<PAGE> 1
FORM 10-Q/A
AMENDMENT NO. 1
------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
COMMISSION FILE NUMBER: 000-29472
AMKOR TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
------------------------
23-1722724
(I. R. S. -- EMPLOYER IDENTIFICATION NO.)
1345 ENTERPRISE DRIVE, WEST CHESTER, PENNSYLVANIA 19380
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(610) 431-9600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock as of
August 5, 1998 was 117,860,000.
<PAGE> 2
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A is being filed as Amendment No. 1 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998. This Form 10-Q/A is being filed with the Securities and Exchange
Commission to amend and restate the Registrant's consolidated balance sheet as
of June 30, 1998, the Registrant's consolidated statements of income for the six
months ended June 30, 1998 and the three months ended June 30, 1998, the
Registrant's consolidated statement of cash flows for the six months ended June
30, 1998, the Registrant's results of operations table for the six months ended
June 30, 1998 and Exhibit 27.1, Financial Data Schedule. Financial results
contained herein reflect the fact that prior to May 1, 1998 certain of the
Company's subsidiaries were taxed as S corporations and, as a result, did not
recognize any provision for federal income taxes. This Form 10-Q/A is being
filed because the previously estimated tax provision was revised in the fourth
quarter based upon the full year results of the S corporation. Consequently, the
second quarter and year-to-date June 1998 results have been restated to reflect
$5.3 million and $4.5 million, respectively, in income taxes attributable to the
S corporation shareholders, and a corresponding reduction in income taxes
attributable to the Registrant. All proforma financial data included herein
include a proforma provision to reflect the U.S. federal and state income taxes,
which would have been recorded by the Company if these subsidiaries had been C
corporations. There was no impact on proforma net income and proforma per share
amounts.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED
AND RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 90,917 $170,461
Short-term investments.................................... 2,524 2,824
Accounts receivable --
Trade, net of allowance for doubtful accounts of $4,234
and $5,593............................................ 102,804 106,112
Due from affiliates.................................... 14,431 39,333
Other.................................................. 4,879 5,675
Inventories............................................... 115,870 93,044
Other current assets...................................... 26,997 16,233
-------- --------
Total current assets.............................. 358,422 433,682
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 427,061 422,533
-------- --------
INVESTMENTS:
ASI at equity............................................. 13,863 --
Other..................................................... 5,958 5,836
-------- --------
Total investments................................. 19,821 5,836
-------- --------
OTHER ASSETS:
Due from affiliates....................................... 29,186 25,308
Other..................................................... 21,102 60,060
-------- --------
50,288 85,368
-------- --------
Total assets...................................... $855,592 $947,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of Long-term
debt................................................... $167,317 $ 32,973
Trade accounts payable.................................... 113,037 92,863
Due to affiliates......................................... 15,581 2,413
Bank overdraft............................................ 29,765 12,937
Accrued expenses.......................................... 43,973 90,784
Accrued income taxes...................................... 26,968 27,956
-------- --------
Total current liabilities......................... 396,641 259,926
-------- --------
LONG-TERM DEBT.............................................. 196,934 18,120
-------- --------
CONVERTIBLE SUBORDINATED NOTES.............................. -- 207,000
-------- --------
DUE TO ANAM USA, INC........................................ 149,776 --
-------- --------
OTHER NONCURRENT LIABILITIES................................ 12,084 11,559
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 12) MINORITY
INTEREST.................................................. 9,282 --
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock.............................................. 46 118
Additional paid-in capital................................ 20,871 381,487
Retained earnings......................................... 70,621 69,209
Cumulative translation adjustment......................... (663) --
-------- --------
Total stockholders' equity........................ 90,875 450,814
-------- --------
Total liabilities and stockholders' equity........ $855,592 $947,419
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 4
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET REVENUES................................................ $663,490 $756,457
COST OF REVENUES -- including purchases from ASI.......... 586,542 627,162
-------- --------
GROSS PROFIT.............................................. 76,948 129,295
-------- --------
OPERATING EXPENSES:
Selling, general and administrative....................... 47,265 57,654
Research and development.................................. 3,515 3,995
-------- --------
Total operating expenses.......................... 50,780 61,649
-------- --------
OPERATING INCOME............................................ 26,168 67,646
-------- --------
OTHER (INCOME) EXPENSE:
Interest expense, net..................................... 16,355 14,397
Foreign currency loss..................................... 100 3,703
Other expense, net........................................ 1,287 5,897
-------- --------
Total other expense............................... 17,742 23,997
-------- --------
INCOME BEFORE INCOME TAXES, EQUITY IN INCOME OF ASI AND
MINORITY INTEREST......................................... 8,426 43,649
PROVISION FOR INCOME TAXES.................................. 2,689 8,159
EQUITY IN INCOME OF ASI..................................... - --
MINORITY INTEREST........................................... 1,859 559
-------- --------
NET INCOME................................................ $ 3,878 $ 34,931
======== ========
PRO FORMA DATA (UNAUDITED):
Historical income before income taxes, equity in income of
ASI and minority interest.............................. $ 8,426 $ 43,649
Pro forma provision for income taxes...................... 5,389 12,659
-------- --------
Pro forma income before equity in income of ASI and
minority interest...................................... 3,037 30,990
Historical equity in income of ASI........................ -- --
Historical minority interest.............................. 1,859 559
-------- --------
Pro forma net income...................................... $ 1,178 $ 30,431
======== ========
Basic and diluted pro forma net income per common
share................................................. $ .01 $ .32
======== ========
Shares used in computing basic pro forma net income per
common share.............................................. 82,610 94,323
======== ========
Shares used in computing diluted pro forma net income per
common share.............................................. 82,610 99,519
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 5
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET REVENUES................................................ $350,471 $384,724
COST OF REVENUES -- including purchases from ASI............ 299,093 317,106
-------- --------
GROSS PROFIT................................................ 51,378 67,618
-------- --------
OPERATING EXPENSES:
Selling, general and administrative....................... 26,657 28,939
Research and development.................................. 2,030 1,938
-------- --------
Total operating expenses.......................... 28,687 30,877
-------- --------
OPERATING INCOME............................................ 22,691 36,741
-------- --------
OTHER (INCOME) EXPENSE:
Interest expense, net..................................... 8,306 4,875
Foreign currency loss..................................... 1,590 956
Other expense, net........................................ (319) 1,808
-------- --------
Total other expense............................... 9,577 7,639
-------- --------
INCOME BEFORE INCOME TAXES, EQUITY IN INCOME OF ASI AND
MINORITY INTEREST......................................... 13,114 29,102
PROVISION FOR INCOME TAXES.................................. 4,186 3,109
EQUITY IN INCOME OF ASI..................................... -- --
MINORITY INTEREST........................................... 221 (126)
-------- --------
NET INCOME.................................................. $ 8,707 $ 26,119
======== ========
PRO FORMA DATA (UNAUDITED):
Historical income before income taxes, equity in income of
ASI and minority interest.............................. $ 13,114 $ 29,102
Pro forma provision for income taxes...................... 5,327 8,437
-------- --------
Pro forma income before equity in income of ASI and
minority interest...................................... 7,787 20,665
Historical equity in income of ASI........................ -- --
Historical minority interest.............................. 221 (126)
-------- --------
Pro forma net income...................................... $ 7,566 $ 20,791
======== ========
Basic pro forma net income per common share............... $ .09 $ .20
======== ========
Diluted pro forma net income per common share............. $ .09 $ .19
======== ========
Shares used in computing basic pro forma income per common
share..................................................... 82,610 106,035
======== ========
Shares used in computing diluted pro forma net income per
common share.............................................. 82,610 116,427
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 6
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,878 $ 34,931
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................... 42,766 56,321
Provision for accounts receivable....................... 800 1,359
Provision for excess and obsolete inventory............. 3,700 7,200
Deferred income taxes................................... (1,982) 3,357
Equity (gain) loss of investees......................... (1,022) --
Loss on sale of fixed assets and investments............ -- 1,307
Minority interest....................................... 1,859 559
Changes in assets and liabilities excluding effects of
acquisitions
Accounts receivable..................................... (20,158) 1,933
Proceeds from sale/(repurchase of) accounts
receivable............................................. -- (12,900)
Other receivables....................................... (1,727) (796)
Inventories............................................. (18,876) 15,626
Due to/from affiliates, net............................. (5,735) (34,192)
Other current assets.................................... (3,490) 5,638
Other non-current assets................................ (3,252) (2,689)
Accounts payable........................................ 68,080 (13,874)
Accrued expenses........................................ 4,990 43,731
Accrued taxes........................................... 716 988
Other long-term liabilities............................. 801 242
Other, net.............................................. -- --
--------- ---------
Net cash provided by operating activities.......... 71,348 108,741
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, including
purchase of AATS........................................ (114,439) (51,926)
Acquisition of minority interest in AAP................... -- (33,750)
Acquisition AKI........................................... -- (3,244)
Sale of property, plant and equipment..................... 858 75
Purchases of investments and issuances of notes
receivable.............................................. (14,092) (300)
Proceeds from sale of investments......................... -- 122
--------- ---------
Net cash used in investing activities.............. (127,673) (89,023)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank overdrafts and short-term Borrowings... 33,905 (177,896)
Net proceeds from issuance of 35,250,000 common shares in
public offering, net.................................... -- 360,689
Proceeds from issuance of Anam USA, Inc. debt............. 432,644 522,116
Payments of Anam USA, Inc. debt........................... (390,834) (658,029)
Net proceeds from issuance of long-term debt.............. 10,056 203,298
Payments of long-term debt................................ (18,698) (157,252)
Distributions to stockholders............................. (5,000) (33,100)
Change in division equity account......................... 5,531 --
--------- ---------
Net cash provided by financing activities.......... 67,604 59,826
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 11,279 79,544
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 49,664 90,917
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 60,943 $ 170,461
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 28,696 $ 18,353
Income taxes............................................ 329 4,013
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 7
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Amkor
Technology, Inc. and its subsidiaries (the "Company"). All of the Company's
subsidiaries are wholly owned except for a small number of shares of each of the
Company's Philippine subsidiaries which are required to be owned by directors of
these companies pursuant to Philippine law.
The consolidated financial statements reflect the elimination of all
significant intercompany accounts and transactions.
The investments in and the operating results of 20% to 50% owned companies
are included in the consolidated financial statements using the equity method of
accounting.
Prior to the Reorganization (as defined below), the Company's financial
statements were presented on a combined basis as a result of common ownership
and business operations of all the Amkor Companies (as defined below), including
AK Industries, Inc. ("AKI"). The Reorganization was treated similar to a pooling
of interests as it represented an exchange of equity interests among companies
under common control, except for the acquisition of AKI, which was accounted for
as a purchase transaction. The purchase price for the AKI stock, which
represented the fair value of these shares, approximated the book value of AKI.
Reorganization
Prior to the Reorganization (as defined herein), the combined financial
statements of Amkor Technology, Inc. ("ATI") and its subsidiaries and AKI and
its subsidiary included the accounts of the following based on the ownership
structure prior to the Reorganization (these companies are referred to as the
"Amkor Companies"):
- Amkor Electronics, Inc., ("AEI") a U.S. S Corporation and its wholly
owned subsidiaries Amkor Receivables Corp and Amkor Wafer Fabrication
Services SARL (a French Limited Company) ("AWFS").
- T.L. Limited ("TLL") (a British Cayman Island Corporation) and its
Philippine subsidiaries, Amkor Anam Advanced Packaging, Inc. ("AAAP")
(wholly owned) and Amkor/Anam Pilipinas, Inc. ("AAP") (which was owned
60% by TLL and 40% by Anam Semiconductor, Inc. (which changed its name in
1998 from Anam Industrial Co., Ltd.) ("ASI") ) and its wholly-owned
subsidiary Automated MicroElectronics, Inc. ("AMI");
- C.I.L., Limited ("CIL") (a British Cayman Islands Corporation) and its
wholly-owned subsidiary Amkor/Anam Euroservices S.A.R.L. ("AAES") (a
French Corporation);
- Amkor Anam Test Services, Inc. (a U.S. Corporation);
- The semiconductor packaging and test business unit of Chamterry
Enterprises, Ltd. ("Chamterry"). During the third quarter of 1997
Chamterry transferred its customers to AEI and CIL and ceased operations
of its semiconductor and test business unit; and
- AKI (a U.S. Corporation) and its wholly owned subsidiary Amkor-Anam, Inc.
(a U.S. Corporation);
Prior to the Reorganization, all of the Amkor Companies were substantially
wholly owned by Mr. and Mrs. James Kim or entities controlled by members of Mr.
James Kim's immediate family (the "Founding Stockholders"), except for AAP which
was 40% owned by ASI and one third of AEI and all of AKI which were owned by
trusts established for the benefit of other members of Mr. James Kim's family
("Kim Family Trusts"). The Amkor Companies were an interdependent group of
companies involved in the same business
5
<PAGE> 8
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
under the direction of common management. ATI was formed in September 1997 to
facilitate the Reorganization and consolidate the ownership of the Amkor
Companies. In connection with the Reorganization, AEI was merged into ATI. Amkor
International Holdings ("AIH"), a Cayman Islands holding company, became a
wholly owned subsidiary of ATI. AIH was formed to hold the following entities:
First Amkor Caymans, Inc. ("FACI"), which was formed to hold AAAP, AAP and its
subsidiary AMI, TLL and its subsidiary CIL and CIL's subsidiary AAES. The
relative number of shares of common stock issued by the Company in connection
with each of the transactions comprising the Reorganization was based upon the
relative amounts of stockholders' equity at December 31, 1997. On April 14,
1998, Mr. and Mrs. James Kim and the Kim Family Trusts received two-thirds
(9,746,760 shares) and one-third (4,873,380 shares) of the ATI common stock
outstanding, respectively. On April 29, 1998, ATI issued 67,989,851 shares of
common stock, representing approximately 82% of its shares immediately after the
Reorganization, in exchange for all of the outstanding shares of AIH and its
subsidiaries. Of such shares, 27,528,234 shares and 36,376,617 shares were
gifted to Mr. and Mrs. James Kim and the Kim Family Trusts, respectively, such
that Mr. and Mrs. James Kim and the Kim Family Trusts owned 45.1% and 49.9%,
respectively, of the ATI common shares outstanding after the Reorganization.
