330)
Increase in minority interest in equity of
consolidated subsidiaries............... - - - - - 6,648 6,648
Net income................................ - - 3,370 - - - 3,370
-------- -------- -------- ------- ------ ------ -------
Balance, December 31, 2000 $9,837 $218,318 $25,933 ($3,822) $464 $7,652 $258,382
======== ======== ======== ======== ====== ====== ========
See accompanying Notes to Consolidated Financial Statements.
MIRAE CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1997 1998 2000 2000
---------- -------- ------- -------
(In millions of Korean won) (In
thousands
of U.S.
dollars)
(Note 2)
Cash flows from operating activities:
Net income (loss)...................................... (Won) 3,828 (Won) (236) (Won) 4,270 $ 3,371
------------ ------------ ------------ --------
Expenses not involving cash payments:
Depreciation and amortization.......................... 6,076 7,793 11,578 9,138
Loss from impairment of deferred research and
development cost.................................... -- 3,859 -- --
Provision for severance indemnities.................... 854 1,280 1,626 1,283
Provision for doubtful accounts........................ 608 894 5,653 4,462
Loss on valuation of inventories..................... 289 723 844 666
Loss on disposal and valuation of securities........... -- 213 402 317
Foreign currency translation loss...................... 66 69 208 164
Equity in losses of affiliate.......................... -- 50 9,664 7,627
Minority interest in net gain of consolidated
subsidiaries........................................ -- 216 -- --
Compensation cost related to stock options............. -- -- 588 464
Other.................................................. 110 96 251 199
------- ------- ------ ------
Sub-total............................................ 8,003 15,193 30,814 24,320
-------- ------- ------ ------
Income not involving cash receipts:
Minority interest in net loss of consolidated
subsidiaries......................................... -- -- (533) (421)
Foreign currency translation gain...................... (86) (17) (1,286) (1,015)
Reversal of provision for doubtful accounts............ (134) -- -- --
Gain on disposal and valuation of marketable securities.. (3,777) (3,334) (1,726) (1,362)
Deferred income taxes ................................... -- (5,699) (7,548) (5,957)
Other.................................................. (1) (40) (25) (20)
-------- --------- -------- --------
Sub-total............................................ (3,998) (9,090) (11,118) (8,775)
! -------- --------- -------- --------
Changes in assets and liabilities related to operating
activities:
Accounts receivable--trade.............................. 13,056 (11,856) (54,112) (42,709)
Accounts receivable--other.............................. -- (264) (803) (634)
Inventories............................................ (3,578) (26,488) (42,689) (33,693)
Accrued interest income................................ 193 1,715 82 65
Advance payments and other current assets.............. (1,597) (6,398) 5,391 4,255
Accounts payable--trade................................. (643) 14,166 (482) (380)
Accounts payable--other................................. 734 123 2,964 2,339
Income taxes payable................................... (1,455) 39 2,062 1,627
Advance receipts from customers........................ (428) 2,565 (1,695) (1,338)
Accrued expenses and other current liabilities......... (1,088) 351 3,374 2,664
Severance indemnity payments........................... (652) (840) (595) (470)
-------- --------- --------- --------
Sub-total............................................ 4,542 (26,887) (86,503) (68,274)
-------- --------- -------- --------
Net cash provided by (used in) operating activities.... 12,375 (21,020) (62,537) (49,358)
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment. (Won) 7 (Won) 1,516 (Won) 279 $ 220
Decrease (increase) in short-term financial
instruments--net..................................... 6,178 17,973 16,801 13,260
Decrease in long-term loans to employees................ 1,932 1,953 1,141 901
Decrease in guarantee deposits.......................... 865 2,258 2,253 1,778
Decrease (increase) in marketable securities-net........ (35,604) 44,536 5,556 4,385
Acquisition of property, plant and equipment............ (15,960) (20,976) (70,545) (55,679)
Acquisition of investment securities.................... -- (1,546) (13,391) (10,569)
Decrease (increase) in long-term and restricted bank
deposits-net.......................................... (6,766) 9,082 (189) (149)
Increase in long-term loans to employees................ (1,900) (876) (328) (259)
Increase in investments and other non-current assets.... 338 (62) (145) (114)
Increase in long-term loans to affiliates............... -- (6,250) -- --
Increase in guarantee deposits.......................... (1,028) (3,162) (2,250) (1,776)
Increase in deferred research and development costs..... (10,407) (6,084) (8,287) (6,541)
Increase in guarantee deposits payable.................. -- -- 6,953 5,488
Increase in long-term guarantee deposits payable........ -- -- 8,831 6,971
-------- --------- ------- --------
Net cash provided by (used in) investing activities..... (62,345) 38,362 (53,321) (42,084)
--------- --------- -------- --------
Cash flows from financing activities:
Increase in short-term borrowings....................... 10,149 59,571 3,500 2,762
Increase in long-term borrowings........................ 3,600 -- -- --
Issuance of common stock................................ 50,456 -- 128,118 101,119
Increase of minority interest in equity of consolidated
subsidiaries.......................................... -- 1,056 8,955 7,068
Increase in additional paid-in capital~
(Note 11)............................................. -- 1,205 9,024 7,122
Decrease in treasury stock.............................. 1,421 -- -- --
Payment of short-term borrowings........................ (4,960) (64,760) -- --
Payment of current portion of long-term debt............ (1,662) -- -- --
Payment of long-term borrowings......................... (158) (9,600) -- --
Increase in treasury stock.............................. (2,850) -- -- --
Payment of stock issuance costs......................... (106) -- -- --
Payment of dividends.................................... (5,621) (1,837) (2,161) (1,706)
--------- -------- -------- --------
Net cash provided by (used in) financing activities..... 50,269 (14,365) 147,436 116,365
--------- -------- -------- --------
Net increase in cash and cash equivalents...... .......... 299 2,977 31,578 24,923
Cash and cash equivalents at beginning of the period...... 60 359 3,336 2,633
-------- -------- ------- --------
Cash and cash equivalents at end of the period............ (Won) 359 (Won) 3,336 (Won) 34,914 $ 27,556
=========== ============= ============ =========
Cash paid for interest, net of amount capitalized......... (Won) 1,061 (Won) 3,016 (Won) 2,616 $ 2,303
=========== ============= ============ =========
Cash paid (refunded) for income taxes..................... (Won) 3,711 (Won) 857 (Won) (763) $ (672)
=========== ============= ============= =========
See accompanying Notes to Consolidated Financial Statements.
MIRAE CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1. GENERAL
Mirae Corporation (the "Company") was incorporated in December 1990
under the laws of the Republic of Korea ("Korea") and is currently
engaged in the manufacture of semiconductor-related equipment including
handlers, SMD placement systems, TFT-LCD testers and lead frame
magazines for sale in domestic and overseas markets, as well as in the
sale of internet portal and website services and on-line electronic
commerce security solutions through its affiliate, Lycos Korea, Inc.,
and its subsidiary, SoftForum Corporation, respectively. The Company's
common shares and American Depositary Shares ("ADSs") are listed on the
Korea Stock Exchange and the Nasdaq National Market, respectively. Each
ADS represents two shares of common stock. As of December 31, 2000, the
Company's largest shareholder was Mr. Chung Moon-Soul, the Company's
former president, with a shareholding of 27.46% and, including his
family members, 29.09%.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company in the
preparation of the accompanying consolidated financial statements are
summarized as follows:
a. Basis of Presentation
The official accounting records of the Company are expressed in
Korean won and are maintained in accordance with the relevant laws
and regulations of Korea. The accounting principles and reporting
practices followed by the Company and generally accepted in Korea
("Korean GAAP") may differ in certain respects from accounting
principles and reporting practices generally accepted in other
countries and jurisdictions.
The financial statements are stated in Korean won, the currency of
the country in which the Company is incorporated and operates. The
translation of Korean won amounts into U.S. dollar amounts is
included solely for the convenience of readers outsides of Korea and
have been made at the rate of (Won) 1,267.00 to US$1, the Noon
Buying Rate in the City of New York for cable transfers in Korean
won as certified for customs purposes by the Federal Reserve Bank of
New York on the last business day of the year ended December 31,
2000. Such translations should not be construed as representations
that the Korean won amounts could be converted into U.S. dollars at
that or any other rate.
b. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all subsidiaries. Significant inter-company accounts and
transactions have been eliminated in consolidation. The Company's
20%- to 50%-owned affiliates are accounted for using the equity
method (see Note 2(l)).
The Company's subsidiaries and its affiliates, which are accounted
for using the equity method, are as follows:
Year of Ownership
Establishment Percentage (%) Remark
----------------- --------------------- -------------------
SoftForum Corporation ("SoftForum") 1999 55.47% Consolidated
MR Tech Town Co. ("MR Tech")
(formerly MR Tech Corporation) 1999 100.00% Consolidated
Lycos Korea, Inc. ("Lycos Korea") 1999 43.25% Equity method
Java Game Co. ("Java Game") 1999 59.98% Consolidated
Mirae Online Co., Ltd. ("MOL") 2000 64.78% Consolidated
Korea Internet Holdings, Inc. ("KIH") 2000 20.00% Equity method
Korea Internet. Com. ("KIC") 2000 47.94% Consolidated
SoftForum was incorporated in April 1999 under the laws of Korea as
a 70%-owned subsidiary of the Company and is currently engaged in
providing security solutions for on-line banking, trading and
electronic commerce. As of December 31, 2000, SoftForum is
55.47%-owned by the Company, 27.58%-owned by SoftForum employees,
9.28%-owned by Dongwon Venture Capital Co., Ltd. And 7.67%-owned by
Mirae Asset Venture Capital.
MR Tech was incorporated in April 1999 under the laws of Korea and
the Company acquired the 100% equity interest in MR Tech on July 12,
1999. As of December 31, 2000, MR Tech is engaged in providing
building administration services.
Lycos Korea was formed in March 1999 under the laws of Korea as a
joint venture company between the Company and Lycos, Inc., a United
States corporation. Lycos Korea offers a Korean language search and
portal site on the internet. Lycos Korea launched its internet
operations in July 1999.
Java Game was incorporated in December 1999 under the laws of Korea
as a 70%-owned subsidiary of the Company and is currently engaged in
providing game programs for Lycos Korea's game site.
MOL was incorporated in March 2000 under the laws of Korea in order
to engage in providing two-way satellite internet broadcasting
service.
KIH was incorporated in March 2000 under the laws of Korea in order
to engage in investing in internet-related companies or companies
that are involved with electronic commerce or the development or
utilization of internet technologies, content or services.
KIC was incorporated in July 2000 under the laws of Korea as a joint
venture company between the Company and internet.com Corporation, a
United States corporation, in order to provide e-business related
information, real-time news, and information for internet
professionals on the internet. KIC's accounts were consolidated due
to the Company's effective control through the nomination of a
majority of the board of directors by the Company.
c. Use of Estimates
The preparation of the Company's financial statements, in conformity
with accounting principles generally accepted in Korea, requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from these estimates.
d. Revenue Recognition
Sales are recognized as products are delivered because at that time
customers contractually assume all risks of ownership and the
earnings process is considered to be substantially complete. Legal
title, however, passes to customers upon final customer acceptance.
Sales of software products are recognized after the installation
process is complete.
e. Marketable Securities
Through 1997, marketable securities, which primarily consist of unit
trusts and money market funds, were stated at cost. Effective
January 1, 1998, Korean GAAP was changed to require that marketable
securities be stated at market value, with unrealized gains and
losses included in the income statement. This change had no
significant effect on the Company and its subsidiaries' net income
for the year ended December 31, 1998.
f. Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided based on the
estimated collectibility of individual accounts and historical bad
debt experience.