Following such transactions the Founding Stockholders beneficially owned a
majority of the outstanding shares of ATI common stock. In addition, ATI
acquired all of the stock of AKI from the Kim Family Trusts for approximately $3
million. The merger of AEI and ATI, the creation of AIH and FACI, the issuance
of ATI common stock for AIH and the acquisition of AKI are collectively referred
to as the "Reorganization". (See "-- Income Taxes" regarding change in AEI tax
status.)
Other Noncurrent Assets
Other noncurrent assets consist principally of goodwill, deferred debt
issuance costs, security deposits, deferred income taxes and the cash surrender
value of life insurance policies.
The Company recorded goodwill representing the excess of cost over the book
value of ASI's minority interest in AAP (See Note 11). Goodwill is to be
amortized on a straight line basis over a period of ten years, which is the
estimated future period to be benefited by the acquisition.
In connection with the $207,000 offering of Convertible Notes (See Note 2),
the Company incurred approximately $8,900 of debt issuance costs which have been
deferred and will be amortized and reflected as interest expense over the life
of the Notes.
Stock Options
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation for stock options is generally measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock. The
Company adopted the disclosure only requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123.
Income Taxes
The Company accounts for income taxes following the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires the use of the liability
method. If it is more likely than not that some portion or all of a deferred tax
asset will not be realized, a valuation allowance is provided.
The Company reports certain income and expense items for income tax
purposes on a basis different from that reflected in the accompanying
consolidated financial statements. The principal differences relate to the
timing of the recognition of accrued expenses which are not deductible for
federal income tax purposes until
6
<PAGE> 9
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
paid, the use of accelerated methods of depreciation for income tax purposes and
unrecognized foreign exchange gains and losses.
AEI elected to be taxed as an S Corporation under the provisions of the
Internal Revenue Code of 1986 and comparable state tax provisions. As a result,
AEI did not recognize U.S. federal corporate income taxes. Instead, the
stockholders of AEI were taxed on their proportionate share of AEI's taxable
income. Accordingly, no provision for U.S. federal income taxes was recorded for
AEI. Given the offerings (see Note 2), for informational purposes, the
accompanying consolidated statements of income include an unaudited pro forma
adjustment to reflect income taxes which would have been recorded if AEI had not
been an S Corporation, based on the tax laws in effect during the respective
periods.
Just prior to the offering, AEI terminated its S Corporation status, at
which point the profits of AEI became subject to federal and state income taxes
at the corporate level.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
Early adoption at the beginning of any quarter after issuance is permitted, but
cannot be applied retroactively. The provisions of the statement must be applied
to derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997.
The Company has not determined the timing of or method of adoption.
However, it believes that the impact of adopting SFAS No. 133 on its financial
statements will not be material.
Risks and Uncertainties
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on the highly cyclical nature of both the
semiconductor and the personal computer industries, competitive pricing and
declines in average selling prices, dependence on the Company's relationship
with ASI (see Note 9), reliance on a small group of principal customers, timing
and volume of orders relative to the Company's production capacity, availability
of manufacturing capacity and fluctuations in manufacturing yields, availability
of financing, competition, dependence on international operations and sales,
dependence on raw material and equipment suppliers, exchange rate fluctuations,
dependence on key personnel, difficulties in managing growth, enforcement of
intellectual property rights, environmental regulations and fluctuations in
quarterly operating results.
2. INITIAL PUBLIC OFFERING
ATI filed an amended registration statement on April 29, 1998 with the
Securities and Exchange Commission. On May 6, 1998, ATI completed its Initial
Public Offering of 30,000,000 shares of its common stock at a price to the
public of $11.00 per share and $180,000 aggregate principal amount of
Convertible Notes ("Initial Public Offering"). Also on May 8, 1998, ATI sold
5,250,000 additional shares of its common stock and $27,000 additional principal
amounts of Convertible Notes in conjunction with the underwriters'
7
<PAGE> 10
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
over-allotment options. The net proceeds were approximately $559,757, after
deducting the underwriter discounts and estimated offering expenses. The
convertible notes 1) are convertible into ATI common stock at $13.50 per share;
2) are callable in certain circumstances after three years; 3) are unsecured and
subordinate to senior debt; 4) carry a coupon rate of 5 3/4%; and 5) have a
maturity of five years. Approximately $264,000 of the proceeds were used to
reduce short-term and long-term borrowings. Approximately $86,000 of the
proceeds were used to reduce amounts due to Anam USA, Inc., ASI's wholly-owned
Financing subsidiary ("AUSA"). Approximately $34,000 of the proceeds were used
to purchase ASI's 40% interest in AAP (See Note 11). In connection with the
offerings, one existing stockholder sold approximately 5,000,000 of his shares.
3. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements and related disclosures as of June
30, 1998 and for the three and six months ended June 30, 1997 and 1998 are
unaudited, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, these financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of the results for the interim
periods. These financial statements should be read in conjunction with the
Company's Registration Statements on Form S-1 (File Nos. 333-49645 and
333-51521) filed with the Securities and Exchange Commission. The results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
4. INVENTORIES
Inventories consist of raw materials and purchased components which are
used in the semiconductor packaging process. The Company's inventories are
located at its facilities in the Philippines or at ASI on a consignment basis.
Components of inventories follow:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and purchased components.............. $105,748 $85,837
Work-in-process..................................... 10,122 7,207
-------- -------
$115,870 $93,044
======== =======
</TABLE>
8
<PAGE> 11
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land................................................ $ 2,346 $ 2,346
Building and improvements........................... 109,528 124,405
Machinery and equipment............................. 448,032 489,580
Furniture, fixtures and other equipment............. 33,050 35,762
Construction in progress............................ 31,964 23,084
-------- --------
624,920 675,177
Less -- Accumulated depreciation and amortization... 197,859 252,644
-------- --------
$427,061 $422,533
======== ========
</TABLE>
6. STOCKHOLDERS EQUITY
At the date of the Reorganization (See Note 1), consolidated retained
earnings included $3,243 related to AKI. This amount is reflected as a reduction
in retained earnings in 1998 as a result of the purchase of AKI by ATI.
7. EARNINGS PER SHARE
The pro forma net income per common share was calculated by dividing the
pro forma net income by the weighted average number of shares outstanding for
the respective periods, adjusted for the effect of the Reorganization (see Note
1).
<TABLE>
<CAPTION>
WEIGHTED
EARNINGS AVG. SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Six Months Ended June 30, 1998
Basic Earnings Per Share..................... $30,431 94,323 $0.32
Convertible Notes............................ 1,193 5,196
Dilutive Effect of Options................... -- --
------- ------- -----
Diluted Earnings Per Share................... $31,624 99,519 $0.32
======= ======= =====
Three Months Ended June 30, 1998
Basic Earnings Per Share..................... $20,791 106,035 $0.20
Convertible Notes............................ 1,193 10,392
Dilutive Effect of Options................... -- --
------- ------- -----
Diluted Earnings Per Share................... $21,984 116,427 $0.19
======= ======= =====
</TABLE>
Stock options to purchase approximately 3 million shares of common stock at
$11.00 per share were outstanding subsequent to the Initial Public Offering, but
are excluded from the computation of diluted earnings per share as the average
market price was below the options exercise price.
8. STOCK OPTIONS
1998 Director Option Plan. The Company's 1998 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in January 1998 and was
approved by the Company's stockholders in
9
<PAGE> 12
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
April 1998. A total of 300,000 shares of Common Stock have been reserved for
issuance under the Director Plan. The option grants under the Director Plan are
automatic and non-discretionary. Generally, the Director Plan provides for an
initial grant of options to purchase 15,000 shares of Common Stock to each new
non-employee director of the Company (an "Outside Director") when such
individual first becomes an Outside Director. In addition, each Outside Director
will automatically be granted subsequent options to purchase 5,000 shares of
Common Stock on each date on which such Outside Director is re-elected by the
stockholders of the Company, provided that as of such date such Outside Director
has served on the Board of Directors for at least six months. The exercise price
of the options is 100% of the fair market value of the Common Stock on the grant
date, except that with respect to initial grants to directors on the effective
date of the Director Plan the exercise price was 94% of the Initial Public
Offering price per share of Common Stock in the Initial Public Offering. The
term of each option is ten years and each option granted to an Outside Director
vests over a three year period. The Director Plan will terminate in January 2008
unless sooner terminated by the Board of Directors. As of June 30, 1998, there
are 30,000 options outstanding under the Director Plan.
1998 Stock Plan. The Company's 1998 Stock Plan (the "1998 Plan" )
generally provides for the grant to employees, directors and consultants of
stock options and stock purchase rights. The 1998 Plan was adopted by the Board
of Directors in January 1998 and was approved by the Company's stockholders in
April 1998. Unless terminated sooner, the 1998 Plan will terminate automatically
in January 2008. The maximum aggregate number of shares which may be optioned
and sold under the 1998 Plan is 5,000,000 plus an annual increase to be added on
each anniversary date of the adoption of the 1998 Plan.
Unless determined otherwise by the Board of Directors or a committee
appointed by the Board of Directors, options and stock purchase rights granted
under the 1998 Plan are not transferable by the optionee. Generally, the
exercise price of all stock options granted under the 1998 Plan must be at least
equal to the fair market value of the shares on the date of grant. In general,
the options granted will vest over a four year period and the term of the
options granted under the 1998 Plan may not exceed ten years. As of June 30,
1998, there are 3,070,300 options outstanding under the 1998 Plan.
1998 Stock Option Plan for French Employees. The 1998 Stock Option Plan
for French Employees (the "French Plan") was approved by the Board of Directors
in April 1998. Unless terminated sooner, the French Plan will continue in
existence for five years. The French Plan provides for the granting of options
to employees for AAES and AWFS, the Company's French subsidiaries (the "French
Subsidiaries"). A total of 250,000 shares of Common Stock have been reserved for
issuance under the French Plan plus an annual increase to be added on each
anniversary date of the adoption of the French Plan. In general, stock options
granted under the French Plan vest over a four year period, the exercise price
for each option granted under the French Plan shall be 100% of the fair market
value of the shares of Common Stock on the date the option is granted and the
maximum term of the option must not exceed ten years. Shares subject to the
options granted under the French Plan may not be transferred, assigned or
hypothecated in any manner other than by will or the laws of descent or
distribution before the date which is five years after the date of grant. As of
June 30, 1998, there are 68,200 options outstanding under the French Plan.
10
<PAGE> 13
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the status of the Company's stock option plans follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance at April 1, 1998......................... -- $ --
Granted........................................ 3,175,900 10.99
Exercised...................................... -- --
Cancelled...................................... 7,400 11.00
--------- ------
Balance at June 30, 1998......................... 3,168,500 10.99
--------- ------
Exercisable at June 30, 1998..................... -- $ --
--------- ------
</TABLE>
Significant option groups outstanding at June 30, 1998 and the related
weighted average exercise price and remaining contractual life information are
as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------- ---------------- REMAINING
SHARES PRICE SHARES PRICE LIFE (YEARS)
--------- ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
OPTIONS WITH EXERCISE
PRICES OF
$11.00......................... 3,138,500 $11.00 -- $11.00 9.8
--------- ------ -- ------ ---
$10.34......................... 30,000 $10.34 -- $10.34 9.8
--------- ------ -- ------ ---
Options outstanding at June 30,
1998........................... 3,168,500 --
========= ==
</TABLE>
A summary of the weighted average fair value of options at grant date
granted during the three months ended June 30, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE GRANT DATE
OF SHARES PER SHARE FAIR VALUES
--------- ---------------- ----------------
<S> <C> <C> <C>
Options whose exercise price equals
market price on grant date............. 3,145,900 $11.00 $4.74
--------- ------ -----
Options whose exercise price is less than
the market price on grant date......... 30,000 $10.34 $4.97
--------- ------ -----
</TABLE>
In order to calculate the fair market value of stock options at date of
grant, the Company used the Black Scholes option pricing model. The following
assumptions were used: expected option term -- 4 years, stock price volatility
factor -- 47%, and dividend yield -- 0%. Risk free interest rate of 5.38% was
used.