Activity in the allowance for doubtful accounts balances for the
years ended December 31, 1998, 1999 and 2000 is as follows (in
millions of Korean won):
1998 1999 2000
--------------- --------------- ----------------
(Allowance for doubtful accounts receivable-trade)
Beginning balance 176 44 494
Provision (charged to selling, general and administrative
expenses) - 648 587
Offset against uncollectible trade receivables - (198) (424)
Reversal (132) - -
--------------- --------------- ----------------
Ending balance 44 494 657
=============== =============== ================
(Allowance for doubtful guarantee deposits, long-term loans
and other)
Beginning balance - 607 -
Provision (charged to other expenses) 607 215 5,066
Offset against uncollectible guarantee deposits - (822) -
--------------- --------------- ----------------
Ending balance 607 - 5,066
=============== =============== ================
g. Inventories
Inventories are stated at the lower of cost, determined using the
average cost method, or net realizable value.
h. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Routine
maintenance and repairs are expensed as incurred. Expenditures which
result in an enhancement of the value or extension of the useful
life of the facilities involved are capitalized.
Interest incurred on debt used for the construction of property,
plant and equipment is capitalized until such construction
activities are complete. Interest of (Won)U270 million and
(Won)U50 million for the years ended December 31, 1998 and 1999
(nil for year ended December 31, 2000), respectively, was
capitalized and included in property additions.
Depreciation is computed using the declining balance or
straight-line methods over the estimated useful lives (two to sixty
years) of the related assets.
i. Research and Development Costs
Through 1997, the Company charged all research and development costs
to expense as incurred. Effective January 1, 1998, in order to
provide for a more accurate matching of revenue and expenses, the
Company changed its accounting policy for research and development
costs, to be deferred and amortized over five years, as permitted
under Korean GAAP. As a result of such change, net income for the
year ended December 31, 1998 increased by (Won)U8,326 million.
In accordance with revised Korean GAAP, effective January 1, 1999,
the Company continues to defer development costs which meet certain
specific conditions such as new product development, technological
feasibility, marketability and usefulness, and amortizes such costs
over five years, while all research and ordinary development costs
are expensed as incurred. In addition, amortization of deferred
development costs is to commence when the related revenue or benefit
is first realized, whereas previously, deferred research and
development costs were amortized beginning in the period such costs
were incurred. The unamortized balance of deferred research and
development costs at January 1, 1999 will continue to be amortized
over a five year period. The effect of such accounting changes
resulted in a net increase in the Company's net loss for the year
ended December 31, 1999 of (Won)3,640 million, net of income tax effect
of (Won)1,620 million.
In addition, through 1998, the amortization of deferred research and
development costs were classified as an other expense item.
Effective January 1, 1999, Korean GAAP was revised to require
classification of the amortization of deferred development costs and
research and ordinary development expenses as incurred as
manufacturing or selling, general and administrative expenses
depending on their nature. As a result of such change, the operating
loss for the year ended December 31, 1999 increased by (Won)9,956
million. This change had no effect on the Company and its
subsidiaries' net loss for the year ended December 31, 1999. For
comparative purposes, research and development costs previously
classified as other expenses in the consolidated financial
statements for the year ended December 31, 1998 have been
reclassified to conform with the presentation of the consolidated
financial statements for the years ended December 31, 1999 and 2000.
These reclassifications did not have any effect on the reported
financial position of the Company and its subsidiaries as of
December 31, 1998, or their net income for the year then ended.
In March 2000, the Company discontinued one of its research and
development projects related to front-end semiconductor production
equipment manufacturing. As a result, related research and
development costs of (Won)3,859 million were written off effective as of
December 31, 1999.
j. Other Intangible Assets
Other intangible assets, consisting primarily of proprietary rights,
are stated at cost less amortization computed using the
straight-line method over five to fifteen years.
k. Stock Issuance Costs
Through 1998, stock issuance costs were capitalized and amortized on
a straight-line basis over three years. Effective January 1, 1999,
Korean GAAP was changed to require that such costs be shown as a
direct reduction to shareholders' equity. The unamortized stock
issuance costs carried over from 1998 have been offset against
additional paid-in capital as of January 1, 1999, in accordance with
the revised Korean GAAP. This change had no significant effect on
the net income of the Company and its subsidiaries for the year
ended December 31, 1999.
l. Investment Securities
(1) Investments with 20% or more ownership interest
Investment securities of nonconsolidated affiliated companies,
in which the Company has a 20% or more ownership interest, are
carried based on the equity method of accounting, whereby the
Company's initial investment is recorded at cost and the
carrying value is subsequently increased or decreased to reflect
the Company's share of income or loss of the investee and
dividends received therefrom. The Company's share in net losses
of its affiliates are reflected only to the extent of its
investment carrying amount.
(2) Other Investments
Investments in equity securities of listed companies are stated
at market value. Also, the net unrealized gain or loss on
investments in equity securities of listed companies is recorded
as a capital adjustment. Other investments in equity securities
of non-listed companies are stated at acquisition cost. If the
market value (or the net book value for non-listed companies) of
the investments declines significantly below the acquisition
cost and is not expected to recover, such investments are
carried at market value (or net book value) and the resulting
unrealized loss on investments is charged to current operations.
m. Accounting for Impairment
When the book value of an asset exceeds its estimated recoverable
value, which is the greater of the net realizable value or useful
value of the asset, due to obsolescence, physical damage or a sharp
decline in market value, and the amount is material, the asset is
recorded at its reduced value and the resulting impairment loss is
charged to current operations. In subsequent periods, if the
recoverable value exceeds the adjusted book value of the asset, the
recoveries of previously recognized losses is recognized as a gain
in subsequent periods until the net realizable value equals the
original book value of the asset.
n. Accrued Severance Indemnities
In accordance with Korean labor laws, all employees with more than
one year of service are entitled to receive severance indemnities,
based on length of service and rate of pay, upon termination of
their employment. Accruals for severance indemnities are recorded to
approximate the amount required to be paid if all employees were to
terminate at the balance sheet date.
Funding of severance indemnities is not required. However, the
Company and subsidiaries maintain deposits for severance indemnities
with insurance companies, which are presented as non-current assets,
to meet the requirements for tax deduction purposes under the Korean
corporate income tax law.
Changes in accrued severance indemnities for the years ended
December 31, 1998, 1999 and 2000 are as follows (in millions of
Korean won).
1998 1999 2000
---------------- ---------------- -----------------
Beginning balance 1,315 1,517 1,957
Provision 854 1,280 1,626
Payments (652) (840) (595)
------------ ----------- -------------
Ending balance 1,517 1,957 2,988
============ =========== =============
o. Treasury Stock
Treasury stock is shown separately as a capital adjustment item
within stockholders' equity. Gains on sales of treasury stock are
credited to capital surplus, and losses are charged against either
capital surplus arising from previous treasury stock transactions or
against retained earnings.
p. Costs for Product Warranties
Product warranty expenditures are included as incurred in
manufacturing costs, which are allocated between cost of sales and
inventories.
q. Income Taxes
Through 1998, the provision for income taxes was determined based on
the amount currently payable under the Korean corporate income tax
law. No deferred income taxes were provided. Effective January 1,
1999, Korean GAAP was revised to require the recognition of deferred
tax assets and liabilities for the future tax consequences of
operating loss and tax credit carryforwards and differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The revised Korean GAAP
requires that the cumulative effect on prior periods of such change
be reflected as a direct adjustment to unappropriated retained
earnings at the beginning of the year of such change. The revised
Korean GAAP also requires that deferred tax assets and liabilities
be presented on the balance sheet as a single non-current net
number. Restatement of prior period financial statements is not
permitted. This change resulted in a decrease in the Company's and
its subsidiaries' beginning retained earnings as of January 1, 1999
of (Won)234 million and a decrease in the net loss for the year ended
December 31, 1999 of (Won)U5,699 million.
r. Cash and Cash Equivalents and Short-Term Financial Instruments
Effective January 1, 1999, Korean GAAP was revised to require
reclassification of time deposits and financial instruments readily
convertible into cash with original maturity of more than three
months less than one year from cash and cash equivalents to
short-term financial instruments. For comparative purposes, prior
year amounts have been reclassified to conform with current year
presentation. This change in classification resulted in a decrease
in cash and cash equivalents as of December 31, 1998, 1999 and 2000
by (Won)34,774 million, (Won)16,801 million and (Won)424 million,
respectively.
s. Accounting for Foreign Currency Transactions
The Company and its subsidiaries maintain their accounts in Korean
won. Transactions in foreign currencies are recorded in Korean won
based on the prevailing rate of exchange at the dates of
transactions. As allowed under Korean GAAP, monetary assets and
liabilities denominated in foreign currencies are translated in the
accompanying consolidated financial statements at the Base Rates
announced by the Korean government on the balance sheet dates,
which, for U.S. dollars, were (Won)1,207.80=$1.00,
(Won)1,145.40=$1.00 and (Won)1,259.70=$1.00, at December 31, 1998,
1999 and 2000, respectively. The resulting gains and losses arising
from the translation or settlement of such assets and liabilities
are included in current operations.
t. Valuation of Long-Term Receivables
Long-term receivables resulting from long-term installment
transactions are stated at the present value of the expected future
cash flows. Imputed interest amounts are recorded in present value
discount accounts which are deducted directly from the related
nominal receivable balances. Such imputed interest is included in
operations using the effective interest rate method over the
redemption period.
u. Accounting for Employee Stock Option Compensation Plan
The Company adopted the fair value based method of accounting for
the employee stock option compensation plan, which was established,
effective as of March 25, 2000, to reward the performance of
individual officers and other employees who have contributed, or
have the ability to contribute, significantly to the Company (see
Note 24). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. For stock options, fair value is
determined using an option-pricing model that takes into account the
stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock, the expected
dividends, and a risk-free interest rate over the expected life of
the option. However, as permitted under Korean GAAP, the Company
excludes the volatility factor in estimating the value of its stock
options, which results in measurement at minimum value. The total
compensation cost at the grant date is not subsequently adjusted for
changes in the price of the underlying stock or its volatility, the
expected life of the option, dividends on the stock, or the
risk-free interest rate.
v. Reclassification of Certain Accounts
Certain amounts in 1998 and 1999 financial statements have been
reclassified to conform with the 2000 financial statement
presentation. In connection with these reclassifications, net income
(loss) for the years ended December 31, 1998 and 1999 and
shareholders' equity as of December 31, 1998 and 1999 were not
affected except for the presentation of minority interest in equity
of consolidated subsidiaries in the balance sheets. Under previous
Korean GAAP, minority interest in equity of consolidated
subsidiaries was presented as a separate item from shareholders'
equity. Effective January 1, 2000, Korean GAAP was changed to
require that minority interest in equity of consolidated
subsidiaries be included in shareholders' equity. As a result, total
shareholders' equity as of December 31, 1999 and 2000 increased by
(Won)1,272 million and (Won)9,695 million, respectively.