The Company accounts for stock option awards as prescribed by Accounting
Principles Board Option 25, "Accounting for Stock Issued to Employees," and its
related interpretations. Accordingly, no compensation cost has been recognized
in the Consolidated Statements of Income. Had the Company recorded compensation
expense for the fair value of the options granted, as provided by Statement of
Financial Accounting
11
<PAGE> 14
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and basic and diluted earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- ---------------------
1997 1998 1997 1998
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Income --
As reported................................. $1,178 $30,431 $7,566 $20,791
Pro forma................................... 1,178 30,054 7,566 20,414
Earnings per share
Basic
As reported.............................. 0.01 0.32 0.09 0.20
Pro forma................................ 0.01 0.32 0.09 0.19
Diluted
As reported.............................. 0.01 0.32 0.09 0.19
Pro forma................................ $ 0.01 $ 0.31 $ 0.09 $ 0.19
</TABLE>
9. RELATIONSHIP WITH ASI
At December 31, 1997, the Company owned 8.1% of the outstanding stock of
ASI, and ASI owned 40% of AAP. On February 16, 1998, the Company sold its
investment in ASI common stock for $13,863 to AK Investments, Inc., an entity
owned by James J. Kim, based on the market value of ASI shares on the Korean
Stock Exchange. On June 1, 1998, the Company purchased ASI's interest in AAP for
approximately $34,000 (See Note 11). In 1996 and 1997, approximately 72% and
68%, respectively, of the Company's net revenues were derived from services
performed for the Company by ASI, a Korean public company in which certain of
the Company's principal stockholders hold a minority interest. By the terms of a
long-standing agreement, the Company has been responsible for marketing and
selling ASI's semiconductor packaging and test services, except to customers in
Korea and certain customers in Japan to whom ASI has historically sold such
services directly. The Company has worked closely with ASI in developing new
technologies and products. The Company has recently entered into five-year
supply agreements with ASI giving the Company the first right to market and sell
substantially all of ASI's packaging and test services and the exclusive right
to market and sell all of the wafer output of ASI's new wafer foundry. The
Company's business, financial condition and operating results have been and will
continue to be significantly dependent on the ability of ASI to effectively
provide the contracted services on a cost-efficient and timely basis. The
termination or disruption of the Company's relationship with ASI for any reason,
or any material adverse change in ASI's business resulting from underutilization
of its capacity, the level of its debt and its guarantees of affiliate debt,
labor disruptions, fluctuations in foreign exchange rates, changes in
governmental policies, economic or political conditions in Korea or any other
change could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company previously has met a significant portion of its financing from
financing arrangements provided by AUSA. A majority of the amount due to AUSA
represented outstanding amounts under financing obtained by AUSA for the benefit
of the Company with the balance representing payables to AUSA for packaging and
service charges paid to ASI. Based on guarantees provided by ASI, AUSA obtained
for the benefit of the Company a continuous series of short-term financing
arrangements which generally were less than six months in duration, and
typically were less than two months in duration. Because of the short-term
nature of these loans, the flows of cash to and from AUSA under this arrangement
were significant. Purchases from ASI through AUSA were $354,062, $460,282 and
$527,858 for 1995, 1996 and 1997, respectively. Charges from AUSA for interest
and bank charges were $4,484, $7,074 and $6,002 for 1995, 1996 and 1997,
respectively. Amounts payable to ASI and AUSA were $252,221, and $156,350 at
December 31, 1996 and 1997, respectively.
12
<PAGE> 15
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ASI's ability to continue to provide services to the Company will depend on
ASI's financial condition and performance. ASI currently has a significant
amount of debt relative to its equity, which debt the Company expects will
continue to increase in the foreseeable future. The Company is advised that ASI,
as a public company in Korea, has published its most recent annual consolidated
financial statements as of December 31, 1997. These consolidated financial
statements are prepared on the basis of Korean GAAP, which differs from U.S.
GAAP. U.S. GAAP financial statements are not available. As of December 31, 1997,
ASI, on a consolidated basis, had current liabilities of approximately W2,124
billion, including approximately W1,721 billion of short-term borrowings and
approximately W121 billion of current maturities of long-term debt, and had
long-term liabilities of approximately W1,710 billion, including approximately
W737 billion of long-term debt and approximately W862 billion of long-term
capital lease obligations. As of such date, the total shareholders' equity of
ASI amounted to approximately W77 billion. The deterioration of the Korean
economy in recent months and the resulting liquidity crisis in Korea have led to
sharply higher domestic interest rates and reduced opportunities for refinancing
or refunding maturing debts as financial institutions in Korea, which are
experiencing financial difficulties, are increasingly looking to limit their
lending, particularly to highly leveraged companies, and to increase their
reserves and provisions for non- performing assets. Therefore, there can be no
assurance that ASI will be able to refinance its existing loans or obtain new
loans, or continue to make required interest and principal payments on such
loans or otherwise comply with the terms of its loan agreements. Any inability
of ASI to obtain financing or generate cash flow from operations sufficient to
fund its capital expenditure, debt service and repayment and other working
capital and liquidity requirements could have a material adverse effect on ASI's
ability to continue to provide services and otherwise fulfill its obligations to
the Company. In addition, ASI has obtained a significant amount of financing
through arrangements by AUSA. As an overseas subsidiary of ASI, AUSA was formed
with the approval of the Bank of Korea. If the Bank of Korea were to withdraw
such approval, or if AUSA otherwise ceased operations for any reason, ASI would
be required to meet their financing needs through alternative arrangements.
As of December 31, 1997, ASI and its consolidated subsidiaries were
contingently liable under guarantees in respect of debt of its non-consolidated
subsidiaries and affiliates in the aggregate amount of approximately W857
billion. As of December 31, 1997, such guarantees included those in respect of
all of AUSA's debt totaling $319,200, $176,250 of the Company's debt to banks
and the Company's obligations under a receivables sales arrangement. Prior to
the Initial Public Offering, the Company met a significant portion of its
financing needs through financing arrangements obtained by AUSA for the benefit
of the Company based on guarantees provided by ASI. The Company currently does
not depend on such financing arrangements. In addition, if any relevant
subsidiaries or affiliates of ASI were to fail to make interest or principal
payments or otherwise default under their debt obligations guaranteed by ASI,
ASI could be required under its guarantees to repay such debt, which event could
have a material adverse effect on its financial condition and results of
operations.
10. ADVANCES TO ASI
The Company incurs charges from ASI for assembly and test services
performed on a monthly basis. Historically the Company has paid ASI for these
services on net 30-day terms. On July 21, 1998 the Company entered into a
prepayment agreement with ASI relating to assembly and test services. In
accordance with the agreement, the Company made a $50,000 non-interest bearing
advance to ASI representing approximately one month's charges for assembly and
test services. The Company will offset this advance against billings by ASI for
assembly and test services provided in the fourth quarter of 1998. This amount
will be reflected in the current portion of Due from Affiliate.
In connection with its wafer foundry agreement with Texas Instruments, Inc.
(TI), the Company and TI agreed to revise certain payment and other terms
contained in the Master Purchase Agreement entered into during 1998 ("Master
Purchase Agreement"). As part of this agreement TI agreed to advance ATI $20,000
in June 1998 as a prepayment of wafer foundry services to be provided in the
fourth quarter of 1998. The
13
<PAGE> 16
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company has recorded this amount in accrued expenses. The Company in turn
advanced these funds to ASI as a prepayment for foundry service charges. The
Company will offset the advance to ASI against billings by ASI in the fourth
quarter of 1998. This amount is reflected in the current portion of Due from
Affiliate. Under the terms of the revision to the Master Purchase Agreement, the
Company is ultimately responsible to reimburse TI for any inability of ASI to
comply with the terms of the agreement.
To facilitate capacity expansion for new product lines, certain customers
advanced ATI funds to purchase certain equipment to fulfill such customer's
forecasts. In certain cases, the customer has requested that the equipment be
installed in the ASI factories. In these cases, the Company receives funds from
the customer and advances the funds to ASI. ASI in turn purchases the necessary
equipment. ASI repays ATI through a reduction of the monthly processing charges
related to the customer product being assembled. ATI will reduce its obligation
to the customer through a reduction in the accounts receivable, due from the
customer, at the time services are billed. These amounts are reflected in
Accrued Expenses and current potion of Due from Affiliate. As of June 30, 1998
this amount was approximately $5,800.
The Company utilizes Anam S&T Co, Ltd. (AST), an affiliate of ASI, as a key
supplier of leadframes. Historically, the Company has paid AST for these
services on net 30-day terms. Effective at the end of July 1998, the Company
changed its payment policy from net 30-days, to paid-in advance. Accordingly the
Company now pays for its materials before shipment. This change in payment
policy resulted in an advance to AST of approximately $5,000 at the end of July
1998. This amount will be reflected in the current portion of Due from
Affiliate.
11. ACQUISITIONS
On June 1, 1998, the Company purchased ASI's 40% interest in AAP for
$33,750. The acquisition was accounted for using the purchase method of
accounting which resulted in the elimination of the minority interest liability
reflected on the consolidated balance sheet, and the recording of approximately
$23,910 of goodwill which is being amortized over 10 years.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims incidental to the conduct of its
business. Based on consultation with legal counsel, management does not believe
that any claims to which the Company is a party will have a material adverse
effect on the Company's financial condition or results of operations.
The Company has various purchase commitments for materials, supplies and
capital equipment incidental to the ordinary conduct of business. As of June 30,
1998, the Company had commitments for capital equipment of approximately $31
million. In the aggregate, such commitments are not at prices in excess of
current market.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains "forward-looking statements" within the
meaning of the U.S. Federal securities laws, including statements regarding the
anticipated growth in the market for the Company's products, the Company's
anticipated capital expenditures and financing needs, the Company's expected
capacity utilization rates, the belief of the Company as to its future operating
performance and other statements that are not historical facts. Because such
statements include risks and uncertainties, actual results may differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in the following discussion as well as in
"Factors That May Affect Operating Results". The following discussion provides
information and analysis of the Company's results of operations for the three
months and the six months ended June 30, 1997 and 1998 and its liquidity and
capital resources and should be read in conjunction with the Company's unaudited
Consolidated Financial Statements and Notes included in Item 1. The operating
results for interim periods are not necessarily indicative of results for any
subsequent period.
Overview
Background. The Company is the world's largest independent provider of
semiconductor packaging and test services. The Company believes that it is also
one of the leading developers of advanced semiconductor packaging and test
technology in the industry. The Company offers a complete and integrated set of
packaging and test services including integrated circuit ("IC") package design,
leadframe and substrate design, IC package assembly, final testing, burn-in,
reliability testing, and thermal and electrical characterization. The Company
recently began offering wafer fabrication services. The Company provides
packaging and test services through its three factories in the Philippines as
well as the four factories of Anam Semiconductors, Inc. (formerly Anam
Industrial Co, Ltd.) (ASI) in Korea, and wafer fabrication services through
ASI's new wafer foundry, pursuant to the Supply Agreements between the Company
and ASI.
The Company was formed in September 1997 to consolidate the operations of
the Amkor Companies, including AEI which was incorporated in 1970. These
companies were under common management and in the same business prior to the
Company's formation. As a result of the Reorganization, the financial statements
included in this filing are presented on a consolidated basis. See Note 1 of
Notes to Consolidated Financial Statements. Prior to the Reorganization, AEI
elected to be taxed as an S Corporation under the Internal Revenue Code of 1986
and comparable state tax laws. Accordingly, AEI did not recognize any provision
for federal income tax expense during the periods presented in the Consolidated
Financial Statements. The Consolidated Financial Statements include a pro forma
provision for income taxes, which reflects the U.S. federal income taxes which
would have been recorded by the Company if AEI had not been an S Corporation
during these periods.
The Company's results of operations are generally affected by the
capital-intensive nature of its business. In 1997 and the six months ended June
30, 1998, the Company invested $179.0 million and $51.9 million, respectively,
in property, plant, and equipment. Increases or decreases in capacity
utilization rates can have a significant effect on gross margins since the unit
cost of packaging and test services generally decrease as fixed charges, such as
depreciation expense for the equipment, are allocated over a larger number of
units produced. The Company plans to invest an additional approximately $88.1
million in property, plant and equipment during the balance of 1998. In
addition, the Company's gross margin is significantly affected by fluctuations
in service charges paid to ASI pursuant to the Supply Agreements. Pricing
arrangements relating to packaging and test services provided by ASI to the
Company are subject to quarterly review and adjustment, and pricing arrangements
relating to wafer fabrication services provided by ASI are subject to annual
review and adjustment, in each case on the basis of factors such as changes in
the semiconductor market, forecasted demand, product mix and capacity
utilization and fluctuations in exchange rates, as well as the mutual long-term
strategic interest of the Company and ASI. The Company's results of operations
are also affected by declines over time in the average selling prices for
particular products. At times in the past, the Company has been able to offset,
at least in part, the effect of such decline on its margins by successfully
developing and marketing new products with higher margins, such as advanced
leadframe and laminate products and by taking advantage of economies of scale
and higher productivity resulting from volume production. During
15
<PAGE> 18
1998, the general slowdown in the semiconductor industry has resulted in strong
pricing pressures which have resulted in decreased average selling prices
(ASP's) on many of the Company's products. However, due to the shift in the
company's product mix to the higher priced laminate products, ASP's for the
Company overall, increased in the first six months of 1998 compared with the
same period in 1997. However, there can be no assurance that the Company will be
successful at offsetting any such declines in the future. See "Factors That May
Affect Operating Results -- Expansion of Manufacturing Capacity; Profitability
Affected by Capacity Utilization Rates."
Due to the concentration of market share in the semiconductor industry, the
Company has been largely dependent upon a small group of customers for a
substantial portion of its business. In 1997 and the six months ended June 30,
1998, 40.1% and 34.7%, respectively, of the Company's net revenues were derived
from sales to the Company's top five customers, with 23.4% and 19.4%,
respectively, derived from sales to Intel. See "Factors That May Affect
Operating Results -- Customer Concentration; Absence of Backlog."
Relationship with ASI. In 1997 and the six months ended June 30, 1998,
approximately 68% and 67%, respectively, of the Company's revenues were derived
from sales of services performed for the Company by ASI. In addition,
substantially all of the revenues of ASI in 1997 and the six months ended June
30, 1998 were derived from services sold by the Company. Historically, ASI has
directly sold packaging and test services in Japan and Korea. The Company
assumed substantially all of the marketing rights for services in Japan in
January 1998. Also, the Company recently began offering wafer fabrication
services through ASI's new deep submicron CMOS foundry which is capable of
producing up to 15,000 8" wafers per month. See "Factors That May Affect
Operating Results -- Risks Associated with New Wafer Fabrication Business." The
Company expects the proportion of its net revenues derived from sales of
services performed for the Company by ASI and the percentage of ASI's revenues
from services sold by the Company to increase as the Company begins selling the
wafer fabrication output of ASI's new wafer foundry. The Company has a first
right to substantially all of the packaging and test service capacity of ASI and
the exclusive right to all of the wafer output of ASI's new wafer foundry.