3. INVENTORIES
Inventories as of December 31, 1998, 1999 and 2000 are as follows
(in millions of Korean won):
1998 1999 2000
------------------ ------------------ -----------------
Merchandise 12 66 6,907
Finished goods - 3,046 35,648
Work in-process 5,573 5,540 2,018
Raw materials 846 19,412 27,291
Inventories in-transit 267 1,955 -
------------------ ------------------ -----------------
6,698 30,019 71,864
================== ================== =================
4. RESTRICTED DEPOSITS
Restricted deposits as of December 31, 1998, 1999 and 2000 are as
follows (in millions of Korean won):
1998 1999 2000
------------------ ------------------ -----------------
Guarantee deposits for checking accounts 5 3 6
Deposits for severance indemnities 270 42 7
------------------ ------------------ -----------------
275 45 13
================== ================== =================
5. INVESTMENT SECURITIES
Investment securities and investments in affiliates as of December 31,
1998, 1999 and 2000 are as follows (in millions of Korean won):
Ownership Net Asset
Percentage (%) Value
----------------- ---------------
2000 1998 1999 2000 2000
----------------- -------------- -------------- --------------- ---------------
(Investment in equity securities of non-listed companies)
AIO Corporation
Preferred stock (Note a) 15.0% 3,513 3,513 3,513 406
JIT Corporation 3.7% 100 100 100 20
On-net Corporation 14.7% - 795 795 670
Intro System (formerly Sun
Mentoring) (Note c) 15.2% - 500 500 -
Nara Vision (Note d) 17.4% - - 3,500 801
NetThru (Note c) 19.7% - - 296 41
Cyber Bank (Note c) 1.4% - - 2,250 282
Infinity Telecom (Note d) 16.7% - - 500 277
Korea Technology Transfer
Center - - - 1,500 1,521
TeleFree (Note c) 2.6% - - 504 117
Streambox Korea (Note c) 5.2% - - 1,500 242
NeoBill Co., Ltd. (Note c) 15.7% - - 525 401
Hackers Lab Co., Ltd. 4.5% - - 250 388
Interchem Korea 11.1% - - 100 100
Korea Software Financial
Co. - - - 5 5
E-GIOS Corporation 1.6% - 200 200 225
Il-Shin Leisure 0.1% - 1 - -
Imobiz 11.6% - - 12 12
-------------- -------------- ------------ ------------
Sub-total 3,613 5,109 50 5,508
-------------- -------------- ------------- ------------
(Investment in affiliates)
Lycos Korea (Note b) 43.3% - - 12,584 12,584
Korea Internet Holdings 20.0% - - 1,944 1,944
-------------- -------------- --------------- ---------------
Sub-total - - 14,528 14,528
-------------- -------------- --------------- ---------------
Total Investment Securities 3,613 5,109 30,578 20,036
============== ============== =============== ===============
(Note a)
As of December 31, 2000, the Company owns 140,218 shares of AIO
Corporation's (a United States corporation) preferred stock. The
Company's investment in AIO Corporation amounted to (Won)3,513
million at December 31, 2000 while the net asset value of the Company's
investment in the preferred stock of AIO Corporation was (Won)406
million as of March 31, 2000. The Company management believes that AIO
Corporation's net losses and significant decrease in sales since 1997,
in addition to cash flow shortages, are not indications of impairment
as to the Company's investment in AIO Corporation and expects the
carrying amount of its investment to be recoverable in the near future.
At the option of the Company, each share of AIO Corporation's preferred
stock is convertible into ten shares of AIO Corporation's common stock,
at any time. Beginning in 2002, the Company has the option to redeem in
cash AIO Corporation's preferred stock in equal installments over three
years at $28.53 per share if AIO Corporation's funds are legally
sufficient to redeem all of its preferred stock.
(Note b)
The investment in Lycos Korea is carried based on the equity method of
accounting. The Company's initial investment cost was (Won)50 million.
In 1999 the carrying value was subsequently reduced to zero to reflect
the Company's share of Lycos Korea's loss for the year ended December
31, 1999 which exceeded the carrying amount of the common stock
investment. In February 2000, Lycos Korea issued and sold 3,122
additional shares of its common stock at a premium to outside entities
including Mirae Asset Venture Capital, Sumitomo Corp., SingTel and
Hikari, for (Won)18,000,000 per share (par value: 5,000 per share). As
a result of such issuance, the Company's equity ownership in Lycos
Korea decreased from 50% to 43% and its investment increased by
(Won)24,628 million. The resulting gain on sale of stock by Lycos Korea
was accounted for as an equity transaction and included in capital
surplus (see Note 11). Also, the Company recognized its share of Lycos
Korea's 1999 loss not recognized during 1999 amounting to (Won)1,685
million, net of income tax effect of 750 million, as an adjustment to
retained earnings from prior periods. In addition, in 2000 the carrying
value was subsequently reduced by a charge to other expense to reflect
the Company's shares of Lycos Korea's loss for the year ended December
31, 2000, amounting to (Won)9,608 million.
(Note c)
Investments in Intro System, NetThru, Cyber Bank, TeleFree, Streambox
Korea and NeoBill are carried at cost and these investees are deemed to
be in start-up or development stage and the Company's management
currently expects the carrying amounts of those investments to be
recoverable in the near future.
(Note d)
Investments in Nara Vision and Infinity Telecom are carried at cost and
these investees are profitably. The Company's management believes that
the differences between the carrying value and net asset value are due
mainly to the premium paid for the investments and are expected to be
recoverable in the near future considering their operating results.
6. SHORT-TERM AND LONG-TERM LOANS TO EMPLOYEES
Short-term and long-term loans to employees as of December 31, 1998,
1999 and 2000 are (Won)3,303 million, (Won)2,347 million and (Won)1,640
million, respectively.
7. LONG-TERM LOANS AND GUARANTEE DEPOSITS PAYABLE TO SUBSIDIARY AND AFFILIATE
When Lycos Korea was incorporated in March 1999, the Company entered
into a loan agreement with Lycos, Inc. to provide a loan up to (Won)6,250
million, which was the outstanding balance as of December 31, 2000, at
an annual interest rate equal to the higher of 8% or the bank overdraft
rate, as prescribed by the Korean income tax law. Final maturity date
of the loan is May 31, 2019. In addition, as of December 31, 2000, the
Company has guarantee deposits payable to SoftForum and Lycos Korea in
the amount of (Won)4,500 million and (Won)4,000 million, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1998, 1999 and 2000
are as follows (in millions of Korean won):
Useful Lives
(years) 1998 1999 2000
----------------- ------------------ ---------------- -----------------
Land - 13,491 16,318 52,721
Buildings and structures 5-60 24,282 36,325 56,715
Machinery and equipment 4-9 2,454 2,652 5,468
Vehicles 4-6 614 552 806
Tools, furniture and fixtures 2-10 10,603 16,436 26,313
Construction in-progress - 909 - -
------------------ ---------------- -----------------
Total 52,353 72,283 142,023
Less accumulated depreciation (8,621) (12,464) (21,054)
------------------ ---------------- -----------------
Net 43,732 59,819 120,969
================== ================ =================
A certain portion of the Company's land and buildings is pledged as
collateral for the Company's lines of credit totaling (Won)3,000 million
and $5,000 thousand with Korea Exchange Bank. As of December 31, 2000,
there are no outstanding borrowings from Korea Exchange Bank.
In addition, at January 1, 1998, 1999 and 2000, the Korean government
declared standard value of land compared to the book value of land owned as
of December 31, 1998, 1999 and 2000 as follows (in million of Korean won):
1998 1999 2000
------------------ ---------------- --------------
Standard value 3,827 8,107 23,260
Book value 13,491 16,318 52,721
9. LONG-TERM BORROWINGS DENOMINATED IN KOREAN WON
Long-term borrowings denominated in Korean won as of December 31, 1998,
1999 and 2000 are as follows (in millions of Korean won):
Final
maturity Annual interest
Lender year rate (%) 1998 1999 2000
----------------------------------- -------------- ------------------ ----------- ------------ ------------
Korea Development Bank 2004 11.3 9,600 - -
Less portion due within one year - - -
--------- -------- --------
Long-term portion 9,600 - -
=========== ============ ============
In November 1999, the Company made an early repayment on its long-term
borrowings from Korea Development Bank, which was scheduled to mature in
2004. In connection with such early repayment, a penalty of (Won)540
million was paid.
10. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
The details of monetary assets and liabilities denominated in foreign
currencies as of December 31, 1998, 1999 and 2000 are as follows (in
millions of Korean won, thousands of U.S. dollars and yens):
Foreign currencies
-----------------------------------------------------------
1998 1999 2000
----------------- ---------------- -----------------
Cash and cash equivalents $ - $59 $3,990
Short-term financial instruments $1,851 $ - $ -
Accounts receivable-- trade $888 $5,459 $18,969
Accounts payable-- trade $463 $13 $250
Accounts payable-- trade - - J. Yen 957,240
Korean won equivalent
-----------------------------------------------------------
1998 1999 2000
----------------- ---------------- -----------------
Cash and cash equivalents - 67 5,026
Short-term financial instruments 2,235 - -
Accounts receivable-- trade 1,072 6,253 23,895
Accounts payable-- trade 559 15 315
Accounts payable-- trade - - 10,544
11. CAPITAL STOCK AND CAPITAL SURPLUS
The Company's capital stock consists entirely of common stock. The par
value and the number of shares authorized, issued and outstanding as of
December 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
------------------- ------------------- ------------------
Par value (in Korean won) 100 100 100
Authorized shares 351,000,000 351,000,000 351,000,000
Issued shares 109,687,500 109,687,500 124,637,500
Outstanding shares, net of treasury stock 108,053,500 108,053,500 123,003,500
Significant changes in capital stock and additional paid-in capital in
1998, 1999 and 2000 are as follows (in millions of Korean won except for
share data):
Numbers of shares Additional
issued (note a) Capital stock paid-in capital
--------------------- --------------- ------------------
At January 1, 1998 87,750,000 8,775 66,963
Issuance of new shares 21,937,500 2,194 48,262
--------------------- --------------- ------------------
At December 31, 1998 109,687,500 10,969 115,225
Offset of unamortized stock issuance costs (note b) - - (96)
Additional issuance by consolidated subsidiary
to outside entity (note c) - - 1,205
--------------------- --------------- ------------------
At December 31, 1999 109,687,500 10,969 116,334
Issuance of ADSs (note d) 14,950,000 1,495 126,623
Disposal of investment in the common stock of
consolidated subsidiary (note e) - - 247
Additional issuance by equity method-affiliate to
outside entity (note f) - - 24,628
Additional issuance by consolidated subsidiary
to outside entity (note g) - - 8,777
--------------------- --------------- ------------------
At December 31, 2000 124,637,500 (Won)12,464 (Won)276,609
===================== =============== ==================
(note a) Number of shares have been adjusted to give retroactive
effect to the 1:50 stock split declared on March 2, 1998.
(note b) In accordance with revised Korean GAAP, unamortized
stock issuance costs carried over from 1998 have been
offset against additional paid-in capital at the beginning
of 1999.
(note c) On September 21, 1999, SoftForum, a majority-owned
subsidiary of the Company, sold (Won)17,200 additional
shares at a premium to an outside entity, Dongwon Venture
Capital Co., Ltd., for 116,300 per share. As a result of
such issuance, the Company's equity in SoftForum increased
by (Won)1,205 million.
(note d) On February 22, 2000, the Company issued 7,475,000
American Depositary Shares ("ADSs") representing 14,950,000
shares of common stock at $8.04 per share, or $16.08 per
ADS. The ADSs are evidenced by certificates called American
Depositary Receipts. As a result of the issuance of ADSs,
the Company's common stock and additional paid-in capital
increased by (Won)U1,495 million and (Won)U126,623 million,
respectively.
(note e) During March 2000, the Company sold 16,000 shares of its
common stock in SoftForum, a subsidiary of the Company, to
SoftForum's employees at a price of (Won)30,000 per share (par
value: (Won)5,000 per share). As a result of such sale, a
portion of the increased additional paid-in capital
resulting from the equity transaction on September 21,
1999, as described in note c, was reduced by (Won)55 million.
In addition, the gain on disposal of 16,000 shares of its
common stock in SoftForum, amounting to (Won)302 million, net
of income tax effect of 134 million, was accounted for as
additional paid-in capital in accordance with Korean GAAP.
(note f) In February 2000, Lycos Korea issued and sold 3,122
additional shares at a premium to outside entities
including Mirae Asset Venture Capital, Sumitomo Corp.,
SingTel and Hikari, for 18,000,000 per share (par value:
5,000 per share). As a result of such issuance, the
Company's equity ownership in Lycos Korea decreased from
50% to 43% and its investment increased by 24,628 million.