The Supply Agreements between the Company and ASI generally provide, among
other things, for periodic price reviews and adjustments and coordination of
research and development efforts regarding package design and packaging and
testing processes and technologies. The Supply Agreements have a five year
initial term and thereafter may be terminated upon five years' notice. There can
be no assurance that ASI will not terminate either Supply Agreement upon the
expiration of such initial term, or that if it does terminate a Supply
Agreement, that the Company will be able to enter into a new agreement with ASI
on terms favorable to the Company or at all.
The Company expects that the businesses of the Company and ASI will
continue to remain highly interdependent by virtue of their supply relationship,
overlaps and family ties between their respective shareholders and management,
financial relationships, coordination of product and operation plans, joint
research and development activities and shared intellectual property rights. As
a result, the Company's business, financial condition and operating results will
continue to be significantly dependent on ASI, including without limitation
ASI's ability to effectively provide the contracted services on a cost-efficient
and timely basis as well as ASI's financial condition and results of operations.
The Company will continue to be controlled to a significant degree by James Kim
and members of his family, and Mr. Kim and other members of his family will also
continue to exercise significant influence over the management of ASI and its
affiliates. In addition, the Company and ASI will continue to have certain
contractual and other business relationships and may engage in transactions from
time to time that are material to the Company. Although any such material
agreements and transactions would require approval of the Company's Board of
Directors, such transactions will generally not require any additional approval
by a separate committee comprised of the disinterested members of the Board of
Directors and conflicts of interest may arise in certain circumstances. There
can be no assurance that such conflicts will not from time to time be resolved
against the interests of the Company. The Company currently has six directors,
four of whom are disinterested. Under Delaware corporate law, each director owes
a duty of loyalty and care to the Company, which if breached can result in
personal liability for the directors. In addition, the Company may agree to
certain changes in its contractual and other business relationships with ASI,
including pricing, manufacturing allocation, capacity utilization
16
<PAGE> 19
and capacity expansion, among others, which in the judgment of the Company's
management will result in reduced short-term profitability for the Company in
favor of potential long-term benefits to the Company and ASI. There can be no
assurance that the Company's business, financial condition or results of
operations will not be adversely affected by any such decision. See
"-- Liquidity and Capital Resources" and "Factors That May Affect Operating
Results -- Dependence on Relationship with ASI; Potential Conflicts of
Interest."
Results of Operations
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................... 85.3 82.4 88.4 82.9
----- ----- ----- -----
Gross profit...................................... 14.7 17.6 11.6 17.1
Operating expenses:
Selling, general and administrative............... 7.6 7.5 7.1 7.7
Research and development.......................... 0.6 0.5 0.5 0.5
----- ----- ----- -----
Total operating expenses.................. 8.2 8.0 7.6 8.2
----- ----- ----- -----
Operating income.................................. 6.5 9.6 4.0 8.9
----- ----- ----- -----
Other (income) expense:
Interest expense, net............................. 2.4 1.3 2.5 1.9
Foreign currency (gain) loss...................... 0.5 0.2 0.0 0.5
Other expense, net................................ (0.1) 0.5 0.2 0.8
----- ----- ----- -----
Total other expense....................... 2.8 2.0 2.7 3.2
----- ----- ----- -----
Income before income taxes, equity in income
(loss) of ASI and minority interest............ 3.7 7.6 1.3 5.7
Provision for income taxes.......................... 1.2 0.8 0.4 1.1
Equity in income (loss) of ASI...................... -- -- -- --
Minority interest................................... -- -- 0.3 --
----- ----- ----- -----
Net income.......................................... 2.5 6.8 0.6 4.6
Pro forma adjustment for income taxes............... 0.3 1.4 0.4 0.6
----- ----- ----- -----
Pro forma net (loss) income....................... 2.2% 5.4% 0.2% 4.0%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30 1998 Compared to Three Months Ended June 30, 1997
Net Revenues. The Company's net revenues consist of fees for the packaging
and testing of ICs which are consigned by customers to the Company's or ASI's
factories as well as fees for wafer fabrication services provided by ASI's new
wafer foundry. The Company's net revenues increased 9.8% to $384.7 million for
the three months ended June 30, 1998, compared to $350.5 million for the same
period in 1997. The growth in revenues was attributable to a significant change
in the proportion of the Company's revenues derived from traditional leadframe
products versus laminate products and advanced leadframe products as well as
revenue from Japanese customers resulting from the assumption of marketing
rights in Japan from ASI in January 1998. During the second quarter of 1998,
laminate and advanced products represented 54% of total net revenue compared to
36% during the same period in 1997. Because the Company's laminate and advanced
leadframe products tend to have higher average selling prices than traditional
leadframe products, this change in the mix of products sold during the second
quarter of 1998 helped to offset generally declining average selling prices for
the Company's products on an overall basis. The first and second quarters of
1998 have seen a
17
<PAGE> 20
general slowdown in the semiconductor industry. This has resulted in quarter to
quarter growth of approximately 1% from the first quarter of 1998 to the second
quarter of 1998 as it relates to the packaging and test operations. Wafer
fabrication services represented only 3% of total net revenue in the second
quarter of 1998. However, revenue from wafer fabrication services increased 274%
in the second quarter of 1998 compared to the first quarter of 1998.
Gross Profit. Gross profit increased to $67.6 million, or 17.6% of net
revenues, for the three months ended June 30, 1998 from $51.4 million, or 14.7%
of net revenues, for the three months ended June 30, 1997 due primarily to
improved gross profit at the Company's newest factory, P3, compared with
negative gross profit for this factory in the three months ended June 30, 1997
while P3 was in its start-up phase. The devaluation of the Philippine peso
resulted in a reduction in the Company's peso denominated costs of its
Philippine factory operations, resulting in lower costs and improved gross
margins. The new supply agreement with ASI with respect to packaging and test
services, which went into effect on January 1, 1998, also provided the Company
with improved gross margins on products purchased from ASI during the three
months ended June 30, 1998 compared with the three months ended June 30, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $28.9 million, or 7.5% of net revenues,
during the three months ended June 30, 1998, compared to $26.7 million or, 7.6%
of net revenues, during the three months ended June 30, 1997 primarily as a
result of growth in the number of employees in the Company's marketing and sales
support groups of approximately 21% during 1997. Such growth has resulted in an
overall increase in personnel-related costs including salaries, benefits and
payroll taxes. The Company also incurred higher costs for office rental,
depreciation and other occupancy-related expenses in the three months ended June
30, 1998 as compared to the same period in 1997. This level of growth has not
continued during 1998.
Research and Development Expenses. Research and development expenses were
$1.9 million or 0.5% of net revenues during the three months ended June 30,
1998, compared to $2.0 million or 0.5% of net revenues for the same period in
1997.
Other (Income) Expense. Other expense decreased during the three months
ended June 30, 1998 to $7.6 million from $9.6 million for the same period in
1997. The decrease of $2.0 million was primarily attributable to a $3.4 million
reduction in interest expense and a $0.6 million decrease in foreign exchange
losses which was offset by a $2.1 million increase in other expenses, net.
Interest expense, net for the second quarter of 1998 decreased $3.4 million
compared to the corresponding period in 1997 due to reduced debt balances
following application of the proceeds of the Company's initial public offering
in May 1998. Other expense, net increased by $2.1 million in the second quarter
of 1998 compared to the second quarter of 1997 primarily due to financing costs
associated with the accounts receivable sale agreement entered into by the
Company in July, 1997.
Income Taxes. The Company's effective tax rate (after giving effect to the
pro forma adjustment for income taxes) for the six months ended June 30, 1998
was 29% as compared to 40.6% for the same period in 1997. The higher effective
tax rate in 1997 was attributable to losses at the Company's subsidiary which
owns P3. The Company's subsidiary that owns P3 operates under a tax holiday from
Philippine income taxes until the end of 2002. Accordingly, the company derived
no tax benefits as a result of these losses. To the extent P3 is profitable, the
Company's effective tax rate related to its Philippine operations during the tax
holiday will be less than the Philippine statutory rate of 35%.
Minority Interest. Minority interest represents ASI's ownership interest
in the consolidated net income of Amkor/Anam Pilipinas, Inc. ("AAP") .
Accordingly, the Company recorded a minority interest expense in its
consolidated financial statements relating to the minority interest in the net
income of AAP. In the second quarter of 1998, the Company purchased ASI's 40%
interest in AAP and, as a result, the Company now owns substantially all of the
common stock of AAP. The acquisition of the minority interest resulted in the
elimination of the minority interest liability and in additional goodwill
amortization of approximately $2.5 million per year.
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<PAGE> 21
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Revenues. The Company's net revenues increased 14.0% to $756.5 million
for the six months ended June 30, 1998, compared to $663.5 million for the same
period in 1997. The growth in revenues was attributable to a significant growth
in unit volumes of semiconductors packaged and tested by the Company as well as
revenue from Japanese customers resulting from the assumption of marketing
rights in Japan from ASI in January, 1998. The proportion of the Company's
revenues derived from traditional leadframe products declined in the first half
of 1998 as compared to the corresponding period in 1997 while revenues from
laminate products and advanced leadframe products increased during this period.
Because the Company's advanced leadframe and laminate products tend to have
higher average selling prices than traditional leadframe products, this change
in the mix of products sold during the first six months of 1998 helped to offset
generally declining average selling prices for the Company's products on an
overall basis.
Revenues from the Company's wafer fabrication services accounted for
approximately 2% of total revenues during the first six months of 1998.
Gross Profit. Gross profit increased to $129.3 million, or 17% of net
revenues, for the six months ended June 30, 1998 from $76.9 million, or 11.6% of
net revenues, in the six months ended June 30, 1997. In order to meet customer
demand, the Company has invested significant resources to expand its capacity in
the Philippines. In 1996 and the first six months of 1997, the Company incurred
and expensed $15.5 million and $16.6 million, respectively, of pre-operating and
start-up costs and initial operating losses in connection with its newest
factory, P3, in the Philippines. This facility operated at substantially less
than full capacity during these periods while customers were completing
qualification procedures for BGA packages to be produced at the facility. The
Company significantly increased utilization of P3 during the last six months of
1997. During the first six months of 1998, continued growth in the Company's
laminate product business have allowed it to increase the utilization of its P3
factory to the point where it is now contributing positive gross margins. In
addition to the improved margins realized at the P3 facility, overall unit
volumes increased during the six months ended June 30, 1998 which allowed the
Company to improve capacity utilization which in turn resulted in improved gross
margins. The devaluation of the Philippine peso resulted in a reduction in the
Company's peso denominated costs of its Philippine factory operations, resulting
in lower costs and improved gross margins. The new Supply Agreement with ASI
with respect to packaging and test services, which went into effect on January
1, 1998, also provided the Company with improved gross margins on products
purchased from ASI during the six months ended June 30, 1998 as compared to the
first six months of 1997. See "Factors That May Affect Operating
Results -- Expansion of Manufacturing Capacity; Profitability Affected by
Capacity Utilization Rates."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $57.7 million, or 7.7% of net revenues,
during the six months ended June 30, 1998 compared to $47.3 million, or 7.1% of
net revenues, during the six months ended June 30, 1997 as a result of growth in
the number of employees in the Company's marketing and sales support groups of
approximately 21% during 1997. Such growth has resulted in an overall increase
in personnel related costs including salaries, benefits and payroll taxes. The
Company also incurred higher costs for office rental depreciation and other
occupancy-related expenses in the first six months of 1998 as compared to the
first six months of 1997. This level of growth has not continued during 1998.
Research and Development Expenses. Research and development expenses were
$4.0 million, or 0.5% of net revenues, during the six months ended June 30,
1998, compared to $3.5 million for the same period in 1997. The increase was
primarily due to increased expenditures by the Company resulting from increased
headcount and corresponding payroll-related costs.
Other (Income) Expenses. Other expense increased during the six months
ended June 30, 1998 to $24.0 million from $17.7 million for the same period in
1997. The increase of $6.3 million was primarily attributable to a $3.7 million
increase in foreign exchange losses and a $4.6 million increase in other
expenses, net, offset in part by a $2.0 million reduction in interest expense,
net. Foreign exchange gains and losses resulted from significant changes in the
value of the Philippine peso relative to the U.S. dollar which during the six
months ended June 30, 1998 resulted in a $3.7 million dollar foreign exchange
loss consisting of realized and
19
<PAGE> 22
unrealized losses. By comparison, changes in the value of the Philippine peso
relative to the U.S. dollar resulted in a foreign currency loss of $0.1 million
for the six months ended June 30, 1997. Other expense, net increased by $4.6
million for the six months ended June 30, 1998 compared to the same period in
1997 due primarily to financing costs associated with the accounts receivable
sale agreement entered into by the Company in July 1997 as well as one time bank
charges incurred during the six months ended June 30, 1998. Interest expense,
net for the first half of 1998 decreased $2.0 million compared to the
corresponding period in 1997 due to reduced debt balances following application
of the proceeds of the Company's initial public offering.