(note g) On March 29, 2000, SoftForum issued and sold 46,000
additional shares at a premium to Dongwon Venture Capital
and Mirae Asset Venture Capital for 350,000 per share. As
a result of such issuance, the Company's equity ownership
in SoftForum decreased from 60.1% to 55.5% and its
investment increased by 8,777 million.
12. RETAINED EARNINGS
The details of appropriated retained earnings as of December 31, 1998, 1999
and 2000 are as follows (in millions of Korean won):
1998 1999 2000
----------- --------- ---------
Legal reserve 1,260 1,480 1,670
Reserve for business rationalization 3,559 3,859 6,859
Reserve for improvement of financial structure 1,328 1,328 1,328
Reserve for overseas market exploration 62 46 31
Reserve for investment in small and medium-sized
companies 256 198 132
Reserve for technological development 3,304 3,000 2,000
Voluntary reserve 16,000 16,000 16,000
------------------ --------------- ----------------
25,769 25,911 28,020
================== =============== ================
Changes in unappropriated retained earnings for the years ended December
31, 1998, 1999 and 2000 are as follows (in millions of Korean won):
1998 1999 2000
--------------- --------------- --------------
Unappropriated retained earnings at beginning of the year 17,764 8,981 6,208
Changes in unappropriated retained earnings:
Loss from disposal of treasury stock (481) - -
Equity in net loss of affiliate (see Note 5) - - (1,685)
Cumulative effect on prior years of change in accounting
policy (see Note 17) - (234) -
--------------- --------------- --------------
Sub-total 17,283 8,747 4,523
--------------- --------------- --------------
Transfers from appropriated reserves:
Reserve for overseas market exploration 16 16 15
Reserve for investment in small and medium-sized companies 58 58 66
Reserve for technological development 303 304 1,000
--------------- --------------- --------------
Sub-total 377 378 1,081
--------------- --------------- --------------
Net income (loss) 3,828 (236) 4,270
--------------- --------------- --------------
21,488 8,889 9,874
--------------- --------------- --------------
Proposed appropriations:
Legal reserve 190 220 190
Reserve for business rationalization 480 300 3,000
Reserve for voluntary reserve 10,000 - -
Cash dividends 1,837 2,161 1,846
--------------- --------------- --------------
Sub-total 12,507 2,681 5,036
--------------- --------------- --------------
Unappropriated retained earnings to be carried
forward to the following year 8,981 6,208 4,836
=============== =============== ==============
Retained earnings available for dividends as of December 31, 1998, 1999 and
2000 were (Won)24,981 million, (Won)22,208 million and (Won)20,838 million,
respectively.
a. Legal Reserve
The Korean Commercial Code requires the Company to appropriate as a
legal reserve at least 10% of the cash dividends for each
accounting period until the reserve equals 50% of the capital
stock. The legal reserve may not be utilized for cash dividends,
but may only be used to offset a future deficit, if any, or may be
transferred to capital stock.
b. Reserve for Business Rationalization
In accordance with the Tax Exemption and Reduction Control Law, the
amount of tax benefit associated with certain tax exemptions and
tax credits must be appropriated as a reserve for business
rationalization. The reserve for business rationalization may not
be utilized for cash dividends, but may only be used to offset a
future deficit, if any, or may be transferred to capital stock.
c. Reserve for Improvement of Financial Structure
The Financial Control Regulation for listed companies in Korea
requires that at least 10% of net income (net of accumulated
deficit), and an amount equal to net gain (net of related income
taxes, if any) on the disposition of property, plant and equipment
be appropriated as a reserve for improvement of financial structure
until the ratio of shareholders' equity to total assets reaches
30%. The reserve for improvement of financial structure may not be
utilized for cash dividends, but may only be used to offset a
future deficit, if any, or may be transferred to capital stock. As
of December 31, 1996, the Company's ratio of shareholders' equity
to total assets exceeded 30%. Therefore, the Company was not
required to appropriate any further unappropriated retained
earnings to this reserve.
d. Reserves for Overseas Market Exploration, Investment and
Technological Development
Reserves for overseas market exploration, investment and
technological development were appropriated in order to recognize
certain tax deductible benefits through the early recognition of
future expenditures. After certain periods, these reserves are
included in taxable income and can be used for cash dividends after
transfer to unappropriated retained earnings in accordance with the
relevant tax laws.
13. DIVIDEND DISCLOSURE
Details of dividends which were declared for the years ended December
31, 1998, 1999 and 2000 are as follows (in millions of Korean won,
except for share data):
Number of shares
Fiscal year Dividend type outstanding Face value Dividend ratio Dividends
------------------ -------------------- -------------------- ----------------- --------------- ---------------
1998 Cash dividends 108,053,500 (Won)100 17.00% (Won)1,837
===============
1999 Cash dividends 108,053,500 (Won)100 20.00% (Won)2,161
===============
2000 Cash dividends 123,003,500 (Won)100 15.00% (Won)1,846
===============
14. TREASURY STOCK
The Company acquired 1,009,000 shares of treasury stock in the market
for (Won)2,849 million during 1998 in order to stabilize the market
price of its stock. A portion of such treasury stock was sold in the
market and provided to its employees as bonuses in 1998. The fair
market value of stock provided to employees in 1998 was recognized as
compensation expense, totaling (Won)1,288 million. Changes in
treasury stock during the years ended December 31, 1998, 1999 and 2000
are as follows (in millions of Korean won except for share data):
Number of
treasury stock (note a) Carrying amount
------------------------- ------------------------
At January 1, 1998 1,275,000 (Won)3,919
Purchase of treasury stock 1,009,000 2,849
Disposal of treasury stock (25,000) (94)
Special stock bonus to employees (625,000) (1,831)
------------------------- ------------------------
At December 31, 1998, 1999 and 2000 1,634,000 (Won)4,843
========================= ========================
(note a) Numbers of shares have been adjusted to give retroactive
effect to the 1:50 stock split declared on March 2, 1998.
The Company intends to sell its treasury stock in the market in the
future. No dividends will be paid on treasury stock (see Note 13).
15. SALES
Details of sales for the years ended December 31, 1998, 1999 and 2000
are as follows (in millions of Korean won):
1998 1999 2000
------------------ ----------------- ------------------
Handlers and components (Won)14,693 (Won)20,326 (Won)43,754
SMD placement systems - 9,861 71,251
TFT-LCD handlers and testers - 3,334 11,166
Lead frame magazines 2,191 3,451 4,733
Security solutions products and services 130 4,272 9,501
Sales of raw materials - 4,437 -
Other - - 5,694
------------------ ----------------- ------------------
(Won)17,014 (Won)45,681 (Won)146,099
================== ================= ==================
Sales for the year ended December 31, 1999 include sales of raw
materials to 21st Century Tech. Co., Ltd. ("21st Century"), one of the
Company's suppliers, totaling (Won)4,437 million. Effective July 1,
1999 the Company revised its sales contract with 21st Century. Under
the revised sales contract with 21st Century, the Company no longer
sells raw materials nor purchases semi-finished goods from 21st Century
related to the SMD placement system components. Instead, the Company
pays outsourcing manufacturing service fees at the time the related
semi-finished SMD placement systems are delivered to the Company.
16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The details of selling, general and administrative expenses for the
years ended December 31, 1998, 1999 and 2000 are as follows (in
millions of Korean won):
1998 1999 2000
----------------- ---------------- ----------------
Salaries (Won)2,915 (Won)3,650 (Won)7,647
Commissions 483 1,021 5,894
Travel 194 398 1,405
Depreciation 473 1,221 2,701
Entertainment 228 396 752
Advertising 245 1,449 2,685
Research and development expense 2,081 10,008 3,464
Other 709 1,845 2,675
----------------- ---------------- ----------------
(Won)7,328 (Won)19,988 (Won)27,223
================= ================ ================
17. INCOME TAXES
The following is a reconciliation between financial accounting income
and taxable income, together with a computation of income taxes for
the years ended December 31, 1998, 1999 and 2000 (in millions of
Korean won):
1998 1999 2000
---------------- ---------------- -----------------
Income (loss) before income taxes and minority interest (Won)4,245 (Won)5,416) (Won)135
Additions (deductions):
Provision for severance indemnities 2 439 632
Loss from valuation of inventories 289 375 153
Entertainment expenses 112 406 656
Accrued interest income 189 824 82
Gain on valuation of marketable securities (3,777) 2,585 1,163
Reversal of tax-free reserves 377 377 1,081
Special deduction for increase in capital stock (312) (338) -
Net loss of consolidated affiliate 1,568 2,765 4,163
Provision for doubtful accounts - - 5,015
Depreciation - 109 1,162
Foreign exchange loss (gain) - - (51)
Equity in losses of affiliate - 50 9,664
Other (24) (420) 431
---------------- ---------------- -----------------
Net taxable income (Won)2,669 (Won)1,756 (Won)24,286
================ ================ =================
Corporate income taxes at statutory Korean corporate
income tax rates of 28% (Won)735 (Won)468 (Won)6,776
Special tax credit for small and medium-sized venture
companies - (96) (362)
Tax credit for technology and human resource development
and capital investments (377) (114) (2,861)
---------------- ---------------- -----------------
Corporate income taxes payable 358 258 3,553
Resident surtax payable 36 26 355
Special surtax for agriculture and fishery industries 23 19 38
---------------- ---------------- -----------------
Total income taxes payable (Won)417 (Won)303 (Won)3,946
================ ================ =================
The provision for income taxes for the years ended December 31, 1998,
1999 and 2000 consists of the following (in millions of Korean won):
1998 1999 2000
----------------- ----------------- -----------------
Currently payable (Won)417 (Won)303 (Won)3,946
Deferred (note a) - (5,699) (8,298)
Adjustments (note b) - - 750
----------------- ----------------- -----------------
Income tax expense (benefit) (Won)417 (Won)5,396) (Won)3,602)
================= ================= =================
(note a) Effective January 1, 1999, in accordance with Korean
GAAP, the Company was required to account for deferred
income taxes. The cumulative effect on prior periods of
such change in accounting policy was reflected as a direct
adjustment to unappropriated retained earnings as of
January 1, 1999, in accordance with Korean GAAP.
Restatement of prior period financial statements is not
permitted (see Note 2(q)).
(note b) As described in Note 5, in 2000, the Company recognized its
share of Lycos Korea's 1999 loss amounting to (Won)1,685
million, net of income tax effect of (Won)750 million,
as an adjustment to beginning retained earnings during the
year ended December 31, 2000. Accordingly, the tax effect
of (Won)750 million was also recognized as an adjustment
to deferred tax assets as of January 1, 2000.
The difference between income tax expense (benefit) computed using the
statutory income tax rate and the recorded income tax benefit for the
years ended December 31, 1999 and 2000 is attributable to the following
(in millions of Korean won):
1999 2000
---------------- ----------------
Income tax expense (benefit) at statutory income tax rate of 28% (Won)1,516) (Won)38
Resident surtax (151) 4
Tax credit for technology and human resource development and
capital investments (4,212) (3,991)
Special deduction for increase in capital stock (104) -
Special tax credit for small and medium-sized venture companies (106) (398)
Net loss of consolidated subsidiaries (note a) 851 1,282
Other (158) (537)
---------------- ----------------
Recorded income tax benefit (Won)5,396) (Won)3,602)
================ ================
(note a) A full valuation allowance has been provided for the tax
effect of the net loss of the consolidated subsidiaries, as
the realization of the resulting deferred tax asset is
uncertain.