Income Taxes. The Company's effective tax rate (after giving effect to the
pro forma adjustment for income taxes) for the six months ended June 30, 1998
was 29% as compared to 64.0% for the same period in 1997. The high effective tax
rate in 1997 was attributable to losses at the Company's subsidiary which owns
P3. The Company's subsidiary that owns P3 operates under a tax holiday from
Philippine income taxes until the end of 2002. Accordingly, the Company derived
no tax benefits as a result of these losses. To the extent P3 is profitable, the
Company's effective tax rate related to its Philippine operations during the tax
holiday will be less than the Philippine statutory rate of 35%.
Minority Interest. Minority interest represents ASI's ownership interest
in the consolidated net income of AAP. Accordingly, the Company recorded a
minority interest expense in its consolidated financial statements relating to
the minority interest in the net income of AAP. The Company has purchased ASI's
40% interest in AAP and, as a result, the Company owns all of the common stock
of AAP. The acquisition of the minority interest resulted in the elimination of
the minority interest liability and in additional amortization of approximately
$2.5 million per year.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents of $170.5
million and working capital of $168.4 million. The increase in the Company's
working capital resulted primarily from the reduction of short-term debt and
increased cash balances as a result of its initial public offering during the
second quarter of 1998. (See note 2 of Notes to Consolidated Financial
Statements)
The Company used the net proceeds received from the initial public offering
primarily to repay an aggregate of approximately $248 million of long-term debt,
including $86 million of amounts due to AUSA. In addition, the Company used such
net proceeds to repay $102 million of short-term loans and $34 million to
repurchase ASI's 40% interest in AAP. Following the application of the net
proceeds of the initial public offering, the Company had $33 million of
short-term borrowing and current portion of long-term debt, $225 million of
long-term debt, which includes $207 million of the 5.75% Convertible Notes sold
by the Company in the initial public offering, and no amounts then due to AUSA.
In addition, the remaining $176 million of such net proceeds will be available
for capital expenditures and working capital.
The Company has been investing significant amounts of capital to increase
its packaging and test services capacity, including the construction of P3, the
addition of capacity in the Company's other Philippine facilities and the
construction of a new manufacturing facility in the United States. Advanced
packaging processes are being developed at the U.S. facility. In 1997 and the
six months ended June 30, 1998, the Company made capital expenditures of $179.0
million and $51.9 million, respectively. Because the Company and ASI have added
a significant amount of packaging and test capacity in recent years, the Company
intends to decrease its level of capital expenditures in 1998. The Company
currently intends to spend approximately $140 million in capital expenditures in
1998, primarily for capacity expansion at the Company's existing facilities in
the Philippines to meet expected demand. The Company believes that expenditure
levels could increase substantially in 1999 to provide the Company with adequate
capacity.
The Company believes that its existing cash balances, cash flow from
operations, available equipment lease financing, and bank borrowings will be
sufficient to meet its anticipated cash requirements including working capital
and capital expenditures, for at least the next 12 months. There can be no
assurance, however, that lower than expected revenues, increased expenses,
increased costs associated with the purchase or maintenance of capital
equipment, decisions to increase planned capacity or other events will not cause
the
20
<PAGE> 23
Company to seek more capital, or to seek capital sooner than currently expected.
The timing and amount of the Company's actual capital requirements cannot be
precisely determined and will depend on a number of factors, including demand
for the Company's services, availability of capital equipment, fluctuations in
foreign currency exchange rates, changes in semiconductor industry conditions
and competitive factors. There can be no assurance that such additional
financing will be available when needed or, if available, will be available on
satisfactory terms. Failure to obtain any such financing could have a material
adverse effect on the Company. In addition, if the Company obtains such
financing by selling equity securities of the Company, the Company's
stockholders may experience significant dilution.
Prior to the Initial Public Offering, the Company met a significant portion
of its cash requirements for working capital and capital expenditures from a
combination of cash from operating activities, short-term and long-term bank
loans and financing obtained for the benefit of the Company by AUSA, a
wholly-owned financing subsidiary of ASI, as well as financing from a trade
receivables securitization agreement. Currently, the Company does not rely on
financing obtained for its benefit by AUSA. Cash provided by operating
activities in 1997 and the six months ended June 30, 1998 was $250.1 million and
$108.7 million, respectively. Cash provided (used) in financing activities was
$(16.0) million and $59.8 million for 1997 and the six months ended June 30,
1998, respectively.
At June 30, 1998, the Company's debt consisted of $33.0 million of
borrowings classified as current liabilities, $18.1 million of long-term debt
and capital lease obligations, $207.0 million of convertible subordinated notes,
and no amounts due to AUSA. As of June 30, 1998, the Company had extended
guarantees in respect of bank debt of affiliates in the amount of $5.0 million
and in respect of vendor obligations of an affiliate in the amount of $8.7
million, which amount may vary over time. At June 30, 1998, the Company had
$83.9 million in borrowing facilities with a number of domestic and foreign
banks, of which $57.3 million remained unused. Certain of the agreements with
such banks require compliance with certain financial covenants and restrictions,
and are collateralized by assets of the Company. These facilities are typically
revolving lines of credit and working capital facilities for one-year renewable
periods and generally bear interest at rates ranging from 9.4% to 17.2%.
Long-term debt and capital lease obligations outstanding at June 30, 1998 have
various expiration dates through April 2004, and accrue interest at rates
ranging from 5.8% to 13.0%.
The Company previously has met a significant portion of its financing needs
through financing arrangements obtained by AUSA. A majority of the amount which
was due to AUSA represented outstanding amounts under financing obtained by AUSA
for the benefit of the Company, with the balance representing payables to AUSA
for packaging and service charges paid to ASI. Based on guarantees provided by
ASI, AUSA obtained for the benefit of the Company a continuous series of
short-term financing arrangements which generally were less than six months in
duration, and typically were less than two months in duration. Because of the
short term nature of these loans, the flows of cash to and from AUSA under this
arrangement have been significant. At June 30, 1998, the Company had no amounts
outstanding with AUSA. Although the Company believes that alternative financing
arrangements will be available in the future, there can be no assurance that the
Company will be able to obtain alternative financing on acceptable terms or at
all.
At June 30, 1998 ASI guaranteed the Company's obligation under a trade
receivables securitization agreement with a commercial financial institution,
whereby the financial institution has committed to purchase, with limited
recourse, all rights, title and interest in eligible receivables, as defined by
the agreement, up to $100 million ("Receivables Sale"). ASI currently has a
significant amount of debt relative to its equity and is contingently liable
under guarantees in respect of debt of its subsidiaries and affiliates,
including AUSA. As of December 31, 1997, ASI and its consolidated subsidiaries
had guarantees outstanding in respect of debt of its non-consolidated
subsidiaries and affiliates in the Anam Group in the aggregate amount of
approximately W857 billion, including the guarantees of the Company's loans. As
a result of its relationship with ASI, the Company's business, financial
condition and operating results are significantly dependent on ASI. There can be
no assurance that AUSA will be able to obtain additional guarantees, if
necessary, from ASI. In addition, deterioration in ASI's financial condition
could trigger defaults under ASI's guarantees, causing acceleration of such
loans. See "Factors That May Affect Operating Results -- Dependence on
Relationship with ASI; Potential Conflicts of Interest" and "Relationship with
ASI"
21
<PAGE> 24
The Company incurs charges from ASI for assembly and test services
performed on a monthly basis. Historically, the Company has paid ASI for these
services on net 30-day terms. On July 21, 1998, the Company entered into a
prepayment agreement with ASI relating to assembly and test services. In
accordance with the agreement, the Company made a $50 million non-interest
bearing advance to ASI representing approximately one month's charges for
assembly and test services. The Company will offset this advance against
billings by ASI for assembly and test services provided in the fourth quarter of
1998.
In connection with its wafer foundry agreement with TI, the Company and TI
agreed to revise certain payment and other terms contained in the Master
Purchase Agreement. As part of this agreement, TI agreed to advance ATI $20
million in June 1998 as a prepayment of wafer foundry services to be provided in
the fourth quarter of 1998. The Company in turn advanced these funds to ASI as a
prepayment for foundry service charges. The Company will offset the advance to
ASI against billings by ASI in the fourth quarter of 1998. Under the terms of
the revision to the Master Purchase Agreement, the Company is ultimately
responsible to reimburse TI for any inability of ASI to comply with the terms of
the agreement.
Prior to the consummation of the Reorganization, AEI was treated for U.S.
federal and certain state tax purposes as an S Corporation under the Internal
Revenue Code of 1986 and comparable state tax laws. As a result, AEI did not
recognize U.S. federal corporate income taxes. Instead, up until the termination
of AEI's S Corporation status on April 28, 1998 (the "Termination Date"), Mr.
and Mrs. Kim and the trusts established for the benefit of other members of Mr.
James Kim's family (the "Kim Family Trusts") had been obligated to pay U.S.
federal and certain state income taxes on their allocable portion of the income
of AEI. The Company, Mr. and Mrs. Kim and the Kim Family Trusts have entered
into tax indemnification agreements providing that the Company will be
indemnified by such stockholders, with respect to their proportionate share of
any U.S. federal or state corporate income taxes attributable to the failure of
AEI to qualify as an S Corporation for any period or in any jurisdiction for
which S Corporation status was claimed through the Termination Date. The tax
indemnification agreements also provide that under certain circumstances the
Company will indemnify Mr. and Mrs. Kim and the Kim Family Trusts if such
stockholders are required to pay additional taxes or other amounts attributable
to taxable years on or before the Termination Date as to which AEI filed or
files tax returns claiming status as an S Corporation. AEI has made various
distributions to Mr. and Mrs. Kim and the Kim Family Trusts which have enabled
them to pay their income taxes on their allocable portions of the income of AEI.
Such distributions totaled approximately $5.0 and $33.1 million in 1997 and for
the six months ended June 30, 1998, respectively. The Company believes the
amount of such undistributed net income was less than $1.0 million at June 30,
1998. (See Note 1 of Notes to Consolidated Financial Statements.)
Foreign Currency Translation Gains and Losses
The Company's subsidiaries in the Philippines maintain their accounting
records in U.S. dollars. This is due to the fact that all sales, the majority of
all bank debt and all significant material and fixed asset purchases of such
subsidiaries are denominated in U.S. dollars. As a result, the Philippine
subsidiaries' exposure to changes in the Philippine peso/U.S. dollar exchange
rate relates primarily to certain receivables and advances and other assets
offset by payroll, pension and local liabilities. To minimize its foreign
exchange risk, the Company selectively hedges its net foreign currency exposure
through short-term (generally not more than 30 to 60 days) forward exchange
contracts. To date, the Company's hedging activity has been immaterial.
22
<PAGE> 25
FACTORS THAT MAY AFFECT OPERATING RESULTS
In addition to the factors discussed elsewhere in this form 10-Q and in the
Company's Registration Statements on Form S-1 (file Nos. 333-49645 and
333-51521) filed with the Securities and Exchange Commission, the following are
important factors which could cause actual results or events to differ
materially from those contained in any forward looking statements made by or on
behalf of the Company.
FLUCTUATIONS IN OPERATING RESULTS; DECLINES IN AVERAGE SELLING PRICES
The Company's operating results have varied significantly from period to
period. A variety of factors could materially and adversely affect the Company's
revenues, gross profit and operating income, or lead to significant variability
of quarterly or annual operating results. These factors include, among others,
the cyclical nature of both the semiconductor industry and the markets addressed
by end-users of semiconductors, the short-term nature of its customers'
commitments, timing and volume of orders relative to the Company's production
capacity, changes in capacity utilization, evolutions in the life cycles of
customers' products, rescheduling and cancellation of large orders, rapid
erosion of packaging selling prices, availability of manufacturing capacity,
allocation of production capacity between the Company's facilities and those of
ASI, fluctuations in package and test service charges paid to ASI, changes in
costs, availability and delivery times of labor, raw materials and components,
effectiveness in managing production processes, fluctuations in manufacturing
yields, changes in product mix, product obsolescence, timing of expenditures in
anticipation of future orders, availability of financing for expansion, changes
in interest expense, the ability to develop and implement new technologies on a
timely basis, competitive factors, changes in effective tax rates, the loss of
key personnel or the shortage of available skilled workers, international
political or economic events, currency and interest rate fluctuations,
environmental events, and intellectual property transactions and disputes.
Unfavorable changes in any of the above factors may adversely affect the
Company's business, financial condition and results of operations. In addition,
the Company increases its level of operating expenses and investment in
manufacturing capacity based on anticipated future growth in revenues. If the
Company's revenues do not grow as anticipated and the Company is not able to
decrease its expenses, the Company's business, financial condition and operating
results would be materially and adversely affected.
Beginning in 1997 and continuing through the current quarter of 1998,
intense competition and a general slowdown in the semiconductor industry
worldwide resulted in decreases in the average selling prices of many of the
Company's lead frame packages. The Company expects that average selling prices
for its services will continue to decline in the future. A decline in average
selling prices of the Company's services, if not offset by reductions in the
cost of producing those services or by a shift to higher margin products, would
decrease the Company's gross margins and could materially and adversely affect
the Company's business, financial condition and results of operations.
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND PERSONAL COMPUTER INDUSTRIES
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times, has
been subject to significant economic downturns characterized by reduced product
demand, rapid erosion of average selling prices and production overcapacity. In
addition, the markets for semiconductors are characterized by rapid
technological change, evolving industry standards, intense competition and
fluctuations in end-user demand. Because the Company's business will be
dependent on the requirements of semiconductor companies for independent
packaging, test and wafer fabrication services for the foreseeable future, any
future downturn in the semiconductor industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's operating results for 1997 and the first six months of 1998 were
adversely affected by a downturn in the semiconductor market. In addition, a
significant portion of the Company's net revenues from packaging and test
services depends on the packaging and testing of semiconductors used in personal
computer ("PC") products. The PC industry is subject to intense competition, is
highly volatile and is subject to significant shifts in demand. As a result, any
deterioration of business conditions in the PC industry could have a material
adverse effect on the Company.