The tax effects of each type of temporary difference and tax credit
carryforwards that gave rise to a significant portion of the deferred
tax liabilities and assets at January 1, 1999 and December 31, 1999 and
2000 are as follows (in millions of Korean won):
January 1, December 31, December 31,
1999 1999 2000
---------------- ----------------- -----------------
Current:
Accrued interest income (Won)596) (Won)342) (Won)42)
Gain on valuation of marketable securities (1,163) (367) (9)
Loss from valuation of inventories 89 204 252
Tax-free reserves (116) (116) (333)
Other 3 3 3
---------------- ----------------- -----------------
Sub-total (1,783) (618) (129)
---------------- ----------------- -----------------
Non-current portion:
Provision for severance indemnities 222 358 552
Tax-free reserves (999) (883) (333)
Net loss of consolidated subsidiaries (note a) - - -
Tax credit carryforwards (note b) 2,319 6,406 7,345
Research and development costs - 146 97
Equity in losses of affiliate - 15 4,106
Depreciation - 33 392
Provision for doubtful accounts - - 1,545
Other 7 8 188
---------------- ----------------- -----------------
Sub-total 1,549 6,083 13,892
---------------- ----------------- -----------------
Total deferred tax assets (liabilities) (Won)234) (Won)5,465 (Won)13,763
================ ================= =================
(note a) Although the tax effect of the net loss carryforwards of
the consolidated subsidiaries gave rise to the deferred tax
assets totaling (Won)505 million, (Won)54 million and
(Won)1,336 million at January 1, 1999 and December 31,
1999 and 2000, respectively, a full valuation allowance has
been provided for such tax effect, as the realization of
the resulting deferred tax asset is uncertain.
(note b) At December 31, 2000, the Company had tax credit
carryforwards for tax purposes relating to technology and
human resource development and capital investments, of
which (Won)488 million will expire in 2004,
(Won)3,354 million in 2006 and (Won)3,503 million in
2007.
18. INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the years ended December 31,
1998, 1999 and 2000 are computed as follows (in millions of Korean won,
except for share data):
1998 1999 2000
------------------ ------------------ ------------------
Net income (loss) (Won)3,828 (Won)236) (Won)4,270
Weighted average number of common shares (note a) 98,300,086 108,053,500 120,838,609
------------------ ------------------ ------------------
Basic and diluted income (loss) per common
share (note b) (Won)39 (Won)2) (Won)35
================== ================== ==================
(note a) Weighted average numbers of common shares and per share
amounts have been adjusted to give effect to the 1:50 stock
split declared on March 2, 1998.
(note b) Stock options to purchase 969,000 shares of common stock
at (Won)8,018 per share were outstanding as of December 31,
2000 but were not included in the computation of diluted
earnings per share because the options exercise price was
greater than the average market price of the common shares
and therefore, the effect would be anti-dilutive.
19. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
A substantial portion of the Company and its subsidiaries' sales for
the years ended December 31, 1998, 1999 and 2000 are made to customers
in the semiconductor industry. Details of customers accounting for 10%
or more of the Company and its subsidiaries' sales are as follows (in
millions of Korean won):
Customers 1998 1999 2000
---------------------------------------------------- ------------------ ------------------ ----------------
Samsung Electronics Co., Ltd. (Won)8,039 (Won)13,164 (Won)19,459
Hyundai Electronics Industries Co., Ltd. (note a) 1,439 683 8,579
Hyundai Micro Electronics Co., Ltd. (formerly LG
Semicon Co., Ltd.) (note a) 1,423 - -
Perfect Dynasty Ltd. 2,205 - -
LG Electronics Co., Ltd. - - 7,950
King Yuan Elec Co., Ltd. - - 8,909
IBM Italia spa 1,852 52 52
EEMS Italia - 3,705 2,043
21st Century Tech. Co., Ltd. (note b) - 4,437 -
Quad Systems Co., Ltd - 4,810 8,438
Panasia Infortech Co., Ltd. - - 8,463
! KMT - - 8,197
INFINEON - - 6,303
BANNER - - 6,122
Other 2,056 18,830 61,584
------------------ ------------------ ----------------
(Won)17,014 (Won)45,681 (Won)146,099
================== ================== ================
(note a) In 1999, Hyundai Micro Electronics Co., Ltd. (formerly LG
Semicon Co., Ltd.) merged with Hyundai Electronics
Industries Co., Ltd. This company's name was changed to
Hynix Semiconductor on April 9, 2001.
(note b) See Note 15.
The related accounts receivable balances from the above major customers
as of December 31, 1998, 1999 and 2000 are as follows (in millions of
Korean won):
Customers 1998 1999 2000
---------------------------------------------------- ---------------- ----------------- -----------------
Samsung Electronics Co., Ltd. (Won)1,039 (Won)3,725 (Won)890
Hyundai Electronics Industries Co., Ltd. 661 254 899
Hyundai Micro Electronics Co., Ltd. 1,274 - -
Perfect Dynasty Ltd. 766 - -
LG Electronics Co., Ltd - - 329
King Yuan Elec Co., Ltd - - 3,199
EEMS Italia - - 189
Quad Systems Co., Ltd. - 3,142 -
Panasia Infortech Co., Ltd. - - 8,463
KMT - - 2,100
INFINEON - - 3,118
BANNER - - 6,146
Other 700 8,855 40,530
---------------- ----------------- -----------------
Total 4,440 15,976 65,863
Allowance for doubtful accounts (44) (494) (657)
Present value discount - - (108)
---------------- ----------------- -----------------
Net (Won)4,396 (Won)15,482 (Won)65,098
================ ================= =================
20. SEGMENT INFORMATION
(1) Export Sales
The Company had foreign export sales amounting to 28.58%, 35.19%
and 40.42% of total sales for the years ended December 31, 1998,
1999 and 2000, respectively. The export sales were made principally
to the following locations:
1998 1999 2000
--------------- ----------------- ---------------
Asia 17.32% 8.06% 24.81%
Europe 11.26% 13.63% 6.16%
United States - 13.50% 9.45%
--------------- ----------------- ---------------
28.58% 35.19% 40.42%
=============== ================= ===============
(2) Business Segment
Through 1998, the Company had operated in one major business
segment, the handler manufacturing business. As the Company
expanded its sales of SMD placement systems, TFT-LCD handlers and
testers and security solutions, additional business segments were
designated. Sales, operating income (loss), identifiable assets,
capital expenditures and depreciation as of and for the years ended
December 31, 1999 and 2000, pertaining to the business segments in
which the Company and its subsidiaries operated are presented as
follows (in millions of Korean won):
Depreciation of
Operating Identifiable Capital property, plant
Sales income (loss) assets expenditures and equipment
--------------------------------------------- -----------------------------------
(As of and for the year ended December 31, 1999)
Handlers and components (Won)20,326 (Won)723 (Won)28,676 (Won)1,180 (Won)804
SMD placement systems 14,298 (8,953) 58,455 10,515 2,081
TFT-LCD handlers and testers 3,334 (3,303) 6,175 528 292
Lead frame magazines 3,451 204 1,701 28 70
Security solutions 4,272 911 4,026 307 107
Research and development
center - - 11,896 9,713 2,135
Other - - - 919 281
------------- --------------- ---------------- ------------- -------------
Consolidated (Won)45,681 (Won)10,418) (Won)110,929 (Won)23,190 (Won)5,770
============== =============== ================ ============== =============
(As of and for the year ended December 31, 2000)
Handlers and components (Won)43,754 (Won)6,420 (Won)40,420 (Won)431 (Won)976
SMD placement systems 71,251 944 126,532 2,946 3,556
TFT-LCD handlers and testers 11,166 1,860 4,173 318 426
Lead frame magazines 4,733 277 1,650 - 12
Security solutions 9,501 1,643 19,972 919 330
Research and development
center - - 15,964 1,923 2,257
LCD merchandise business 5,050 302 10,980 - -
Other 644 (3,947) - 63,871 1,455
---------------- -------------- -------------- --------------- --------------
Consolidated (Won)146,099 (Won)7,499 (Won)219,691 (Won)70,408 (Won)9,012
================ ============= ================ ============== =============
21. COMMITMENTS AND CONTINGENCIES
In accordance with normal Korean business practices the Company has
provided two blank checks to Seoul Guarantee Insurance Company ("Seoul
Guarantee") as collateral for performance guarantees it has provided to
certain of the Company's significant customers for the timely delivery
of goods and satisfaction of warranty obligations. In the event Seoul
Guarantee pays claims on such guarantees, the blank checks would be
utilized by Seoul Guarantee to recover resulting losses from the
Company up to a total maximum amount of (Won)1,000 million. Company
management does not currently anticipate any such losses.
In addition, in accordance with normal Korean business practices, at
the request of a significant customer the Company has provided a blank
promissory note to such customer in order to guarantee the timely
delivery of goods and satisfaction of warranty obligations. In the
event the Company failed to properly perform its contractual
obligations to such customer, the blank note would be utilized by the
customer to recover resulting losses. There is no legal limit to the
exposure of the Company in connection with this arrangement. Because of
the general nature of the underlying contractual agreement with such
customer, it is not possible to determine the Company's potential loss
exposure associated with this arrangement. Company management does not
currently anticipate any such loss.
As of December 31, 2000, the Company has been provided with guarantees
on import financing totaling US$13,800,000 and US$10,000,000 from Korea
Exchange Bank and Hana Bank, respectively. As of December 31, 2000, the
unused amounts of such guarantees received from Korea Exchange Bank and
Hana Bank were US$5,436,208 and US$9,122,508, respectively.
As of December 31, 2000, the Company is contingently liable for notes
sold at discount with recourse of (Won)3,989 million, which were
deducted from accounts receivable - trade at December 31, 2000.
22. INSURANCE
At December 31, 2000, certain of the Company's assets are insured with
local insurance companies as follows (in millions of Korean won):
Asset Risk Book value Coverage
--------------------------- ----------------------------------- ------------------- -------------------
Property, plant and
equipment Fire and comprehensive liability (Won)53,020 (Won)49,489
Inventories Comprehensive liability 70,887 16,500
------------------- -------------------
Total (Won)123,907 (Won)65,989
=================== ===================
Pursuant to an exclusive three year OEM sales and distribution contract
with Quad Systems Corporation ("Quad"), a United States corporation,
the Company maintains product liability insurance coverage amounting to
US$1 million to third parties arising out to its SMD placement systems
manufactured and exported to North and South America, Europe, Africa,
Israel and Turkey. In addition, the Company carries director and
officer liability insurance policies against loss arising from any
claims made against the directors and officers for any alleged wrongful
acts in their respective capacities as directors or officers of the
Company, up to US$3 million.
23. LONG-TERM SALES AND DISTRIBUTION CONTRACT
On June 1, 1999, the Company entered into an exclusive three year OEM
sales and distribution contract with Quad Systems Corporation ("Quad"),
a United States corporation, whereby Quad was designated as the
exclusive distributor of certain models of the Company's SMD placement
systems in North and South America, Europe, Africa, Israel and Turkey.
In addition, on December 7, 1999, the Company entered into an exclusive
three year sales and distribution contract with Ryoko Sangyo
Corporation ("Ryoko"), a Japanese corporation, whereby Ryoko was
designated as the exclusive distributor of certain models of the
Company's SMD placement systems in Japan. Under the terms of both sales
and distribution contracts, legal title passes to the distributor upon
product shipment for which payment is not contingent upon the resale of
product to customer.
24. STOCK OPTION COMPENSATION PLAN
On March 25, 2000, in accordance with the approval of its shareholders,
the Company granted stock options to its employees, representing
2,052,000 common shares of the Company, at an exercise price of
(Won)8,018 per share. However, a certain portion of the stock
options representing 1,083,000 common shares was cancelled during the
year ended December 31, 2000 and accordingly, the outstanding stock
options as of December 31, 2000 represented 969,000 common shares. The
stock options shall become exercisable after three years from the date
of grant and shall be exercisable within five years from the first
exercisable date. When the length of employment is less than two years
after the grant of stock option, the Company may cancel the stock
options awarded. Upon exercise of stock options, in accordance with the
sole discretion of the board of directors, the Company may (1) grant
newly issued common stock, (2) grant treasury stock or (3) grant the
net difference in exercise price and market price with either cash or
treasury stock.
As described in Note 2, the Company adopted the fair value based method
of accounting for the stock option compensation plan, in which fair
value is determined using the Black-Scholes option-pricing model,
without considering a volatility factor in estimating the value of its
stock options, as permitted under Korean GAAP. Under these accounting
policies, compensation cost is measured at (Won)1,528 million and is
recognized over the service period (2 years). Such compensation cost
for the year ended December 31, 2000 of (Won)588 million was
recognized.
The pro forma consolidated net income and consolidated net income per
common share for the year ended December 31, 2000 would have been
(Won)3,662 million and (Won)30, respectively, assuming the
Company had considered a volatility factor in estimating the value of
its stock options.
In addition, the weighted average fair value of options granted during
the year ended December 31, 2000 was (Won)1,577 per share when the
volatility factor was not considered in estimating the value of the
stock options; and (Won)3,935 per share when the volatility factor
was considered. The fair value of the stock option grant was estimated
based on the following assumptions for the year ended December 31,
2000: dividend yield of 18.5%; expected volatility of 64.25%; risk-free
interest rate of 8.65%; and expected lives of 4 years.
25. ALLOWANCE FOR DOUBTFUL LONG-TERM LOANS
On December 18, 2000, Quad Systems Corporation, one of the Company's
major customers, filed a voluntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code of the United States of
America. Before Quad filed the voluntary petition for reorganization
under Chapter 11, on September 29, 2000 the Company entered into an
agreement with Quad to convert the Company's trade receivables to
long-term loans, which bear a fixed interest rate of 9% and have a
maturity of 2 years, and accordingly, the Company reclassified those
receivables to long-term loans in the accompanying consolidated
financial statements. As of December 31, 2000, the outstanding balance
of such loans totaled approximately (Won)5,066 million and the
Company provided an allowance for the entire amount of the loans, which
was recorded as a loss in other expense.
26. SUBSEQUENT EVENT
On March 24, 2001, in accordance with the approval of its shareholders,
the Company granted stock options to its employees, representing
2,480,000 common shares of the Company, at an exercise price of
(Won)1,780 per share.
27. UNCERTAINTIES IN BUSINESS ENVIRONMENT
Beginning in 1997, Korea and other countries in the Asia Pacific region
experienced a severe contraction in substantially all aspects of their
economies. This situation is commonly referred to as the 1997 Asian
financial crisis. In response to this situation, the Korean government
and the private sector began implementing structural reforms to
historical business practices.
The Korean economy is currently experiencing additional difficulties,
particularly in the areas of restructuring private enterprises and
reforming the banking industry. The Korean government continues to
apply pressure on Korean companies to restructure into more efficient
and profitable firms. The banking industry is currently undergoing
consolidations and significant uncertainty exists with regard to the
availability of short-term financing during the coming year. The
Company and its subsidiaries may be either directly or indirectly
affected by the situation described above.
The accompanying consolidated financial statements reflect management's
current assessment of the impact to date of the economic situation on
the financial position of the Company and its subsidiaries. Actual
results may differ materially from management's current assessment.
The semiconductor industry in Korea is highly competitive and
concentrated, with a relatively small number of large semiconductor
manufacturers. The industry is characterized by rapid technological
changes and fluctuating product prices. The rapid rate of technological
change within the industry will require the Company to continually
develop new and improved products and processes to maintain its
competitive position. The Company's future operating results will be
affected by a wide variety of factors, including general economic
conditions and conditions specific to semiconductor-related industries,
timing of new product introductions (both by the Company and its
competitors), competitive pricing, timely and efficient completion of
product design and the availability of new manufacturing technologies.
28. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA
The consolidated financial statements have been prepared in accordance
with Korean GAAP, which differs in certain respects from accounting
principles generally accepted in the United States of America ("US
GAAP"). The significant differences are described below. Other
differences were determined not to have a significant effect on either
the Company and its subsidiaries' consolidated net income or
shareholders' equity.
a. Deferred Income Taxes (see Note 2)
Under previous Korean GAAP, the provision for income taxes was
determined based on the amount currently payable under the Korean
corporate income tax law. No deferred income taxes were provided.
However, effective January 1, 1999, Korean GAAP was changed to
require the recognition of deferred tax assets and liabilities for
the future tax consequences of operating loss and tax credit
carryforwards and differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases.
The need for a valuation allowance on deferred tax assets depends on
the likelihood of realization. Under US GAAP, the realization of
deferred tax assets depends on an objectively verifiable estimate of
future income which is commonly based on pretax accounting income
(or losses) of the current and immediate two preceding years. Under
Korean GAAP, no such practice has evolved.
Under US GAAP, deferred tax assets and liabilities are separated
into their current and non-current portions based on the
classification of related asset or liability for financial reporting
purposes. Under revised Korean GAAP, deferred tax assets and
liabilities are presented on the balance sheet as a single
non-current net number.
b. Research and Development Costs (see Note 2)
As permitted under previous Korean GAAP, through 1997 the Company
elected to charge research and development costs to expense as
incurred. During 1998, the Company deferred certain research and
development costs which met specific criteria and amortized these
costs over five years. The amortization of deferred research and
development costs was classified as other expense items. In
connection with a change in Korean GAAP, effective January 1, 1999,
the Company continues to defer development costs which meet specific
conditions such as new product development, technological
feasibility, marketability and usefulness, and expenses research
costs and ordinary development costs as incurred. Amortization of
deferred development costs and research and ordinary development
expenses are classified as manufacturing costs or selling, general
and administrative expenses depending on their nature.
Research and development costs charged to expense under US GAAP
totaled (Won)13,094 million, (Won)16,963 million and (Won)
20,752 million for the years ended December 31, 1998, 1999 and 2000,
respectively.
c. Stock Issuance Costs
Under previous Korean GAAP, stock issuance costs were capitalized
and amortized over a period not to exceed three years. Effective
January 1, 1999, Korean GAAP was changed to require that stock
issuance costs be netted against the related proceeds from stock
issuance, in line with US GAAP.
d. Marketable Securities and Investment Securities (see Notes 2(e) and 2(l))
Debt and equity securities bought and held for the purpose of
selling them in the near term are considered marketable securities
and other securities are investment securities.
Under previous Korean GAAP, marketable securities and investment
securities had been stated at cost. However, if the market value of
listed equity securities or the net book value of non-listed equity
securities declined below cost and the decline was not deemed
recoverable, marketable securities and investment securities were
stated at market value or net book value.
Under current Korean GAAP, effective from the Company's 1998 fiscal
year, marketable securities and equity investment securities in
listed companies are stated at market value; and equity investment
securities in non-listed companies are generally stated at cost.
Under US GAAP, effective January 1, 1994, Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain
Investments in Debt and Equity Securities", requires that marketable
equity securities and all debt securities be classified into three
categories and be accounted for as follows:
o Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
o Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with
unrealized gains and losses included in income.
o Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.
Under US GAAP, the Company's marketable securities are classified as
trading securities at December 31, 1998, 1999 and 2000. All
investment securities consist of equity investments in non-listed
companies, which are not affected by SFAS No. 115. Gross proceeds
from the sale of marketable securities were (Won)92,018 million,
(Won)105,353 million and (Won) 107,756 million for the years
ended December 31, 1998, 1999 and 2000, respectively. The net
realized gains arising from such sales were (Won)2,157 million,
(Won)4,815 million and (Won)3,378 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
Information with respect to marketable securities affected by SFAS
No. 115 at December 31, 1998, 1999 and 2000 is as follows (in
millions of Korean won):
Gross Gross
unrealized unrealized Fair
Cost gains losses value
----------------- --------------- ----------------- ----------------
At December 31, 1998:
Debt securities (Won)50,730 (Won)3,777 (Won)- (Won)54,507
================= =============== ================= ================
At December 31, 1999:
Equity securities (Won)4,325 (Won)1,186 (Won)82) (Won)5,429
Debt securities 6,684 1,110 (131) 7,663
----------------- --------------- ----------------- ----------------
(Won)11,009 (Won)2,296 (Won)213) (Won)13,092
================= =============== ================= ================
At December 31, 2000:
Debt securities 8,831 29 - 8,860
----------------- --------------- ----------------- ----------------
(Won)8,831 (Won)29 (Won) - (Won)8,860
================= =============== ================= ================
e. Revenue Recognition
Under Korean GAAP, sales are recognized at the time products are
delivered to customers. Under US GAAP, product sales are recognized
upon final customer acceptance and passage of legal title. Final
customer acceptance and passage of legal title first require the
completion of installation and final calibration of the products
within the customer's production line, which typically occurs
between one month and one year after product delivery. Under US
GAAP, amounts received on products where delivery has occurred but
final customer acceptance and passage of legal title have not yet
occurred are recorded as advance receipts from customers in the
current liabilities section of the balance sheets.
Under US GAAP, sales recognition is not permitted where there is an
obligation to repurchase finished or semi-finished products from an
outsourced manufacturer. Under Korean accounting practices, sales
recognition is permitted in such cases. The Company recognized sales
upon the supply of raw materials to its outsourced manufacturer,
21st Century Tech. Co., Ltd., in which the raw materials are used in
the manufacture of semi-finished products to be purchased by the
Company. Sales for the year ended December 31, 1999, which were not
recognized under US GAAP, include the sales of raw materials to 21st
Century Tech. Co., Ltd. in the amount of(Won)4,437 million, which
approximated cost plus a 10% margin.
f. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
US GAAP (SFAS No. 121) requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity, be
reviewed for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an
impairment loss for long-lived assets and identifiable intangibles
that an entity expects to hold and use is based on the fair value of
the asset.
SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower
of the carrying amount or fair value, less cost to sell. Under US
GAAP after an asset write- down, representing the new carrying
amount, subsequent recoveries in value may not be recognized,
whereas under Korean GAAP, such recoveries are recognized as gains
to the extent of impairment losses previously recognized.
The Company has made significant additions to its facilities in
recent years. Because of a decline in sales, the Company has
reviewed its long-lived assets for potential impairment in
accordance with the provisions of SFAS 121 and determined the
carrying values are appropriately recorded.
g. Costs for Product Warranties
Under Korean accounting practices, product warranty expenditures are
included as incurred in manufacturing costs, which are allocated
between cost of sales and inventories. Such amounts included in
inventories as of December 31, 1998 only are charged to cost of
sales as the related inventories are sold. Under US GAAP, warranty
costs are accrued at the time of sale based on historical experience
and expected future costs.
h. Comprehensive Income
Under Korean GAAP, there is no requirement to present comprehensive
income. Under US GAAP, effective for fiscal years beginning after
December 15, 1997, comprehensive income and its components must be
presented in the financial statements. Comprehensive income includes
all changes in shareholders' equity during a period except those
resulting from investments by, or distributions to, owners,
including certain items not included in the current results of
operations. There were no such changes in the Company's
shareholders' equity in all periods presented.
i. Dividends
Under Korean GAAP, proposed cash dividends are recorded as a current
liability. Under US GAAP, a liability for cash dividends is not
recorded until the dividends have been approved.
j. Loss from Valuation of Inventories
Under Korean GAAP, loss from valuation of inventories is classified
as other expense, while loss from valuation of inventories is
classified as cost of sales under US GAAP.
k. Applying the Equity Method of Accounting
Under US GAAP, when an investor holds other types of interest (for
example, loans and preferred stock) in addition to common stock of
an investee accounted for by the equity method of accounting and the
investor's share of losses of the investee exceed the carrying
amount of the common stock investment, additional equity method
losses are recognized by the investor. Under Korean GAAP, no such
additional losses are required to be recognized by the investor. If
the investee subsequently reports net income or issues its common
stock, the investor shall resume applying the equity method and
recognize its share of the net loss not recognized during the period
the equity method was suspended as an adjustment to retained
earnings from prior periods, under Korean GAAP.
As of December 31, 1999, the Company had a 50% equity ownership in
Lycos Korea as well as loans outstanding of (Won)6,250 million.