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<PAGE> 26
DEPENDENCE ON RELATIONSHIP WITH ASI; POTENTIAL CONFLICTS OF INTEREST
ASI was founded in 1956 by Mr. H. S. Kim, who currently serves as the
honorary Chairman and a Representative Director of ASI. ASI is a member of the
Anam group of companies (the "Anam Group"), consisting principally of companies
in Korea in the electronics industries. The management of ASI and the other
companies in the Anam Group are influenced to a significant degree by the family
of H. S. Kim, which, together with the Company, collectively owned approximately
40.7% of the outstanding common stock of ASI as of December 31, 1997. A
significant portion of the shares owned by the Kim family are leveraged and as a
result of this, or for other reasons, the family's ownership could be
substantially reduced. James Kim, the founder of the Company and currently its
Chairman and Chief Executive Officer, is the eldest son of H. S. Kim. Since
January 1992, in addition to his other responsibilities, James Kim has been
serving as acting Chairman of the Anam Group and a director of ASI. Mr. In-Kil
Hwang, the President and a Representative Director of ASI, is the brother-in-law
of James Kim. In addition, four other members of Mr. Kim's family are on the
13-member Board of Directors of ASI. After the Initial Public Offering, James
Kim and members of his family beneficially owned approximately 65.8% of the
outstanding Common Stock of the Company, and Mr. Kim and other members of his
family will continue to exercise significant control over the Company.
The businesses of the Company and ASI have been interdependent for many
years. In 1997 and the three months ended June 30, 1998, approximately 68% and
67%, respectively, of the Company's revenues were derived from sales of services
performed for the Company by ASI. In addition, substantially all of the revenues
of ASI in 1997 and the three months ended June 30, 1998 were derived from
services sold by the Company. The Company expects the proportion of its revenues
derived from sales of services performed for the Company by ASI and the
proportion of ASI's revenues from services sold by the Company to increase as
the Company begins selling the wafer fabrication output of ASI's new wafer
foundry. In the event the ability of ASI to supply the Company were disrupted
for any reason, the Company's facilities in the Philippines would be able to
fill only a small portion of the resulting shortfall in capacity. In addition,
there are currently no significant third party suppliers of packaging and test
services from which the Company could fill its orders. As a result, the
Company's business, financial condition and operating results will continue to
be significantly dependent on the ability of ASI to effectively provide
contracted services on a cost-efficient and timely basis. The Company expects
that the businesses of the Company and ASI will continue to remain highly
interdependent by virtue of their supply relationship, family ties between their
respective shareholders and management, financial relationships, coordination of
product and operations plans, joint research and development activities and
shared intellectual property rights. The termination or disruption of the
Company's relationship with ASI for any reason, or the insolvency of, or any
material adverse change in ASI's business resulting from underutilization of its
capacity, the level of its debt and its guarantees of affiliate debt, labor
disruptions, fluctuations in foreign exchange rates, changes in governmental
policies, economic or political conditions in Korea or any other change, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has recently entered into new supply agreements with ASI (the
"Supply Agreements"). Under the Supply Agreements, ASI has granted to the
Company a first right to substantially all of the packaging and test services
capacity of ASI and the exclusive right to all of the wafer output of its new
wafer foundry. The Company expects to continue to purchase substantially all of
ASI's packaging and test services, and to purchase all of ASI's wafer output,
under the Supply Agreements. Under the Supply Agreements, pricing arrangements
relating to packaging and test services provided by ASI to the Company are
subject to quarterly review and adjustment, and such arrangements relating to
the wafer output provided by ASI to the Company are subject to annual review and
adjustment, in each case on the basis of factors such as changes in the
semiconductor market, forecasted demand, product mix, capacity utilization and
fluctuations in exchange rates, as well as the mutual long-term strategic
interests of the Company and ASI. Although the Company and ASI agreed to reduce
the price paid by the Company for packaging and test services beginning in the
second quarter of 1998, there can be no assurance that any new pricing
arrangements resulting from such review and adjustment will be favorable to the
Company. Pursuant to long-standing arrangements between ASI and the Company's
operating subsidiaries, sales from ASI to the Company will continue to be made
through AUSA, a wholly-owned financing subsidiary of ASI. Under the Supply
Agreements, the Company
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<PAGE> 27
will continue to reimburse AUSA for the financing costs incurred by it in
connection with trade financing provided to the Company. The Supply Agreements
also provide that Amkor-Anam, Inc., a subsidiary of the Company, will continue
to provide raw material procurement and related services to ASI on a fee basis.
The Supply Agreements have a five-year term and may be terminated by any party
thereto upon five years' written notice at any time after the expiration of such
initial five-year term. There can be no assurance that ASI will not terminate
either Supply Agreement upon the expiration of such initial term or, if it does
terminate a Supply Agreement, that the Company will be able to obtain a new
agreement with ASI on terms that are favorable to the Company or at all.
ASI's ability to continue to provide services to the Company will depend on
ASI's financial condition and performance. ASI currently has a significant
amount of debt relative to its equity, which debt the Company expects will
continue to increase in the foreseeable future. The Company is advised that ASI,
as a public company in Korea, has published its most recent consolidated
financial statements as of and for the year ended December 31, 1997. These
consolidated financial statements are prepared on the basis of Korean GAAP,
which differs significantly from U.S. GAAP. U.S. GAAP financial statements are
not available. The independent auditor's report regarding ASI includes an
explanatory paragraph regarding change in accounting principles, the impact of
the Korean economic situation on ASI and its ability to continue as a going
concern.
25
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<TABLE>
<CAPTION>
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
INCOME STATEMENT DATA:
Sales..................................................... W1,338,718 W1,786,457
Cost of sales............................................. 1,096,117 1,507,271
---------- ----------
Gross profit.............................................. 242,601 279,186
Selling and administrative expenses....................... 77,754 103,158
---------- ----------
Operating income.......................................... 164,847 176,028
Non-operating income:
Interest and dividend income........................... 38,569 47,592
Foreign exchange gains................................. 10,420 122,507
Other.................................................. 9,268 11,196
---------- ----------
58,257 181,295
---------- ----------
Non-operating expenses:
Interest expenses...................................... 138,657 160,658
Amortization of deferred charges....................... 2,861 33,891
Foreign exchange losses................................ 39,792 339,204
Loss from forward contract............................. -- 94,644
Other.................................................. 9,962 20,639
---------- ----------
191,272 649,036
---------- ----------
Ordinary income (loss).................................... 31,832 (291,713)
Extraordinary gains....................................... 447 774
Extraordinary losses...................................... 11,072 1,812
---------- ----------
Net income (loss) before income taxes..................... 21,207 (292,751)
Income taxes.............................................. 17,363 7,922
---------- ----------
Net income (loss) after income taxes...................... 3,844 (300,673)
Minority interests in losses (earnings) of consolidated
Subsidiaries, net...................................... (8,569) 1,206
Amortization of consolidation adjustments, net............ (5,326) (3,009)
Equity in earnings (losses) of unconsolidated
equity-method subsidiaries and investees, net.......... 666 (46,253)
---------- ----------
Net loss.................................................. W (9,385) W(348,729)
========== ==========
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and bank deposits.................................... W 324,139 W 215,024
Accounts and notes receivable, net........................ 170,724 189,522
Inventory................................................. 214,494 260,302
Other current assets...................................... 145,302 241,965
---------- ----------
Total current assets.............................. 854,659 906,813
---------- ----------
Property, plant and equipment, net........................ 994,931 2,159,466
Investments............................................... 83,715 121,880
Long-term accounts receivable............................. 198,251 203,739
Long-term loans........................................... 747 258,322
Other long-term assets.................................... 92,985 285,810
---------- ----------
Total long-term assets............................ 1,370,629 3,029,217
---------- ----------
Total assets...................................... W2,225,288 W3,936,030
========== ==========
Short-term borrowings..................................... 1,050,405 1,720,916
Current maturities of long-term debt...................... 85,252 120,913
Other current liabilities................................. 190,989 282,653
---------- ----------
Total current liabilities......................... 1,326,646 2,124,482
---------- ----------
Long-term debt, net of current maturities................. 475,045 736,784
Long-term capital lease obligations....................... 106,068 861,813
Other long-term liabilities............................... 67,672 111,017
---------- ----------
Total long-term liabilities....................... 648,785 1,709,614
---------- ----------
Total liabilities................................. 1,975,431 3,834,096
---------- ----------
Minority interests........................................ 21,600 25,160
Stockholders' equity...................................... 228,257 76,774
---------- ----------
Total liabilities and stockholders' equity........ W2,225,288 W3,936,030
========== ==========
</TABLE>
A significant amount of the current and long-term liabilities of ASI are
denominated in U.S. dollars and other foreign currencies. At December 31, 1997,
the amount of U.S. dollar and other foreign currency denominated short-term
borrowings, current maturities of long-term debt, long-term debt (net of current
maturities) and long-term capital lease obligations were W1,222 billion, W59
billion, W159 billion and W834 billion, respectively. Due in part to the
significant depreciation of the won (for example, from a Market Average Exchange
Rate, as defined below, of W884 to $1.00 on December 31, 1996 to W1,415 to $1.00
on December 31, 1997 and W1,324 to $1.00 on August 13, 1998) resulting from the
recent economic crisis in Korea, ASI's liabilities in won terms and its leverage
calculated in won have significantly increased in 1997. The effect of this
depreciation on ASI, however, has been mitigated by the fact that substantial
amounts of ASI's revenues are denominated in U.S. dollars. The increase in ASI's
liabilities was also attributable in part to additional financing obtained in
connection with the construction of its new wafer foundry. See "-- Risks
Associated with New Wafer Fabrication Business."
The recent economic crisis in Korea has also led to sharply higher interest
rates in Korea and reduced opportunities for refinancing or refunding maturing
debts as financial institutions in Korea, which are experiencing financial
difficulties, are increasingly looking to limit their lending, particularly to
highly leveraged companies, and to increase their reserves and provisions for
non-performing assets. These developments will result in higher interest rates
on loans to ASI and have otherwise made it more difficult for ASI to obtain new
financing. In addition, ASI has obtained a significant amount of financing
through arrangements obtained by AUSA. As an overseas subsidiary of ASI, AUSA
was formed with the approval of the Bank of Korea. If the Bank of Korea were to
withdraw such approval, or if AUSA otherwise ceased
27
<PAGE> 30
operations for any reason, ASI would be required to meet their financing needs
through alternative arrangements. Therefore, there can be no assurance that ASI
will be able to refinance its existing loans or obtain new loans, or continue to
make required interest and principal payments on such loans or otherwise comply
with the terms of its loan agreements. Any inability of ASI to obtain financing
or generate cash flow from operations sufficient to fund its capital
expenditure, debt service and repayment and other working capital and liquidity
requirements could have a material adverse effect on ASI's ability to continue
to provide services and otherwise fulfill its obligations to the Company. See
"-- Risks Associated with Leverage" and "-- Dependence on International
Operations and Sales; Concentration of Operations in the Philippines and Korea."
As of December 31, 1997, ASI and its consolidated subsidiaries were
contingently liable under guarantees in respect of debt of ASI's
non-consolidated subsidiaries and affiliates in the Anam Group in the aggregate
amount of approximately W857 billion. As of such date, ASI had provided
guarantees for all of AUSA's debt of $319 million, $176 million of bank loans to
one of the Company's subsidiaries and the Company's obligations under a
receivables sales arrangement. Prior to the initial public offering, the Company
met a significant portion of its financing needs through financing arrangements
obtained by AUSA for the benefit of the Company based on guarantees provided by
ASI. The Company currently does not depend on such financing arrangements. In
addition, if any relevant subsidiaries or affiliates of ASI, certain of which
may have greater exposure to domestic Korean economic conditions than ASI, were
to fail to make interest or principal payments or otherwise default under their
debt obligations guaranteed by ASI, ASI could be required under its guarantees
to repay such debt, which event could have a material adverse effect on its
financial condition and results of operations.
Historically, ASI has undertaken capacity expansion programs and other
capital expenditures primarily on the basis of forecasts of the Company and
business plans prepared jointly with the Company. The Supply Agreements
generally provide for continued capital investment by ASI based on the Company's
forecasts and operational plans prepared jointly by the Company and ASI
reflecting such forecasts. However, as a result of the recent deterioration of
the Korean economy, there can be no assurance that ASI will be able to fund
future capacity expansions and other capital investments required to supply the
Company with necessary packaging and test services and wafer output on a timely
and cost-efficient basis.
The Company and ASI have historically cooperated on the development of new
package designs and packaging and testing processes and technologies. The Supply
Agreements generally provide for continued cooperation between the Company and
ASI in research and development, as well as the cross-licensing of intellectual
property rights between the Company and ASI. If the Company's relationship with
ASI were terminated for any reason, the Company's research and development
capabilities and intellectual property position could be materially and
adversely affected.
The Company will continue to be controlled to a significant degree by James
Kim and members of his family for the foreseeable future, and Mr. Kim and other
members of his family will also continue to exercise significant influence over
the management of ASI and its affiliates. In addition, the Company and ASI will
continue to have certain contractual and other business relationships, including
under the Supply Agreements, and may engage in transactions from time to time
that are material to the Company. For example, on July 21, 1998 the Company
entered into a prepayment agreement with ASI relating to assembly and test
services. In accordance with the agreement, the Company made a $50 million
non-interest bearing advance to ASI, representing approximately one month's
charges for assembly and test services. The Company will offset this advance
against billings by ASI for assembly and test services provided in the fourth
quarter of 1998. Additionally, in connection with its wafer foundry agreement
with TI, the Company and TI agreed to revise certain payment and other terms
contained in the Master Purchase Agreement. As part of this agreement, TI agreed
to advance ATI $20 million in June 1998 as a prepayment of wafer foundry
services to be provided in the fourth quarter of 1998. The Company in turn
advanced these funds to ASI as a prepayment for foundry service charges. The
Company will offset the advance to ASI against billings by ASI in the fourth
quarter of 1998. Although any material agreements and transactions between the
Company and ASI would require approval of the Company's Board of Directors, such
transactions generally will not require any additional approval by a separate
committee comprised of the disinterested members of the Board of Directors or by
the
28
<PAGE> 31
stockholders of the Company and conflicts of interest may arise in certain
circumstances. There can be no assurance that such conflicts will not from time
to time be resolved against the interests of the Company. The Company currently
has six directors, four of whom are disinterested. Under Delaware corporate law,
each director owes a duty of loyalty and care to the Company, which if breached
can result in personal liability for the directors. In addition, the Company may
agree to certain changes in its contractual and other business relationships
with ASI, including pricing, manufacturing allocation, capacity utilization and
capacity expansion, among others, which in the judgment of the Company's
management will result in reduced short-term profitability for the Company in
favor of potential long-term benefits to the Company and ASI. There can be no
assurance that the Company's business, financial condition or results of
operations will not be adversely affected by any such decision.
DEPENDENCE ON INTERNATIONAL OPERATIONS AND SALES; CONCENTRATION OF OPERATIONS IN
THE PHILIPPINES AND KOREA
All of the production facilities currently used to fill the Company's
orders are located in the Philippines and Korea and many of the Company's
customers' operations are located in countries outside of the United States. A
substantial portion of the Company's revenues are derived from sales to
customers located outside of the United States. In 1997 and the six months ended
June 30, 1998, sales to such customers accounted for 28% and 29%, respectively,
of the Company's revenues. The Company expects sales outside of the United
States to continue to represent a significant portion of its future revenues. As
a result, the Company's business will continue to be subject to certain risks
generally associated with doing business abroad, such as foreign governmental
regulations, currency fluctuations, political unrest, disruptions or delays in
shipments, currency controls and fluctuations, changes in local economic
conditions and import and export controls, as well as changes in tax laws,
tariffs and freight rates. The Company has structured its global operations to
take advantage of lower tax rates in certain countries and tax incentives
extended to encourage investment. The Company's tax returns through 1993 in the
Philippines and through 1994 in the U.S. have been examined by the Philippine
and U.S. tax authorities, respectively. The recorded provisions for subsequent
open years are subject to changes upon examination by tax authorities of tax
returns for these years. Changes in the mix of income from the Company's foreign
subsidiaries, expiration of tax holidays and changes in tax laws and regulations
could result in increased effective tax rates for the Company.
Philippines
The Company's results of operations and growth will be influenced by the
political situation in the Philippines and by the general state of the
Philippine economy. Although the political and economic situation in the
Philippines has stabilized in recent years, it has historically been subject to
significant instability. Most recently, the devaluation of the Philippine peso
relative to the U.S. dollar beginning in July 1997 has led to instability in the
Philippine economy. Any future economic or political disruptions or instability
or low economic growth in the Philippines could have a material adverse effect
on the Company's business, financial condition and results of operations.
Because the functional currency of the Company's Philippine operations is the
U.S. dollar, the Company has recently benefited from cost reductions relating to
peso denominated expenditures, primarily payroll costs. The Company believes
that such devaluation of the Philippine peso will eventually lead to inflation
in the Philippines, which could offset any savings achieved to date.
Korea
In 1997 and the six months ended June 30, 1998, approximately 68% and 67%,
respectively, of the Company's revenues were derived from sales of services
performed for the Company by ASI. The operations of ASI are subject to certain
risks. Relations between Korea and the Democratic People's Republic of Korea
("North Korea") have been tense over most of Korea's history. Incidents
affecting relations between the two Koreas continually occur. No assurance can
be given that the level of tensions with North Korea will not increase or change
abruptly as a result of current or future events, which could have a material
adverse effect on ASI's, and as a result the Company's, business, financial
condition and results of operations.
29
<PAGE> 32
Since the beginning of 1997, Korea has experienced a significant increase
in the number and size of companies filing for corporate reorganization and
protection from their creditors. Such failures were caused by, among other
factors, excessive investments, high levels of indebtedness, weak export prices
and the Korean government's greater willingness to allow troubled corporations
to fail. As a result of such corporate failures, Korea's financial institutions
have experienced a sharp increase in non-performing loans and certain Korean
banks have ceased operations. In addition, declines in domestic stock prices
have reduced the value of Korean banks' assets. These developments have led
international credit rating agencies to downgrade the credit ratings of Korea,
as well as various companies (including ASI) and financial institutions in
Korea.
During the same period, the value of the won relative to the U.S. dollar
has depreciated significantly. The base rate under the market average exchange
rate system, as announced by the Korea Financial Telecommunications and
Clearings Institute in Seoul, Korea (the "Market Average Exchange Rate") as of
August 12, 1998 was W1,338 to $1.00, as compared to the December 31, 1996 Market
Average Exchange Rate of W884 to $1.00. Such depreciation of the won relative to
the U.S. dollar has increased the cost of imported goods and services, and the
value in won of Korea's public and private sector debt denominated in U.S.
dollars and other foreign currencies has also increased significantly. Korea's
foreign currency reserves also have declined significantly. Such developments
have also led to sharply higher domestic interest rates and reduced
opportunities for refinancing or refunding maturing debts as financial
institutions in Korea, which are experiencing financial difficulties, are
increasingly looking to limit their lending, in particular to highly leveraged
companies, and to increase their reserves and provisions for non-performing
assets.
In order to address the liquidity crisis and the deteriorating economic
situation in Korea, the Korean government concluded an agreement with the
International Monetary Fund on December 3, 1997 pursuant to which Korea is
eligible to receive loans and other financial support reported to amount to an
aggregate of approximately $58 billion (the "IMF Financial Aid Package").
Because there are conditions on the availability of loans and other financial
support under the IMF Financial Aid Package, there can be no assurance that such
conditions will be satisfied or that such loans and other financial support will
be available. In connection with the IMF Financial Aid Package, the Korean
government announced a comprehensive policy package (the "Reform Policy")
intended to address the structural weaknesses in the Korean economy and the
financial sector. While the Reform Policy is intended to alleviate the current
economic crisis in Korea and improve the Korean economy over time, the immediate
effects could include, among others, slower economic growth, a reduction in the
availability of credit to Korean companies, an increase in interest rates, an
increase in taxes, an increased rate of inflation due to the depreciation of the
won, an increase in the number of bankruptcies of Korean companies, labor unrest
and labor strikes resulting from a possible increase in unemployment, and
political unrest. These events could have a material adverse effect on the
Korean economy. Moreover, there can be no assurance that either the IMF
Financial Aid Package or the Reform Policy will be successful. In addition,
there can be no assurance that political pressure will not force the Korean
government to retreat from some or all of its announced Reform Policy or that
the Reform Policy will be implemented as currently contemplated.
The Korean government has stated that as of December 31, 1997 the total
amount of Korea's private and governmental external liabilities was $154.4
billion under IMF standards. As of December 31, 1997, the total amount of
foreign currency reserves held by Korea was $20.4 billion, of which the usable
portion (the total less amounts on deposit with overseas branches of Korean
financial institutions and swap positions between the Korean central bank and
other central banks) was $8.9 billion. Pursuant to an exchange offer concluded
in April 1998, the Korean financial institutions exchanged approximately $21.8
billion of their short-term foreign currency debt for longer term floating rate
loans guaranteed by the Korean government. In addition, the Korean government
raised approximately $4 billion through an international offering of its debt
securities in April 1998. Korean financial institutions and the Korean corporate
and public sectors continue to carry substantial amounts of debt denominated in
currencies other than the won, including short-term debt, and there can be no
assurance that there will be sufficient foreign currency reserves to repay this
debt or that this debt can be extended or refinanced.
Such recent and potential future developments relating to Korea, including
the continued deterioration of the Korean economy, could have a material adverse
effect on ASI's and the Company's business, financial
30
<PAGE> 33
condition and results of operations. See "-- Dependence on Relationship with
ASI; Potential Conflicts of Interest."
CUSTOMER CONCENTRATION; ABSENCE OF BACKLOG
Due to the concentration of market share in the semiconductor industry, the
Company has been largely dependent on a small group of customers for a
substantial portion of its business. In 1997 and the six months ended June 30,
1998, 40.1% and 34.7%, respectively, of the Company's net revenues were derived
from sales to the Company's top five customers, with 23.4% and 19.4% of the
Company's net revenues, respectively, derived from sales to Intel Corporation
("Intel"). The ability of the Company to maintain close, satisfactory
relationships with such customers is important to the ongoing success and
profitability of its business. The Company expects that it will continue to be
dependent upon a relatively limited number of customers for a significant
portion of its net revenues in future periods. None of the Company's customers
is presently obligated to purchase any amount of packaging or test services or
to provide the Company with binding forecasts of product purchases for any
period. In addition, the Company's new wafer fabrication business will be
significantly dependent upon Texas Instruments, Inc. ("TI"). The reduction,
delay, or cancellation of orders from one of the Company's significant
customers, including Intel for packaging and test services or TI for wafer
fabrication services, could materially and adversely affect the Company's
business, financial condition and results of operations. Although the Company
has received a commitment from TI which indicates that TI will meet its minimum
purchase obligation during the second half of 1998, during the first half of
1998 TI's orders were below such minimum purchase commitment due to market
conditions and issues encountered by TI in the transition of its products to .18
micron technology. There can be no assurance that TI will meet its purchase
obligations in the second half of 1998 or in the future. In addition, there can
be no assurance that such customers will not reduce, cancel or delay orders. See
"-- Dependence on the Highly Cyclical Semiconductor and Personal Computer
Industries" and "-- Risks Associated with New Wafer Fabrication Business."
All of the Company's customers operate in the cyclical semiconductor
business and may vary order levels significantly from period to period. In
addition, there can be no assurance that such customers or any other customers
will continue to place orders with the Company in the future at the same levels
as in prior periods. From time to time, semiconductor companies have experienced
reduced prices for some products, as well as delays or cancellations in orders.
There can be no assurance that, should these circumstances occur in the future,
they will not adversely affect the Company's business, financial condition and
results of operations. The loss of one or more of the Company's customers, or
reduced orders by any of its key customers, could adversely affect the Company's
business, financial condition and results of operations. The Company's packaging
and test business does not typically operate with any material backlog, and the
Company expects that in the future the Company's packaging and test revenues in
any quarter will continue to be substantially dependent upon orders received in
that quarter. The Company's expense levels are based in part on its expectations
of future revenues and the Company may be unable to adjust costs in a timely
manner to compensate for any revenue shortfall.
EXPANSION OF MANUFACTURING CAPACITY; PROFITABILITY AFFECTED BY CAPACITY
UTILIZATION RATES
The Company believes that its competitive position depends substantially on
its ability to expand its manufacturing capacity. Accordingly, although the
Company currently has available manufacturing capacity, the Company expects to
continue to make significant investments to expand such capacity, particularly
through the acquisition of capital equipment and the training of new personnel.
There can be no assurance that the Company will be able to utilize such capacity
or to continue to expand its manufacturing capacity in a timely manner, that the
cost of such expansion will not exceed management's current estimates or that
such capacity will not exceed the demand for the Company's services. In
addition, expansion of the Company's manufacturing capacity will continue to
significantly increase its fixed costs, and the Company expects to continue to
incur substantial additional depreciation and other expenses in connection with
the acquisition of new equipment and the construction of new facilities.
Increases or decreases in capacity utilization rates can have a significant
effect on gross margins since the unit cost of packaging and test services
generally decreases
31
<PAGE> 34
as fixed charges are allocated over a larger number of units produced.
Therefore, the Company's ability to maintain or enhance its gross margins will
continue to be dependent, in part, on its ability to maintain high capacity
utilization rates.
Capacity utilization rates may be affected by a number of factors and
circumstances, including overall industry conditions, operating efficiencies,
the level of customer orders, mechanical failure, disruption of operations due
to expansion of operations or relocation of equipment, fire or natural
disasters, employee strikes or work stoppages or other circumstances. Although
the Company has been able to maintain a high rate of capacity utilization in
recent years as a result of its close association with its customers, its
knowledge of the semiconductor market conditions, and its continued improvements
in operating efficiencies and equipment maintenance, there can be no assurance
that this high utilization rate will be sustained in the future. The Company's
inability to generate the additional orders necessary to fully utilize its
capacity would have a material adverse effect on the Company's business,
financial condition and results of operations. For example, in 1996 the
Company's capacity utilization rates were negatively affected by an unexpected
downturn in the semiconductor industry. There can be no assurance that the
Company's utilization rates will not be adversely affected by future declines in
the semiconductor industry or for any other reason.
RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT
The semiconductor packaging and test industry is characterized by rapid
increases in the diversity and complexity of semiconductor packaging products.
As result, the Company expects that it will need to offer, on an ongoing basis,
more advanced package designs in order to respond to competitive industry
conditions and customer requirements. The requirement to develop and maintain
advanced packaging capabilities and equipment could require significant research
and development and capital expenditures in future years. In addition, advances
in technology also typically lead to rapid and significant price erosion and
decreased margins for older package types and may lead to products currently
being offered by the Company becoming less competitive or inventories held by
the Company becoming obsolete. The failure by the Company to achieve advances in
package design or to obtain access to advanced package designs developed by
others could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company's success is also dependent upon the ability of it and ASI to
develop and implement new manufacturing process and package design technologies.