Application of US GAAP to this investment resulted in recording
equity losses of (Won)4,871 million for the year ended December
31, 1999. Subsequent to December 31, 1999, Lycos Korea issued and
sold 3,122 additional shares at a premium to outside entities. Such
issuance resulted in increasing shareholders' equity of Lycos Korea
by (Won)56,196 million. After issuance of new common stock, the
shareholders' equity of Lycos Korea was (Won)51,325 million,
compared to a deficiency in assets of Lycos Korea of (Won)4,871
million before the new common stock issuance and at December 31,
1999. As a result of the increase in shareholders' equity, 50% of
the 1999 additional equity losses under US GAAP, amounting to
(Won)2,435 million, which was recognized by the Company in excess
of its investment balance, was reversed by the Company during the
year ended December 31, 2000 for US GAAP purposes.
Summary financial information of Lycos Korea as of December 31, 1999
and 2000 and for the period from May 21, 1999 (date of
incorporation) to December 31, 1999 and for the year ended December
31, 2000 is as follows (in millions of Korean won):
December 31, December 31,
1999 2000
----------------------- ----------------------
Current assets
Cash and cash equivalents (Won)1,176 (Won)1,024
Other current assets 1,897 30,409
Property and equipment, net 3,515 17,085
Investments - 8,969
Other assets 351 4,115
----------------------- ----------------------
(Won)6,939 (Won)61,602
Total assets
======================= ======================
Current liabilities (Won)3,944 18,945
Long-term borrowings from affiliate 6,250 6,250
Obligations under capital lease 1,616 7,243
Severance indemnities - 66
----------------------- ----------------------
Total liabilities 11,810 32,504
----------------------- ----------------------
Common stock 100 116
Additional paid-in capital - 56,169
Accumulated deficit (4,971) (27,187)
----------------------- ----------------------
Total shareholders' equity (deficiency in assets) (4,871) 29,098
----------------------- ----------------------
Total liabilities and shareholders' equity (deficiency in
assets) (Won)6,939 (Won)61,602
======================= ======================
Period from May 21,
1999 to December 31, Year ended December
1999 31, 2000
----------------------- ----------------------
Sales (Won)1,392 (Won)13,315
Cost of sales (727) (9,089)
Selling, general and administrative expenses (5,468) (27,287)
Other income (expenses), net (168) 845
----------------------- ----------------------
Net loss (Won)4,971) (Won)22,216)
======================= ======================
l. Sales of Stock by Subsidiary and Affiliate
Under US GAAP, a parent company or investor may elect the accounting
effect for sales of stock by a subsidiary or affiliate which is
accounted for by the equity method, in either the income statement
or as an equity transaction depending on certain criteria being met.
Such election must be applied consistently and on a prospective
basis for all subsidiary and/or affiliate stock transactions. The
Company elected income statement recognition in accounting for the
sales of stock by its subsidiary and affiliate. Under Korean GAAP, a
parent company or investor is required to account for sales of stock
by a subsidiary or affiliate which is accounted for by the equity
method, as an equity transaction included in capital surplus.
m. Depreciation
As allowed under Korean GAAP, six months' depreciation expense is
recorded for assets placed in service in the second half of the year
in accordance with Korean tax law. Under US GAAP, depreciation
expense commences in the month the related asset is placed in
service.
n. Accounting for Employee Stock Option Compensation Plan
Korean GAAP permits all entities to exclude the volatility factor in
estimating the value of their stock options, which results in
minimizing the measurement. Under US GAAP, public entities are not
permitted to exclude the volatility factor in estimating the value
of their stock options.
o. Gain on Disposal of the Investments in Common Stock of Subsidiary
Under Korean GAAP, gain on disposal of investments in common stock
of subsidiary incurred from a transaction between the Company and
its subsidiary's employees, which should be included in capital
surplus, is measured based on the actual selling price and the
carrying value of such investment. Under US GAAP, however, if the
actual selling price differs from the fair value of the investment
at the transaction date, such gain should be measured based on the
fair value of the investment and the difference between the fair
value and the actual selling price should be recorded as an employee
benefits expense.
p. Provision for Doubtful Other Accounts
Under Korean GAAP, provisions for doubtful accounts other than trade
receivables are classified as other expenses while provisions for
doubtful trade receivables are classified as selling, general and
administrative expenses. In 2000, as described in Note 25, the
Company reclassified trade receivables due from Quad Systems
Corporation as long-term loans, provided a full allowance for those
loans, and recorded a loss in other expenses in accordance with
Korean GAAP. Under US GAAP, however, this provision was recorded as
selling, general and administrative expenses considering the
original nature of those receivables.
q. Minority Interest in Equity of Consolidated Subsidiaries
Under previous Korean GAAP, minority interest in equity of
consolidated subsidiaries was presented as a separate item from
shareholders' equity. Effective January 1, 2000, Korean GAAP was
changed to require that minority interest in equity of consolidated
subsidiaries be included in shareholders' equity. Under US GAAP,
minority interest is presented as a separate item from shareholders'
equity.
r. Recently Issued Accounting Pronouncement
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS
133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company has adopted
SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not
have a significant impact on the financial position, results of
operations, or cash flows of the Company.
Sales, cost of sales, gross profit, operating expenses, operating
income (loss) and net income (loss) under US GAAP in 1998, 1999 and
2000 are as follows (in millions of Korean won):
1998 1999 2000
------------------ ------------------ ------------------
Sales (Won)19,619 (Won)51,358 (Won)143,643
Cost of sales 12,500 35,832 100,098
Gross profit 7,119 15,526 43,545
Operating expenses 18,342 26,689 55,448
Operating loss (*) (11,223) (11,163) (11,903)
Net income (loss) (*) 2,888 (117) 9,290
(*) See reconciliation of amounts from Korean GAAP to US GAAP below.
The following table reconciles net income (loss) and operating
income (loss) for the years ended December 31, 1998, 1999 and 2000
and shareholders' equity as of December 31, 1998, 1999 and 2000
under Korean GAAP, as reported in the consolidated financial
statements, to the net income (loss), operating income (loss) and
shareholders' equity amounts determined under US GAAP, giving effect
to adjustments for the differences listed above (in millions of
Korean won, except per share amounts):
1998 1999 2000
---------------- ------------------ ----------------
Net income (loss) based on Korean GAAP (Won)3,828 (Won)236) (Won)4,270
Adjustments:
Revenue recognition timing difference related to
deliveries awaiting final customer acceptance 1,930 3,236 (169)
Revenue recognition timing difference related to
sales with obligation to repurchase - (85) 85
Warranty expenditures capitalized in inventories (552) 552 -
Warranty cost accrual 3,235 (220) (1,543)
Research and development costs (8,326) (4,107) (5,865)
Write-off of impaired research and development
costs under Korean GAAP - 3,859 -
Depreciation - 597 -
Foreign exchange gain (note a) 14 - -
Deferred charges 200 5 -
Equity in losses of affiliate - (4,871) 2,435
Sales of stock by subsidiary and affiliate - 1,205 33,350
Employee benefits related to disposal of
subsidiary's stock - - (5,120)
Compensation cost related to stock options - - (880)
Deferred income taxes 2,559 (52) (17,273)
---------------- ------------------ ----------------
Net income (loss) based on US GAAP (Won)2,888 (Won)117) (Won)9,290
================ ================== ================
Net income (loss) per share (basic and diluted) based
on US GAAP (In Korean won) (Won)29 (Won)1) (Won)77
================ ================== ================
(note a) Under US GAAP, monetary assets and liabilities denominated
in foreign currencies are translated at the actual prevailing
rates of exchange on the balance sheet dates. However, as
described in Note 2(s), monetary assets and liabilities of the
Company and its subsidiaries denominated in foreign currency
are translated at the Base Rates announced by the Korean
government on the balance sheet dates, as allowed under Korean
GAAP. Accordingly, the resulting differences in the calculated
foreign currency translation gain and loss amounts are
considered a US GAAP adjustment.
1998 1999 2000
------------------ ----------------- ----------------
Operating income (loss) based on Korean GAAP (Won)7,221) (Won)10,418) (Won)7,499
Adjustments:
Revenue recognition timing difference related to
deliveries awaiting final customer acceptance 1,930 3,236 (169)
Revenue recognition timing difference related to
sales with obligation to repurchase - (85) 85
Warranty expenditures capitalized in inventories (552) 552 -
Warranty cost accrual 3,235 (220) (1,543)
Research and development costs (8,326) (4,107) (5,865)
Depreciation - 597 -
Deferred charges - 5 -
Employee benefits related to disposal of
subsidiary's stock - - (5,120)
Compensation cost related to stock options - - (880)
Provision for doubtful other accounts - - (5,066)
Loss from valuation of inventories (289) (723) (844)
------------------ ----------------- ----------------
Operating loss based on US GAAP (Won)11,223) (Won)11,163) (Won)11,903)
================== ================= ================
1998 1999 2000
------------------- ------------------ -----------------
Shareholders' equity based on Korean GAAP (Won)156,101 (Won)155,851 (Won)327,370
Adjustments:
Revenue recognition timing difference related to
deliveries awaiting final customer acceptance (4,455) (1,219) (1,388)
Revenue recognition timing difference related to
sales with obligation to repurchase - (85) -
Warranty expenditures capitalized in inventories (552) - -
Warranty cost accrual (663) (883) (2,426)
Research and development costs (8,326) (8,574) (14,440)
Depreciation - 597 597
Deferred charges (101) - -
Equity in losses of affiliate - (4,871) -
Deferred income taxes 4,077 4,259 (13,762)
Proposed dividends 1,837 2,161 1,846
Minority interest in equity of consolidated
subsidiaries - (1,272) (9,695)
------------------- ------------------ -----------------
Shareholders' equity based on US GAAP (Won)147,918 (Won)145,964 (Won)288,101
=================== ================== =================
Changes in shareholders' equity based on US GAAP for the years ended
December 31, 1998, 1999 and 2000 are as follows (in millions of Korean
won):
1998 1999 2000
------------------- ------------------ -----------------
Balance, beginning of the period (Won)101,729 (Won)147,918 (Won)145,964
Net income (loss) for the period 2,888 (117) 9,290
Cash dividends (5,621) (1,837) (2,161)
Issuance of common stock 50,350 - 128,118
Stock options - - 1,468
Gain on disposal of the investment in common
stock of subsidiary - - 5,422
Net increase in treasury stock (1,428) - -
------------------- ------------------ -----------------
Balance, end of the period (Won)147,918 (Won)145,964 (Won)288,101
=================== ================== =================
A reconciliation of the significant balance sheet accounts, except for
the shareholders' equity items listed above, to the amounts determined
under US GAAP as of December 31, 1998, 1999 and 2000, is as follows (in
millions of Korean won):
1998 1999 2000
------------------ ----------------- -----------------
Current assets:
As reported (Won)105,447 (Won)87,794 (Won)186,223
US GAAP adjustments
- accounts receivable - trade (3,558) (3,429) (1,115)
- inventories 9,693 3,540 5,703
- deferred income tax assets - 56 -
------------------ ----------------- -----------------
As adjusted 111,582 87,961 190,811
------------------ ----------------- -----------------
Non-current assets:
As reported 72,820 93,427 192,949
US GAAP adjustments
- deferred income tax assets 4,114 4,203 (13,763)
- deferred charges (101) - -
- research and development costs (8,326) (8,574) (14,440)
- property, plant and equipment - 597 597
- investment securities - (4,871) -
------------------ ----------------- -----------------
As adjusted 68,507 84,782 165,343
------------------ ----------------- -----------------
Total assets based on US GAAP (Won)180,089 (Won)172,743 (Won)356,154
================== ================= =================
Current liabilities:
As reported (Won)11,049 (Won)23,413 (Won)39,982
US GAAP adjustments
- advance receipts from customers 11,763 1,776 6,546
- provision for warranty cost 42 522 1,856
- dividends payable (1,837) (2,161) (1,845)
- deferred income tax liabilities 37 - -
------------------ ------------------ -----------------
As adjusted 21,054 23,550 46,539
------------------ ------------------ -----------------
Long-term liabilities:
As reported 11,117 1,957 11,819
US GAAP adjustments - - -
------------------ ------------------ -----------------
As adjusted 11,117 1,957 11,819
------------------ ------------------ -----------------
Minority interest in equity of consolidated
subsidiaries:
As reported - - -
US GAAP adjustments - 1,272 9,695
------------------ ------------------ -----------------
As adjusted - 1,272 9,695
------------------ ------------------ -----------------
Total liabilities and minority interest based on US
GAAP (Won)32,171 (Won)26,779 (Won)68,053
================== ================== =================
The following table reconciles cash flows from operating and investing
activities for the years ended December 31, 1998, 1999 and 2000 under
Korean GAAP, as reported in the consolidated financial statement, to
cash flows from operating and investing activities for the years ended
December 31, 1998, 1999 and 2000 under US GAAP, giving effect to
adjustments for the differences listed in this Note (in millions of
Korean won):
1998 1999 2000
----------------- ---------------- ----------------
Cash flows from operating activities based on Korean
GAAP (Won)12,375 (Won)21,020) (Won)62,537)
Adjustments:
Reclassification of payments for research and
development (10,407) (6,084) (8,287)
----------------- ---------------- ----------------
Cash flows from operating activities based on US GAAP (Won)1,968 (Won)27,104) (Won)70,824)
================= ================ ================
Cash flows from investing activities based on Korean
GAAP (Won)62,345) (Won)38,362 (Won)53,321)
Adjustments:
Reclassification of payments for research and
development 10,407 6,084 8,287
----------------- ---------------- ----------------
Cash flows from investing activities based on US GAAP (Won)51,938) (Won)44,446 (Won)45,034)
================= ================ ================
29. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP
a. Income Taxes
Income tax expense (benefit) under US GAAP for the years ended
December 31, 1998, 1999 and 2000 is as follows (in millions of Korean
won):
1998 1999 2000
---------------- ---------------- ----------------
Currently payable (Won)417 (Won)303 (Won)3,946
Deferred (2,559) (5,646) 9,724
---------------- ---------------- ----------------
Income tax expense (benefit) (Won)2,142) (Won)5,343) (Won)13,670
================ ================ ================
The difference between income tax expense (benefit) computed using
the statutory income tax rate and the recorded income tax expenses
(benefit) for the years ended December 31, 1998, 1999 and 2000 is
attributable to the following (in millions of Korean won):
1998 1999 2000
----------------- ---------------- ----------------
Income tax expense (benefit) at Statutory Korean
Corporate Income Tax rates of 28% (Won)209 (Won)1,468) (Won)7,714
Resident surtax
21 (147) 771
Tax credit for technology and human resource
development and capital investments (2,734) (4,212) (3,991)
Special tax credit for small and medium-sized venture
companies - (106) (398)
Net loss of consolidated subsidiaries (note a) 483 851 1,282
Special deduction for increase in capital stock (96) (104) -
Change in valuation allowance (note b) - - 8,829
Other (25) (157) (537)
----------------- ---------------- ----------------
Recorded income tax expense (benefit) (Won)2,142) (Won)5,343) (Won)13,670
================= ================ ================
Effective tax rate - - 59.54%
================= ================ ================
(note a) A full valuation allowance has been provided for the tax
effect of the net loss of the consolidated subsidiaries, as
the realization of the resulting deferred tax asset is
uncertain.
(note b) At December 31, 2000 the Company and its subsidiaries'
net deferred tax assets are fully offset by a valuation
allowance. The Company will continue to assess the
valuation allowance and to the extent it is determined that
such allowance is no longer required, a tax benefit will be
recognized.
The tax effects of each type of temporary difference and the tax credit
carryforwards that gave rise to a significant portion of the deferred
tax assets and liabilities at December 31, 1998, 1999 and 2000,
computed under US GAAP, and a description of the financial statement
items that created these differences are as follows (in millions of
Korean won):
1998 1999 2000
------------------ ----------------- ----------------
Current:
Accrued interest income (Won)596) (Won)342) (Won)42)
Gain on valuation of marketable securities (1,163) (367) (9)
Loss from valuation of inventories 89 204 252
Revenue recognition timing difference related to
deliveries awaiting final customer acceptance 1,372 375 428
Revenue recognition timing difference related to
sales with obligation to repurchase - 26 -
Warranty cost accrual 374 272 747
Tax-free reserves (116) (116) (333)
Other 4 4 2
----------------- ----------------- ----------------
(36) 56 1,045
------------------ ----------------- ----------------
Non-Current:
Provision for severance indemnities 222 357 552
Research and development costs 2,564 2,786 4,544
Tax-free reserves (999) (883) (333)
Tax credit carryforwards 2,319 6,406 7,345
Net loss of consolidated subsidiaries 505 54 1,336
Equity in losses of affiliate - 1,516 4,106
Sales of stock by subsidiary and affiliate - (371) (10,643)
Stock options - - 452
Provision for bad debt accounts - - 1,545
Depreciation - (184) (208)
Other 8 41 424
---------------- ----------------- -----------------
4,619 9,722 9,128
------------------ ----------------- -----------------
Total 4,583 9,778 10,165
Valuation allowance (505) (54) (10,165)
------------------ ----------------- -----------------
Total deferred tax assets (Won)4,078 (Won)9,724 (Won) -
================== ================= =================
b. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments as of December 31, 1998,
1999 and 2000.
Cash and Cash Equivalents, Short-term Financial Instruments, Accounts
Receivable (trade and other), Short-term Loans, Accounts Payable
(trade and other) and Short-Term Borrowings
The carrying amount approximates fair value due to the short maturity
of these instruments.
Marketable Securities and Investment Securities
The fair value of marketable securities is estimated based on quoted
market price. For non-marketable equity securities held for
investment purposes, a reasonable estimate of fair value could not be
made without incurring excessive costs. Additional information
pertinent to these investments is provided in Note 5.
Long-Term Bank Deposits
The carrying amount approximates fair value based on interest rates
currently available for similar deposits.
Long-Term Loans and Long-Term Receivables
The fair value of long-term loans and long-term receivables is
estimated by discounting the future cash flows using the current
interest rate of time deposits with a maturity of one year.
Long-Term Borrowings
The fair value of long-term borrowings is estimated based on the
quoted market prices for the same or similar issues or on the current
rates offered for debt with the same remaining maturity.
The fair value of financial instruments under US GAAP as of December
31, 1998, 1999 and 2000 is as follows (in millions of Korean won):
1998 1999 2000
----------------------- -------------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
------------- --------- ---------- ----------- ------------- ----------
Financial assets:
Cash and cash equivalents (Won)359 (Won)359 (Won)3,351 (Won)3,351 (Won)34,914 (Won)34,914
Short-term financial instruments 34,774 34,774 16,786 16,786 424 424
Marketable securities 54,507 54,507 13,092 13,092 8,860 8,860
Accounts receivable (trade and other)
including long-term receivable 843 843 12,322 12,322 65,276 65,276
Investment securities, excluding
investments accounted for under
the equity method 3,613 N/A 5,109 N/A 16,050 N/A
Long-term bank deposits 9,373 9,373 521 521 284 284
Restricted deposits 5 5 3 3 6 6
Short-term and long-term loans 3,303 2,399 4,005 3,554 7,890 7,549
---------------- --------------- --------------
(Won)106,777 (Won)55,189 (Won)133,704
================ =============== ===============
Financial liabilities:
Accounts payable (trade
and other) (Won)3,298 (Won)3,289 (Won)17,572 (Won)17,572 (Won)20,261 (Won)20,261
Short-term borrowings 5,189 5,189 - - 3,500 3,500
Long-term borrowings including
current portion 9,600 9,600 - - - -
--------------- -------------- -------------
(Won)18,087 (Won)17,572 (Won)23,761
=============== =============== ==============
c. Segment Information
Export Sales
The Company had foreign export sales under US GAAP amounting to
24.79%, 31.31% and 41.13% of total sales for the years ended
December 31, 1998, 1999 and 2000, respectively. The export sales
under US GAAP were made principally to the following locations:
1998 1999 2000
---------------- ---------------- ---------------
Asia 15.02% 7.17% 25.24%
Europe 9.77% 12.12% 6.27%
United States - 12.02% 9.62%
---------------- ---------------- ---------------
24.79% 31.31% 41.13%
================ ================ ===============
Business Segment
The Company has operated in one major business segment, the handler
manufacturing business. As the Company expanded its sales of SMD
placement systems, TFT-LCD handlers and testers and security
solutions, additional business segments were designated. Sales,
operating income, identifiable assets, capital expenditures and
depreciation under US GAAP as of and for the years ended December
31, 1999 and 2000, pertaining to the business segments in which the
Company and its subsidiaries operated are presented as follows (in
millions of Korean won):
Depreciation of
property, plant
Operating Identifiable Capital and
Sales loss assets expenditures Equipment
-------------------------------------------------------------------------------------
(As of and for the year ended December 31, 1999)
Handlers and components (Won)30,440 (Won)3,123 (Won)28,367 (Won)1,180 (Won)718
SMD placement systems 9,861 (8,831) 51,968 10,515 1,658
TFT-LCD handlers and testers 3,334 (2,943) 5,449 528 204
Lead frame magazines 3,451 204 1,701 28 70
Security solutions 4,272 642 3,817 307 107
Chemical vapour deposition - (3,228) - - -
Research and development
center - - 11,896 9,713 2,135
Other - (130) - 919 281
-------------------------------- --------------------------------------------------
Consolidated (Won)51,358 (Won)11,163) (Won)103,198 (Won)23,190 (Won)5,173
======================================================================================
Depreciation of
property, plant
Operating Identifiable Capital and
Sales loss assets expenditures Equipment
-------------------------------------------------------------------------------------
(As of and for the year ended December 31, 2000)
Handlers and components (Won)43,604 (Won)4,507 (Won)42,452 (Won)431 (Won)976
SMD placement systems 71,250 (8,072) 117,442 2,946 3,556
TFT-LCD handlers and testers 8,861 992 4,779 318 426
Lead frame magazines 4,733 277 1,650 - 12
Security solutions 9,501 (4,122) 19,145 919 330
Chemical vapour deposition - - - - -
Research and development
center - - 15,964 1,923 2,257
LCD merchandise business 5,050 302 10,980 - -
Other (note a) 644 (5,787) - 63,871 1,455
------------------------------------------------------------------------------------
Consolidated (Won)143,643 (Won)11,903) (Won)212,412 (Won)70,408 (Won)9,012
====================================================================================
In addition to business segment identifiable assets, total assets
as of December 31, 1999 and 2000 of (Won)172,743 million and
(Won)356,154 million, respectively, include unallocated
corporate assets consisting of cash and investments (Won)38,863
million and (Won)60,755 million as of December 31, 1999 and
2000, respectively), land (Won)8,331 million and (Won)44,790
million as of December 31, 1999 and 2000, respectively), loans-net
(Won)3,474 million and (Won)7,890 million as of December 31,
1999 and 2000, respectively), deferred tax assets (Won)9,724
million and nil as of December 31, 1999 and 2000, respectively) and
other (Won)9,153 million and (Won)30,307 million as of
December 31, 1999 and 2000, respectively).
The unallocated other corporate assets of (Won)30,307 million as
of December 31, 2000 consisted of long-term receivables of
(Won)6,250 million to Lycos Korea, Inc., building of
(Won)19,915 million and other fixed assets of (Won)4,142
million, respectively.
(Note a) Other capital expenditures included land and building
acquired for office building in Seoul for (Won)36,459 million
and (Won)19,915 million, respectively.