Semiconductor package design and process methodologies have become increasingly
subject to technological change, requiring large expenditures for research and
development. Converting to new package designs or process methodologies could
result in delays in producing new package types which could adversely affect the
Company's ability to meet customer orders.
MANUFACTURING RISKS; PRODUCTION YIELDS
The semiconductor packaging process is complex and involves a number of
precise steps. Defective packaging can result from a number of factors,
including the level of contaminants in the manufacturing environment, human
error, equipment malfunction, use of defective raw materials, defective plating
services and inadequate sample testing. From time to time, the Company expects
to experience lower than anticipated production yields as a result of such
factors, particularly in connection with any expansion of its capacity or change
in its processing steps. In addition, the Company's yield on new products will
be lower during the period necessary for the Company to develop the requisite
expertise and experience in producing such products and using such processes.
The failure of the Company or ASI to maintain high quality production standards
or acceptable production yields, if significant and sustained, could result in
loss of customers, delays in shipments, increased costs, cancellation of orders
and product returns for rework, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH NEW WAFER FABRICATION BUSINESS
The Company recently began providing wafer fabrication services, with
delivery of the first products from ASI's new foundry in January 1998. Neither
the Company nor ASI has significant experience in providing
32
<PAGE> 35
wafer fabrication services, and there can be no assurance that the Company will
not experience difficulties in marketing and selling these services or that ASI
will not encounter operational difficulties such as lower than expected yields
or longer than anticipated production ramp-up, unexpected costs and other
problems in providing these services. If the Company or ASI encounters these or
similar difficulties, the Company's and ASI's businesses, financial condition
and results of operations could be materially adversely affected. In addition,
TI has transferred certain of its Complementary Metal Oxide Silicon ("CMOS")
processes to ASI and ASI is dependent upon TI's assistance for developing other
state-of-the-art wafer manufacturing processes. If ASI's relationship with TI is
disrupted for any reason, ASI's ability to produce wafers would be adversely
affected, thus negatively impacting the Company's ability to fulfill its
customers' orders for fabrication services, which could materially and adversely
affect the Company's business, financial condition and results of operations. In
addition, ASI's technology agreements with TI (the "TI Technology Agreements")
only cover .25 micron and .18 micron CMOS technology and TI is not under any
obligation to transfer any next-generation technology. If ASI is not able to
obtain such technology on commercially reasonable terms or at all, the Company's
ability to market ASI's wafer fabrication services could be materially and
adversely affected which could have a material adverse effect on the Company's
and ASI's business, results of operations and financial condition.
The Company's right to the supply of wafers from ASI's foundry is subject
to an agreement (the "TI Manufacturing and Purchasing Agreement") among ASI, the
Company and TI, pursuant to which TI has agreed to purchase from the Company at
least 40% of the capacity of this foundry and under certain circumstances has
the right to purchase up to 70% of this capacity. As a result, the Company's
wafer fabrication business will be significantly dependent upon TI, which may
adversely affect the Company's ability to obtain additional customers. If the
Company is unable to sell substantially all of the output of ASI's wafer
foundry, its business, results of operations and financial condition could be
materially and adversely affected. Although the Company has received a
commitment from TI which indicates that TI will meet its minimum purchase
obligation during the second half of 1998, during the first half of 1998 TI's
orders were below such minimum purchase commitment due to market conditions and
issues encountered by TI in the transition of its products to .18 micron
technology. There can be no assurance that TI will meet its purchase obligations
in the second half of 1998 or in the future. Accordingly, there can be no
assurance that TI will place orders representing at least 40% of the capacity of
this foundry during this period or in the future. A failure by TI to comply with
its minimum purchase obligations or the cancellation of a significant wafer
fabrication order by TI or any other customer could have a material adverse
effect on ASI's and the Company's business, financial condition and results of
operations. The TI Manufacturing and Purchasing Agreement terminates on December
31, 2007, unless terminated sooner. The TI Manufacturing and Purchasing
Agreement may be terminated upon two years' prior notice by either ASI or TI if
ASI and TI are unable to successfully negotiate prior to June 30, 2000 an
amendment to the TI Technology Agreements or a new agreement with respect to
ASI's use of TI's next-generation CMOS technology. During such two-year period,
TI would be obligated to purchase a minimum of only 20% of the capacity of ASI's
wafer fabrication facility. In addition, the TI Manufacturing and Purchasing
Agreement may be terminated sooner upon, among other events, mutual written
consent, material breach of the agreement by either party, the inability of
either party to obtain any necessary government approvals, the failure of ASI to
protect TI's intellectual property and a change of control, bankruptcy,
liquidation or dissolution of ASI.
DEPENDENCE ON RAW MATERIALS SUPPLIERS AND SUBCONTRACTORS
The Company obtains the direct materials for the packaging and test
services of its factories and for the packaging and test services provided by
ASI to fill the Company's orders directly from vendors. To maintain competitive
manufacturing operations, the Company must obtain from its vendors, in a timely
manner, sufficient quantities of acceptable materials at expected prices. The
Company sources most of its raw materials, including critical materials such as
lead frames and laminate substrates, from a limited group of suppliers. The
Company purchases all of its materials on a purchase order basis and has no
long-term contracts with any of its suppliers. From time to time, vendors have
extended lead times or limited the supply of required materials to the Company
because of vendor capacity constraints and, consequently, the Company has
experienced difficulty in obtaining acceptable raw materials on a timely basis.
In addition, from time to
33
<PAGE> 36
time, the Company may reject materials that do not meet its specifications,
resulting in declines in output or yield. There can be no assurance that the
Company will be able to obtain sufficient quantities of raw materials and other
supplies of an acceptable quality. The Company's business, financial condition
and results of operations could be materially and adversely affected if its
ability to obtain sufficient quantities of raw materials and other supplies in a
timely manner were substantially diminished or if there were significant
increases in the costs of raw materials that the Company could not pass on to
its customers.
COMPETITION
The independent semiconductor packaging and test industry is very
competitive, being comprised of approximately 50 companies with about 15 of
those companies having sales of $100 million per year or more. The Company faces
substantial competition from established packaging companies primarily located
in Asia, such as Advanced Semiconductor Engineering, Inc. (Taiwan), ASE Test
Limited (Taiwan and Malaysia), ASAT, Ltd. (Hong Kong), Hana Microelectronics
Public Co. Ltd. (Hong Kong and Thailand), Astra International (Indonesia),
Carsem Bhd. (Malaysia), ChipPAC Incorporated (Korea), Siliconware Precision
Industries Co., Ltd. (Taiwan), and Shinko Electric Industries Co., Ltd. (Japan).
Each of these companies has significant manufacturing capacity, financial
resources, research and development operations, marketing and other
capabilities, and have been operating for some time. Such companies have also
established relationships with many large semiconductor companies which are
current or potential customers of the Company. The principal elements of
competition in the independent semiconductor packaging market include time to
market, breadth of package offering, technical competence, design services,
quality, production yields, responsiveness and customer service and price. On a
larger scale, the Company also competes with the internal manufacturing
capabilities of many of its largest customers. There can be no assurance that
the Company will be able to compete successfully in the future against existing
or potential competitors or that the Company's operating results will not be
adversely affected by increased price competition.
The independent wafer fabrication business is also highly competitive. The
Company's wafer fabrication services compete primarily with independent wafer
foundries such as Chartered Semiconductor Manufacturing, Ltd., Taiwan
Semiconductor Manufacturing Company Ltd. and United Microelectronics
Corporation, as well as with integrated device manufacturers such as LG Semicon
Co., Ltd., Hitachi, Ltd., Toshiba Corp. and Winbond Electronics Corporation,
which provide foundry services for other semiconductor companies. Each of these
companies has significant manufacturing capacity, financial resources, research
and development operations, marketing and other capabilities and have been
operating for some time. Many of these companies have also established
relationships with many large semiconductor companies which are current or
potential customers of the Company. The principal elements of competition in the
wafer foundry market include technology, delivery cycle times, price, product
performance, quality, production yield, responsiveness and flexibility,
reliability and the ability to design and incorporate product improvements.
There can be no assurance that the Company will be able to compete successfully
in the future against such companies.
INTELLECTUAL PROPERTY
The Company currently holds 24 United States patents, five of which are
jointly held with ASI, related to various IC packaging technologies, in addition
to other pending patents. These patents will expire at various dates from 2012
through 2016. With respect to development work undertaken jointly with ASI, the
Company and ASI share intellectual property rights under the terms of the Supply
Agreements between the Company and ASI. Such Supply Agreements also provide for
the cross-licensing of intellectual property rights between the Company and ASI.
In addition, the Company enters into agreements with other developers of
packaging technology to license or otherwise obtain certain process or package
technologies.
The Company expects to continue to file patent applications when
appropriate to protect its proprietary technologies; however, the Company
believes that its continued success depends primarily on factors such as the
technological skills and innovation of its personnel rather than on its patents.
The process of seeking patent protection can be expensive and time consuming.
There can be no assurance that patents will be issued from pending or future
applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial
34
<PAGE> 37
advantage to the Company. Moreover, there can be no assurance that any patent
rights will be upheld in the future or that the Company will be able to preserve
any of its other intellectual property rights.
Although the Company is not currently a party to any material litigation,
the semiconductor industry is characterized by frequent claims regarding patent
and other intellectual property rights. As is typical in the semiconductor
industry, the Company may receive communications from third parties asserting
patents on certain of the Company's technologies. In the event any third party
were to make a valid claim against the Company or ASI, the Company or ASI could
be required to discontinue the use of certain processes or cease the
manufacture, use, import and sale of infringing products, to pay substantial
damages and to develop non-infringing technologies or to acquire licenses to the
alleged infringed technology. The Company's business, financial condition and
results of operations could be materially and adversely affected by such
developments. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may also be necessary to enforce patents
or other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, ASI has obtained intellectual property for wafer
manufacturing primarily from TI. The licenses granted to ASI by TI under the TI
Technology Agreements are very limited. Although TI has granted to ASI a license
under TI's trade secret rights to use TI's technology in connection with ASI's
provision of wafer fabrication services, TI has not granted ASI a license under
its patents, copyrights and mask works to manufacture semiconductors for third
parties. Although TI has agreed that TI will not assert a claim for patent,
copyright or mask work right infringement against ASI or the Company in
connection with ASI's manufacture of semiconductor products for third parties,
TI has reserved the right to bring such infringement claims against ASI's or the
Company's customers with respect to semiconductor products purchased from ASI or
the Company. As a result, ASI's and the Company's customers could be subject to
patent litigation by TI and others, and ASI and the Company could in turn be
subject to litigation by such customers and others, in connection with the sale
of wafers produced by ASI. Any such litigation could materially and adversely
affect ASI's ability to continue to manufacture wafers and ASI's and the
Company's business, financial condition and results of operations.
NO PRIOR MARKET; LIQUIDITY; STOCK PRICE VOLATILITY
Prior to the initial public offering, there had been no public market for
the Common Stock. There can be no assurance that an active public market for the
Common Stock will be sustained or that the market price of the Common Stock will
not decline. The trading price of the Common Stock has varied significantly and
could be subject to wide fluctuations in the future in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the semiconductor industry, changes in earnings estimates
or recommendations by analysts, developments affecting ASI or other events or
factors. In addition, the public stock markets have experienced extreme price
and trading volume volatility in recent months. This volatility has
significantly affected the market prices of securities of many high technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
BENEFITS OF THE INITIAL PUBLIC OFFERING TO EXISTING STOCKHOLDERS;
CONTINUED CONTROL BY EXISTING STOCKHOLDERS
Immediately after the closing of the initial public offering, based upon
shares outstanding as of the date hereof, James Kim and members of his family
beneficially owned in the aggregate 77,610,000 shares of Common Stock, which
shares represented all of the outstanding Common Stock not offered in the
initial public offering and approximately 65.8% of the total number of shares of
Common Stock outstanding following the initial public offering. The initial
public offering created a public market for the resale of shares held by these
existing stockholders. Such stockholders, acting together, will be able to
effectively control substantially all matters submitted for approval by the
stockholders of the Company. Such matters could include the election of a
majority of the members of the Board of Directors, proxy contests, approvals of
35
<PAGE> 38
transactions between the Company and ASI or other entities in which Mr. James
Kim and members of his family have an interest, mergers involving the Company,
tender offers, open market purchase programs or other purchases of common stock
that could give stockholders of the Company the opportunity to realize a premium
over the then prevailing market price for their shares of Common Stock. Such
continued control could also have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price and may adversely affect the
market price of the Common Stock.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) The registrant did not file any reports on form 8-K during the quarter
ended June 30, 1998.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AMKOR TECHNOLOGY, INC.
(Registrant)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRANK J. MARCUCCI Chief Financial Officer and March 30, 1999
- --------------------------------------------- Secretary (Principal Financial,
Frank J. Marcucci Chief Accounting Officer and Duly
Authorized Officer)
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 170,461
<SECURITIES> 2,824
<RECEIVABLES> 156,713
<ALLOWANCES> 5,593
<INVENTORY> 93,044
<CURRENT-ASSETS> 433,682
<PP&E> 675,177
<DEPRECIATION> 252,644
<TOTAL-ASSETS> 947,419
<CURRENT-LIABILITIES> 259,926
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 450,696
<TOTAL-LIABILITY-AND-EQUITY> 947,419
<SALES> 384,724
<TOTAL-REVENUES> 384,724
<CGS> 317,106
<TOTAL-COSTS> 347,983
<OTHER-EXPENSES> 7,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,875
<INCOME-PRETAX> 29,102
<INCOME-TAX> 3,109
<INCOME-CONTINUING> 26,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,119
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
